UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 0-22282.
USCI, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3702647
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6115-A Jimmy Carter Blvd., Norcross, Georgia 30071
(Address of principal executive offices) (Zip Code)
(770) 840-8888
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's
classes of Common Stock, as of the latest practicable date:
As of August 31, 1999, 92,826,873 shares of $.0001 par value
Common Stock were outstanding.
<PAGE>
USCI, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
Part I FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as
of June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of
Operations and Accumulated Deficit for
the Three months ended June 30, 1999 and
June 30, 1998 4
Condensed Consolidated Statements of
Operations and Accumulated Deficit for
the Six months ended June 30, 1999 and
June 30, 1998 5
Condensed Consolidated Statements of Cash
Flows for the Six months ended June 30, 1999
and June 30, 1998 6
Notes to Condensed Consolidated
Financial Statements 7-8
Item 2 Management's Discussion and Analysis of 9-14
Financial Condition and Results of
Operations for the Six and Three months
Ended June 30, 1999 and June 30, 1998
PART II OTHER INFORMATION
Item 1 Legal Proceedings - None 15
Item 2 Changes in Securities - None
Item 3 Default Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of
Security Holders - None
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
Part I
Item 1
USCI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998*
(unaudited)
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents, including restricted
cash of $181,500 in 1999 and $454,124 in 1998 $ 394,225 $ 754,758
Accounts receivable--trade, net of allowances of
$10,552,723 in 1999 and $11,787,545 in 1998 10,100,096 8,212,484
Accounts receivable-other 36,178 47,533
Prepaid expenses 2,019,668 310,000
------------ ------------
Total current assets 12,550,167 9,324,775
------------ ------------
PROPERTY AND EQUIPMENT, net 1,008,068 1,555,366
OTHER ASSETS 1,307,679 1,531,740
------------ ------------
Total Assets $14,865,914 $12,411,881
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Credit Facility $10,843,394 $2,955,232
Other payables 2,556,693 2,700,000
Accounts payable and bank overdraft 10,425,652 10,805,063
Accrued expenses 5,920,286 4,069,927
Commissions payable 342,434 362,416
------------ ------------
Total current liabilities 30,088,459 20,892,638
------------ ------------
OTHER LIABILITIES 8,790,657 14,354,096
------------ ------------
Total liabilities 38,879,116 35,246,734
------------ ------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $.01 par value;
5,000 shares authorized, 1,743 shares issued at June 30,
1999 and 1,910 shares issued at December 31, 1998 17 19
Common stock, $.0001 par value; 100,000,000 shares
authorized; 92,826,873 shares issued at June 30,
1999 and 12,006,828 shares issued at December 31, 1998 9,284 1,201
Additional paid-in capital 65,925,174 63,453,345
Accumulated deficit (89,919,627) (86,261,368)
Treasury stock, at cost, 5,500 shares in 1999 and 1998 (28,050) (28,050)
------------ -------------
Total stockholders' deficit (24,013,202) (22,834,853)
------------ -------------
Total liabilities and stockholders' deficit $14,865,914 $12,411,881
============ ============
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
Three Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============ ============
<S> <C> <C>
REVENUES
Subscriber Sales $4,126,023 $12,124,878
------------ ------------
Total Revenues 4,126,023 12,124,878
------------ ------------
COST OF SALES
Cost of subscriber sales 1,703,520 7,227,092
------------ ------------
Total cost of sales 1,703,520 7,227,092
------------ ------------
GROSS MARGIN 2,422,503 4,897,786
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 2,601,474 5,783,486
Subscriber acquisition and promotional costs 378,924 6,152,989
Other 380,333 0
------------ ------------
Total Operating Expenses 3,360,731 11,936,475
------------ ------------
OPERATING LOSS ( 938,228) (7,038,689)
Interest expense, Net 424,678 2,910,490
------------ ------------
LOSS BEFORE INCOME TAXES (1,362,906) ( 9,949,179)
Income Taxes 0 0
------------ ------------
NET LOSS (1,362,906) ( 9,949,179)
Preferred Dividends 78,424 126,667
Deficit at Beginning of Period (88,478,297) (54,681,267)
------------ ------------
Deficit at End of Period $(89,919,627) $(64,757,113)
============= ============
Basic and Diluted Net Loss per Share $ (0.02) $ (0.93)
============ ============
Basic and Diluted Weighted
Average Shares Outstanding 69,949,908 10,718,925
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============ ============
<S> <C> <C>
REVENUES
Subscriber Sales $9,923,425 $21,302,934
------------ ------------
Total Revenues 9,923,425 21,302,934
------------ ------------
COST OF SALES
Cost of subscriber sales 4,704,792 12,707,857
------------ ------------
Total cost of sales 4,704,792 12,707,857
------------ ------------
GROSS MARGIN 5,218,633 8,595,077
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 5,759,047 11,978,206
Subscriber acquisition and promotional costs 1,116,079 12,786,501
Other 380,333 0
------------ ------------
Total Operating Expenses 7,255,459 24,764,707
------------ ------------
OPERATING LOSS (2,036,826) (16,169,630)
Interest expense, Net 1,271,540 5,338,238
------------ ------------
LOSS BEFORE INCOME TAXES (3,308,366) (21,507,868)
Income Taxes 0 0
------------ ------------
NET LOSS (3,308,366) (21,507,868)
Preferred Dividends 349,893 126,667
Deficit at Beginning of Period (86,261,368) (43,122,578)
------------ ------------
Deficit at End of Period $(89,919,627) $(64,757,113)
============= ============
Basic and Diluted Net Loss per Share $ (0.09) $ (2.04)
============ ============
Basic and Diluted Weighted
Average Shares Outstanding 41,138,432 10,555,707
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============= =============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 3,308,366) $(21,507,868)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 723,353 1,201,061
Amortization of discount on notes payable 0 4,258,370
Amortization of deferred financing costs 86,600 629,600
Provision for losses on accounts receivable 637,000 983,721
Changes in operating assets and liabilities:
Accounts receivable - trade (2,524,612) (10,940,156)
Accounts receivable - other 11,355 312,693
Inventory 0 17,588
Prepaids and other assets 318,434 (33,518)
Commissions payable (19,983) (315,109)
Accounts payable and accrued expenses 2,768,907 6,467,320
Promotional deposits 0 (200,000)
----------- -------------
Total adjustments 2,001,054 2,381,570
----------- ------------
Net cash used in operating activities (1,307,312) (19,126,298)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,085) (276,622)
----------- -------------
Net cash used in investing activities (11,085) (276,622)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and line of credit 10,564,896 13,589,200
Repayments of notes payable (9,473,399) (6,452,757)
Issuance of common stock 0 3,625,513
Costs associated with issuance of common stock 0 (185,970)
Issuance of preferred stock 0 10,000,000
Costs associated with issuance of
preferred stock 0 (1,084,075)
Issuance of stock upon exercise of warrants 0 3,751
Issuance of stock upon exercise of options 0 893
Costs associated with term loan and line of credit (133,633) (388,710)
------------ ------------
Net cash provided by financing activities 957,864 19,107,845
------------ ------------
NET DECREASE IN CASH (360,533) (295,075)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 754,758 1,105,530
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 394,225 $ 810,455
============ =============
INTEREST PAID DURING THE PERIOD $ 618,695 $ 334,675
============ =============
WARRANTS ISSUED IN CONNECTION WITH DEBT
FINANCING $ 0 $ 4,647,000
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
USCI, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
Note 1: BASIS OF PRESENTATION
The unaudited financial information furnished herein in the opinion of
management reflects all adjustments which are necessary to fairly state the
Company's financial position, the results of its operations and its cash
flows. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for
the year ended December 31, 1998. Footnote disclosure which would
substantially duplicate the disclosure contained in those documents has
been omitted. Operating results for the six month period ended June
30, 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999.
Note 2: LOSS PER SHARE
Basic earnings per share are based on the weighted average number of shares
outstanding. Diluted earnings per share are based on the weighted average
number of shares outstanding and the dilutive effect of outstanding stock
options and warrants (using the treasury stock method). For all periods
presented, outstanding options and warrants have been excluded from diluted
weighted average shares outstanding, as their impact was antidilutive.
Net loss for the six and three month periods ended June 30, 1999 is adjusted by
dividend requirements of $349,893 and $78,424, respectively, related to the
Company's Convertible Preferred Stock.
Note 3: CREDIT FACILITY
On April 14, 1999, we entered into an Amended and Restated Loan and Security
Agreement with Foothill Capital Corp. in which the original Loan and Security
Agreement entered into on June 5, 1998 was amended to restructure the existing
credit facility by reducing the total facility to $17.5 million. Additionally,
certain of our preferred shareholders and certain other persons have entered
into a Participation Agreement with Foothill Capital Corp. ("Foothill") in
connection with the restructuring of the our outstanding $20 million credit
facility with Foothill. An aggregate of $7 million has been made available by
the participants in the Foothill facility as term loans. Although the limit of
the credit facility has been reduced from $20 million to $17.5 million, the $7
million allocated for term loans will be available for working capital upon
certain conditions. As of June 30, 1999, $2.6 million had been advanced and an
additional $550,000 was advanced in July 1999. The balance of the $10.5 million
limit has been structured as part revolver, part term loan and part letters of
credit. As of June 30, 1999, $10,843,394 was outstanding comprised of revolver
and term loans. Also, there were $925,000 in standby letters of credit
outstanding under the line. Additionally, the financial covenants in the June
5, 1998 Agreement were replaced with revenue, subscriber and cash receipt
covenants. For the month ended June 30, 1999, we were not in compliance with
certain financial and other covenants. As a result, we have reclassified
approximately $9 million in long-term debt to current liabilities. Foothill has
continued to fund advances under our revolver. Subsequent to June 30, 1999, we
obtained a waiver from Foothill until September 30, 1999 with respect to such
non-compliance. We are working with Foothill to obtain a further waiver and to
amend the Amended and Restated Loan and Security Agreement to better match our
current business model.
Note 4: EQUITY
During the three months ended June 30, 1999 we issued common shares to various
individuals as follows:
300,000 shares to the new Board of Directors (at 100,000 shares per member) as
consideration for services and assistance.
520,045 replacement shares to current and former officers, directors, and other
stockholders for the shares utilized in October 1997 as collateral for a letter
of credit issued by an investment banker. As a result of the Company's failure
7
<PAGE>
to replace the collateral with cash in January 1998, the investment banker
exercised its rights to transfer the shares deposited as collateral into its
name. See "Liquidity and Capital Resources".
5,000,000 shares issued to Howard Zuckerman as consideration for his
operational and financial assistance and restructuring (as outlined in his
consulting agreement dated May 1, 1999) from May 1, 1999 for a period of one
year.
Note 5: RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF USCI, INC.
OVERVIEW
Historically, our revenues have consisted of commissions earned as an
activation agent for cellular and paging carriers and, since the last
quarter of 1996, revenues from the resale of cellular and paging services.
Since completion of our transition in 1998 to becoming a reseller, we do not
receive material revenues from agency commissions.
We bill our resale customers for monthly access to the underlying carrier's
cellular or paging network, cellular usage based on the number, time and
duration of calls, the geographic location of both the originating and
terminating phone numbers, extra service features, the applicable rate plan
in effect.
The wholesale cost of subscriber service includes monthly access, usage
(home and roaming, long distance) and special features charges paid by us to
the cellular and paging carriers.
Subscriber acquisition and promotional costs includes commission payments we
make to our channels of distribution (or to equipment suppliers on their
behalf) for each activation by their customers of a cellular telephone,
certain advertising costs incurred by us or our distribution channels and
reduced access and/or free airtime for a limited period to our cellular
subscribers. These costs may be recoverable from the long-term revenue
stream created by the continuation of subscribers services. Our ability to
capture such revenue streams has been adversely affected by early service
cancellations, known as churn, and by losses caused by fraudulent use of
service by third persons which are not recoverable from subscribers. Under
existing agreements with the carriers which provide us with cellular
service, we have recovered access fraud in some instances and although not
generally recoverable, subscriber fraud is also recoverable under certain
circumstances. We believe that through the introduction of improved
controls, the hiring of additional personnel to monitor fraud and install
fraud prevention procedures, we will be able to reduce fraud in the future.
Selling, general and administrative expense include all personnel related
costs, including the costs of providing sales and support services for
customers, personnel required to support our operations and growth, and
commissions to our independent sales representatives. It also includes the
costs of the billing and information systems, other administrative expenses,
bad debt expense, facilities related expenses, travel, professional fees, as
well as all depreciation and amortization expenses.
We have experienced and will continue to experience significant operating
and net losses and negative cash flow from operations. The loss of the
RadioShack account in October 1998 further accelerated the losses and
negative cash flow we had previously experienced. In response to the
RadioShack termination, we reduced our workforce from 280 to 115 employees,
which included a substantial number of customer service and collection
personnel and reduced our leased facilities from 23,000 square feet to
18,000 square feet. The reductions in personnel resulted in reduced
effectiveness of our customer service and collection departments causing
higher churn rates. We believe that offering prepaid cellular services to
specialized national channels of distribution and through the sales
opportunities afforded by e-commerce, we could achieve positive operating
margins and cash flow over time, provided that we have the capital to fund
the introduction of this new marketing strategy. See "Risk Factors-Limited
History of Losses; Uncertainty of Future Profitability" and "Need For
Additional Financing."
9
<PAGE>
RESULTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO
SIX AND THREE MONTHS ENDED JUNE 30, 1998
Revenues
Total revenues for the six months ended June 30, 1999 ("1999 Six Months"),
consisting primarily of subscriber sales, were $9,923,425 as compared to
$21,302,934 for the six months ended June 30, 1998 ("1998 Six Months").
Total revenues for the three months ended June 30, 1999 ("1999 Quarter"),
consisting primarily of subscriber sales, were $4,126,023 as compared to
$12,124,878 for the three months ended June 30, 1998 ("1998 Quarter"). The
decreased revenues for the 1999 Six Months and the 1999 Quarter are
attributable to a net decline in our subscriber base.
As an agent, we received activation commissions from other wireless carriers
in the first quarter of 1998. However, after we completed our transition
from agent to reseller in 1998, agency activation commissions in 1999 were
immaterial.
Cost of Sales
Costs of subscriber services, which consist of direct charges from cellular
and paging carriers for access, airtime and services resold to our
subscribers, amounted to $4,704,792 and $12,707,857 for the 1999 Six Months
and the 1998 Six Months, respectively and $1,703,520 and $7,227,092 for the
1999 Quarter and the 1998 Quarter, respectively. The gross margin for
subscriber sales was $5,218,633 or 52.6% and $8,595,077 or 40.4% for the
1999 Six Months and the 1998 Six Months, respectively, and $2,422,503 or
58.7% and $4,897,786 or 40.4% for the 1999 Quarter and the 1998 Quarter,
respectively. The increase in the 1999 Six Months' and the 1999 Quarter's
gross margin percentage is attributable to better wholesale rates
experienced in areas we currently service.
Following the completion of our transition from agent to reseller, our
agency commission expenses were immaterial in both the 1999 Six Months and
the 1998 Six Months and the 1999 Quarter and the 1998 Quarter. Such
expenses consisted primarily of commissions paid to our mass market
distribution channels in the 1998 Six Months and the 1998 Quarter.
Operating Expenses
Subscriber acquisition and promotional costs represent expenses incurred by
us to acquire new subscribers for our cellular and paging services. These
costs consist primarily of commissions paid to retailers and outside sales
representatives, below cost discounts (i.e. reduced monthly access charges
or free minutes) granted to subscribers when purchasing cellular or paging
services, rebates issued to subscribers and certain advertising costs.
Subscriber acquisition and promotional costs amounted to $1,116,079 and
$12,786,501 for the 1999 Six Months and the 1998 Six Months, respectively,
and $378,924 and $6,152,989 for the 1999 Quarter and the 1998 Quarter,
respectively. This decrease reflects the curtailment of acquisition of new
subscribers. The decrease in these costs in the 1999 Six Months and the
1999 Quarter is also attributable to reduced activity relating to new
subscribers in 1999 coupled with lower promotional costs due to the
termination of promotions during a subscribers term.
Selling, general and administrative expenses for the 1999 Six Months were
$5,759,047 as compared to $11,978,206 for the 1998 Six Months and were
$2,601,474 for the 1999 Quarter as compared to $5,783,486 for the 1998
Quarter, reflecting our staff reductions and reduction of other operating
expenses due to reduced activity. Salaries and related employee benefits
decreased by 60.3% to $2,228,440 for the 1999 Six Months from $5,610,858 for
the 1998 Six Months and decreased by 55.8% to $1,188,906 for the 1999
Quarter from $2,688,232 for the 1998 Quarter. Telecommunications and
facilities expense decreased by 63.9% to $465,768 for the 1999 Six Months
from $1,288,791 for the 1998 Six Months and decreased by 68.0% to $198,908
for the 1999 Quarter from $621,553 for the 1998 Quarter. Billing and credit
review services decreased to $806,371 in the 1999 Six Months from
10
<PAGE>
$1,148,829 in the 1998 Six Months and decreased to $302,049 in the 1999
Quarter from $625,361 in the 1998 Quarter. Travel expense decreased by 89.1%
to $39,604 for the 1999 Six Months from $363,114 for the 1998 Six Months and
decreased by 85.6% to $24,706 for the 1999 Quarter from $171,970 for the
1998 Quarter. Professional and other fees increased to $1,041,118 in the
1999 Six Months from $785,274 in the 1998 Six Months and decreased to
$420,017 in the 1999 Quarter from $444,982 for the 1998 Quarter. The
increase in the 1999 Six Months over the 1998 Six Months is due to legal,
consulting and other fees incurred in connection with our restructuring and
reorganization as well as material litigation instituted by former customers
and vendors including RadioShack and others. Depreciation and amortization
for the 1999 Six Months was $723,353 as compared to $1,201,061 for the 1998
Six Months and was $361,676 for the 1999 Quarter as compared to $603,120 for
the 1998 Quarter. As a percentage of revenues, the selling, general and
administrative expenses were 58.0% for the 1999 Six Months and 63.1% for the
1999 Quarter compared to 136% in the fourth quarter of 1998 reflecting the
Company's emphasis on controlling overhead costs.
During the three months ended June 30, 1999 we issued common shares to
various individuals for either services or for replacement of shares
previously used as collateral (see Footnote 4). Valuation for the shares
issued for services amounted to approximately $380,000 and are included in
other operating expenses.
Interest expense (net of income) was $1,271,540 for the 1999 Six Months
compared to $5,338,238 for the 1998 Six Months and was $424,678 for the 1999
Quarter compared to $2,910,490 for the 1998 Quarter. The decrease in
interest expense during the 1999 Six Months and the 1999 Quarter is related
to $4,879,870 and $2,345,750, respectively, of non-cash charges attributable
to the fair value of warrants issued in connection with three private
financings offset by higher loan levels in 1999. See "Liquidity and Capital
Resources".
Between January 1, 1999 and June 30, 1999, we did not add any new
subscribers and our active cellular subscriber base was reduced from
approximately 60,000 to approximately 33,000.
We incurred net losses of $3,308,366 and $21,507,868 for the 1999 Six Months
and the 1998 Six Months, respectively, and $1,362,906 and $9,949,179 for the
1999 Quarter and the 1998 Quarter, respectively.
Liquidity and Capital Resources
Working capital deficiency at June 30, 1999 was $17,538,292 compared to
$11,567,863 at December 31, 1998. Cash and cash equivalents at June 30,
1999 totaled $394,225 (of which $181,500 was restricted). We have a
stockholders' deficit of $24,013,202 at June 30, 1999 compared to
$22,834,853 at December 31, 1998. The increase in working capital
deficiency is mostly due to the reclassification of approximately $9 million
of long term debt to current liabilities due to certain defaults under the
Amended and Restated Loan and Security Agreement with Foothill Capital Corp.
("Foothill") due to non-compliance with certain financial and other
covenants which non-compliance was subsequently waived by Foothill. See
Note 3. The decrease in cash and stockholders' equity is attributable to
our operating loss for the six months ended June 30, 1999. We continue to
experience monthly losses and negative cash flow from operations.
Our past growth in subscribers created losses and a working capital
deficiency due to the acquisition costs associated with the high rate of
subscriber acquisition. We currently require substantial amounts of capital
to fund current operations, for the settlement and payment of past due
obligations, and the deployment of our new business strategy. Due to
recurring losses from operations, an accumulated deficit, stockholders'
deficit, negative working capital, being in default under the terms of our
letters of credit advances, having significant litigation instituted against
us, and our inability to date to obtain sufficient financing to support
current and anticipated levels of operations, our independent public
accountant audit opinion states that these matters raise substantial doubt
about our ability to continue as a going concern.
11
<PAGE>
To date, we have funded operations and growth primarily through financing
activities. As a consequence of the merger in May 1995, we received cash
and cash equivalents of approximately $9,750,000 of which $3,450,000 was
used to repay debt to private lenders. In November 1995, we received net
proceeds of approximately $21,850,000 from the exercise, following a notice
of redemption, of outstanding common stock purchase warrants.
In the fourth quarter of 1997 and the first quarter of 1998, we obtained
letter of credit financing in the amount of approximately $3.1 million from
our investment banker, and short term loans totaling $6.0 million from
private individuals (all of which has been repaid). In addition, we raised
approximately $2.5 million from the private sale of Common Stock and $19
million from the private sale of Convertible Preferred Stock in 1998 which
was in part funded through the conversion of debt into shares of Preferred
Stock. The $3.1 million letter of credit financing was collateralized by
544,545 shares of company common stock pledged by certain of our current and
former officers, directors and other stockholders. We were required to
provide the investment banker with replacement collateral in January 1998
which we failed to do. As a result, the investment banker has recently
exercised its rights to transfer the shares deposited as collateral into its
name and we have issued replacement shares (totaling 520,045) to the
pledgors. From the letter of credit availability, a letter of credit for
$2.5 million was issued to RadioShack and we have asserted in our
counterclaims in the RadioShack lawsuit that RadioShack improperly drew down
the $2.5 million letter of credit.
On June 5, 1998, we entered into a four-year $20 million revolving credit
and term loan facility with Foothill Capital Corp. The Foothill credit
facility provides for term loans which will amortize equally over a 30-month
period and revolving credit borrowings. Availability is based on a number
of factors, including eligible accounts receivable and eligible cellular
subscribers. Term loan borrowings bear interest at the bank's base rate
plus 2.5% and revolving credit borrowings bear interest at the base rate
plus 1.5%. Concurrent with the closing of the credit facility, we received
proceeds of $6.1 million under a term loan borrowing, of which $3 million
was used to pay RadioShack.
On April 14, 1999, we entered into an Amended and Restated Loan and Security
Agreement with Foothill in which the original Loan and Security Agreement
entered into on June 5, 1998 was amended to restructure the existing credit
facility by reducing the total facility to $17.5 million. Additionally,
certain of our preferred shareholders and certain other persons have entered
into a Participation Agreement with Foothill in connection with the
restructuring of the outstanding $20 million credit facility with Foothill
Capital Corp. An aggregate of $7 million has been made available by the
participants in the Foothill facility as term loans. Although the limit of
the credit facility has been reduced from $20 million to $17.5 million, the
$7 million allocated for term loans will be available for working capital
upon certain conditions. As of June 30, 1999, $2.6 million had been advanced
and an additional $550,000 was advanced in July 1999. The balance of the
$10.5 million limit has been structured as part revolver, part term loan and
part letters of credit. Additionally, the financial covenants in the June
5, 1998 Agreement were replaced with revenue, subscriber and cash receipt
covenants. For the months ending June 30 and July 31, 1999, we were not in
compliance with certain financial and other covenants. As a result, we have
reclassified approximately $9 million in long-term debt to current
liabilities. Foothill has continued to fund advances under our revolver.
Subsequent to June 30, 1999, we obtained a waiver from Foothill with respect
to such non-compliance until September 30, 1999. We are working with
Foothill to obtain a further waiver and to amend the Amended and Restated
Loan and Security Agreement to better match our current business model.
We have been actively engaged in negotiations with our principal vendors and
carriers to enter into long term payment plans for past due obligations. To
date, we have been successful in concluding agreements aggregating
approximately $13,000,000 of past due obligations. On April 13, 1999 we
entered into an debt restructuring agreement with a cellular carrier which
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is our largest vendor, allowing for payment of our debt to them, which was
approximately $12 million reflecting charges through March 12, 1999 and
payments through April 30, 1999, over a 48 month period with interest at the
rate of 6% per annum. We have not made the June, July or August payments
and are in the process of negotiating a restructuring of this debt.
Following the closing of the Foothill Amended Loan Agreement, the holders of
our preferred shares entered into an agreement with us in which they
converted $1.5 million stated value of preferred stock into 75 million
shares of our common stock at $0.02 per share, agreed to waive all future
dividends on the outstanding preferred shares, waived all defaults under the
terms of the preferred shares, and cancelled all outstanding options and
warrants held by them covering 4,485,707 shares of common stock.
In order to fund our capital needs for the year ending December 31, 1999, we
will need substantial additional capital, since our cash flow from our
existing subscriber base is not sufficient to fund both our current
operating expenses and the settlement of past due obligations. While we are
in a position to utilize the additional funds made available through the
restructuring of our credit facility with Foothill Capital Corp., these
funds will only be released upon certain conditions, including our ability
to meet the performance requirements contained in the restructuring
agreement. Accordingly, there is no assurance and no representation can be
made that we will be successful, in increasing cash flow from our current
subscriber base, or any increases in subscribers obtained through the
deployment of our new strategy, meeting the conditions contained in the
credit facility permitting the release of funds or that we will be able to
negotiate settlements with the creditors which permit us to continue in
business.
There is no assurance that we will be able to control or minimize churn or
that our retention programs will be successful, that we will be able to
control or minimize the damaging effect of fraud, that our subscribers will
use a sufficient number of minutes each month to support the revenue
required to support our cash flow needs, that Foothill will amend the
Amended and Restated Loan and Security Agreement, that we will be able to
control or fund the legal fees for the lawsuits that are currently pending,
or that we will be able to avoid additional suits instituted by vendors for
past due obligations, or that we will be able to successfully implement a
plan to collect our delinquent accounts receivable on a timely basis or in
sufficient amounts.
In the event that we are not successful in increasing revenues or obtaining
additional financing or restructuring our current indebtedness, we will be
required to seek other sources of funding and further restructure the
payment schedules which we negotiated to satisfy past due obligations and
substantially reduce or suspend operations to the extent that one or more of
these conditions is not met. See "Risk Factors-Need For and Availability of
Additional Financing."
Because the cost of implementing our new prepaid cellular and e-commerce
strategies will depend upon a variety of factors (including our ability to
negotiate additional distribution agreements and increase our penetration of
existing distribution channels, our ability to negotiate favorable wholesale
prices with carriers, the number of new customers and services for which
they subscribe, the nature and penetration of services that we may offer,
regulatory changes and changes in technology), actual costs and revenues
will vary from expected amounts, possibly to a material degree, and such
variations will affect our future capital requirements.
Year 2000 Compliance
Currently, many computer systems and software products are coded to accept
only two digit, rather than four digit, entries in the date code field.
Date-sensitive software or hardware coded in this manner may not be able to
distinguish a year that begins with a "20" instead of a "19," and programs
that perform arithmetic operations, make comparisons or sort date fields may
not yield correct results with the input of a Year 2000 date. This Year
2000 problem could cause miscalculations or system failures that could
affect our operations.
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Our State of Readiness
We have evaluated the effect of the Year 2000 problem on our information
systems and we are implementing plans to ensure our systems and applications
will effectively process information necessary to support ongoing operations
in the Year 2000 and beyond. We believe our information technology, or IT,
and our other systems will be Year 2000 compliant by the end of 1999.
While we expect that all significant computer systems will be Year 2000
compliant by the end of the third quarter of 1999, we cannot assure you that
all Year 2000 problems will be identified or that the necessary corrective
actions will be completed in a timely manner.
We have requested certification from our significant vendors and suppliers
demonstrating their Year 2000 compliance. We intend to continuously
identify critical vendors and suppliers and communicate with them about
their plans and progress in addressing Year 2000 problems. We cannot assure
you that the systems of these vendors and suppliers will be timely
converted. We also cannot assure you that any failure of their systems to
be Year 2000 compliant will not adversely effect our operations.
Our Costs of Year 2000 Remediation
We have not incurred material costs related specifically to Year 2000 issues
and do not expect to in the future. However, we cannot assure you that the
costs associated with Year 2000 problems will not be greater than we
anticipate.
Our Year 2000 Risk
Based on the efforts described above, we currently believe that our systems
will be Year 2000 compliant in a timely manner. We have completed the
process of identifying Year 2000 issues in our computer systems and expect
to complete any remediation efforts by the end of the third quarter of 1999.
However, we cannot assure you that all Year 2000 problems will be
successfully identified, or that the necessary corrective actions will be
completed in a timely manner. Failure to successfully identify and
remediate Year 2000 problems in critical systems in a timely manner could
have a material adverse effect on our business, results of operations or
financial condition.
In addition, we believe that there is risk relating to significant vendors'
and suppliers' failure to remediate their Year 2000 issues in a timely
manner. Although we are communicating with our vendors and suppliers
regarding the Year 2000 problem, we do not know whether these vendors' or
suppliers' systems will be Year 2000 compliant in a timely manner. If one
or more significant vendors or suppliers are not Year 2000 compliant, this
could have a material adverse effect on our business, results of operations
or financial condition.
Our Contingency Plans
We plan by the end of the third quarter of 1999 to develop contingency plans
to be implemented in the event planned solutions prove ineffective in
solving Year 2000 compliance. If it becomes necessary for us to implement a
contingency plan, such plan may not avoid a material Year 2000 issue.
INFLATION
To date, inflation has not had any significant impact on our business.
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PART II
ITEM 2. CHANGES IN SECURITIES
(c) Incorporated by reference to Note 4 to the Condensed Consolidated
Financial Statements filed under Part I, Item 1 of this Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.1 Employment Agreement dated as of July 6, 1999 between the
Registrant and Lee Feist.
27 Financial Data Schedule
99 Risk Factors
(b) Reports on Form 8-K
We filed one report on Form 8-K during the quarter
ended June 30, 1999:
Date Items Reported
------- ---------------------------------------------------
May 11, 1999 Announcement that the we converted an aggregate of
$1.5 million stated value of Preferred Stock
into 75 million shares of the Company's Common Stock
and that the credit facility provided by Foothill
Capital Corp. has been restructured. Announcement
of changes in personnel and retention of consultant.
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FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
USCI, INC.
/S/ ROBERT J. KOSTRINSKY
---------------------------
Robert J. Kostrinsky,
Executive Vice President;
Chief Financial Officer
Date: September 10, 1999
Exhibit 10.1
EMPLOYMENT AGREEMENT
AGREEMENT made as of July 6, 1999, among USCI, Inc., a Delaware
corporation with its principal office at 6115-A Jimmy Carter Blvd.,
Norcross, Georgia 30071 (the "Company"), and LEE FEIST, residing at 16
Copper Beech Lane, Ridgefield, Connecticut 06877 (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company desires that Executive be employed to serve
in a senior executive capacity with the Company, and Executive desires
to be so employed by the Company upon the terms and conditions herein
set forth.
NOW, THEREFORE, in consideration of the premises and of the
mutual promises, representations and covenants herein contained, the
parties hereto agree as follows:
1. EMPLOYMENT.
The Company hereby employs Executive and Executive
hereby accepts such employment, subject to the terms and conditions
herein set forth. Executive shall hold the office of Chief Executive
Officer of the Company, and such other office or offices of the Company
and any of its subsidiaries as the Board of Directors shall designate,
reporting to the Board of Directors of the Company, or such subsidiary
or subsidiaries, as applicable. The Company shall nominate Executive for
election as a director of the Company for all periods that Executive
holds the office of Chief Executive Officer of the Company.
2. TERM.
The initial term of employment under this Agreement
shall begin on the date hereof (the "Employment Date") and shall
continue for a period of five (5) years from that date, subject to prior
termination in accordance with the terms hereof. Thereafter, this
Agreement shall automatically be renewed for a two-year term, unless the
Company or the Executive shall give the other sixty (60) days prior
written notice of its or his intent not to renew this Agreement.
3. PLACE OF PERFORMANCE
In connection with the Executive's employment by the Company,
the Executive shall be based at the Company's principal office in
Norcross, Georgia. The Company understands and agrees, however, that
Executive will, for at least the first six months following the
Employment Date, maintain his principal residence in Ridgefield,
Connecticut and, accordingly, Executive shall be entitled to the
benefits set forth in Section 9 hereof.
4. COMPENSATION.
(a) Base Salary. During the term of this Agreement,
Executive shall receive an annual salary at the rate of $275,000 in the
first year of the term, $295,000 in the second year of the term,
$315,000 in the third year of the term, $335,00 in the fourth year of
the term and $355,000 in the fifth year of the term. Executive's
compensation shall be payable in equal installments in accordance with
the Company's normal salary payment policies and shall be subject to
such payroll deductions as are required by law or applicable employee
benefit programs.
(b) Bonus. Executive shall receive a guaranteed
$75,000 cash bonus at the end of the first year of employment, payable
within thirty (30) days following the end of the first year of
employment.
(c) Incentive Compensation. Executive shall receive
incentive compensation ("Incentive Compensation") for each fiscal year
of the Company during Executive's employment equal to five percent (5%)
of the first $4,000,000 of EBITDA (earnings before depreciation,
interest, amortization and taxes) of the Company and two percent (2%) of
EBITDA in excess of $4,000,000 for that fiscal year. Since the fiscal
year of the Company does not correspond to the employment year for the
Executive, Incentive Compensation for 1999 will be prorated. In the
event that Executive and the Company cannot agree, in good faith, on the
computation of EBITDA, that determination shall be made by an
independent public accounting firm which is not then performing services
for either the Executive or the Company (or any of its subsidiaries),
and which is selected by Executive and approved by the Company (whose
approval shall not be unreasonably withheld.) Such determination shall
be made in accordance with GAAP applied on a consistent basis and shall
be final and binding upon the parties.
5. EXPENSES.
The Company shall pay or reimburse Executive, upon
presentment of suitable vouchers, for all reasonable business and travel
expenses which may be incurred or paid by Executive in connection with
his employment hereunder, with such frequency as the Executive shall
determine. Executive shall comply with such restrictions and shall keep
such records as the Company may deem necessary to meet the requirements
of the Internal Revenue Code of 1986, as amended from time to time, and
regulations promulgated thereunder.
6. AUTOMOBILE.
The Company shall lease, during the term of Executive's
employment hereunder, for Executive an automobile with a retail purchase
price not to exceed $25,000 and shall replace such automobile at least
every three (3) years during Executive's term of employment.
7. INSURANCE AND OTHER BENEFITS.
Executive shall be entitled to such vacations and to
participate in and receive any other benefits customarily provided by
the Company to its senior management personnel (including any profit
sharing, pension, health insurance, dental coverage, key man life
insurance, AD&D and short and long-term disability in accordance with
the terms of such plans), and including stock options and/or stock
purchase plans, all as determined from time to time by the Board of
Directors of the Company. The Company shall maintain director and
officer ("D & O") insurance which will inure to Executive's benefit, in
such amounts and with such scope of coverage as are customary in such
circumstances for public corporations in the Company's industry.
8. STOCK OPTIONS.
(a) Non-Qualified Stock Options. The Company and
Executive will enter into an Non-Qualified Stock Option Agreement dated
the Employment Date, providing for the grant to Executive of a stock
option to purchase .5% of the outstanding shares of the Company's Common
Stock on a fully-diluted basis, at an exercise price per share equal to
the par value of the Company's Common Stock. Executive shall receive
non-qualified stock options to purchase an additional .5% of the
outstanding shares of the Company's Common Stock on a fully-diluted
basis on each of the second and third anniversaries of the Employment
Date, at an exercise price per share equal to the par value of the
Company's Common Stock. Each of the foregoing options shall be ten (10)
year stock options, shall vest one hundred percent (100%) on the date of
grant and shall terminate no earlier than one (1) year after the date of
Executive's expiration or termination of employment or service;
provided, however, that if Executive's employment is terminated for
cause, as defined in Section 11(c) hereof, all such options shall
terminate if not exercised within thirty (30) days following the date of
employment termination. All Common Stock issuable upon exercise of the
options shall be registered on a registration statement filed and
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
(b) Incentive Stock Options. The Company and
Executive will enter into an Incentive Stock Option Agreement dated the
Employment Date, providing for the grant to Executive of a stock option
to purchase .5% of the outstanding shares of the Company's Common Stock
on a fully-diluted basis, at an exercise price per share equal to the
fair market value of the Common Stock on the date of grant. Executive
shall receive incentive stock options to purchase an additional .5% of
the outstanding shares of the Company's Common Stock on a fully-diluted
basis on each of the second, third and fourth anniversaries of the
Employment Date, at an exercise price per share equal to the fair market
value of the Company's Common Stock on the date of grant. Each of the
foregoing options shall be ten (10) year options, shall vest one hundred
percent (100%) on the date of grant and shall terminate no earlier than
one (1) year after the date of Executive's termination of employment or
service; provided, however, that if Executive's employment is terminated
for cause, as defined in Section 11(c) hereof, all such options shall
terminate if not exercised within thirty (30) days following the date of
employment termination. All Common Stock issuable upon exercise of the
options shall be registered on a registration statement filed and
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
(c) Additional Stock Options. Executive shall
receive stock options to purchase 1,500,000 shares of the Company's
Common Stock at an exercise price per share of $1.50 in the event (i)
the stock price of the Company's Common Stock is listed on any stock
exchange or quoted on the Nasdaq Stock Market or on the pink sheets and
(ii) the closing price or closing bid price per share is $1.50 or more
for twenty-five (25) consecutive trading days. Such options shall be
incentive stock options, if permissible by law, shall have a term of ten
(10) years, shall vest one hundred percent (100%) on the date of the
grant and shall terminate no earlier than one (1) year after the date of
Executive's expiration or termination of employment or service. All
Common Stock issuable upon exercise of these options shall be registered
on a registration statement filed and declared effective by the
Securities and Exchange Commission under the Securities Act of 1933, as
amended.
9. RELOCATION SUPPORT.
(a) Because the Company is considering moving its corporate
headquarters from Norcross, Georgia and Executive currently resides in
Ridgefield, Connecticut, Executive shall initially commute from
Connecticut to corporate headquarters on a weekly basis. During such
period, the Company shall reimburse Executive for all reasonable
transportation and temporary living expenses incurred. In the event that
the Company determines (i) to move its corporate headquarters during the
term of this Agreement such that Executive is still required to commute
to another state, or (ii) to continue maintaining its headquarters in
Norcross, Georgia, the Company shall continue to reimburse Executive for
all such reasonable expenses; provided, however, that the Company shall
reimburse Executive for temporary living expenses only for up to six (6)
months from the date of such determination.
(b) Executive shall receive reimbursement for relocation,
to the Atlanta, Georgia area, or where the corporate headquarters may be
relocated, if necessary, including (i) reasonable moving expenses, and
(ii) reasonable transportation expenses for Executive and his family in
connection with the relocation described in 9(a). All reimbursements for
relocation will be based upon actual expenses incurred, and shall be
paid promptly following Executive's delivering receipts thereof to the
Company. Any portion of such relocation expense reimbursement that is
taxable to Executive will be "grossed up" to cover all federal and state
taxes payable by Executive.
10. DUTIES.
(a) Executive shall perform such duties and functions as the
Board of Directors of the Company shall from time to time determine and
Executive shall comply in the performance of his duties with the
policies of, and be subject to, the reasonable direction of the Board of
Directors.
(b) Executive agrees to devote substantially all his working
time, attention and energies to the performance of the business of the
Company; Executive shall not, directly or indirectly, alone or as a
member of any partnership or other organization, or as an officer,
director or employee of any other corporation, partnership or other
organization, be actively engaged in or concerned with any other duties
or pursuits which interfere with the performance of his duties
hereunder, or which, even if non-interfering, may be inimical, or
contrary, to the best interests of the Company, except those duties or
pursuits specifically authorized by the Board of Directors.
(c) The Company acknowledges that Executive is currently a
director of International Consulting Resources LLC and American
Entertainment Network, LLC, and consents to the continuation by
Executive as a director of these companies. However, Executive will
obtain Board of Directors approval before accepting any new director
positions. This provision shall not be construed to prevent Executive
from investing or trading in non-conflicting investments for his own
account, including real estate, stocks, bonds, securities, commodities
or other forms of investments.
11. TERMINATION OF EMPLOYMENT; EFFECT OF TERMINATION.
(a) Executive's employment hereunder may be
terminated at any time upon written notice from the Company to
Executive,
(i) upon the determination by the Board of Directors
that Executive's performance of his duties has not been fully
satisfactory for any reason, which would not constitute "cause" (as
hereinafter defined), upon sixty (60) days' prior written notice to
Executive;
(ii) upon the determination by the Board of
Directors of the Company that there is cause for such
termination, upon ten (10) days' prior written notice to Executive;
(iii) the death of the Executive; or
(iv) the "disability" of Executive (as hereinafter
defined).
(b) For the purposes of this Agreement, the term
"disability" shall mean the inability of Executive, due to illness,
accident or any other physical or mental incapacity, to perform his
duties in a normal manner for a period of three (3) consecutive months
or for a total of six (6) months (whether or not consecutive) in any
twelve (12) month period during the term of this Agreement as reasonably
determined by the Board of Directors of the Company after examination of
Executive by an independent physician reasonably acceptable to
Executive.
(c) For the purposes hereof, the term "cause" shall
mean and be limited to: (i) Executive's conviction (which, through lapse
of time or otherwise, is not subject to appeal) of any crime or offense
involving money or other property of the Company or which constitutes a
felony in the jurisdiction involved; (ii) Executive's willful or
purposeful misconduct that is materially damaging or detrimental to the
Company; (iii) Executive's continued willful failure or refusal without
proper cause to perform his duties under this Agreement; provided that
Executive shall have first received written notice from the Board of
Directors of the Company stating with specificity the nature of such
failure and refusal and affording Executive an opportunity to correct
the acts or omissions complained of; (iv) any attempt by Executive to
secure any unauthorized personal profit in connection with the business
of the Company; and (v) the engaging by Executive in any business other
than the business of the Company which interferes with the performance
of his duties hereunder.
(d) Executive's employment hereunder may be
terminated by Executive at any time upon sixty (60) days' prior written
notice to the Company. Executive's employment hereunder may be
terminated by Executive for "Good Reason" upon ten (10) days' prior
written notice to the Company. For purposes hereof, the term "Good
Reason" shall mean the failure by the Company to comply with any
material provision of this Agreement which has not been cured within ten
(10) days after notice of such noncompliance has been given by the
Executive to the Company.
(e) If Executive shall die during the term of his
employment hereunder, this Agreement shall terminate immediately. In
such event, the estate of Executive shall thereupon be entitled to
receive such portion of Executive's annual salary and benefits as has
been accrued but remains unpaid through the end of the month of
Executive's death, plus any reimbursement of expenses as provided herein
and vested amounts to which he is entitled under any compensation or
employee benefit plan of the Company, in accordance with the terms and
conditions of each such plan, plus bonus, if any, and Incentive
Compensation in respect of the fiscal year of Executive's death on a pro
rata basis through the date of death.
(f) Upon Executive's "disability", the Company shall
have the right to terminate Executive's employment. Notwithstanding any
inability to perform his duties, Executive shall be entitled to receive
his compensation (including bonus, if any, and Incentive Compensation on
a pro rata basis through the termination date), plus any reimbursement
of expenses as provided herein and vested amounts to which he is
entitled under any compensation or employment benefit plan of the
Company, in accordance with the terms and conditions of each such plan,
until the termination of his employment for disability. Any termination
pursuant to this subsection (f) shall be effective on the date thirty
(30) days after which Executive shall have received written notice of
the Company's rightful election to terminate.
(g) If the Executive's employment shall be
terminated by the Company for cause or by Executive for reasons other
than Good Reason, the Company shall pay the Executive his salary and
earned but unpaid bonus and Incentive Compensation through the date of
termination, plus any reimbursement of expenses as provided herein and
vested amounts to which he is entitled under any compensation or
employee benefit plan of the Company, in accordance with the terms and
conditions of each such plan.
(h) Notwithstanding any provision to the contrary
contained herein, in the event that Executive's employment is terminated
by the Company at any time for any reason other than cause, disability
or death, or in the event Executive's employment is terminated by
Executive for Good Reason, the Company shall pay to Executive,
Executive's earned but unpaid salary and Incentive Compensation prorated
up to and including the date of termination, plus any reimbursement of
expenses as provided herein and any vested amounts to which he is
entitled under any compensation or employee benefit plan of the Company,
in accordance with the terms and conditions of each such plan.
Executive shall also receive his guaranteed $75,000 bonus if such
termination on these grounds occurs prior to the end of the first 12
months of the term of employment and shall receive the stock options
specified in Section 8(c) hereof, whether or not the triggering event
for such grant has occurred, except to the extent previously granted.
In addition, Executive shall also receive a lump sum cash severance
payment of $600,000, payable within thirty (30) days following
termination of his employment.
(i) Unless otherwise specified herein, the timing of
any payments to be made to Executive upon an expiration or termination
of his employment shall be within thirty (30) days after the applicable
termination date, except that any Incentive Compensation to be paid
shall be paid within thirty (30) days after the Company's fiscal year
end in respect of the fiscal year in which Executive's employment
expires or is terminated.
12. CHANGE IN CONTROL.
(a) Definition. A "Change in Control" shall mean
the occurrence of any of the following events:
(i) The Company is merged with or consolidated with
another corporation in a transaction in which (x) the Company is not the
surviving corporation, and (y) the Company's stockholders immediately
prior to such transaction do not have the same proportionate ownership
of the outstanding voting securities of the surviving corporation
immediately following the transaction; or
(ii) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company; or
(iii) the stockholders of the Company shall approve
any plan or proposal for liquidation or dissolution of the Company; or
(iv) Any person or entity or affiliated group of
persons or entities becomes the holder of more than 51% of the Company's
outstanding shares of Common Stock.
(b) Payments. If a Change in Control occurs during
the term of the Executive's employment pursuant to this Agreement then,
if Executive resigns for any reason within ninety (90) days after the
Change in Control, the Company shall (i) continue existing health
insurance, dental coverage, key man life insurance, AD&D and long-term
disability coverage in effect for Executive at the time of his
resignation for a period of the lesser of one (1) year or until covered
by another plan, and (ii) continue the Executive's salary for a one (1)
year period; provided, however, that during the applicable period in
which benefits are being paid by the Company, Executive agrees to
maintain a consulting relationship with the Company which shall not
interfere with any other obligations of the Executive.
13. REPRESENTATIONS AND AGREEMENTS OF EXECUTIVE.
(a) Executive represents and warrants that he is free to
enter into this Agreement and to perform the duties required hereunder,
and that there are no employment contracts or understandings,
restrictive covenants or other restrictions, whether written or oral,
preventing the performance of his duties hereunder.
(b) Executive agrees, if requested, to submit to a
medical examination and to cooperate and supply such other information
and documents as may be required by any insurance company in connection
with he Company's obtaining life insurance on the life of Executive, and
any other type of insurance or fringe benefit as the Company shall
determine from time to time to obtain.
14. NON-COMPETITION.
(a) Executive agrees that during his employment by the
Company and, in the event of a termination by the Company for cause, for
a period of one (1) year following termination of Executive's employment
hereunder (the "Non-Competitive Period"), Executive shall not, directly
or indirectly, as owner, partner, joint venturer, stockholder, employee,
broker, agent, principal, trustee, corporate officer, director,
licensor, or in any capacity whatsoever engage in, become financially
interested in, be employed by, render any consultation or business
advice with respect to, or have any connection with, any business which
is competitive with the business of the Company at the time of
Executive's termination, and which is doing business in any geographic
area where, at the time of such termination, the business of the Company
is being conducted; provided, however, that Executive may own any
securities of any corporation which is engaged in such business and is
publicly owned and traded but in an amount not to exceed at any one time
two percent (2%) of any class of stock or securities of such
corporation.
(b) If any portion of the restrictions set forth in this
Section 14 should, for any reason whatsoever, be declared invalid by a
court of competent jurisdiction, the validity or enforceability of the
remainder of such restrictions shall not thereby be adversely affected.
(c) Executive acknowledges that the Company conducts
business on a world-wide basis, that its sales and marketing prospects
are for continued expansion into world markets and that, therefore, the
territorial and time limitations set forth in this Section 14 are
reasonable and properly required for the adequate protection of the
business of the Company. In the event any such territorial or time
limitation is deemed to be unreasonable by a court of competent
jurisdiction, Executive agrees to the reduction of the territorial or
time limitation to the area or period which such court deems reasonable.
15. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
(a) Executive acknowledges that his employment by the
Company will, throughout the term of this Agreement, bring him in
contact with proprietary or confidential information relating to the
business or interests of the Company not readily available to the
public, ("Confidential Information"). In recognition of the foregoing,
Executive covenants and agrees that, unless specifically authorized to
do so by the Company, during the term of this Agreement and for a period
of three (3) years thereafter, he will not, directly or indirectly,
disclose or make use in any manner or permit to be known, any
Confidential Information other than in performing the services required
of him under this Agreement, except as required by court order, law or
subpoena, or other legal compulsion to disclose. The provisions of this
Section 15(a) shall not apply to any Confidential Information which is
publicly known under circumstances involving no breach of this
Agreement.
(b) Upon the expiration or termination of Executive's
employment with the Company, all documents, records, reports, writings
and other similar documents containing Confidential Information,
including copies thereof, then in Executive's possession or control
shall be returned and left with the Company.
16. RIGHT TO INJUNCTION.
Executive agrees that if he breaches, or threatens to
commit a breach of, any of the provisions of Sections 14 or 15 hereof,
then, in addition to all other rights and remedies which the Company may
have under the terms hereof and pursuant to all applicable law, the
Company shall have the right to seek equitable relief in the form of a
temporary restraining order and permanent injunction against Executive's
violation of the terms of Sections 14 or 15 hereof.
17. AMENDMENT OR ALTERATION.
No amendment or alteration of the terms of this Agreement shall
be valid unless made in writing and signed by both of the parties
hereto.
18. LETTER OF CREDIT.
In order to partially secure the full, complete and
timely payment and performance of the Company's obligations under this
Agreement, as amended from time to time, the Company shall deliver to
Executive, within ten (10) business days following the execution of this
Agreement, an irrevocable letter of credit in form acceptable to
Executive and Executive's counsel, which shall be issued in favor of
Executive by a major commercial center bank with a branch or office in
either Georgia or Connecticut, in the aggregate principal amount (and at
no time not less than) $300,000 for a term of the lesser of (i) five (5)
years, or (ii) such time as the Company has positive profits (earnings
before taxes) for six (6) consecutive months, which letter of credit can
be drawn on by Executive upon demand, accompanied by a certificate of
Executive certifying that the Executive has made a demand for payment to
the Company under this Agreement and such demand has not been honored .
19. ARBITRATION AND CONSENT TO JURISDICTION
(a) In the event a dispute, claim or controversy shall arise
between the parties with respect to any provision of this Agreement, or
the interpretation or performance hereof or thereof, and such is
declared by written notice from one party to the other, the parties
agree to negotiate in good faith toward resolution of the dispute. If
such dispute cannot be resolved within a period of thirty (30) days
after such notice is given, either party may submit the dispute to
arbitration. Such dispute shall then be settled by arbitration in the
City of New York, New York, under the laws of the State of New York, in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"). In rendering its decision, the
arbitration tribunal shall apply the substantive laws of the State of
New York, apply the rules of evidence of the State of New York and
interpret this Agreement in accordance with its terms. The determination
of the arbitration tribunal shall be conclusive and binding upon the
parties hereto. The arbitration will be decided by a panel of three (3)
arbitrators, mutually acceptable to both parties, who will preside and
decide the controversy or claim unless the parties hereto agree in
writing to the contrary. Should the parties fail to agree on three (3)
mutually acceptable arbitrators, then the parties agree to accept those
mutually acceptable arbitrator(s) and such additional arbitrators
appointed by the AAA as may be necessary to complete an arbitration
tribunal of three (3)persons.
(i) The award of the arbitration tribunal may be
alternatively or cumulatively, for monetary damages, an order requiring
the performance of non-monetary obligations (including specific
performance) or any other appropriate order or remedy. The arbitrators
may issue interim awards and order any provisions or measures which
should be taken to preserve the respective rights of either party.
(ii) Any award rendered by the arbitration
tribunal shall be in writing, setting forth the reasons for the award,
and shall be a final disposition on the merits. Judgment upon the award
may be rendered in any court having jurisdiction, or application may be
made to any such court having jurisdiction for a judicial acceptance of
the award and an order of enforcement, as the case may be. The parties
waive any right they may enjoy in any Federal or state courts for relief
from the provisions of this clause or from any decision of the
arbitrators made prior to the award.
(iii) Each party shall bear their own costs and
expenses of the arbitration, and the parties shall share equally the
cost of the arbitrators; provided that any party instituting a claim or
providing a defense under this Section 19 which the tribunal shall
declare to be frivolous shall pay all costs and expenses, including
attorney's fees and costs, incurred with such arbitration.
(iv) The arbitration procedures in Section 19(a)
shall be the exclusive remedy available to the parties hereunder to
resolve any dispute, claim or controversy arising hereunder, except as
provided in Section 19(b), below.
(b) Notwithstanding anything to the contrary
contained in paragraph (a) above, each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the Supreme Court of the State
of New York, New York County, and to the exclusive jurisdiction of the
United States District Court for the Southern District of New York, only
for the purposes of (i) obtaining relief not within the jurisdiction or
powers of the arbitration tribunal, in connection with any suit, action
or other proceeding brought by any other party hereto, or any of their
respective heirs, successors or assigns as applicable, arising out of or
related to this Agreement, or (ii) the enforcement of the arbitration
tribunal's determination as provided in paragraph (a) above; and agrees
not to assert by way of motion, as a defense or otherwise, in any such
suit, action or proceeding, any claim that such party is not subject to
the jurisdiction of the above-named courts, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the
suit, action or proceeding is improper or that this Agreement may not be
enforced in or by such courts. Executive and the Company hereby agree
that all actions and proceedings permitted to be instituted hereunder by
Executive or the Company, and their heirs, successors or assigns in a
forum other than arbitration arising out of or related to this Agreement
or the transactions contemplated hereby shall be commenced only in the
courts having a situs in New York County.
20. SEVERABILITY.
The holding of any provision of this Agreement to be
invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this Agreement, which shall remain in full
force and effect.
21. NOTICES.
Any notices required or permitted to be given hereunder
shall be sufficient if in writing, and if delivered by hand, or sent by
certified mail, return receipt requested, to the addresses set forth
above or such other address as either party may from time to time
designate in writing to the other, and shall be deemed given as of the
date of the delivery or mailing.
22. WAIVER OR BREACH.
It is agreed that a waiver by either party of a breach
of any provision of this Agreement shall not operate, or be construed,
as a waiver of any subsequent breach by that same party.
23. ENTIRE AGREEMENT AND BINDING EFFECT.
This Agreement contains the entire agreement of the
parties with respect to the subject matter hereof and shall be binding
upon and inure to the benefit of the parties hereto and their respective
legal representatives, heirs, distributors, successors and assigns.
Notwithstanding the foregoing, all prior agreements, if any, between
Executive and the Company relating to the confidentiality of
information, trade secrets and patents shall not be affected by this
Agreement.
24. SURVIVAL.
The expiration or termination of Executive's employment
hereunder shall not affect the enforceability of Sections 5, 8, 9, 11,
12, 14, 15, 16, 18, 19, 21, 23 and 24 hereof.
25. FURTHER ASSURANCES.
The parties agree to execute and deliver all such
further documents, agreements and instruments and take such other and
further action as may be necessary or appropriate to carry out the
purposes and intent of this Agreement.
26. HEADINGS.
The section headings appearing in this Agreement are for
the purposes of easy reference and shall not be considered a part of
this Agreement or in any way modify, demand or affect its provisions.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date and year first above written.
USCI, INC.
By: /s/ Robert J. Kostrinsky
Name: Robert J. Kostrinsky
Title: Executive Vice President
EXECUTIVE:
/s/ Lee Feist
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<NAME> USCI, INC.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 394,225
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<RECEIVABLES> 20,688,997
<ALLOWANCES> 10,552,723
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<CURRENT-ASSETS> 12,550,167
<PP&E> 7,957,670
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<TOTAL-ASSETS> 14,865,914
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<COMMON> 9,284
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<TOTAL-LIABILITY-AND-EQUITY> 14,865,914
<SALES> 0
<TOTAL-REVENUES> 9,923,425
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<TOTAL-COSTS> 4,704,792
<OTHER-EXPENSES> 7,255,459
<LOSS-PROVISION> 2,036,826
<INTEREST-EXPENSE> 1,271,540
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Exhibit 99.1
RISK FACTORS
WE HAVE EXPERIENCED A HISTORY OF LOSSES AND
ANY FUTURE PROFITABILITY IS UNCERTAIN
We have a history of losses and our future profitability is uncertain. We
have never operated at a profit, and have experienced increasing losses and
negative operating cash flow. We expect that such losses and negative
operating cash flow will continue for at least the next several years as we
develop our new marketing strategy. As of June 30, 1999, we had an
accumulated deficit of approximately $90,000,000 and there is no assurance
that we will ever achieve profitability or positive operating cash flow. We
have also experienced a persistent working capital deficiency and expect
that we will continue to incur significant losses and negative operating
cash flow in the future. We are depending upon the successful transition to
out recently adopted strategy of selling prepaid cellular services to meet
our working capital and debt service requirements. If this transition is
not successful, we will not be able to make required payments on our
outstanding indebtedness and may have to refinance our outstanding
indebtedness in order to repay our obligations of which there can be no
assurance.
WE NEED ADDITIONAL FINANCING
The wireless resale industry is highly capital intensive, particularly for us
as a reseller of telecommunications services since substantial costs are
incurred in connection with the acquisition of new subscribers. We require
substantial additional capital to meet past due obligations and to fully
implement our new strategy. Although we are attempting to negotiate
settlements of our past due obligations, there is no assurance that the funds
made available through the recent restructuring of our loan with Foothill
Credit Corp. and the income from our current subscriber base will be
sufficient. In view of the substantial reduction in our subscriber base since
November 1998, we will be required to seek additional capital and may also be
required to slow the deployment of our new prepaid cellular strategy. We may
seek to raise such additional capital from public or private equity or debt
sources but there is no assurance that we may be able to obtain such
additional capital on acceptable terms or at all. If we can only raise
additional capital through the incurrence of additional debt, we may become
subject to additional or more restrictive financial covenants. If additional
funds are raised by issuing equity securities, our stockholders may experience
further dilution. In addition, such equity securities may have rights,
preferences or privileges senior to those of our Common Stock. If we are
unable to obtain additional capital on acceptable terms or at all, we will be
required to curtail our planned expansion and/or current operations, which
would materially adversely affect our business, results of operations and
financial condition and our ability to compete. We also may be compelled to
seek protection under the federal bankruptcy system, either voluntarily or
involuntarily.
WE HAVE RECEIVED A "GOING CONCERN" OPINION FROM OUR ACCOUNTANTS
We have received a "going concern" opinion from our independent accountants.
Our past growth in subscribers created losses and a working capital
deficiency due to the acquisition costs associated with the high rate of
subscriber acquisition. We currently require substantial amounts of capital
to fund current operations, the settlement of past due obligations, and the
deployment of our new business strategy. Due to recurring losses from
operations, an accumulated deficit, stockholders' deficit, negative working
capital, being in default under the terms of our letters of credit advances,
having significant litigation instituted against us, and our inability to
date to obtain sufficient financing to support current and anticipated
levels of operations, our independent public accountants' audit opinion
states that these matters raise substantial doubt about our ability to
continue as a going concern.
WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN THE DEVELOPMENT OF OUR
NEW BUSINESS STRATEGY
We cannot assure you that we can successfully operate our new business
strategy. If we fail to execute our strategy in a timely or effective
manner, we may be unable to successfully compete in our markets. Our
business strategy is complex and requires that we successfully complete many
tasks, a number of which must be completed simultaneously including the
following.
- - the negotiation of additional reseller agreements on commercially
reasonable terms.
- - attract and retain customers.
- - attract and retain skilled employees
- - expand our sales presence in existing and new markets.
- - negotiate settlements of our past due indebtedness.
If we are unable to effectively coordinate the implementation of these
multiple tasks, our business is likely to suffer.
RISKS OF THE INTERNET AS A MEDIUM FOR COMMERCE
Use of the Internet by consumers is at a relatively early stage of
development, and market acceptance of the Internet as a medium for commerce
is subject to a high level of uncertainty. Our future success will depend on
our ability to significantly increase revenues, which will require the
development and widespread acceptance of the Internet as a medium for
commerce. There can be no assurance that the Internet will be a successful
retailing channel. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary
infrastructure, such as reliable network backbones, or complementary
services, such as high speed modems and security procedures for financial
transactions. The viability of the Internet or its viability for commerce
may prove uncertain due to delays in the development and adoption of new
standards and protocols (for example, the next generation Internet Protocol)
to handle increased levels of Internet activity or due to increased
government regulation or taxation. If use of the Internet does not continue
to grow, or if the necessary Internet infrastructure or complementary
services are not developed to effectively support growth that may occur, our
e-commerce business could be materially adversely affected. In addition, the
nature of the Internet as an electronic marketplace (which may, among other
things, facilitate competitive entry and comparison shopping) may render it
inherently more competitive than conventional retailing formats.
RAPID TECHNOLOGY CHANGE
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of future online business. The
Internet and the e-commerce industry are characterized by rapid
technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our existing online bookstore and proprietary technology and
systems obsolete. Our success will depend, in part, on our ability to
license leading technologies useful in our business, enhance our existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of a Web site and other
proprietary technology entails significant technical, financial and business
risks. There can be no assurance that we will successfully implement new
technologies or adapt our online business, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market
conditions or customer requirements, our business could be materially
adversely affected.
SECURITY RISKS
Despite our implementation of network security measures, our
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by its customers or others. Consumer concern over
Internet security has been, and could continue to be, a barrier to
commercial activities requiring consumers to send their credit card
information over the Internet. Computer viruses, break-ins or other security
problems could lead to misappropriation of proprietary information and
interruptions, delays or cessation in service to our customers. Moreover,
until more comprehensive security technologies are developed, the security
and privacy concerns of existing and potential customers may inhibit the
growth of the Internet as a medium for commerce.
THERE ARE RISKS ASSOCIATED WITH DOMAIN NAMES
We currently hold various Web domain names relating to our brand,
including the "americomonline.com" domain name. The acquisition and
maintenance of domain names generally is regulated by governmental agencies
and their designees. For example, in the U.S., the National Science
Foundation has appointed Network Solutions, Inc. as the current exclusive
registrar for the ".com," ".net" and ".org" generic top-level domains. The
regulation of domain names in the U.S. and in foreign countries is expected
to change in the near future. Such changes in the U.S. are expected to
include a transition from the current system to a system which is controlled
by a non-profit corporation and the creation of additional top-level
domains. Requirements for holding domain names will also be affected. As a
result, there can be no assurance that we will be able to acquire or
maintain relevant domain names in all countries in which it conducts
business. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is
unclear. We, therefore, may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise
decrease the value of its trademarks and other proprietary rights. Any
such inability could have a material adverse effect on our business.
WE ARE DEPENDENT UPON STRATEGIC ALLIANCES
We rely on certain strategic alliances to attract users to our online
e-commerce site. We are attempting to enter into strategic alliances to
attract users from numerous other Web sites or online service providers.
We believe that such alliances result in increased traffic
to our online business. Our ability to generate revenues from
e-commerce may depend on the increased traffic, purchases, advertising and
sponsorships that we expect to generate through such strategic
alliances. There can be no assurance that these alliances will be maintained
beyond their initial terms or that additional third-party alliances will be
available to us on acceptable commercial terms or at all. The inability
to enter into new, and to maintain any one or more of its existing,
significant strategic alliances could have a material adverse effect on our
business.
WE ARE DEPENDENT ON MAJOR CHANNELS OF DISTRIBUTION FOR THE
ACQUISITION OF OUR SUBSCRIBERS
We were primarily dependent on RadioShack, our former principal customer, to
obtain subscribers. In October 1998, RadioShack terminated its agreement
with us. At that time, approximately 78% of our subscriber base resulted
from sales at RadioShack stores. Following termination, we lost a
substantial part of our subscriber base, thereby substantially reducing our
cash flow. We are not presently adding new subscribers until we deploy our
new prepaid business strategy.
In the future, a material component of our growth strategy will be the
development of relationships with new channels of distribution to sell our
prepaid wireless services. As a result, our successful growth will be
dependent in large part on the efforts of third parties whose efforts
growth, whose efforts will depend on their own financial, competitive,
marketing and strategic considerations. Such considerations include the
relative advantages of alternate products being offered by competitors.
There can be no assurance that these channels of distribution will devote
sufficient time, attention and energy to the marketing of our wireless
services.
WE ARE DEPENDENT ON WIRELESS CARRIERS TO SUPPLY THE SERVICES PROVIDED TO OUR
CUSTOMERS
We are totally dependent upon facilities-based cellular telephone and paging
service providers for the supply of cellular services to be resold to our
subscribers as well as for the information as to usage needed by us to bill
customers. Because of a lack of capital, we have not paid many of our
carriers within the time period required under our agreements with the
carriers and have been adversely affected by carriers who have failed to
renew existing agreements with us. We would also be adversely affected if
the carriers failed to renegotiate an agreement to allow us to activate new
subscribers, failed to provide adequate service or billing information or if
they experienced financial, technical or regulatory difficulties, or if
future demand for service exceeds current service capabilities. Further, an
increase in the wholesale rates charged by the carriers would force us to
either increase the rates we charge to subscribers, which could adversely
affect our ability to attract new, and retain existing, subscribers, or
accept lower operating margins, which would adversely affect our results of
operations.
OUR MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY; MANY OF OUR COMPETITORS HAVE GREATER RESOURCES AND MORE
EXPERIENCE.
We operate in a highly competitive environment. We have no significant
market share in any market in which we operate. We will face substantial and
growing competition from a variety of cellular service providers. The
number of competitors who have entered the market have increased as a result
of regulatory changes and industry consolidation. Many of our competitors
are larger and better capitalized than we are. Also, many of our competitors
have long standing relationships with their customers and greater name
recognition. See "Business--Competition."
THE FAILURE OF OUR INFORMATION SYSTEMS TO PRODUCE ACCURATE AND PROMPT
BILLING AND TO PROCESS CUSTOMER ORDERS COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS.
The accurate and prompt billing of our customers is essential to our
operations and future profitability. The implementation of our new prepaid
and e-commerce strategy will place additional demands on our information
systems. We cannot assure you that our information systems will perform how
we expect. Also, if our business grows as we plan, we cannot assure you that
our billing and management systems will be sufficient to provide us with
accurate and efficient billing and other necessary processing capabilities.
We may not identify all of our information and processing needs (including
issues related to the Year 2000) and may not upgrade our information systems
as needed. Either of these could materially adversely affect our business,
results of operations and financial condition.
IF WE DO NOT RECEIVE TIMELY AND ACCURATE CALL DATA RECORDS FROM OUR
SUPPLIERS, OUR BILLING AND COLLECTION ACTIVITIES COULD BE ADVERSELY
AFFECTED.
Our billing and collection activities are dependent upon our suppliers
providing us accurate call data records. If we do not receive accurate call
data records in a timely manner, our business, results of operations and
financial condition could be materially adversely affected. In addition, we
pay our suppliers according to our calculation of the charges based upon
invoices and computer tape records provided by these suppliers. Disputes may
arise between us and our suppliers because these records may not always
reflect current rates and volumes. If we do not pay disputed amounts, a
supplier may consider us to be in arrears in our payments until the amount
in dispute is resolved. We cannot assure you that disputes with suppliers
will not arise or that such disputes will be resolved in our favor.
OUR ABILITY TO SERVE OUR CUSTOMERS DEPENDS UPON THE RELIABILITY OF THE
NETWORKS, SERVICES AND EQUIPMENT OF THIRD PARTY PROVIDERS.
We depend entirely upon facilities-based carriers to provide cellular
services to our customers. We cannot be sure that third party cellular
services will be available when needed or upon acceptable terms.
Although we can exercise direct control of the customer care and
support we provide, all of the cellular services we offer are provided by
others. These services are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security and other factors which
may cause interruptions in service or reduced capacity for our customers.
These problems, although not within our control, could adversely affect
customer confidence and damage our reputation. Either of these could have a
material adverse effect on our business, results of operations and financial
condition.
OUR OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY INCREASES IN CUSTOMER
ATTRITION RATES.
We cannot assure you that our customers will continue to purchase
cellular services from us. Because of the termination of the RadioShack
agreement and our lack of capital, we have been compelled to reduce our
customer service staff which has been one of the factors in causing an
attrition in our customer base. In addition, since November 1998, we have
devoted our principal efforts to obtaining additional financing and the
development of our new business strategy. We could lose customers as a
result of national advertising campaigns, telemarketing programs and
customer incentives provided by major competitors as well as for other
reasons not in our control. Increases in our customer attrition rates have
had a material adverse effect on our business, results of operations and
financial condition.
IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESS COULD BE IMPAIRED.
We are pursuing a business plan that if successful will result in rapid
growth and expansion of our operations. This rapid growth would place
significant additional demands upon our current management and other
resources. Our success will depend on our ability to manage our growth. To
accomplish this we will have to train, motivate and manage an increasing
number of employees. We will also need to continually enhance our
information systems. Our failure to manage growth effectively could have a
material adverse effect on our business, results of operations and financial
condition.
OUR SUCCESS WILL DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO COULD BE
DIFFICULT TO REPLACE AS WELL AS ON OUR ABILITY TO HIRE OTHER SKILLED
PERSONNEL.
We believe that our continued success will depend upon the abilities
and continued efforts of our management, particularly members of our senior
management team. The loss of the services of any of these individuals could
have a material adverse effect on our business, results of operations and
financial condition. Our success will also depend upon our ability to
identify, hire and retain additional highly skilled sales, service and
technical personnel. Demand for qualified personnel with telecommunications
experience is high and competition for their services is intense. We cannot
be sure that we will be able to attract and retain the additional employees
we need to implement our business strategy. Our inability to hire and retain
such personnel could have a material adverse effect on our business, results
of operations and financial condition.
RAPID TECHNOLOGICAL CHANGES IN THE TELECOMMUNICATIONS INDUSTRY COULD RENDER
OUR SERVICES OBSOLETE FASTER THAN WE EXPECT OR COULD REQUIRE US TO SPEND
MORE TO DEVELOP OUR NETWORK THAN WE CURRENTLY ANTICIPATE.
The telecommunications industry is subject to rapid and significant
changes in technology. We cannot predict the effect that changes in
technology will have on our business. Any changes could have a material
adverse effect on our business, operating results and financial condition.
Advances in technology could lead to more entities becoming facilities-based
cellular and paging carriers. We believe that our long-term success will
increasingly depend on our ability to offer advanced services and to
anticipate or adapt to evolving industry standards. We cannot be sure that:
. we will be able to offer the services our customers require;
. our services will not be economically or technically outmoded by
current
or future competitive technologies;
. our information systems will not become obsolete; or
. we will have sufficient resources to develop or acquire new
technologies
or introduce new services that we need to effectively compete.
WE MAY INCUR SIGNIFICANT COSTS AND OUR BUSINESS COULD SUFFER IF OUR SYSTEMS
AND NETWORK, OR THE SYSTEMS OF OUR SUPPLIERS AND VENDORS, DO NOT PROPERLY
PROCESS DATE INFORMATION AFTER DECEMBER 31, 1999.
Currently, many computer systems and software products are coded to
accept only two digit, rather than four digit, entries in the date code
field. Date- sensitive software or hardware coded in this manner may not be
able to distinguish a year that begins with a "20" instead of a "19," and
programs that perform arithmetic operations, make comparisons or sort date
fields may not yield correct results with the input of a Year 2000 date.
This Year 2000 problem could cause miscalculations or system failures that
could affect our operations. We cannot assure you that we have successfully
identified all Year 2000 problems with our information systems. We also
cannot assure you that we will be able to implement any necessary corrective
actions in a timely manner. Our failure to successfully identify and
remediate Year 2000 problems in critical systems could have a material
adverse effect on our business, results of operations and financial
condition. Also, if the systems of other companies that provide us services
or with whom our systems interconnect are not Year 2000 compliant, our
business, operating results and financial condition could be materially
adversely affected. The Year 2000 issue is discussed at greater length in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
OUR EXISTING PRINCIPAL STOCKHOLDERS CONTROL A SUBSTANTIAL AMOUNT OF OUR
VOTING SHARES AND WILL BE ABLE TO INFLUENCE ANY MATTER REQUIRING SHAREHOLDER
APPROVAL.
Our principal stockholders control approximately 92% of our outstanding
voting stock. Therefore, these shareholders will be able to influence any
matter requiring shareholder approval.
OUR STOCK PRICE IS LIKELY TO BE VOLATILE.
The trading price of our common stock is likely to be volatile. The
stock market in general, and the market for technology and
telecommunications companies in particular, has experienced extreme
volatility. This volatility has often been unrelated to the operating
performance of particular companies. Other factors that could cause the
market price of our common stock to fluctuate substantially include:
. announcements of developments related to our business, or that of our
competitors, our industry group or our customers;
. fluctuations in our results of operations;
. hiring or departure of key personnel;
. a shortfall in our results compared to analysts' expectations and
changes in analysts' recommendations or projections;
. sales of substantial amounts of our equity securities into the
marketplace;
. regulatory developments affecting the telecommunications industry or
data services; and
. general conditions in the telecommunications industry or the economy
as a whole.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL
NUMBER OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE.
All of our shares will be freely tradeable, under the Securities Act,
subject to compliance with Rule 144 under the Securities Act. We cannot be
sure what effect, if any, future sales of shares or the availability of
shares for future sale will have on the market price of the common stock.
The market price of our common stock could drop due to sales of a large
number of shares in the market after the offering or the perception that
sales of large numbers of shares could occur. These factors could also make
it more difficult to raise funds through future offerings of common stock.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION
AND COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could make it more difficult for a third party to
acquire control of the company even if a change in control would be
beneficial to our stockholders. These provisions may negatively affect the
price of our common stock and may discourage third parties from bidding for
our company. In addition, our board of directors may issue, without
stockholder approval, shares of preferred stock with terms set by the board.
In addition to delaying or preventing an acquisition, the issuance of a
substantial number of preferred shares could depress the price of the common
stock.
FORWARD LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN.
Certain statements about us and our industry under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and elsewhere
in this document are "forward-looking statements." These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations, intentions and assumptions and other statements in
this document that are not historical facts. When used in this document, the
words "estimate," "project," "believe," "anticipate," "intend," "plan,"
"expect" and similar expressions are generally intended to identify forward-
looking statements. Because these forward-looking statements involve risks
and uncertainties, including those described in this "Risk Factors" section,
actual results could differ materially from those expressed or implied by
these forward-looking statements. We caution you not to place undue reliance
on these forward-looking statements. These forward-looking statements speak
only as of the date of this document. We do not undertake any obligation to
publicly release any revisions to these forward-looking statements to reflect
new information, future events or otherwise.
EXPOSURE TO FRAUDULENT USE OF WIRELESS SERVICES
The cellular industry has been subject to telecommunications fraud and, in
particular, "cloning" of legitimate phone numbers leading to the illegal use
of such numbers. Under our existing agreements with cellular carriers,
access fraud, which results from the unauthorized duplication of a cellular
telephone number, is generally recoverable from the carrier. However,
subscriber fraud, which occurs when a customer fraudulently uses another
person's identification to become a subscriber and obtain wireless services,
is not recoverable from the carrier. Due to the failures of some of our
channels of distribution to properly screen potential subscribers and obtain
the required documentation from them, we have been severely damaged as a
result of subscriber fraud. There can be no assurance that we will not in
the future become subject to increased liability for access fraud or that
future liability for fraud will not have a material adverse effect on our
business.
GOVERNMENT REGULATION
The resale of interstate and intrastate cellular mobile telephone service is
subject to federal regulation as a commercial mobile radio service, or CMRS
and, as such, to certain aspects of common carrier regulation. Although the
Federal Communications Commission, or FCC, has the authority to do so, it
has to date elected not to regulate rates and the entry of wireless services
providers, and states are precluded, as a matter of federal law, from
regulating the rates or entry of CMRS resellers. However, we remain subject
to the general obligations of all common carriers, including the requirement
to charge just and reasonable rates and to service all customers in a non-
discriminatory manner. Because Congress has preempted all state rate and
entry regulation CMRS providers, we are not required to obtain state
certification or file state tariffs in connection with its provision of
wireless services. States, however, retain authority to regulate other
terms and conditions of wireless services. This has been interpreted to
include the ability of a state public utility commission to act on a
complaint regarding an underlying carrier's alleged discrimination against a
cellular reseller. We also remain subject to state regulations generally
affecting corporations that do business within a state, including a state's
consumer protection laws.
Common carriers are currently required to make their services available for
resale. However, the FCC has determined to terminate the resale obligations
of cellular, PCS and ESMR providers on November 24, 2002. The FCC order
terminating such resale obligations is currently being reconsidered by the
FCC. We cannot predict the outcome of the FCC's reconsideration; however,
if the FCC upholds its decision to terminate the resale obligation of
carriers, our business, results of operations and financial condition could
be adversely affected.
Effective January 1, 1998, a new universal service support system went into
effect to ensure the provision of service to rural, insular and high-cost
areas, to low-income individuals and to eligible schools, libraries and
rural healthcare providers. Under this system, we are required to
contribute a percentage of our revenues to these universal service programs.
Although these charges apply equally to all carriers, to the extent that
the charges increase the rates we charge, they could adversely affect our
business.
We expect that there will continue to be numerous changes in federal and
state regulation of the telecommunications industry. We are unable to
predict the future course of such legislation and regulation, and further
changes in the regulatory framework could have a material adverse effect on
our business, results of operations and financial condition.
INTELLECTUAL PROPERTY RISKS
We rely on copyrights, trade secret protection and non-disclosure agreements
to establish and protect its rights relating to its proprietary software
platform and other technology. We do not hold any patents. Despite our
efforts to safeguard and maintain its proprietary rights, there can be no
assurance that it will be successful in doing so, or that its competitors
will not independently develop and/or patent computer software and hardware
that is functionally substantially equivalent or superior to our Activation
Services Network, or ASN system, which could have a material adverse effect
on our business. We have also been advised that its use of the service mark
and trade name "Ameritel" and the service mark "Family Link" may infringe on
trademarks and service marks of others in certain states. Additionally, we
are aware that several other companies are using the name "Ameritel" or
similar names, and that it is unlikely that we can obtain exclusive or even
broad service mark protection for the "Ameritel" name. There also can be no
assurance that other companies using the "Ameritel" name or a similar name
will not challenge our right to use the "Ameritel" name and will not seek to
enjoin us from using such name. Accordingly, we are in the process of
exploring whether to seek a new name under which to market its services;
however, a change in name may cause confusion in the marketplace and may
adversely affect our business strategy of developing a brand name and
identity, which in turn may adversely affect our growth, particularly in the
short-term.
CONVERTIBLE PREFERRED STOCK DILUTION
We have approximately $16.6 million of Convertible Preferred Stock
outstanding, which is convertible into shares of Common Stock at a
conversion price equal to the lesser of (i) 85% of the average of the three
lowest closing prices per share of Common Stock for the 25 trading days
immediately preceding the conversion notice and (ii) $6.89 per share in
respect of $5.0 million of Convertible Preferred Stock, $5.85 per share in
respect of an additional $5.0 million of Convertible Preferred Stock $5.31
per share in respect of an additional $5.0 million of Convertible Preferred
Stock and $5.51 per share with respect to an additional $4.0 million of
Convertible Preferred Stock. Further, the conversion price of each series
of Convertible Preferred Stock is subject to reduction if we do not comply
with certain covenants within specified time periods. Accordingly, a
decline in the price of the Common Stock below the fixed conversion price
will result in the issuance of additional shares of Common Stock and the
number of such additional shares may be material. In addition, holders of
securities having conversion features similar to those of the Convertible
Preferred Stock tend to sell their shares immediately upon conversion,
which generally results in a decline in the price of the Common Stock and an
increase in the number of shares issued upon the next conversion.
Accordingly, any conversion of the Convertible Preferred Stock is likely to
increase substantially the number of shares of Common Stock outstanding,
adversely affect the price of the Common Stock and result in dilution to
existing stockholders. In addition, under generally accepted accounting
principles a portion of the proceeds from the sale of the Convertible
Preferred Stock was allocated to this beneficial conversion feature, and
this discount is amortized; to the extent conversion occurs prior to the
full amortization of the discount, we will be required to recognize the
remainder of the discount in the period of conversion, which will reduce
earnings in that period.
ABSENCE OF DIVIDENDS
We have not paid and do not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. We intend to retain our earnings,
if any, for use in our growth and ongoing operations. In addition, the
terms of the Foothill Credit Facility restrict our ability to pay dividends
on our Common Stock.
