<PAGE>
U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 33-2279-D
NET TELECOMMUNICATIONS, INCORPORATED
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(Name of Small Business Issuer in its Charter)
NEVADA 87-0297202
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(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
101 Convention Center Drive, Suite P125
Las Vegas, Nevada 89109
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(Address of Principal Executive Offices)
Issuer's Telephone Number: (702) 734-1160
N/A
---
(Former Name or Former Address, if changed since last Report)
Securities Registered under Section 12(b) of the Exchange Act: None
Name of Each Exchange on Which Registered: None
Securities Registered under Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
Check if there is no disclosure of delinquent files in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year: December 31, 1996 -
$29,571
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as of a specified
date within the past 60 days.
June 30, 1997 - $1,337,610.75. There are approximately 5,350,443 shares
of common voting stock of the Company held by non-affiliates. These shares
have been valued at the average bid price of the Company's common stock during
the quarterly period ended June 30, 1997.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Not Applicable.
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's
classes of common equity, as of the latest practicable date:
August 28, 1997
9,222,981
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained
in Item 13 of this report.
Transitional Small Business Issuer Format Yes X No
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PART I
Item 1. Description of Business.
------------------------
Business Development.
- ---------------------
Net Telecommunications, Inc., a Nevada corporation (the "Company"),
was organized under the laws of the State of Montana on April 22, 1966 as
Silver Ridge, Incorporated and changed its corporate name to Silver Ledge,
Incorporated on October 4, 1966. The Company was engaged, through a subsidiary,
in the business of steel fabrication and production of assorted steel
products.
The Company was merged into Silver Ledge, Incorporated, a Nevada
corporation ("Silver Ledge Nevada") on or about July 1, 1996, for the sole
purpose of changing its domicile to the State of Nevada. Unless otherwise
indicated, all references in this Report to "the Company" shall refer to
Silver Ledge Nevada.
Pursuant to an Agreement and Plan of Merger (the "Net Tel Plan")
dated July 10, 1996, between the Company, certain principal stockholders of
the Company (the "Company's Principal Stockholders"), Net Telecommunications,
Incorporated, a Nevada corporation ("Net Tel"), and certain stockholders of
Net Tel who owned in excess of a majority of the outstanding voting securities
of Net Tel and who executed and delivered a copy of the Net Tel Plan (the "Net
Tel Majority Stockholders"), the Net Tel Majority Stockholders became the
controlling stockholders of the Company in a transaction viewed as a "reverse
merger," which became effective on July 11, 1996. As a condition to the Net
Tel Plan, the Company exchanged all of its right, title and interest in and to
the securities of all of its subsidiaries, through which it owned or operated
all of its properties, assets and business for the 27,622,793 pre-split shares
owned by the Company's Principal Stockholders. The Net Tel Plan was accounted
for as a recapitalization of Net Tel.
In summary, pursuant to the Net Tel Plan, (i) Net Tel merged with
and into the Company, with the Company being the surviving corporation; (ii)
the name of the Company was changed to "Net Telecommunications, Incorporated";
(iii) the pre-Plan outstanding voting securities of the Company were reverse
split on the basis of 40.087785 for one, while retaining the authorized
capital at 50,000,000 shares and the par value at $0.001 per share, with
appropriate adjustments to the stated capital and additional paid in capital
accounts of the Company; (iv) each issued, outstanding or subscribed share of
common stock of Net Tel was exchanged for 2,385.4 post-split shares of common
stock of the Company, amounting to approximately 6,000,000 post-split shares
in the aggregate; (v) the Company's Principal Stockholders exchanged
27,622,793 pre-split shares of the Company's common stock (approximately
689,057 post-split shares) for the Company's interest in all of its
subsidiaries, including all of its properties, assets and business, resulting
in there being approximately 400,000 post-split outstanding shares of common
stock of the Company immediately prior to the completion of the Net Tel Plan,
not taking into account any shares of common voting stock to be issued under
the Net Tel Plan; and (vi) an additional 1,600,000 post-split shares were to
be issued to certain consultants of the Company and Net Tel, 610,000 and
990,000 shares, respectively, for services related to the negotiation and
consummation of the Net Tel Plan. The Net Tel Plan was disclosed in the
Company's Current Report on Form 8-K, dated July 5, 1996, which was filed with
the Securities and Exchange Commission on July 26, 1996, and which is
incorporated herein by reference. See the Exhibit Index, Item 13 of this
Report.
Pursuant to an Agreement and Plan of Merger (the "Sierra Plan")
dated July 29, 1996, between the Company; First Net Telecommunications
Subsidiary, Incorporated, a Nevada corporation and recently formed
wholly-owned subsidiary of the Company (the "Net Tel Subsidiary"); Sierra-Net,
Inc., a Nevada corporation ("Sierra"); and all of the stockholders of Sierra
(the "Sierra Stockholders"), Sierra merged with and into the Net Tel
Subsidiary, with the Net Tel Subsidiary being the surviving corporation, and
each issued, outstanding or subscribed share of common stock of Sierra was
exchanged for 100 shares of common stock of the Company, amounting to an
aggregate total of 600,000 shares of the Company's "unregistered" and
"restricted" common stock. The Sierra Plan was treated as a "purchase" for
accounting purposes.
Following the completion of the Sierra Plan, Sierra became a wholly-
owned subsidiary of the Company by virtue of its merger into the Net Tel
Subsidiary, which was formed solely for the purpose of this merger. The
Sierra Plan was fully disclosed in the Company's Current Report on Form 8-K,
dated August 1, 1996, which was filed with the Securities and Exchange
Commission on August 16, 1996, and which is incorporated herein by this
reference. See the Exhibit Index, Item 13 of this Report.
Pursuant to an Agreement and Plan of Merger (the "Tahoe On-Line
Plan") dated August 24, 1996, between the Company; Sierra; Sierra Internet,
Inc., a Nevada corporation dba Tahoe On-Line ("Tahoe On-Line"); and all of the
stockholders of Tahoe On-Line (the "Tahoe On-Line Stockholders"), Tahoe
On-Line merged with and into Sierra, with Sierra being the surviving
corporation, and each issued, outstanding or subscribed share of common stock
of Tahoe On-Line was exchanged for 118.181818 shares of common stock of the
Company, amounting to an aggregate total of 130,000 shares of the Company's
"unregistered" and "restricted" common stock. The Tahoe On-Line Plan was
treated as a "purchase" for accounting purposes.
Following the completion of the Tahoe On-Line Plan, Tahoe On-Line
became a wholly-owned subsidiary of the Company by virtue of its merger into
Sierra.
Pursuant to an Agreement and Plan of Merger (the "Global Plan")
dated August 26, 1996, between the Company; Second Net Telecommunications
Subsidiary, Incorporated, a Nevada corporation and recently formed wholly-
owned subsidiary of the Company (the "Net Tel Subsidiary"); Global Tours,
Inc., a Nevada corporation ("Global"); and all of the stockholders of Global
(the "Global Stockholders"), Global merged with and into the Net Tel
Subsidiary, with the Net Tel Subsidiary being the surviving corporation, and
each issued, outstanding or subscribed share of common stock of Global was
exchanged for 322.580645 shares of common stock of the Company, amounting to
an aggregate total of 500,000 shares of the Company's "unregistered" and
"restricted" common stock. The Global Plan was treated as a "purchase" for
accounting purposes.
Following the completion of the Global Plan, Global became a
wholly-owned subsidiary of the Company by virtue of its merger into the Net
Tel Subsidiary, which was formed solely for the purpose of this merger. Both
the Tahoe On-Line Plan and the Global Plan were fully disclosed in the
Company's Current Report on Form 8-K, dated August 24, 1996, which was filed
with the Securities and Exchange Commission on or about September 16, 1996,
and which is incorporated herein by reference. See the Exhibit Index, Item 13
of this Report.
Pursuant to a Rescission Agreement dated February 11, 1997, the
Global Plan was rescinded by the cancellation of 483,871 shares that were
issued pursuant to the Global Plan, and 16,129 shares were to remain
outstanding of those issued pursuant to the Global Plan. This rescission was
fully disclosed in the Company's Current Report on Form 8-K-A1, dated August
24, 1996, which was filed with the Securities and Exchange Commission on March
20, 1997, and which is incorporated herein by reference. See the Exhibit
Index, Item 13 of this Report.
Pursuant to a Stock Purchase Agreement dated April 1, 1997, and an
Addendum to Stock Purchase Agreement dated April 25, 1997, both of which were
subsequent to the period covered by this Report, (i) the Sierra Plan was
deemed to have been rescinded by the purchase of all of the outstanding shares
of Sierra and the subsequent cancellation of 393,757 shares of the 600,000
shares issued pursuant to the Sierra Plan (126,243 shares were to remain
outstanding of those purchased pursuant to the Plan); and (ii) the Tahoe On-Line
Plan was deemed to have been rescinded by the cancellation of all 130,000
shares issued under the Tahoe on-Line Plan. These rescissions were fully
disclosed in the Company's Current Reports on Form 8-K-A1, which were dated
August 1, 1996, and August 24, 1996, respectively, and which were filed with
the Securities and Exchange Commission on or about May 15, 1997. See the
Exhibit Index, Item 13 of this Report.
Subsequent Events
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On February 4, 1997, which is subsequent to the period covered by
this Report, the Company executed a Promissory Note and a Loan Agreement
whereby it formalized a loan of $300,000 from Bentley King Associates, Inc., a
Delaware corporation ("Bentley King"). Under the terms of the Loan Agreement,
Bentley King made three incremental payments to the Company as follows:
$55,000 on November 11, 1996; $30,000 on December 13, 1996; and $30,000 on
January 17, 1997, with the balance of $185,000 to be funded on an "as needed"
basis on or before June 1, 1997. As of the date of this Report, the Company
has received the total amount of $300,000 under the Loan Agreement, plus an
additional $300,000 pursuant to a loan agreement that has not yet been
formalized.
The Bentley King loan bears interest at the rate of 10% per annum
and will be fully due and payable on October 31, 2000. Commencing on November
1, 1997, the loan will be self-amortizing for the principal and all interest
accruing to November 1, 1997, with payments to be due annually commencing on
that date.
The Loan Agreement also required that the Company form a wholly-owned
subsidiary, NTI Telecom, Inc., a Nevada corporation, ("NTI"), to acquire
equipment and operate as a telecommunications long distance service provider.
As further partial consideration, the Company granted to Bentley King options
to purchase 1,400,000 shares of its common stock at a price of $0.06 per
share, exercisable at any time during the term of the loan. If the Company
prepays the loan, the options shall be exercisable until October 31, 2000.
As further conditions of the loan, on February 4, 1997, the Company executed a
Security Agreement and a Collateral Pledge Agreement whereby it pledged all
issued and outstanding shares of common stock of NTI as collateral for
repayment of the loan. Also on February 4, 1997, NTI executed a Guaranty
whereby it guaranteed repayment of the loan. True and correct copies of the
Promissory Note, Loan Agreement, Security Agreement, Collateral Pledge
Agreement and Guaranty are attached as exhibits hereto and are incorporated
herein by reference. See the Exhibit Index, Item 13 of this Report.
NTI Telecom was incorporated in the State of Nevada on January 27,
1997.
On June 2, 1997, which is subsequent to the period covered by this
Report, the Board of Directors of the Company adopted a cafeteria plan within
the context of Section 125 of the Internal Revenue Code and group medical
insurance. Under the cafeteria plan, the Company pays 75% of the medical plan
costs and 50% of the vision and dental plan for all employees that have
enrolled in the plans. The Company also offers a disability plan and cancer
coverage at employee expense. Group insurance coverage began in July, 1997,
which is subsequent to the period covered by this Report, and all employees
and certain consultants are eligible, provided that employees must remain
employed for 90 days after initial enrollment.
Business.
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The Company is a facilities based long distance company which
provides long distance (1+, 0+) and other telecommunication services directly
to end users, and "unbundled" or wholesale long distance services (1+ and 0+)
which are sold to non facilities based or switchless resale companies.
The Company sells primarily to a niche market of small to medium
size business customers, hotels, payphone companies, and residential users.
Residential customers comprise less than 20% of the Company's business. The
Company transmits long distance telephone calls through and over various types
of transmission circuits leased from other telecommunications carriers at
fixed rates. Each call is routed through the Company's Siemens DCO-CS switch,
which selects the least expensive routing among the various available
transmission alternatives to complete the call. Calls can also be completed by
various underlying carriers and the Company provides billing, customer service
and other features relative to the call. Profits are based on the Company's
ability to charge rates in excess of the Company's cost of transmitting calls
over the transmission lines selected by the switching equipment or in excess
of underlying carrier costs.
The Company is a provider of long distance services throughout the
United States. The Company's main services include MTS (Message
Telecommunication Service), which is also referred to as direct distance
dialing (000) or 1+ dialing. This is the most basic of the Company's services.
Other long distance products include private line service, travel service
(calling cards), 800 service for incoming toll free calls (the called party
pays for the call), prepaid calling cards, and Operator Services both live and
automated for the hospitality and pay phone industry.
The long distance industry is dominated by the three largest long
distance providers, namely AT&T, MCI and Sprint Communications, each with
revenues over $1 billion. The second level is comprised of companies under $1
billion but in excess of $100 million in annual revenues. The Company's goal
is to establish itself as a second-level long distance telecommunications
company. The Company will achieve this goal through sales utilizing the
Company's reseller (wholesale), agent and direct retail distribution channels.
The Company business plan also provides for growth through acquisition of
customer base of other long distance carriers.
Industry Overview
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The competitive long distance telecommunications industry has
evolved principally as a result of the divestiture in 1984, by AT&T of its
local exchange operations which are collectively known as Bell Operating
Companies. AT&T's former local business has been divided into seven regional
Bell operating companies (RBOCs) (NYNEX, Bell Atlantic, Bell South, Ameritech,
U.S. West, Southwestern Bell and Pacific Telesis).
As part of the AT&T divestiture decree, the United States was
divided into approximately 200 geographic areas known as Local Access
Transport Areas or "LATAs". Under the divestiture decree, RBOCs are now
permitted only to provide for local and long distance service originating and
terminating within a LATA ("IntraLATA" traffic). Long distance service between
LATAs ("InterLATA" traffic) is provided by long distance companies known as
"interexchange carriers" and include such companies as AT&T, MCI, Sprint and
the Company. The divestiture decree also requires the RBOCs and other local
exchange carriers to provide interexchange carriers with access to local
telephone exchange facilities which are "equal in type, quality and price"
("Equal Access") to that provided to AT&T. In addition, regulations were
mandated in order to place all long distance carriers on equal competitive
footing. Prior to equal access, customers of long distance carriers other than
AT&T frequently had to dial a local access number and a personal authorization
code to make a log distance call. These requirements were, for the most part,
eliminated by the equal access regulations, under which a customer is given
the opportunity to designate its primary long distance carrier. Now, to
connect with the network of their long distance carriers, customers merely
dial "1", the area code and the telephone number of their desired call
destination, which is the same method of access available to customers of AT&T
in all markets ("1+ dialing").
The divestiture decree and regulations mandating equal access
constitute the fundamental regulatory framework that allow interexchange
carriers other than AT&T to compete in the long distance market. The Company
views the long distance industry as a three-level industry, of which AT&T, MCI
and Sprint comprise the first-level with annual revenues in excess of $1
billion. The second- level is comprised of companies with less than $1
billion, but more than $100 million, in annual revenues. The Company is
positioned in the third-level with annual revenues of less than $100 million.
Competition in the industry is based on pricing, customer service, network
quality and value-added services.
There has been significant growth in the long distance service
industry during the past several years. According to a 1992 FCC report based
on information supplied by the National Exchange Carrier Association,
aggregate interstate switched access minutes increased at a compound annual
rate of 11.9% during the seven year period ended December 31, 1991. The FCC
report also indicated that aggregate long distance revenues reported by long
distance carriers to their stockholders during the 1991 calendar year amounted
to $60.7 billion. The compound annual growth rate for long distance revenue
was 6.0% from 1984 through 1991.
According to the FCC report, the percentage of long distance
revenues earned by second, third, and fourth level carriers, such as the
Company, has also increased since 1984. The first-level companies earned 88.5%
of such 1991 revenues, as compared to 97.4% in 1984, while the second through
fourth level carriers accounted for 11.5% of such 1991 revenues, as compared
to 2.6% in 1984. Aggregate long distance revenues of the second through fourth
level carriers grew at a compound annual rate of 31.3% from 1984 through 1991.
Such FCC data also indicated an increase in aggregate long distance revenues
of first-level carriers of 4.2% for the nine months ended September 30, 1992,
over the corresponding period in 1991. By contrast, revenues of second- and
third-level carriers increased by 12.3% between such periods.
Principal Divisions
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The Company attempts to maximize minutes from all three divisions of
its long distance telecommunications market. The Company primarily focuses its
efforts and expansion philosophy on the wholesale reseller and agent divisions
because it believes that larger interexchange carriers are not offering
comprehensive services to these markets.
Wholesale Reseller
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As providers of long distance services to their end-user retail
customers, wholesale resellers constantly strive to reduce their variable
costs of access to long distance transmission facilities and services.
Wholesale resellers' margin is the difference between the variable costs of
long distance services and the price at which they sell such services to end-
user retail customers.
Historically, first-level interexchange carriers have provided the
bulk of transmission facilities and services to wholesale resellers. However,
in recent years, such interexchange carriers have provided less favorable
pricing and have not offered all of the support services necessary, forcing
them to look to other providers. While a large number of companies compete in
the reseller market, the Company believes resellers are attracted to the
Company because of the range of transmission, billing and other support
services available from the Company.
The Company typically provides origination, termination, and billing
services to its reseller customers. Long distance service requirements of
these resellers vary depending on their retail customer base, existing service
capability and regional location.
Agent
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Master agents sign non-exclusive contracts with the Company to
represent the Company and sell its long distance services to end-users. The
agents are paid a variable commission on each service sold. While a large
number of companies compete in the agent market, the Company believes master
agents are attracted to the Company due to the high quality, commissions,
products and support of its services.
The Company provides turn-key long distance service for master
agents. These services include everything necessary for set up of end-user
accounts, transmission, billing, customer support, credit and collection and
all other services. Master agents build their own network of agents.
Retail
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The Company's retail division currently concentrates on commercial
customers, which use long distance services more frequently on weekdays during
normal business hours, as compared to residential users who tend to place
calls more frequently at night and on weekends when rates are lower. The
Company believes that commercial customers tend to use long distance services
more often and generate more billable minutes than residential users. The
Company primarily targets commercial customers which incur monthly phone
charges of approximately $75 to $10,000.
The Company provides long distance services to retail customers who
utilize the Company's services throughout the United States. The Company
offers a variety of value-added features and options designed to attract the
interest of long distance customers. For example, the Company offers unique
billing reports, which display the calls made in number called order, an
inbound "800", which service permits the customer to be billed for all
incoming long distance calls and a travel card service, which permits
customers to utilize the Company's network from locations outside their own
service areas. The Company primarily charges its customers on the basis of
minutes of usage at rates that vary with the time of day of call.
Rates and Charges
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Management believes that its rates generally will remain competitive
with or below rates charged by long distance carriers such as AT&T, MCI and
Sprint and most other common carriers. The savings realized by customers of
the Company and other long distance carriers may decrease in the future if and
to the extent AT&T further reduces its rates. The Company charges its
customers on the basis of minutes or partial minutes of usage at rates which
may vary with the distance, duration, time of day of the call and the type of
call. Rates charged for a call are not affected by the particular transmission
facilities selected by the Company switching system for call transmission but
are affected by the type of call a user may select.
Network Switching
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The Company's Siemens DCO-CS network switching equipment routes the
calls to their destinations over transmission circuits then available at the
least cost. In addition to networking, the Company's switching equipment
verifies the customer preassigned personal authorization code or the telephone
number called from, records billing data, tests transmission circuits and
monitors system quality and performance.
The Company believes that digital switches are generally superior to
all other currently available types of switches. Digital switches are able to
interface with digital transmission facilities leased by the Company, and are
able to handle multiple transmission channels on a single line, thereby
reducing transmission costs. A digital switch also provides superior quality
and ease of maintenance.
Sales and Marketing
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The Company utilizes an in-house sales staff which consists of a
marketing manager, sales manager, and account executives. This staff is
responsible for the wholesale reseller, agent and retail division accounts.
The sales staff utilizes various techniques to solicit customers and
continually monitors existing customer accounts to insure satisfaction with
the Company's services. In addition, the Company supplements sales efforts
with wholesale resellers and independent master agents (collectively referred
to herein as "marketing companies") who sell the Company's services to their
end-users.
Marketing companies concentrate on the sale of long distance
telecommunications products and services through a sales force of regional and
nationwide agents who solicit business and residential retail customers. The
marketing companies generally solicit accounts through face to face meetings
with small to medium business accounts. Marketing companies typically
establish a network of agents built on a foundation of continued residual
commissions on customer accounts serviced by the Company.
The Company anticipates hiring additional in-house sales
representatives, expanding its participation in national, regional and local
trade shows and expanding its line of advertising materials.
Business Expansion
- ------------------
The Company believes that there are currently 400 small and medium-
sized long distance companies operating throughout the United States which are
similar to the Company in terms of operating revenues and customer base. The
Company will evaluate several of these companies with a view to their
acquisition or purchase of their customer base. The addition of these entities
will enable the Company to increase its operating efficiency without a
significant increase in overhead by eliminating duplicate overhead and the
enhanced use of the Company's software and existing personnel.
The larger long distance companies such as AT&T, MCI and Sprint are
no longer actively pursuing acquisition of small and medium-sized long
distance companies because it adds only marginally to their market size and
economies of scale. This provides an opportunity for the Company to acquire
these small and medium-sized long distance companies without competition from
the larger long distance companies. See the caption "Competition" of this
Report.
Principal Products or Services and their Markets.
- -------------------------------------------------
The Company provides long distance and "800" telephone services,
travel cards and operator services for the hotel and payphone industry. See
the caption "Business" of this Report.
Distribution Methods of the Products or Services.
- -------------------------------------------------
The Company makes direct sales to telephone companies and end users.
See the caption "Business" of this Report.
Status of Any Publicly Announced New Product or Service.
- --------------------------------------------------------
None; not applicable.
Competition.
- ------------
The Company competes with numerous interexchange carriers and
resellers, some of which are substantially larger, have substantially greater
financial, technical and marketing resources, or utilize larger transmission
systems than the Company. AT&T is the dominant supplier of long distance
services in the United States InterLATA market. The Company also competes with
other national interexchange carriers, such as MCI, Sprint and regional
companies. The Company believes that the principal competitive factors
affecting its market share are pricing, transmission quality, customer
service, cost of underlying facilities and value added services. The Company
competes effectively with other interexchange carriers and resellers in its
service areas on the basis of these factors.
In the United States, price competition in the long distance
business generally has increased in intensity over the last five years. The
FCC has, on several occasions since 1984, approved or required price decreases
by AT&T. Additionally, the FCC's approval of AT&T "price cap" proposal and the
filing of AT&T's Tariffs 12 and 15 has intensified this price competition.
Since the Company believes that its service offerings and those of its
principal competitors are priced at or below the prices charged by AT&T for
its telecommunications services, reductions by AT&T in its rates result in
similar price decreases by the Company and by such competitors. The Company
anticipates that the FCC's application of "price cap" regulations to the Bell
Operating Companies and other local exchange carriers may similarly intensify
price competition but may also have a negative impact through imposition of
higher local access charges. The Company maintains its prices at competitive
levels and maintains adequate margins through aggressive purchasing of its
network from its vendors. This enables the Company to maintain an adequate
margin even as prices decrease due to competitive pressures.
The Company faces extensive competition in its three customer
divisions for long distance services. Other long distance carriers offer
similar services, and there are a number of major carriers which offer
products similar to those of the Company. However, not all long distance
carriers compete in each product line. Management believes that ACCESS,
Expresstel, High Rim and One to One are the Company's primary competitors in
its market niche.
Sources and Availability of Raw Materials.
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None; not applicable.
Dependence on One or a Few Major Customers.
- -------------------------------------------
The Company's customer base is diverse. No individual customer
accounts for more than 10% of the Company's business base.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or
Labor Contracts.
- ----------------
The Company has applied for acceptance of its tariff with the Public
Utility Commissions of all states except Michigan and Utah, which are not
regulated. Of these states, four have already accepted the tariff, and the
Company expects that the balance of these tariffs will be accepted within 30
days.
Governmental Approval of Principal Products or Services.
- --------------------------------------------------------
Providers of long distance and operator services are required to
obtain domestic and international tariffs. The Company has applied for such
tariffs in all states except Michigan and Utah, and has obtained approval in
four states, with the rest pending. In addition, the Company has made its
"214" tariff filing with the Federal Communications Commission. The Company's
operations do not currently require it to obtain an international tariff and
the Company does not have any present plans to do so.
Effects of Existing or Probable Governmental Regulations.
- ---------------------------------------------------------
In addition to the above-referenced tariff requirements, the
Company is required to qualify to do business as a foreign corporation in each
state (other than its state of incorporation) in which it does business. To
date, the Company has qualified to do business in 31 of these states.
Cost and Effect of Compliance with Environmental Laws.
- ------------------------------------------------------
The Company does not believe that its current or contemplated
operations are subject to compliance with environmental laws.
Research and Development Expenses.
- ----------------------------------
None; not applicable.
Number of Employees.
- --------------------
The Company presently has 22 employees, all of which are employed
full time. It is expected that by September 30, 1997, the Company will hire
an additional five full-time employees.
Item 2. Description of Property.
------------------------
The Company leases approximately 10,000 square feet of office space
located at 101 Convention Center Drive, Suite P125, Las Vegas, Nevada, at a
current rent of $88,701 for the calendar year ending December 31, 1997. Rent
expenses for the calendar years ended December 31, 1996, and 1995, were
$22,284 and $12,561, respectively. Annual lease payments for the years 1998
through 2001 are as follows:
Year Annual Rent
---- -----------
1998 $ 92,841
1999 96,986
2000 101,133
2001 60,403
The lease is for a five year term, with the possibility of five year
extensions, and is noncancelable.
The Company leases digital, fiber optic transmission facilities at
either fixed rates or at rates which vary according to usage. The Company
leases these facilities at rates which are less than those it charges to its
customers for connecting calls through these facilities. The continued
availability of cost-effective digital, fiber optic transmission facilities in
certain of the Company's service origination areas, as well as proper planning
of the utilization of leased transmission facilities, is critical to the
Company's ability to provide its services on a profitable basis.
Fixed cost leased facilities include intercity private line
circuits, and DS-1, DS-2, and DS-3 provided by other facilities based bulk
carriers. Bulk carriers are also known as "carrier's carriers" and provide
large transmission capacity. These circuits represent point-to-point bulk
circuits which are broken down by the Company into retail and resale
subscriber capacity. For routes that carry high volumes of traffic, the
Company's fixed cost facilities normally cost the Company less per minute of
usage than usage sensitive facilities. Accordingly, the Company, through use
of its Siemens DCO-CS computerized network switching equipment and its
contract negotiations, endeavors to maximize usage of fixed cost leased
facilities and negotiated rates from its underlying carrier's carriers.
The Company contracts with other various underlying
telecommunication carriers to provide origination and terminating transmission
of calls not switched by the Company. The Company provides direct billing to
end-users and provides billing tapes and other enhancements. The Company is
dependent upon the underlying carriers for competitive contract arrangements.
Item 3. Legal Proceedings.
------------------
Except as indicated below, to the knowledge of management, during
the past five years, no present or former director, executive officer, or
person nominated to become a director or an executive officer of the Company:
(1) Filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an
executive officer at or within two years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him or her from or
otherwise limiting his involvement in any type of business, securities or
banking activities;
(4) Was found by a court of competent jurisdiction in a civil
action, by the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated any federal or state securities law, and
the judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or vacated.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of the calendar year ended December 31,
1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
---------------------------------------------------------
Market Information
- ------------------
The Company's common stock is traded on the "OTC Bulletin Board" of
the National Association of Securities Dealers, Inc. However, there is no
"established trading market" in these shares of common stock.
The range of high and low bid quotations for the Company's
common stock during the each quarter of the year ended December 31, 1995 and
each quarter of the calendar year ended December 31, 1996, and the first two
quarters of 1997, is shown below. Prices are inter-dealer quotations as
reported by the NASD and do not necessarily reflect transactions, retail
markups, mark downs or commissions.
<TABLE>
<CAPTION>
STOCK QUOTATIONS*
BID
Quarter ended: High Low
- -------------- ---- ---
<S> <C> <C>
March 31, 1995 0.02 0.02
June 30, 1995 0.02 0.02
September 30, 1995 0.02 0.02
December 31, 1995 0.02 0.02
March 31, 1996 0.02 0.001
June 30, 1996 0.01 0.001
September 30, 1996 1.375 1.00
December 31, 1996 1.00 0.0625
March 31, 1997 0.125 0.0625
June 30, 1997 0.375 0.125
</TABLE>
* The future sale of presently outstanding "unregistered" and
"restricted" common stock of the Company by present members of
management and persons who own more than five percent of the
outstanding voting securities of the Company may have an
adverse effect on any market that may develop in the shares of
common stock of the Company.
Holders
- -------
The number of record holders of the Company's common stock as of
August 28, 1997, was approximately 1180.
Dividends
- ---------
The Company has not declared any cash dividends with respect to its
common stock, and does not intend to declare dividends in the foreseeable
future. The present intention of management is to utilize all available funds
for the development of the Company's business. There are no material
restrictions limiting, or that are likely to limit, the Company's ability to
pay dividends on its common stock.
Recent Sales of Unregistered Securities.
- ----------------------------------------
For a discussion of the issuances of "unregistered" and "restricted"
shares of the Company's common stock in connection with the reorganizations
outlined under the heading "Business Development" of the caption "Description
of Business" of this Report, and the cancellation of certain of those shares
in connection with the rescissions of the Sierra and Tahoe On-Line
reorganizations, see the Current Reports on Forms 8-K and 8-K-A1 that were
filed with the Securities and Exchange Commission with respect to such
transactions. See the Exhibit Index, Item 13 of this Report.
On July 3, 1996, the Board of Directors of the Company unanimously
resolved to issue "unregistered" and "restricted" shares of its common stock
to the following entities and in the amounts and for the consideration
indicated: (i) 11,000 shares to the McKenna Group, in consideration of
$11,000; (ii) 50,000 shares to Telcom Communications, Ltd., in consideration
of $5,000; and (iii) a total of 500,000 shares to Two Catawba Corporation, in
consideration of consulting services rendered, with 100,000 shares to be
issued on the 15th day of every month commencing on June 15, 1997 and ending
on August 15, 1997, and with the final 200,000 shares to be issued on
September 15, 1997. All of these shares have now been issued. On August 25,
1997, the Board of Directors of the Company unanimously consented to issue
350,000 "unregistered" and "restricted" shares of common stock to Bentley King
as collateral for the Company's February 4, 1997, loan from Bentley King.
Each of these entities had access to all material information
regarding the Company prior to the offer or sale of these securities, the
offers and sales of which are believed to have been exempt from the
registration requirements of Section 5 of the Securities Act of 1933 pursuant
to Section 4(2) thereof, and from similar states' securities laws, rules and
regulations requiring the offer and sale of securities by available state
exemptions from such registration.
Item 6. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
Plan of Operation.
- ------------------
As of April 15, 1997, which is subsequent to the period covered by this
Report, the Company's Siemens switch is fully operational and customers are
being fully serviced. Additional customers will be solicited on an ongoing
basis. The Company began receiving revenues from these customers in July,
1997.
The Company's objective is to reach a volume of revenues that would
enable it to be classified as a second-level long distance company with annual
revenues in excess of $100 million. In order to reach this level, the Company
will continue to make an effort to increase revenue, improve cash flows and
increase earnings by implementing the following business strategies. However,
there can be no assurance that such strategies will be successful.
Nationwide Origination
- ----------------------
The Company provides nationwide origination and termination of long
distance services. This enables retail, agent and wholesale reseller customers
to be added in any of the 50 United States, thereby enabling expansion to
occur on a national, rather than regional, basis.
Build Call Volume
- -----------------
In order to reach certain economics of scale, the Company will
continue to focus on building minutes of long distance traffic by region, to
defined levels, prior to establishing an independent switching system for that
region. This strategy allows the Company to build call volumes within
geographic areas without incurring large capital expenditures for switching
equipment until the call volumes meet an acceptable predefined level. Once the
Company has established the call volumes to an acceptable level, the Company
can reduce its cost of transmission by establishing a switching system.
The management of the Company is experienced at traffic engineering,
utilized to evaluate the optimum network configuration which will reduce the
Company's costs. Retail, agent and wholesale customers will receive the
benefits of a network configuration that provides for lower cost transmission
in markets where call volume is high and supported by the Company's switching
systems. In addition, due to the Company's large volume of traffic, the
Company has negotiated long distance facility arrangements that allow it to
provide a low cost per minute in the other areas in which it operates.
Consolidation to Support Marketing
- ----------------------------------
The Company has a strategic plan for acquiring small and medium-size
long distance telephone companies as a method of achieving controlled growth.
The size of the acquisition targets is a key concept in the Company's
acquisition strategy. Combining smaller and medium-size long distance
companies creates large gains in market share and immediate operating
improvements through economies of scale. The Company's plan is to use the
consolidation of other long distance companies operating throughout the United
States into a platform to serve the sales made by retail, agent and wholesale
resellers.
The Company has and will seek additional affiliations with existing
marketers of long distance telephone services, agents and wholesale resellers,
which sell to their end users' long distance telecommunications services that
utilize the Company's existing relationships and facilities. These marketing
companies supplement the Company's direct sales staff and act as the Company's
nationwide distribution channel.
Results of Operations.
- ----------------------
Net sales for the calendar years ending December 31, 1995 and 1996,
were $10,747 and $29,571, respectively. Total expenses during these years
were $110,185 and $245,568, resulting in losses from operations of $99,438 and
$215,997, respectively.
During the calendar year ended December 31, 1996, the Company entered
into agreements to acquire three operating companies in exchange for 1,230,000
shares of its common stock. In 1997, which is subsequent to the period
covered by this Report, the agreements were rescinded. However, the Company
was unable to recover all of the shares issued in the acquisitions and a total
of 222,372 shares, valued at the subscription price of $1.00 per share, will
not likely be recovered. As a result, the Company recorded a loss on
discontinued operations of $222,372 in the calendar year ended December 31,
1996. Net losses for the calendar years ended December 31, 1995, and 1996,
were $99,438 ($0.02 per share) and $452,238 ($0.06 per share), respectively.
Liquidity.
- ----------
The Company has been able to meet all of its cash needs up to the time
that revenue from the sale of its services began to be received. As of the
date of this Report, management expects that the Company will be able to meet
its liquidity requirements through such revenues. It is not anticipated that
the Company will be required to raise additional capital through borrowing or
by selling additional securities during the next 12 months, although there can
be no guarantee that such activities will not become necessary in the future.
It is not anticipated that the Company will be required to purchase
any plant or significant equipment in the next 12 months.
Item 7. Financial Statements.
---------------------
Financial Statements for the years ended
December 31, 1996, and December 31, 1995
Independent Auditors' Report
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
(Deficit)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ---------------------
During the Company's two most recent calendar years, and to the date
of this Report, the Company's principal independent accountant has not
resigned (or declined to stand for re-election) or been dismissed.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
- --------------------------------------------------
Identification of Directors and Executive Officers
- --------------------------------------------------
The following table sets forth the names of all current directors and
executive officers of the Company. These persons will serve until the next
annual meeting of stockholders or until their successors are elected or
appointed and qualified, or their prior resignation or termination.
<TABLE>
<CAPTION>
Date of Date of
Positions Election or Termination
Name Held Designation or Resignation
---- ---- ----------- --------------
<S> <C> <C> <C>
Michael W. Gorts President 7/96 *
Director 7/96 *
Tony Tegano Chairman of the 7/96 *
Board of Directors
Lonnie Ellis Director 7/96 *
Annette Moreno Secretary/Treasurer 7/96 *
</TABLE>
* These persons presently serve in the capacities indicated opposite
their respective names.
Term of Office
- --------------
The terms of office of the current directors shall continue until
the annual meeting of stockholders, which has been scheduled by the Board of
Directors to be held in October of each year. The annual meeting of the Board
of Directors immediately follows the annual meeting of stockholders, at which
executive officers for the coming year are elected.
Business Experience
- -------------------
Michael W. Gorts, President and Director. Mr. Gorts, age 54, is a
graduate of the University of New York, with a B.A. degree in Liberal Arts.
He was Executive Vice President\Consultant of Operations Track from 1989 to
1991. Operations Track, based in Orlando, Florida, was a multi-disciplinary
consulting firm whose clients were primarily Fortune 500 organizations. From
1991 to 1995, Mr. Gorts served as Vice President and Chief Operating Officer
of CRC Long-Distance Corporation in Las Vegas, Nevada. He became President of
Net Tel in 1995, and has been President of the Company since July, 1996.
Tony Tegano, Chairman of the Board of Directors. Mr. Tegano is 60
years of age. In 1971, he founded Tango Pools, Inc., the most successful
swimming pool construction company in Nevada. Mr. Tegano and three partners
founded Custom Business Interiors, a millwork manufacturing company located in
Henderson, Nevada, in 1988. Tango Pools is anticipated to have gross sales in
excess of $15 million in 1197, and Custom Business Interiors has gross sales
of $6 million to $8 million annually. Mr. Tegano is also a 50% partner in
Baja Millwork, located in Tijuana, Mexico. He is also active with many
professional and civic associations, as well as several charitable and
educational institutions in the Las Vegas area.
Lonnie Ellis, Director. Mr. Ellis is 33 years of age. In 1987, he
received a B.S. degree in Business Administration, with distinction, from the
University of Nevada, Reno. Mr. Ellis is a 1994 graduate, cum laude, of the
University of San Diego law school. In 1992, he was employed as a Tax
Supervisor at the accounting firm Fair, Anderson & Langerman; he has worked as
a Tax Manager at that firm since 1995. Mr. Ellis is a member of the bars of
the states of California and Nevada and the District of Columbia.
Annette Moreno, Secretary/Treasurer. Ms. Moreno, age 53, graduated
from Stockton State College in 1985 with a B.S. degree in Accounting and
Business Administration. She served as Accounts Payable Manager with Central
Telephone Company in Las Vegas (currently known as "Sprint-Centel") from 1975
to 1981. Her duties included the monitoring and disbursement of payables in
excess of $15,000,000 per month. Ms. Moreno was Chief Financial Officer of
Colorado River Communications, Inc. from 1993 through 1995. This company is a
long-distance provider with 1+ and 0+ operations. Ms. Moreno has served as
Secretary/Treasurer of the Company since October 30, 1996.
Family Relationships
- --------------------
There are no family relationships between any directors or executive
officers of the Company, either by blood or by marriage.
Involvement in Certain Legal Proceedings
- ----------------------------------------
Except as indicated below and to the knowledge of management, during
the past five years, no present or former director, person nominated to become
a director, executive officer, promoter or control person of the Company:
(1) Was a general partner or executive officer of any business by
or against which any bankruptcy petition was filed, whether at
the time of such filing or two years prior thereto;
(2) Was convicted in a criminal proceeding or named the subject of
a pending criminal proceeding (excluding traffic violations and
other minor offenses);
(3) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining
him from or otherwise limiting the following activities:
(i) Acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool
operator, floor broker, leverage transaction merchant,
associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in
securities, or as an affiliated person, director or
employee of any investment company, bank, savings and loan
association or insurance company, or engaging in or
continuing any conduct or practice in connection with such
activity;
(ii) Engaging in any type of business practice; or
(iii) Engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with
any violation of federal or state securities laws or
federal commodities laws;
(4) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any federal or
state authority barring, suspending or otherwise limiting for
more than 60 days the right of such person to engage in any
activity described above under this Item, or to be associated
with persons engaged in any such activity;
(5) Was found by a court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have
violated any federal or state securities law, and the judgment
in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or
vacated; or
(6) Was found by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have
violated any federal commodities law, and the judgment in such
civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated.
Item 10. Executive Compensation.
-----------------------
Cash Compensation
- -----------------
The following table sets forth the aggregate compensation paid by
the Company for services rendered during the periods indicated:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year or Other Restricted Option/ LTIP All
Principal Period $ $ Annual Stock SAR's Payouts Other
Position Ended Salary Bonus Compen- Awards ($) (#) ($) Compensa-
December sation($) tion ($)
31
Michael W. 1995 -0- -0- -0- -0- -0- -0- -0-
Gorts, 1996 $6,497 -0- -0- -0- -0- -0- -0-
President and
Director
Tony Tegano, 1995 -0- -0- -0- -0- -0- -0- -0-
Chairman of 1996 -0- -0- -0- -0- -0- -0- -0-
the Board
Lonnie Ellis, 1995 -0- -0- -0- -0- -0- -0- -0-
Director 1996 -0- -0- -0- -0- -0- -0- -0-
Annette Moreno, 1995 -0- -0- -0- -0- -0- -0- -0-
Sec./Treasurer 1996 $9,083 -0- -0- -0- -0- -0- -0-
Robert Briare, 1995 -0- -0- -0- -0- -0- -0- -0-
former Sec./ 1996 -0- -0- -0- -0- -0- -0- -0-
Treasurer
Robert Amira, 1995 -0- -0- -0- -0- -0- -0- -0-
former director 1996 -0- -0- -0- -0- -0- -0- -0-
Robin D. Porter 1995 -0- -0- -0- -0- -0- -0- -0-
former Pres./CEO1996 -0- -0- -0- -0- -0- -0- -0-
,treasurer & Dir.
Rodney G. Porter1995 -0- -0- -0- -0- -0- -0- -0-
former Operat- 1996 -0- -0- -0- -0- -0- -0- -0-
tions Officer
and director
Godfrey Penrod, 1995 -0- -0- -0- -0- -0- -0- -0-
former Chairman 1996 -0- -0- -0- -0- -0- -0- -0-
of the Board
David Call, 1995 -0- -0- -0- -0- -0- -0- -0-
former VP and 1996 -0- -0- -0- -0- -0- -0- -0-
director
Jennie Porter, 1995 -0- -0- -0- -0- -0- -0- -0-
former Sec. and 1996 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
Bonuses and Deferred Compensation
- ---------------------------------
None; not applicable.
Compensation Pursuant to Plans
- ------------------------------
None; not applicable.
Pension Table
- -------------
None; not applicable.
Other Compensation
- ------------------
None; not applicable.
Compensation of Directors
- -------------------------
There are no standard arrangements pursuant to which directors of the
Company are compensated for any services provided as a director, including any
amounts payable of committee participation or special assignments.
Employment Contracts
- --------------------
The Company does not have any employment contracts with any officer or
employee.
Termination of Employment and Change of Control Arrangements
- ------------------------------------------------------------
None.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The Company does not have any securities registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
therefore, its directors and executive officers and the beneficial owners of
more than 10% of its issued and outstanding common stock are not required to
file statements of beneficial ownership of securities with the Securities and
Exchange Commission in accordance with the Exchange Act.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following tables set forth the shareholdings of the Company's
directors and executive officers and those persons who own more than five
percent of the Company's common stock as of August 28, 1997, with the
computations being based upon 9,222,981 shares of common stock being
outstanding:
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Number of Shares Percent
Name and Address (1) Beneficially Owned of Class
- ---------------- ------------------ --------
<S> <C> <C>
Michael Gorts 1,490,875 16.2%
c/o Net Telecommunications, Inc.
101 Convention Center Dr., Suite P125
Las Vegas, NV 89109
Tony Tegano -0- (2) -0-
c/o Net Telecommunications, Inc.
101 Convention Center Dr., Suite P125
Las Vegas, NV 89109
Lonnie Ellis -0- -0-
c/o Net Telecommunications, Inc.
101 Convention Center Dr., Suite P125
Las Vegas, NV 89109
Annette Moreno -0- -0-
c/o Net Telecommunications, Inc.
101 Convention Center Dr., Suite P125
Las Vegas, NV 89109
</TABLE>
All directors and officers as a group 1,490,875 16.2%
(Four persons)
(1) See Part I, Item 5, below, for information concerning the
offices or other capacities in which the foregoing persons
serve with the Company.
(2) A total of 1,490,875 "unregistered" and "restricted" shares of
the Company's common stock are held by Sharon Tegano, who is
the daughter of Mr. Tegano. However, Ms. Tegano is not a
minor and does not share a residence with Mr. Tegano and these
shares will not be deemed to be beneficially owned by Mr.
Tegano.
FIVE PERCENT STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Shares Percent
Name and Address Beneficially Owned of Class
- ---------------- ------------------ --------
<S> <C> <C>
Chris Fanelli 483,871 5.2%
3595 S. Polaris, #102
Las Vegas, NV 89103
Michael Gorts 1,490,875 16.2%
9301 Leaping Lily Lane
Las Vegas, NV 89129
Sharon Tegano 1,490,875 16.2%
c/o Net Telecommunications, Inc.
101 Convention Center Drive
Las Vegas, NV 89109
Windsor Acquisition Corp. 890,788 9.7%
140 Heatherdell Road
Ardsley, NY 105021
_______ ______
4,356,409 47.3%
</TABLE>
Changes in Control
- ------------------
There are presently no arrangements that may result in a change in
control of the Company. However, by executing the Security Agreement and the
Collateral Pledge Agreement with Bentley Kin on February 4, 1997, the Company
pledged all of the issued and outstanding shares of common stock of NTI, its
wholly-owned subsidiary, to secure repayment of the Bentley King loan. See
the heading "Subsequent Events" of the caption "Description of Business" of
this Report.
Item 12. Certain Relationships and Related Transactions.
-----------------------------------------------
Transactions with Management and Others.
- ----------------------------------------
There have been no material transactions, series of similar
transactions or currently proposed transactions, to which the Company or any
of its subsidiaries was or is to be a party, in which the amount involved
exceeds $60,000 and in which any director or executive officer, or any
security holder who is known to the Company to own of record or beneficially
more than five percent of the Company's common stock, or any member of the
immediate family of any of the foregoing persons, had a material interest.
Certain Business Relationships.
- -------------------------------
There have been no material transactions, series of similar
transactions or currently proposed transactions, to which the Company or any
of its subsidiaries was or is to be a party, in which the amount involved
exceeds $60,000 and in which any director or executive officer, or any
security holder who is known to the Company to own of record or beneficially
more than five percent of the Company's common stock, or any member of the
immediate family of any of the foregoing persons, had a material interest.
Indebtedness of Management.
- ---------------------------
There have been no material transactions, series of similar
transactions or currently proposed transactions, to which the Company or any
of its subsidiaries was or is to be a party, in which the amount involved
exceeds $60,000 and in which any director or executive officer, or any
security holder who is known to the Company to own of record or beneficially
more than five percent of the Company's common stock, or any member of the
immediate family of any of the foregoing persons, had a material interest.
Parents of the Issuer.
- ----------------------
The Company has no parent.
Transactions with Promoters.
- ----------------------------
There have been no material transactions, series of similar
transactions, currently proposed transactions, or series of similar
transactions, to which the Company or any of its subsidiaries was or is to be
a party, in which the amount involved exceeds $60,000 and in which any
promoter or founder, or any member of the immediate family of any of the
foregoing persons, had a material interest.
Item 13. Exhibits and Reports on Form 8-K.
---------------------------------
Reports on Form 8-K*
Current Report on Form 8-K, dated July 5, 1996**
Current Report on Form 8-K, dated August 1, 1996**
Current Report on Form 8-K-A1, dated August 1, 1996**
Current Report on Form 8-K, dated August 24, 1996**
Current Report on Form 8-K-A1, dated August 24, 1996**
Current Report on Form 8-K-A2, dated August 24, 1996**
Exhibits*
(i)
Where Incorporated
in this Report
--------------
None.
(ii)
Exhibit
Number Description
- ------ -----------
10.1 Promissory Note
10.2 Loan Agreement
10.3 Security Agreement
10.4 Collateral Pledge Agreement
10.5 Guaranty
21 Subsidiaries of the Company
27 Financial Data Schedule
* Summaries of all exhibits contained within this
Report are modified in their entirety by reference
to these Exhibits.
** These documents and related exhibits have been
previously filed with the Securities and Exchange
Commission and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NET TELECOMMUNICATIONS, INC.
Date: 10-6-97 By /s/ Michael W. Gorts
-------------- --------------------------------------
Michael W. Gorts, President and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Report has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated:
NET TELECOMMUNICATIONS, INC.
Date: 10-6-97 By /s/ Michael W. Gorts
------------- ------------------------------------
Michael W. Gorts, President and
Director
Date: 10-7-97 By /s/ Tony Tegano
------------- ------------------------------------
Tony Tegano, Chairman of the Board
Date: 10/6/97 By /s/ Lonnie Ellis
-------------- ------------------------------------
Lonnie Ellis, Director
Date: 10/6/97 By /s/ Annette Moreno
-------------- ------------------------------------
Annette Moreno, Secretary/Treasurer
<PAGE>
NET TELECOMMUNICATIONS
(Formerly Silver Ledge, Inc.)
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
[Jones, Jensen & Company letterhead]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Net Telecommunications, Inc.
(Formerly Silver Ledge, Inc.)
(A Development Stage Company)
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of Net
Telecommunications, Inc. (formerly Silver Ledge, Inc.) (a development stage
company) as of December 31, 1996 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year then
ended, and from inception on October 24, 1994 through December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Net Telecommunications, Inc. (formerly Silver Ledge, Inc.) (a development
stage company) as of December 31, 1996 and the results of their operations and
their cash flows for the year then ended and from inception on October 24,1994
through December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 5 to
the consolidated financial statements, Net Telecommunications, Inc. has
suffered losses from operations for each of the years ended December 31, 1996
and 1995, and has a stockholders' deficit as of December 31, 1996 that
together raise substantial doubt about their ability to continue as a going
concern. Management's plans in regard to these matters also are described in
Note 5. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result from the
outcome of this uncertainty.
/s/Jones, Jensen & Company
Jones, Jensen & Company
June 6, 1997
<TABLE>
NET TELECOMMUNICATIONS, INC.
(Formerly Silver Ledge, Inc.)
(A Development Stage Company)
Consolidated Balance Sheet
December 31, 1996
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash in bank $ 15,742
Prepaid expenses 17,485
Total Current Assets 33,227
PROPERTY AND EQUIPMENT (Note 1)
Office equipment 17,363
Furniture 5,925
Less - accumulated depreciation (5,196)
Property and Equipment - net 18,092
OTHER ASSETS (Note 1) 25,476
TOTAL ASSETS $ 76,795
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 40,846
Accrued expenses 4,384
Note payable - current portion (Note 2) 19,312
Total Current Liabilities 64,542
LONG-TERM DEBT (Note 2) 65,688
Total Liabilities 130,230
COMMITMENTS (Note 6 and 8)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; par value $0.001; 50,000,000 authorized,
8,318,892 issued and outstanding 8,319
Additional paid-in capital 849,920
Subscriptions receivable (Note 9) (358,998)
Deficit accumulated during the development stage (552,676)
Total Stockholders' Equity (Deficit) (53,435)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 76,795
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
NET TELECOMMUNICATIONS, INC.
(Formerly Silver Ledge, Inc.)
(A Development Stage Company)
Consolidated Statements of Operations
<CAPTION>
From
Inception on
October 24,
For the Years Ended 1994 Through
December 31, December 31,
1996 1995 1996
<S> <C> <C> <C>
NET SALES $ 29,571 $ 10,747 $ 40,318
EXPENSES
Depreciation and amortization 3,172 2,024 5,196
General and administrative 242,396 108,161 351,557
Total Expenses 245,568 110,185 356,753
LOSS FROM OPERATIONS 215,997 (99,438) (316,435)
OTHER EXPENSE
Interest expense 13,869 - 13,869
Total Other Expense 13,869 - 13,869
LOSS BEFORE DISCONTINUED OPERATIONS (229,866) (99,438) (330,304)
DISCONTINUED OPERATIONS (Note 7) (222,372) - (222,372)
NET LOSS $ {452,238) $ (99,438) $ (552,676)
LOSS PER SHARE $ (0.06) $ (0.02)
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,930,491 4,403,990
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
NET TELECOMMUNICATIONS, INC.
(Formerly Silver Ledge, Inc.)
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage
<S> <C> <C> <C> <C>
Balance, October 24, 1994 - $ - $ - $ -
Shares issued to initial
stockholders for services
valued at $1,000 on October
24, 1994 4,472,803 4,473 (3,473)
Net loss from inception to
December 31, 1994 - - - (1,000)
Balance, December 31, 1994 4,472,803 4,473 (3,473) (1,000)
Issuance of common stock in
exchange for debt November
1995 at an approximate
price of $0.14 per share 448,473 449 59,551 -
Issuance of common stock for
cash at various dates
approximately $0.14 per
share 512,882 513 70,788 -
Net loss for the year ended
December 31, 1995 - - - (99,438)
Balance, December 31, 1995 5,434,158 5,435 126,866 (100,438)
Issuance of common stock
for cash at various dates
at approximately $0.14 per
share 565,362 565 78,134 -
Common stock issued in
recapitalization 2,000,000 2,000 (2,000) -
Issuance of common stock
for cash at various dates
at $1.00 per share 47,000 47 46,953 -
Issuance of common stock
for cash at $0.10 per share
on July 3, 1996 50,000 50 4,950 -
Issuance of common stock in
failed acquisitions (Note 7) 222,372 222 222,150 -
Options granted at $0.06 per
share (Note 9) - - 372,867 -
Net loss for the year ended
December 31, 1996 - - - (452,238)
Balance, December 31, 1996 8,318,892 $ 8,319 $ 849,920 $ (552,676)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
NET TELECOMMUNICATIONS, INC.
(Formerly Silver Ledge, Inc.)
(A Development Stage Company)
Consolidated Statements of Cash Flows
<CAPTION>
From
Inception on
October 24,
For the Years Ended 1994 Through
December 31, December 31,
1996 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (452,238) $ (99,438) $ (552,676)
Adjustments to reconcile net
income (loss to net cash
provided (used) by operating
activities:
Depreciation and amortization 3,172 2,024 5,196
Loss on rescinded acquisition
(Note 7) 222,372 - 222,372
Issuance of stock options 13,869 - 13,869
Change in assets and liabilities:
(Increase) decrease in accounts
receivable 5,808 (5,808) -
(Increase) decrease in receivable
related parties 5,120 (5,120) -
(Increase) decrease in prepaid
expenses (17,411) (74) (17,485)
(Increase) decrease in other assets(25,476) - (25,476)
Increase (decrease )in accounts
payable 38,240 5,260 43,500
Increase (decrease) in accrued
expenses 3,932 452 4,384
Increase (decrease) in payable to
officer (6,555) 3,901 (2,654)
Net Cash Used in Operating
Activities (209,167) (98,803) (308,970)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (13,170) (10,118) (23,288)
Net Cash Used in Investing
Activities $ (13,170 ) $ (10,118) $ (23,288)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans $ 85,000 $ - $ 85,000
Sale of common stock 130,699 131,301 263,000
Net Cash Provided from Financing
Activities 215,699 131,301 348,000
NET INCREASE (DECREASE) IN CASH (6,638) 22,380 15,742
CASH BEGINNING OF PERIOD 22,380 - -
CASH END OF PERIOD $ 15,742 $ 22,380 $ 15,742
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR
Interest $ - $ - $ -
Income taxes $ - $ - $ -
NON CASH FINANCING
Issuance of stock options $372,867 $ - $372,867
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NET TELECOMMUNICATIONS, INC.
(Formerly Silver Ledge, Inc.)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The accompanying consolidated financial statements include the accounts of Net
Telecommunications, Inc. (Net Tel) and its wholly-owned subsidiary, Long
Distance International (LDI). Collectively, they are referred to herein as
"the Company". All significant intercompany accounts and transactions have
been eliminated.
Net Tel was originally incorporated under the laws of the State of Montana
under the name of Silver Ledge, Inc. Net Tel has been in the business of
manufacturing and selling steel and steel related products such as wood
burning stoves. In connection with the reorganization described below, Net Tel
has disposed of its steel related business and changed its name to Net
Telecommunications, Inc. Net Tel was reincorporated in Nevada on July 1, 1996.
LDI was incorporated under the laws of the State of Nevada on October 24,
1994. LDI started its operations in May of 1995 primarily as a reseller of
long distance telephone services.
On July 10, 1996, Net Tel and LDI completed an Agreement and Plan of
Reorganization whereby Net Tel issued shares of its common stock in exchange
for all of the issued and outstanding common stock of LDI. The acquisition was
accounted for as a recapitalization of LDI, because the shareholders of LDI
control the Company after the acquisition. Therefore, LDI is treated as the
acquiring entity for accounting purposes. There was no adjustment to the
carrying value of the assets or liabilities of LDI in the exchange as the
market value approximated the net carrying value. Net Tel is the acquiring
entity for legal purposes and LDI is the surviving entity for accounting
purposes.
b. Accounting Method
The Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31 year end.
c. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be
cash equivalents.
d. Earnings (Loss) Per Share
The computation of earnings (loss) per share of common stock is based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the periods presented.
e. Income Taxes
Due to net losses at December 31, 1996, no provision for income taxes has been
made. There are no deferred income taxes resulting from Income and expense
items being reported for financial accounting in different periods than for
tax reporting purposes.
f. Property and Equipment
The cost of the property and equipment is depreciated over the estimated
useful lives (5 - 7 years) of the related assets. Depreciation is computed
using the straight line method.
g. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
h. Other Assets
Other assets consist of various refundable deposits for leases.
NOTE 2 - NOTE PAYABLE
During 1996, the Company received advances of $85,000 in accordance with a
loan agreement which was formalized on February 4, 1997. The agreement
provides for total advances of $300,000 to be made to the Company by June 1,
1997. The balance bears interest at 10% per annum. As additional
consideration, the Company granted stock options to the lender to purchase
1,400,000 shares at a price of $0.06 per share. The consideration attributable
to the $85,000 advanced during 1996 was $372,867. This will be amortized over
the life of the loan and recorded as additional interest expense. The
effective interest rate of the loan is 141% when considering the additional
consideration. Payments are due annually commencing on November 1, 1997. The
current portion due on the $85,000 balance is $19,312. Long-term maturities
are as follows:
1998 $ 19,845
1999 21,830
2000 24,013
$ 65,688
NOTE 3 - INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes (SFAs 109). SFAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than enactments of changes in the tax law or rates. For tax purposes, the
Company has available at December 31, 1990 net operating loss carryforwards of
approximately $530,000 for federal income which will expire in 2011. The tax
ben~ fit of the net operating loss carryforwards is offset by a valuation
allowance of the same amount due to the uncertainty that the carryforwards
will be used before they expire.
NOTE 4- CONCENTRATIONS OF RISK
The Company has entered into an agreement with LCI International, Inc. (LCI).
LCI appointed the Company as a non-exclusive representative to promote the
sale of and solicit orders for LCI long distance telephone services. The
Company receives commissions for the sale of the above services at 10% of
monthly collected revenue for 12 months. After 12 months the commission rate
varies from 5% to 15% based on various monthly collected revenue levels per
different types of name long distance services as outlined in the agreement
and its amendments.
The Company has also entered into an agreement with Metrocom Corporation
(Metrocom). Metrocom appointed the Company as a non-exclusive representative
to sell and solicit orders for Metrocom long distance telephone services. The
Company also gets commissions on this agreement based on a complicated
commission schedule with rates from 5% to 30% as outlined in the agreement per
certain volume levels of orders obtained. During the years ended December 31,
1896 and 1995, 97% and 100%, respectively, of the commissions received were
from LCI.
The Company has consultant agreements with individuals and other organizations
to pay commissions of 5% to 6% on billed long distance minus taxes and
discounts.
NOTE 5 - GOING CONCERN
The Company has experienced losses during the year ended December 31, 1998.
The Company has yet to generate sales or revenue to cover operations to date,
and there is no assurance that future sales will be adequate to cover future
expenses. In light of the above circumstances, the ability of the Company to
continue as a going concern is substantially in doubt. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Management has completed a corporate reorganization. The Company also plans to
take steps to reduce expenses and enhance sales. Management believes their
plans will provide the Company with the ability to continue in existence.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancelable operating lease. Future
minimum lease payments are as follows:
1997 $ 88,701
1998 92,841
1999 96,986
2000 101,133
2001 60,403
$ 440,064
Rent expense for the years ended December 31, 1996 and 1995 was $22,284 and
$12,561, respectively.
NOTE 7 - DISCONTINUED OPERATIONS
During 1996, the Company entered into acquisition agreements to acquire three
operating companies. The Company issued 1,230,000 shares of its common stock
in exchange for all of the shares of the operating companies. In 1997, the
agreements were rescinded. The Company was unable to recover all of the shares
issued in the acquisitions. A total of 222,372 shares remain outstanding and
will not likely be recovered. The shares were valued at the subscription price
of $1.00 per share, and a loss on discontinued operations of $222,372 has been
recorded.
NOTE 8 - SUBSEQUENT EVENT
On January 31, 1997, the Company entered into a noncancelable equipment lease
for a five year term. The term starts June 1, 1997 with monthly lease payments
of $14,662.
NOTE 9 - STOCK OPTIONS
On February 4, 1997, the Company formalized a loan agreement relating to
advances received during 1996 (Note 2). The loan agreement provided for the
granting of stock options to the lender to purchase 1,400,000 shares of the
Company's stock at a price of $0.06 per share. The stock options expire
October 31, 2000. The stock options are considered to be common stock
equivalents, but they are not included in the earnings per share calculation
as they are anti-dilutive.
NOTE 10 - CONSULTING AGREEMENT
During 1996, the Company entered into a consulting agreement with a financial
consulting company. As consideration for the services to be rendered, the
Company will issue 500,000 shares of its common stock according to the
following schedule:
June 15, 1997 100,000 shares
July 14, 1997 100,000 shares
August 15, 1997 100,000 shares
September 15, 1997 200,000 shares
Total 500,000 shares
NET TELECOMMUNICATIONS, INC.
As of February 4, 1997
$300,000.00
PROMISSORY NOTE
NET TELECOMMUNICATIONS, INC., having offices at 101 Convention Center
Drive, Las Vegas, Nevada 89109 (the "Company"), for value received, hereby
covenants and promises to pay to BENTLEY KING ASSOCIATES, INC., having an
address at 1601 E. Flamingo Road, Las Vegas, Nevada 891 19 or registered
assigns (the "Holder") on October 31, 2000, (the "Maturity Date"), at the
principal offices of the Holder, the principal sum of Three Hundred Thousand
Dollars ($300,000.00) Dollars in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the outstanding principal sum
hereof at the rate of Ten percent (10%) per annum from the date hereof until
the Maturity Date, together with an option to purchase 1,400,000 shares of
common stock of the Company at $.06 per share (the "Note"). Principal and
interest shall be payable quarterly beginning on the 1st day of November,
1997, and every quarter thereafter in equal self liquidating installments as
the office of the Company as hereinafter set forth and shall include all
interest accrued from the date of this Note trough the first payment date,
November 1, 1997. The Company will punctually pay or cause to be paid the
principal amount and interest on this Note. Any sums required to be withheld
from any payment of principal amount, or interests on this Note by operation
of law or pursuant to any order, judgment, execution, treaty, rule or
regulation may be withheld by the Company and paid over in accordance
therewith.
1. Issuance of Option.
As and for additional consideration of this Note, the Company shall
grant to Holder an option to purchase 1,400,000 shares of common stock of the
Company at a price of $.06 per share which shall be exercisable by the Holder
at any time during the term of this Note, but in the
event of prepayment, then Holder may exercise its option at any time prior to
October 31, 2000.
The terms contained in this paragraph shall survive this Note.
2. Transfers of Note to Comply with the Securities Act.
The Holder agrees that this Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who,
pursuant to an opinion of counsel, is a person whom the Note may legally be
transferred without registration and without delivery of a current prospectus
under the Securities Act with respect thereto and then only against receipt of
an agreement of such person to comply with the provisions of this Section with
respect to any resale or other disposition of the Note; or (2) to any person
who complies with the provisions of this Section with respect to any resale or
other disposition of the Note; or (3) to any person upon delivery of a
prospectus then meeting the requirements of the Securities Act relating to
such securities and the offering thereof for such sale of disposition, and
thereafter to all successive assignees.
3. Prepayment.
The principal amount of this Note may be prepaid by the Company, in
whole or in part without premium or penalty, at any time. Upon any prepayment
of the entire principal amount of this Note, or portion thereof, all accrued,
but unpaid, interest shall be paid to the Holder on the date of prepayment
with respect to the principal amount prepaid.
4. Events of Default.
a. This Note shall become due and payable immediately upon any of the
following events, herein called "Events of Default":
() Default in the payment of the principal or accrued interest on
this Note, when and as the same shall become due and payable, whether by
acceleration or otherwise, if such default shall continue uncured for five (5)
days after written notice specifying such default, having been given to the
Company by the Holder;
(ii) Default in the due observance or performance of any covenant,
condition or agreement on the part of the Company to be observed or performed
pursuant to the terms hereof, if such default shall continue uncured for five
(5) days after written notice specifying such default, having been given to
the Company by the Holder;
(iii) General assignment by the Company for the benefit of
creditors;
b. In the case any one or more of the Events of Default specified above
shall happen or be continuing, the Holder may proceed to protect and enforce
his or her right by suit in the specific performance of any covenant or
agreement contained in this Note or in aid of the exercise
of any power granted in this Note or may proceed to enforce the payment of
this Note or to enforce any other legal or equitable rights as such Holder may
have.
5. Waiver of Notices
The Company waives any and all notices of demand, presentment, dishonor,
notice of dishonor or any other notice which may be required in the event the
Company defaults in any terms of this Note hereunder.
6. Default
The Company agrees and covenants to pay to Holder, all reasonable fees
and costs, including but not limited to, attorneys fees, related to the
collection and/or enforcement of Holder's rights in the event of default by
the Company
7. Miscellaneous.
a. Notice of dishonor, presentment, demand, protest and notice of
protest are hereby waived.
b. The terms "Company' and "Holder" shall be construed to include their
respective heirs, personal representatives, successors, subsequent holders and
assigns. The registered owner of this Note shall have the right to transfer
this Note without the prior written consent of the Company by assignment, and
the transferee thereof shall, upon his registration as owner of this Note,
become vested with all the powers and rights of the transferor. Registration
of any new owners shall take place upon presentation of this Note to the
Company at its principal offices, together with a duly authenticated
assignment. In case of transfer by operation of law, the transferee agrees to
notify the Company of such transfer and of his address, and to submit
appropriate evidence regarding the transfer so that this Note may be
registered in the name of the transferee.
c. In the event of a transfer, payment of principal and interest due in
accordance with the terms herein shall be made to the registered owner of this
Note upon presentation of this Note.
d. Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Note, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Note, if
mutilated, the Company shall execute and deliver a new Note of like tenor and
date.
e. This Note shall be construed and enforced in accordance with the laws
of the State of Nevada. The Company and the Holder hereby consent to the
jurisdiction of the Courts of the State of Nevada and the United States
District Courts situated in Nevada therein in connection
with any action concerning the provisions of this Note instituted by the
Holder against the Company.
f. The Company shall pay all costs and expenses incurred by the Holder
to enforce any of the provisions of this Note, including attorneys' fees and
other expenses of collection.
IN WITNESS WHEREOF, NET TELECOMMUNICATIONS, INC. has caused this
Note to be signed in its name by an authorized officer.
NET TELECOMMUNICATIONS, INC.
By:/s/Michael Gorts
-------------------
Michael Gorts
President
LOAN AGREEMENT
The Agreement, dated as of the 4 day of February 1997, between BENTLEY
KING ASSOCIATES, INC., a Delaware corporation whose principal offices are at
1601 E. Flamingo Road, Las Vegas, Nevada, (hereinafter "BENTLEY" or "LENDER")
and NET TELECOMMUNICATIONS, INC., a Nevada corporation whose principal offices
are at 101 Convention Center Drive, Las Vegas, Nevada, (hereinafter "NET TEL"
or " BORROWER") (collectively the "PARTIES") (hereinafter "LOAN AGREEMENT")
agree as follows.
WITNESSETH
WHEREAS, NET TEL requires to funding to continue business operations and
seeks venture capital for said funding;
WHEREAS, BENTLEY agrees to loan a certain sum to NET TEL for the finance
of certain start up operations of a wholly owned subsidiary, as defined
herein, (hereinafter "LOAN'); and
WHEREAS, NET TEL, in order to finance its wholly owned subsidiary so
that it may commence telecommunication service operations and acquire certain
equipment in connection therewith, agrees to accept this LOAN from BENTLEY
pursuant to the terms of this LOAN AGREEMENT and all related documents hereto;
and
WHEREAS, to induce BENTLEY to lend to NET TEL, GUARANTOR, (as defined
herein) shall guarantee the repayment of the LOAN and all terms and conditions
of this LOAN AGREEMENT;
NOW THEREFORE, in consideration of the foregoing covenants and
agreements herein contained, and other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the PARTIES agree as follows:
1. The LOAN.
Upon satisfaction of the conditions set forth in Section 4 below, and at
the times and upon the terms indicted in Section 2 below, LENDER shall make a
LOAN to BORROWER. Such LOAN may be referred to herein together as the "LOANS,"
aud each may be referred to individually as a "LOAN."
2. Terms.
(A) The LOAN shall have been made in the aggregate total amount of
$300,000 and shall be advanced to BORROWER initially in three (3) increments:
$55,000.00 on November 11, 1996, and $30,000.00 on December 13, 1996 and
$30,000.00 on January 17, 1997; with the balance of $185,000.00 being funded
on an "as needed" basis and on the consent of LENDER with the aggregate being
paid no later than June 1, 1997. The LOAN shall bear interest at a rate of Ten
percent (10%) per annum and shall be fully due and payable on October 31.
2000. Commencing November 1, 1997, the LOAN shall be self amortizing for the
principal and interest due on the LOAN, including all interest accruing from
the date of this LOAN AGREEMENT through the first payment date, November 1,
1997. BORROWER shall make payments to LENDER of principal and interest in
respect of the LOAN in equal self liquidation payments beginning November 1,
1997 through the maturity Date, October 31, 2000.
(B) The BORROWER shall form a wholly owned subsidiary, the principal
purpose of which will be to acquire equipment and operate as a
telecommunication long distance service provider. From the proceeds available
from the LOAN, NET TEL agrees to make all necessary capital contributions to
the wholly owned subsidiary in order to effectuate the aforementioned
operations. As and for consideration of, and as condition to the LOAN, the
wholly owned subsidiary, shall guarantee the LOAN (hereinafter GUARANTOR").
(C) BORROWER shall pledge as collateral, all shares of the common stock
issued and outstanding to BORROWER by the GUARANTOR, to LENDER pursuant to a
collateral pledge agreement and a stock power,
(D) As and for partial consideration of LENDER making this LOAN, LENDER
shall receive an option to purchase 1,400,000 shares of common stock of the
BORROWER at a price of $.06 per share. This option may be exercised in whole
or any part thereof at the sole discretion of the LENDER. This option shall be
exercisable at the sole discretion of the LENDER at any time during the term
of this LOAN, but in the event of prepayment by the BORROWER, then LENDER may
exercise this option at any time prior to October 31. 2000.
3. Documentation.
The LOAN shall be evidenced by a promissory note in the form attached
hereto as Exhibit A (the "Note" ) and guaranteed by NTI TELECOM, INC., a
Nevada corporation (the "GUARANTOR") pursuant to a guaranty in the form
attached hereto as Exhibit B (the "Guaranty"). Additionally, the LOAN shall be
secured by a UCC-1 financing statement in the form attached hereto as Exhibit
C (the "Financing Statement") and a security agreement (the "Security
Agreement") in the form attached hereto as Exhibit D. BORROWER shall pledge to
LENDER all shares of the common stock issued and outstanding which its holds
of the GUARANTOR pursuant to a collateral pledge agreement attached hereto as
Exhibit E (the "Collateral Pledge Agreement") and a stock power attached
hereto as Exhibit F (the "Stock Power").
4. Conditions Precedent to LENDER'S Obligations.
(A) LENDER'S obligation to make the LOAN shall be subject to
satisfaction of the following conditions precedent:
(1) BORROWER shall have duly executed and delivered to LENDER the
Note, the Financing Statement, the Collateral Pledge Agreement, the
GUARANTOR's shares of common stock and the Stock Power;
(2) GUARANTOR shall be duly formed in accordance with the
appropriate state laws of the state of formation
(3) GUARANTOR shall have executed and delivered to LENDER the
Guaranty;
(4) GUARANTOR shall have executed the digital telephone switch
lease.
(5) No Event of Default (as defined in Section 6 below) shall have
occurred and be existing.
5. Covenants of BORROWER.
So long as the commitment of LENDER hereunder shall be outstanding and
until the payment in full of the Note outstanding hereunder and the
performance of all other obligations of BORROWER hereunder, BORROWER agrees
that, unless LENDER otherwise agrees in writing:
(A)BORROWER covenants to prohibit GUARANTOR from creating, incurring or
suffering any lien, mortgage, pledge, assignment or other encumbrance, except
as contemplated by this LOAN AGREEMENT on, or security interest in, any of
GUARANTOR'S property, assets or receivables, now owned or hereafter acquired;
(B) BORROWER shall not have any indebtedness, except for indebtedness
incurred in the normal course of business;
(C) All taxes, levies and assessments of any description of the BORROWER
will be paid before interest or penalties accrue thereon;
(D)BORROWER will not make any significant change in its management;
(E) BORROWER shall maintain an insurance policy providing "umbrella
liability" coverage in an amount not less than $1,000,000 per occurrence;
This paragraph was deleted from the agreement
(F) BORROWER shall provide one (1) director seat to LENDER on BORROWER'S
Board of directors. BORROWER shall maintain a Board of Directors with at a
total number of five (5) directors seats. In the event that BORROWER
increases its number of Board of Directors seats, for any reason whatsoever,
then LENDER shall receive twenty percent of all seats issued or in the event
that less than five new director seats are added to the Board, then one (l)
additional director seat;
(G) BORROWER shall not decapitalize nor dilute the corporate of stock
structure of GUARANTOR;
(I) BORROWER covenants that all costs, fees charges expenses, etc.
assessed against GUARANTOR by BORROWER shall be customary and reasonable.
(J) BORROWER states and LENDER acknowledges that ownership of the switch
is vested in Telecommunication Finance Group. LENDER acknowledges only the
Lease ownership interest acquired by Net Tel in said equipment.
6. Events of Default.
As used herein, "Events of Default" shall mean any of the following:
(A) BORROWER's default in making any payment in respect of the Note when
it becomes due and payable, where such default continues for a period of five
(5) days;
(B) BORROWER's breach of any covenant contained in Section 5 above or
elsewhere in this LOAN AGREEMENT, where such default continues unremedied for
a period of five (5) days after written notice by LENDER to BORROWER thereof;
(C)BORROWER's voluntary or involuntary dissolution;
(D)BORROWER's voluntary or involuntary transfer or hypothecation,
without LENDER's prior written consent, of all or any portion of the property
which is the subject of the Financing Statement (the "Collateral"); or
(E) Entry by any court having jurisdiction over BORROWER of (1) a decree
or order for relief regarding BORROWER in an involuntary case or proceeding
under any applicable federal or state bankruptcy, insolvency, reorganization
or other similar law, or (2) a decree or order adjudging BORROWER a bankrupt
or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or regarding
BORROWER, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of BORROWER, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days.
7. Acceleration.
If an Event of Default occurs LENDER may, by written notice to BORROWER,
declare the Note to be due and payable, whereupon the Note shall immediately
mature and become due and payable, together with interest thereon, without
presentment, demand, protest or notice, all of which are hereby waived by
BORROWER.
8. Failure to Pay
In the event BORROWER fails to make any payment pursuant to this LOAN
AGREEMENT, including a principal or interest payment, then in addition to the
then outstanding principal and interest, there shall be a penalty often
percent (10%) of the outstanding payment due and, owing for failure to make
such payment. In addition, LENDER may exercise any or all rights contained in
this LOAN AGREEMENT or any related documents thereto, including but not
limited to, the Note, the Guaranty, the Collateral Pledge Agreement or Stock
Power. Nothing contained in this section shall be deemed as a waiver of
LENDER's rights.
9. Representations of BORROWER
The BORROWER acknowledges, represents, warrants and covenants, as the
case may be, the following:
A) The BORROWER acknowledges that it has accepted an offer of LENDER
based upon, and in reliance on, all terms, representations, warranties and
other information of this LOAN AGREEMENT as set forth herein.
B) The BORROWER is aware that no federal or state agency, regulatory
authority or other entity has made any findings or determination as to the
fairness or adequacy of this LOAN.
C) The BORROWER represents that it is properly authorized to enter into
this transaction in accordance with its By Laws and pursuant to a vote of its
Board of Directors.
D) The BORROWER warrants and represents that it has determined that the
LOAN is a suitable transaction for it and its financial condition is such that
(i) it has need for financing; and (ii) it is able to bear all risks of
holding the LOAN in accordance with terms of this LOAN AGREEMENT.
E) BORROWER has relied solely upon the information contained in
documents provided to it and upon independent investigations made by it or its
legal representatives. BORROWER is not relying on any representations or
warranties from LENDER or any of its officers, directors, affiliates,
employees or agents, except those contained herein.
F) BORROWER owns the Collateral free and clear of any liens or
encumbrances.
10. Representations of LENDER
LENDER acknowledges, represents, warrants and covenants, as the case may
be, the following:
A) The LENDER is aware that no federal or state agency, regulatory
authority or other entity has made any findings or determination as to the
fairness or adequacy of this LOAN.
B) The LENDER represents that it is properly authorized to enter into
this transaction in accordance with its By Laws and pursuant to a vote of its
Board of Directors.
11. Prepayment.
BORROWER may prepay the LOAN in whole or in part at any time; provided,
that in the event of any partial prepayment of the LOAN, any remaining
principal balance shall continue to bear interest as set forth above and shall
be due and payable at the date set forth in the Note, and all other provisions
of the Note, the Guaranty, the Financing Statement, Collateral Pledge
Agreement and this LOAN AGREEMENT shall continue in full effect
notwithstanding such partial payment.
12. Notices.
Each notice and other communication under or with respect to this LOAN
AGREEMENT shall be in writing and shall be effective when mailed by certified
or registered mail, return receipt requested, to the PARTIES at the following
addresses:
LENDER: Bentley King Associates, Inc.
1601 E. Flamingo Road
Suite 18
Las Vegas, Nevada 891 19
BORROWER: Net Tel
101 Convention Center Drive
Las Vegas, Nevada 89109
GUARANTOR: NTI Telecom, Inc.
c/o Net Tel
101 Convention Center Drive
Las Vegas, Nevada 89109
Any party may change his or its address of record by delivering notice to the
other PARTIES of such address change in accordance with this Section.
13. Application of Nevada Law.
This LOAN AGREEMENT and the related documents, including but not limited
to, the Notes, Collateral Pledge Agreement, Guaranty and Financing Statement
shall be governed by and construed in accordance with Nevada law.
14. Amendments.
This LOAN AGREEMENT may be amended only by a written instrument executed
by all PARTIES.
15. Execution of Additional instruments.
BORROWER and GUARANTOR shall execute and deliver to LENDER such other
and further documents, including without limitation statements of interest and
holdings, designations, powers of attorney, and other instruments necessary or
appropriate to further the intent of this LOAN AGREEMENT or to comply with any
laws, rules or regulations.
16. Severability.
If any provision in this LOAN AGREEMENT is held to be invalid or
unenforceable on any occasion or in any circumstance, such holding shall not
be deemed to render the provision invalid or unenforceable on any other
occasion or in any other circumstance nor to render any other provision hereof
invalid or unenforceable, and to that extent the provisions of this LOAN
AGREEMENT are severable.
17. Heirs, Successors, end assigns.
This LOAN AGREEMENT shall be binding upon and inure to the benefit of
the PARTIES hereto and, to the extent permitted hereunder, their respective
heirs, legal representatives and successors. BORROWER may not assign or cause
the assignment of this LOAN AGREEMENT or of any right or obligation hereunder
without the written consent of the LENDER.
18. Counterparts.
This LOAN AGREEMENT may be executed in counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the
same instrument.
19. Attorney's Fees.
If one or more PARTIES to this LOAN AGREEMENT brings an action to
enforce the terms hereof and declare rights hereunder, the prevailing party or
PARTIES in any such action, on arbitration, trial or appeal, shall be entitled
to its reasonable attorney's fees and costs to be paid by the non-prevailing
party or PARTIES as fixed by the court or arbitrator(s).
20. Order of Recourse.
BORROWER and GUARANTOR are jointly and severally liable to LENDER for
the obligations pursuant to this LOAN AGREEMENT and any related document
thereto. In the event of a default hereunder, LENDER shall not be required to
exhaust any or all remedies against BORROWER before proceeding against
GUARANTOR.
21. Survival
The representations, warranties, covenants, and agreements contained in
or made pursuant to this LOAN AGREEMENT shall survive the closing of this
transaction, irrespective of any investigation made by or on behalf of any
party. The statements contained in any certificate or other instrument
delivered by or on behalf of BORROWER pursuant hereto or in connection with
the transactions contemplated hereby shall be deemed representations,
warranties, covenants and/or agreements, as the case may be, of BORROWER
hereunder.
22. Sole Benefit
This LOAN AGREEMENT is made solely for the benefit of BORROWER, LENDER
and GUARANTOR and no other person shall acquire or have any right under or by
virtue of this LOAN AGREEMENT.
23. Entire Agreement
This LOAN AGREEMENT constitutes the entire understanding among the
PARTES and incorporates all prior dealings, representations and promises,
whether written or oral, and expresses the full agreement after full
investigation by the PARTIES. No party is relying on any statement,
representation or promise that is not set forth in this LOAN AGREEMENT.
24. Modification
This LOAN AGREEMENT and any Exhibits or amendments hereto, sets forth
the entire understanding of the PARTES with respect to the subject matter
hereof, supersedes all existing agreement among them concerning such subject
matter, and may be modified only by a written instrument duly executed by each
party with the approval of their respective boards of directors.
25. Waiver
Any waiver by any party of a breach of any provision of this LOAN
AGREEMENT shall not operate as, or be construed to be, a waiver of any other
breach of such provision or of any breach of any other provision of this LOAN
AGREEMENT. The failure of a party to insist upon strict adherence to any term
of this LOAN AGREEMENT on one or more occasions shall not be considered a
waiver of the right thereafter to insist upon strict adherence to that term or
any other term of this LOAN AGREEMENT. Any waiver must be in writing.
26. Binding Effect
The provisions of this LOAN AGREEMENT shall be binding upon and inure to
the benefit of the PARTIES hereto and the respective successors and assigns of
the PARTIES. Neither party may sell, assign, transfer, or otherwise convey any
of its rights or delegate any of its duties under this LOAN AGREEMENT without
the prior written consent of the other except to a corporation which has
succeeded to substantially all the business and assets of the assignor and
assumed in writing its obligations under this LOAN AGREEMENT or to a
corporation surviving a merger or consolidation to which the party to this
LOAN AGREEMENT is a party and this LOAN AGREEMENT shall be binding upon and
inure to the benefit of the PARTIES hereto and such respective successors and
assigns of PARTES and such respective assigns Any attempted sale, assignment,
transfer, conveyance, or delegation in violation of this Section shall be
void.
27. Separability
If any provision of this LOAN AGREEMENT is invalid, illegal, or
unenforceable, the balance of this LOAN AGREEMENT shall remain in effect, and
if any provision is inapplicable to any of the PARTIES or circumstances, it
shall nevertheless remain applicable to all other PARTIES and circumstances.
28. Headings
The headings in this LOAN AGREEMENT are solely for convenience of
reference and shall be given no effect in the construction or interpretation
of this LOAN AGREEMENT.
29. Counterparts
This LOAN AGREEMENT may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
30. Confidentiality
The PARTIES agree that in contemplation of this LOAN AGREEMENT certain
business and financial prospects and conditions of the PARTES, have been
divulged, either, orally or in writing, including but not limited to,
financial statements, operation procedures, etc. As a condition to this LOAN
AGREEMENT, the PARTIES agree that no public disclosure to any person or entity
other than the PARTES, shall not be purposefully made until this LOAN
AGREEMENT has been duly executed. The PARTES shall take reasonable precautions
to maintain the confidentiality of this LOAN AGREEMENT and information
pertinent hereto until such time as this LOAN AGREEMENT has been duly
executed. PARTIES acknowledges that the information provided herein is
proprietary in nature.
IN WITNESS WHEREOF the PARTIES have affixed their seal hereto, as of the
date first hereinabove stated.
NET TELECOMMUNICATIONS, INC.
By:/s/Michael Gorts
---------------------
Michael Gorts
President
BENTLEY KING ASSOCIATES, INC.
By:/s/Jon M. Levine
---------------------
Jon M. Levine
Executive Vice President
NTI TELECOM, INC.
By:/s/Michael Gorts
----------------------
Michael Gorts
President
SECURITY AGREEMENT
AGREEMENT, dated as of February 4, 1997, between NET TELECOMMUNICATIONS,
INC., a Nevada corporation, having an address at 101 Convention Center Drive,
Las Vegas, Nevada ("Debtor"), and BENTLEY KING ASSOCIATES, INC., a Delaware
corporation, having and address at 1601 E. Flamingo Road, Las Vegas, Nevada
("Secured Party").
WITNESSETH:
WHEREAS, concurrently herewith Secured Party is lending to Debtor the
sum of $300,000.00, as evidenced by a promissory note and loan agreement dated
as of February 4, 1997 herewith (the "Note" and "Loan Agreement"); and
WHEREAS, in order to induce Secured Party to make said loan, Debtor has
agreed to pledge to Secured Party certain property as security for the loan;
NOW THEREFORE, in consideration of Ten Dollars, and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Definitions. The following terms as used in this Agreement shall have
the meaning set forth below:
"Collateral" shall mean all of the property set forth in Exhibit A
attached hereto and made a part hereto, and all property of the same class or
character acquired by Debtor subsequent to the date hereof, and all proceeds
thereof, and all substitutions, replacements and accessions thereto.
"Obligations" shall mean all principal and interest due or to become due
under the aforesaid Note, and any other indebtedness or liability of Debtor to
Secured Party, direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising.
2. Creation Of The Security Interest. Debtor hereby grants to Secured
Party a security interest in all of the right, title and interest of Debtor in
and to the Collateral to secure the full and prompt payment and performance of
all of the Obligations.
3. Debtor's Obligations To Pay. Debtor shall pay and perform all of the
Obligations of Debtor to Secured Party as the same may become due according to
their terms. Debtor shall be liable for, and shall reimburse to Secured Party,
all expenses, including reasonable attorneys' fees, incurred or paid in
connection with establishing, perfecting, maintaining, protecting or enforcing
any of Secured Party's rights and remedies hereunder.
4. Protection Of The Collateral. Debtor shall defend the title to the
collateral against all claims and demands whatsoever. Debtor shall keep the
collateral free and clear of all liens, charges, encumbrances, taxes and
assessments, and shall pay all taxes, assessments and fees relating to the
Collateral. Upon request by Secured Party, Debtor shall furnish further
assurances of title, execute any further instruments and do any other acts
necessary to effectuate the purpose and provisions of this Agreement. Debtor
shall not sell, exchange, assign, transfer or otherwise dispose of the
Collateral, and shall not encumber, hypothecate, mortgage, create a lien on or
security interest in the Collateral, without the prior written consent of
Secured Party in each instance. The risk of loss of the Collateral at all
times shall be borne by Debtor. Debtor shall keep the Collateral in good
repair and condition and shall not misuse, abuse or waste the Collateral or
allow the Collateral to deteriorate except for normal wear and tear.
Debtor at all times shall maintain: (a) insurance covering the
Collateral and all other property of Debtor against loss or damage by fire and
other hazards; (b) insurance against liability on account of damage to persons
and property; (c) all insurance required under applicable workmen's
compensation laws; and (d) insurance covering such other risks as Secured
Party reasonably may request. Such insurance shall be in amounts satisfactory
to Secured Party, shall be maintained with responsible insurance carriers,
shall name Debtor and Secured Party as their interests may appear as insured,
and shall provided for at least ten days' notice to Secured Party prior to
cancellation. Debtor, from time to time, upon Secured Party's written request,
promptly shall furnish or cause to be furnished to Secured Party evidence of
the maintenance of all insurance required to be maintained hereunder,
including such originals or copies of policies, certificates of insurance,
riders and endorsements relating thereto and proof of payment of premiums as
Secured Party may request. If Debtor shall fail to maintain any such
insurance, Secured Party may, but shall not be obligated to, do so at the
expense of Debtor, in addition to the other rights and remedies of Secured
Party. Debtor hereby appoints Secured Party the attorney of Debtor for purpose
of obtaining, adjusting and canceling any such insurance and endorsing
settlement drafts, and hereby assigns to Secured Party all sums which may
become payable under such insurance, including returned premiums and
dividends, as additional security for the Obligations.
The Collateral shall be kept at Debtor's place of business set forth
above, except for temporary removal in connection with its ordinary use or
unless Debtor shall have obtained the prior written consent of Secured Party
for its removal to another location. Secured Party shall have the right to
enter upon Debtor's premises at any reasonable time, and from time to time, to
inspect the Collateral.
5. Filing And Recording. Debtor, at its own cost and expense, shall
execute and deliver to Secured Party any financing statements, and shall
procure for Secured Party any other documents, necessary or appropriate to
protect the security interest granted to Secured Party hereunder against the
rights and interests of third parties, and shall cause the same to be duly
recorded and filed in all places necessary to perfect the security interest of
Secured Party in the Collateral. In the event that any recording or refiling
thereof (or filing of any statements of continuation of assignment of any
financing statement) is required to protect and preserve such security
interest, Debtor, at its own cost and expense, shall cause the same to be re-
recorded and/or refiled at the time and in the manner requested by Secured
Party. Debtor hereby authorizes Secured Party to file or refile any financing
statements or continuation statements with respect to the security interest
granted pursuant to this Agreement which at any time may be required or
appropriate, although the same way have been executed only by Secured Party,
and to execute such financing statement on behalf of Debtor. Debtor hereby
irrevocably designates Secured Party, its agents, representatives and
designees, as agent ant attorney-in-fact for Debtor for the aforesaid
purposes.
6. Default. The occurrence of any one or more of the following events
(hereinafter referred to as "Events of Default") shall constitute a default
hereunder, whether such occurrence is voluntary or involuntary or comes about
or is effected by operation of law or pursuant to or in compliance with any
judgment, decree or order of ~any court or any order, rule or regulation of
any administrative or governmental authority:
(a) If Debtor shall fail to pay, perform or observe any covenant,
agreement, term or provision of this Agreement, the Loan Document, the Note or
any other agreement or arrangement now or hereafter entered into between the
parties hereto or with respect to any Obligation of Debtor to Secured Party;
or
(b) If any representation, warranty or other statement of fact herein or
in any writing, certificate, report or statement at any time furnished to
Secured Party pursuant to or in connection with this Agreement or the Note
shall be false or misleading in any material respect; or
(c) If Debtor shall: admit in writing its inability to pay its debts
generally as they become due; file a petition for relief under the bankruptcy
laws or a petition to take advantage of any insolvency act; make an assignment
for the benefit of creditors; commence a proceeding for the appointment of a
receiver, trustee, liquidator or conservator of itself or the whole or any
substantial part of its property; file a petition or answer seeking
reorganization or arrangement or similar relief under the Federal Bankruptcy
Laws or any other applicable law or statute of the United States or any State;
or if Debtor shall be adjudged a bankrupt or insolvent, or a court of
competent jurisdiction shall enter any order, judgment or decree appointing a
receiver, trustee, liquidator or conservator of Debtor or of the whole or any
substantial part of the property of Debtor or approves a petition filed
against Debtor seeking reorganization or similar relief under the Federal
Bankruptcy Laws or any other applicable law or statute of the United States or
any State; or if, under the provisions of any other law for the relief or aid
of debtors, a court of competent jurisdiction shall assume custody or ~
control of Debtor or the whole or any substantial part of its property; or if
there is commenced against Debtor any proceeding for any of the foregoing
relief; or if Debtor any act indicates its consent to, approval of, or
acquiescence in any such proceeding; or
(d) If all or any creditor of Debtor for any reason whatsoever hereafter
shall accelerate payment in whole or in part of any outstanding obligation
owed to it by Debtor under any agreement or arrangement, or if any judgment
against the Debtor or any execution against any of its property for an amount
remains unpaid, unstayed or undismissed for a period in excess of ten days; or
(e) If all or any pan of the Collateral shall be sold, transferred or
assigned, or shall be funkier encumbered, hypothecated, mortgaged, or made
subject to any other lien or security interest, without the prior written
consent of Secured Party.
7. Rights And Remedies. Upon the occurrence of an Event of Default, the
obligations shall immediately become due and payable in full without notice or
demand. Secured Party shall have all rights and remedies provided by the
Uniform Commercial Code in effect in the State of Nevada on the date hereof.
In addition to, or in conjunction with, or substitution for such rights and
remedies, Secured Party may at any time and from and after the occurrence of
an Event of Default hereunder:
(a) with or without notice to Debtor, foreclose the security interest
created herein by any available judicial procedure, or take possession of the
Collateral, or any portion thereof, with or without judicial process, and
enter any premises where the Collateral may be located for the purpose of
taking possession of or removing the same, or rendering the same unusable, or
disposing of the Collateral on such premises, and Debtor agrees not to resist
or interfere therewith;
(b) require Debtor to prepare, assemble or collect the Collateral, at
Debtor's own expense, and make the same available to Secured Party at such
place as Secured Party may designate, whether at Debtor's premises or
elsewhere;
(c) sell, lease or otherwise dispose of all or any pan of the
Collateral, whether in its then condition or after funkier preparation, in
Debtor's name or in its own name, or in the name of such party as Secured
Party may designate, either at public or private sale (at which Secured Party
shall have the right to purchase), in lots or in bulk, for cash or for credit,
with or without representations or warranties, and upon such other terms as
Secured Party, in its sole discretion, may deem advisable; and ten days'
written notice of such public sale date or dates after which private sale may
occur, or such lesser period of time in the case of an emergency, shall
constitute reasonable notice hereunder;
(d) execute and deliver documents of title, certificates of origin, or
other evidence of payment, shipment or storage of any Collateral or proceeds
on behalf of and in the name of Debtor;
(e) remedy any default by Debtor hereunder, without waiving such
default, and any monies expended in so doing shall be chargeable with interest
to Debtor and added to the Obligations secured hereby; and
(f) apply for an injunction to restrain a breach or threatened breach of
this Agreement by Debtor.
8. Cumulative Rights. All rights, remedies and powers granted to Secured
Party herein, or in any instrument or document related hereto, or provided or
implied by law or in equity shall be cumulative and may be exercised singly or
concurrently on any one or more occasions.
9. Debtor's Representations And Warranties. Debtor hereby represents and
warrants to Secured Party that:
(a) Neither the execution nor the delivery of this Agreement, nor the
consummation of the transactions herein contemplated, nor compliance with the
provisions hereof, will violate any law or regulation, or any order or decree
of any court of governmental authority, or will conflict with, or result in
the breach of, or constitute a default under, any indenture, mortgage, deed or
trust, agreement or other instrument to which Debtor is a party or by which
Debtor my be bound, or result in the creation or imposition of any lien, claim
or encumbrance upon any property of Debtor.
(b) Debtor has the power to execute, deliver and perform the provisions
of this Agreement and all instruments and documents delivered or to be
delivered pursuant hereto; and has taken or caused to be taken all necessary
or appropriate actions to authorize the execution, delivery and performance of
this Agreement and all such instruments and documents.
(c) Debtor is the legal and equitable owner of the Collateral, free and
clear of all security interests, liens, claims and encumbrances of every kind
and nature.
(d) No default exists, and no event which with notice or the passage of
time, or both, would constitute a default under the Collateral by any party
thereto, and there are no offsets, claims or defenses against the obligations
evidenced by the Collateral, except as may be expressly set forth in Exhibit A
annexed hereto.
10. Notices. All notices, requests, demands or other communications
provided for herein shall be in writing and shall be deemed to have been
property given if sent by registered or certified mail, return receipt
requested, addressed to the parties at their respective addresses hereinabove
set forth, or at such other addresses as the parties may designate in writing.
11. Modification And Waiver. No modification or waiver of any provision
of this Agreement, and no consent by Secured Party to any breach thereof by
Debtor, shall be effective unless such modification or waiver shall then be in
writing and signed by Secured Party, and the same shall then be effective only
for the period and on the conditions and for the specific instances and
purposes specified in writing. No course of dealing between Debtor and Secured
Party in exercising any rights or remedies hereunder shall operate as a waiver
or preclude the exercise of any other rights or remedies hereunder.
12. Applicable Law. This Agreement shall be construed in accordance with
an shall be governed by the laws of the State of Nevada.
13. Benefit. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
on the date first above written.
NET TELECOMMUNICATIONS INC.
By:/s/Michael Gorts
--------------------------
Michael Gorts
President
BENTLEY KING ASSOCIATES, INC.
By:/s/Jon M. Levine
--------------------------
Jon M. Levine
Executive Vice President
Exhibit A
1. All shares of common stock issued and outstanding of NTI Telecom,
Inc.
2. All equipment, including but not limited to, computers and related
equipment, printers, fixtures, furniture, supplies, account receivables and
all other assets of the Debtor whether existing now or acquired hereinafter.
3. Secured party acknowledges that the ownership of the switch and all
related equipment is vested in Telecommunication Finance Group (TFG) pursuant
to TFG's prior recorded documents.
COLLATERAL PLEDGE AGREEMENT
AGREEMENT, dated as of February 4, 1997, among NET TELECOMMUNICATIONS,
INC., a Nevada corporation, having an address at 101 Convention Center Drive,
Las Vegas, Nevada ("Debtor"), BENTLEY KING ASSOCIATES, INC., a Delaware
corporation, having and address at 1601 E. Flamingo Road, Las Vegas, Nevada
("Secured Party") and CHARLES J. SPINELLI, ESQ., having an address at 120 Wall
Street, 28th Floor, New York, New York ("Escrow Age ~t")(hereinafter "Pledge
Agreement")
WITNESSETH:
WHEREAS, concurrently herewith Secured Party is lending to Debtor the
sum of $300,000.00, as evidenced by a promissory note and loan agreement and
related documents dated as of February 4, 1997 herewith (the "Note" and Loan
Agreement"); and
WHEREAS, in order to induce Secured Party to make said loan, Debtor has
agreed to pledge to Secured Party certain property as security for the loan;
NOW THEREFORE, in consideration of Ten Dollars, and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Debt. Debtor is indebted to the Secured Party in accordance with a
Note dated as of February 4, 1997, in the amount of Three Hundred Thousand
Dollars ($300,000.00)
2. Description of Collateral. Simultaneously with the execution of the
Note, this Pledge Agreement and related documents, the Debtor shall deliver
all issued and outstanding shares of NTI Telecom, Inc., consisting of 2500
shares of common stock, certificate number 001, dated January 27, 1997,
together with a blank stock power duly endorsed (the "Pledged Property").
3. Appointment of Escrow Agent. The Debtor and the Secured Party do
hereby appoint the Escrow Agent to accept possession of the Pledged Property
and to hold it for the purposes and under the terms and conditions set forth
herein
4. Acceptance by Escrow Agent. The Escrow Agent upon receipt of the
Pledged Property, shall keep, hold and preserve said Pledged Property in its
possession until the payment in full and performance of all terms and
conditions on behalf of the Debtor of the Note and related documents, or until
the Debtor defaults in the payment of the Note or any term or condition of the
Note or related documents.
5. Return of Property on Performance. When the Note is paid in full and
upon performance of all the terms and conditions of the Note and related
documents, the Escrow Agent shall return the Pledged Property to the Debtor
upon written demand accepted by both the Debtor and the Secured Party.
6. Return of Property on Non-performance. If the Debtor defaults in the
payment of the Note or on any terms or conditions of the Note or Loan
Agreement or related documents, the Escrow Agent shall, upon written demand by
the Secured Party, deliver the Pledged Property to the Secured Party to be
dealt with by the Secured Party in manner and like as the Secured Party deems
fit.
7. Dividends on Property. Provided the Debtor is not in default of any
payment on the Note or any terms or conditions of the Note or Loan Agreement
or related documents, the Debtor shall have the right to receive all ordinary
dividends, excepting any liquidating dividend, on the Pledged Property and
shall have the right to vote the shares of stock at all meetings of the
corporation, except that Debtor shall not vote the shares of stock for
changing the present authorized and issued capital structure of the
corporation or for any consolidation, merger, liquidation or dissolution of
the corporation without the prior written consent of the Secured party. If
Debtor is in default, the Secured Party shall have the right to receive all
dividends on the Pledged Property and shall have the right to vote the shares
of stock at all meetings of the corporation.
8. Indemnification of Escrow Agent. The Debtor and the Secured Party do
hereby release the Escrow Agent from and against any and all liability
whatsoever arising out of this Pledge Agreement and agree to jointly and
severally indemnify and hold harmless Escrow Agent against the same.
9. Notices. All notices, requests, demands or other communications
provided for herein shall be in writing and shall be deemed to have been
property given if sent by registered or certified mail, return receipt
requested, addressed to the parties at their respective addresses hereinabove
set forth, or at such other addresses as the parties may designate in writing.
10. Modification And Waiver. No modification or waiver of any provision
of this Pledge Agreement, and no consent by Secured Party to any breach
thereof by Debtor, shall be effective unless such modification or waiver shall
then be in writing and signed by Secured Party, and the same shall then be
effective only for the period and on the conditions and for the specific
instances and purposes specified in writing. No course of dealing between
Debtor and Secured Party in exercising any rights or remedies hereunder shall
operate as a waiver or preclude the exercise of any other rights or remedies
hereunder. .
11. Applicable Law. This Pledge Agreement shall be construed in
accordance with an shall be governed by the laws of the State of Nevada.
12. Benefit. This Pledge Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge
Agreement on the date first above written.
NET TELECOMMUNICATIONS, INC.
By:/s/Michael Gorts
-------------------------
Michael Gorts
President
BENTLEY KING ASSOCIATES, INC.
By:/s/Jon M. Levine
--------------------------
Jon M. Levine
Executive Vice President
---------------------------
Charles J. Spinelli
Escrow Agent
GUARANTY
GUARANTY, given as of February 4, 1997, by NTI TELECOM, INC., a Nevada
Corporation, having an address at 101 Convention Center Drive, Las Vegas,
Nevada (hereinafter referred to as" Guarantor"), to BENTLEY KING ASSOCIATES,
INC., a Delaware corporation, having an address at 1601 E. Flamingo Road, Las
Vegas, Nevada ("Lender")(hereinafter "Guaranty"),
W I T N E S S E T H:
WHEREAS, concurrently herewith the Lender is lending to Net
Telecommunication Inc., a Nevada corporation, having an address at 101
Convention Center Drive, Las Vegas, Nevada 89109 ("Maker"), the sum of
$300,000.00, together with interest thereon, as evidenced by a promissory note
and loan agreement dated as of February ~ ,1997 herewith made by Maker to
Lender (the "Note" and "Loan Agreement"); and
WHEREAS, Guarantor is a direct beneficiary of the Note to Maker inasmuch
as Maker will, from proceeds of the Note, finance Guarantor for the purpose of
commencing telecommunication service operations and in order to induce the
Lender to make said loan, the Guarantor has agreed to give the Guaranty of the
payment of the Note.
NOW THEREFORE, in consideration of Ten Dollars, and other valuable
consideration, the receipt and sufficiently of which is hereby acknowledged,
the parties hereto agree as follows:
1. The Guarantor does hereby unconditionally guaranty to the Lender the
due and punctual payment of all principal and interest evidenced by the Note
and all extensions, renewals or refinancings thereof, whenever due and
payable, and all expenses of collection of the Note and of enforcement of the
Guaranty, including reasonable attorneys' fees (collectively referred to
herein as the "Obligations").
2. This Guaranty is irrevocable, continuing, indivisible and
unconditional and, except as otherwise provided herein, may be proceeded upon
immediately after failure by the Maker to pay any of the Obligations, without
any prior action or proceeding against the Maker. The Guarantor hereby
consents to and waives notice of the following, none of which shall affect,
change or discharge the liability of the Guarantor hereunder: (a) any changes
in the terms of any agreement between the Maker and the Lender; and (b) the
acceptance, alteration, release or substitution by the Lender of any security
for the Obligations, whether provided by the Guarantor or any other person.
3. The Guarantor hereby expressly waives the following: (a) acceptance
and notice of acceptance of the Guaranty by Lender; (b) notice of extension of
time of the payment of, or renewal or alteration of the terms and conditions
of, any Obligations; (c) notice of any demand for payment, notice of default
or nonpayment as to any Obligations; (d) all other notices to which the
Guarantor might otherwise be entitled in connection with the Guaranty or the
Obligations of the Maker hereby guaranteed; and (e) trial by jury and the
right thereto in any action or proceeding~of any kind or nature, arising on,
under or by reason of, or relating in any way to, the Guaranty or the
Obligations.
4. The Guarantor has not and will not set up or claim and defense,
counterclaim, act-off or other objection of any kind to the suit, action or
proceeding at law, in equity, or otherwise, or to any demand or claim that may
be instituted or made under and by virtue of the Guaranty. All remedies of the
Lender by reason of or under the Guaranty are separate and cumulative remedies
and it is agreed that no one of such remedies shall be deemed in exclusion of
any other remedies available to the Lender.
5. The Guarantor represents and warrants that the Guarantor has full
power and authority to execute, deliver and perform this Guaranty, and that
neither the execution, delivery nor performance of the Guaranty will violate
any law or regulation, or any order or decree of any court or governmental
authority, or will conflict with, or result in the breach of, or constitute a
default under, any agreement or other instrument to which the Guarantor is a
party or by which Guarantor may be bound or will result in the creation or
imposition of any lien, claim or encumbrance upon any property of Guarantor.
6. The Guarantor covenants and agrees as follows:
(A) Guarantor covenants not to create, suffer or incur any lien,
mortgage, pledge, assignment or other encumbrance, or security interest in any
of Guarantor's property, assets or receivables, now owned or hereafter
acquired, except as contemplated by the Loan Agreement and related documents;
(B) Guarantor shall no have any indebtedness, except for indebtedness
incurred in the normal course of business;
(C) All taxes, levies and assessments of any description will be paid
and satisfied before interest of penalties accrue thereon;
(D) Guarantor shall not make any significant changes in its management;
(E) Guarantor shall maintain all necessary insurance and coverage so as
to protect its interest and the interest of Lender;
(F) Guarantor shall not decapitalize nor dilute the corporate structure
of the Guarantor;
(G) Guarantor shall not issue nor authorize any additional shares of any
stock, whether common or preferred.
7. This Guaranty may not be changed or terminated orally.
8. This Guaranty shall be construed in accordance with, and governed by,
the laws of the State of Nevada. No invalidity, irregularity, illegality or
unenforceability of any Obligation shall affect, impair or be defense to the
enforceability )f the Guaranty.
9. This Guaranty shall be binding upon an inure to the benefit of the
parties hereto and their respective heirs, executors, administrators,
successors and assigns.
IN WITNESS WHEREOF, the parties hereto have duly executed this Guaranty
on the date first above written.
NTI TELECOM, INC.
By:/s/Michael Gorts
------------------------
Michael Gorts
President
BENTLEY KING ASSOCIATES, INC.
By:/s/Jon M. Levine
------------------------
Jon M. Levine
Executive Vice President
SUBSIDIARIES OF THE REGISTRANT
Long Distance International
NTI Telecom, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000090357
<NAME> NET TELECOMMUNICATIONS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,742
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 33,227
<PP&E> 23,288
<DEPRECIATION> 5,196
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<BONDS> 0
0
0
<COMMON> 8,319
<OTHER-SE> (61,754)
<TOTAL-LIABILITY-AND-EQUITY> 76,795
<SALES> 29,571
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<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 245,568
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (229,866)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (452,238)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
