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 September 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 December 7, 1999, 93,975,028 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 September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of
Operations and Accumulated Deficit for
the Three months ended September 30, 1999 and
September 30, 1998 4
Condensed Consolidated Statements of
Operations and Accumulated Deficit for
the Nine months ended September 30, 1999 and
September 30, 1998 5
Condensed Consolidated Statements of Cash
Flows for the Nine months ended September 30, 1999
and September 30, 1998 6
Notes to Condensed Consolidated
Financial Statements 7-8
Item 2 Management's Discussion and Analysis of 9-15
Financial Condition and Results of
Operations for the Nine and Three months
Ended September 30, 1999 and September 30, 1998
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
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 16
</TABLE>
2
<PAGE>
Part I
Item 1
USCI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998*
(unaudited)
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents, including restricted
cash of $451,000 in 1999 and $454,124 in 1998 $ 460,797 $ 754,758
Accounts receivable--trade, net of allowances of
$9,904,060 in 1999 and $11,787,545 in 1998 8,356,854 8,212,484
Accounts receivable-other 35,336 47,533
Prepaid expenses 1,615,940 310,000
------------ ------------
Total current assets 10,468,927 9,324,775
------------ ------------
PROPERTY AND EQUIPMENT, net 171,278 1,555,366
OTHER ASSETS 111,854 1,531,740
------------ ------------
Total Assets $10,752,059 $12,411,881
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Credit Facility $12,016,643 $2,955,232
Other payables 2,538,593 2,700,000
Accounts payable and bank overdraft 11,178,289 10,805,063
Accrued expenses 4,586,563 4,069,927
Commissions payable 342,434 362,416
------------ ------------
Total current liabilities 30,662,522 20,892,638
------------ ------------
OTHER LIABILITIES 8,073,567 14,354,096
------------ ------------
Total liabilities 38,736,089 35,246,734
------------ ------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $.01 par value;
5,000 shares authorized, 1,743 shares issued at September
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 September 30,
1999 and 12,006,828 shares issued at December 31, 1998 9,284 1,201
Additional paid-in capital 65,925,173 63,453,345
Accumulated deficit (93,890,454) (86,261,368)
Treasury stock, at cost, 5,500 shares in 1999 and 1998 (28,050) (28,050)
------------ -------------
Total stockholders' deficit (27,984,030) (22,834,853)
------------ -------------
Total liabilities and stockholders' deficit $10,752,059 $12,411,881
============ ============
</TABLE>
* Condensed from audited financial statements.
The acting 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 September 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============ ============
<S> <C> <C>
REVENUES
Subscriber Sales $2,703,650 $11,214,089
------------ ------------
Total Revenues 2,703,650 11,214,089
------------ ------------
COST OF SALES
Cost of subscriber sales 1,281,978 6,467,391
------------ ------------
Total cost of sales 1,281,978 6,467,391
------------ ------------
GROSS MARGIN 1,421,672 4,746,698
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 2,471,969 7,636,591
Subscriber acquisition and promotional costs 269,027 3,909,224
Loss due to asset impairment 1,711,923 0
Other 462,500 0
------------ ------------
Total Operating Expenses 4,915,419 11,545,815
------------ ------------
OPERATING LOSS (3,493,747) (6,799,117)
Interest expense, Net 477,081 1,992,012
------------ ------------
LOSS BEFORE INCOME TAXES (3,970,828) ( 8,791,129)
Income Taxes 0 0
------------ ------------
NET LOSS (3,970,828) ( 8,791,129)
Preferred Dividends 0 198,548
Deficit at Beginning of Period (89,919,626) (64,757,113)
------------ ------------
Deficit at End of Period $(93,890,454) $(73,746,790)
============= ============
Basic and Diluted Net Loss per Share $ (0.04) $ (0.79)
============ ============
Basic and Diluted Weighted
Average Shares Outstanding 92,826,873 11,322,687
============ ============
</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
Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============ ============
<S> <C> <C>
REVENUES
Subscriber Sales $12,627,075 $32,517,023
------------ ------------
Total Revenues 12,627,075 32,517,023
------------ ------------
COST OF SALES
Cost of subscriber sales 5,986,770 19,175,248
------------ ------------
Total cost of sales 5,986,770 19,175,248
------------ ------------
GROSS MARGIN 6,640,305 13,341,775
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 8,231,015 19,614,796
Subscriber acquisition and promotional costs 1,385,106 16,695,726
Loss due to asset impairment 1,711,923 0
Other 842,833 0
------------ ------------
Total Operating Expenses 12,170,877 36,310,522
------------ ------------
OPERATING LOSS (5,530,572) (22,968,747)
Interest expense, Net 1,748,621 7,330,250
------------ ------------
LOSS BEFORE INCOME TAXES (7,279,193) (30,298,997)
Income Taxes 0 0
------------ ------------
NET LOSS (7,279,193) (30,298,997)
Preferred Dividends 349,893 325,215
Deficit at Beginning of Period (86,261,368) (43,122,578)
------------ ------------
Deficit at End of Period $(93,890,454) $(73,746,790)
============= ============
Basic and Diluted Net Loss per Share $ (0.13) $ (2.83)
============ ============
Basic and Diluted Weighted
Average Shares Outstanding 58,557,247 10,814,176
============ ============
</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 Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============= =============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 7,279,193) $(30,298,997)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 969,639 2,016,985
Amortization of discount on notes payable 0 5,342,000
Amortization of deferred financing costs 144,453 980,250
Provision for losses on accounts receivable 787,000 3,115,650
Loss due to asset impairment 1,711,923 0
Changes in operating assets and liabilities:
Accounts receivable - trade (931,370) (16,397,771)
Accounts receivable - other 12,197 957,338
Inventory 0 17,871
Prepaids and other assets 759,872 169,549
Commissions payable (19,982) 993,751
Accounts payable and accrued expenses 1,548,584 8,268,049
Promotional deposits 0 (400,000)
----------- -------------
Total adjustments 4,982,316 5,063,672
----------- ------------
Net cash used in operating activities (2,296,877) (25,235,325)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,596) (544,505)
----------- -------------
Net cash used in investing activities (12,596) (544,505)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and line of credit 15,190,514 21,486,554
Repayments of notes payable (13,021,720) (11,500,355)
Issuance of common stock 0 2,625,319
Costs associated with issuance of common stock 0 (192,421)
Issuance of preferred stock 0 15,000,000
Costs associated with issuance of
preferred stock 0 (1,616,372)
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 (153,282) (432,465)
------------ ------------
Net cash provided by financing activities 2,015,512 25,374,904
------------ ------------
NET DECREASE IN CASH (293,961) (404,926)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 754,758 1,105,530
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 460,797 $ 700,604
============ =============
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
September 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 nine month period ended September 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 nine month period ended September 30, 1999 is adjusted by
dividend requirements of $349,893 related to the Company's Convertible
Preferred Stock.
Note 3: CREDIT FACILITY/ REORGANIZATION UNDER BANKRUPTCY PROCEEDINGS
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 September 30, 1999, approximately $4.2 million had
been advanced. The $10.5 million limit has been structured as part revolver,
part term loan and part letter of credit. As of September 30, 1999,
approximately $7.8 million was outstanding comprised of revolver and term
loans. Also, there were approximately $1 million 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 September 30, 1999, we were not in compliance
with certain financial and other covenants. As a result, we have reclassified
approximately $10.4 million of long-term debt to current liabilities.
On October 29, 1999, (the "filing date"), Ameritel Communications, Inc., a
wholly owned subsidiary of the Company ("Ameritel"), filed a voluntary petition
under Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court for
the Southern District of New York (Case No. 99-11081)(the "Bankruptcy Court").
Since the filing date, Ameritel has operated its business as a debtor-in-
possession subject to the jurisdiction of the Bankruptcy Court. All claims
against Ameritel in existence prior to the filing date are subject to payment
only when and as provided for by an order of the Bankruptcy Court.
7
<PAGE>
Ameritel's reorganization plan, which has not been completed and is subject to
approval by the Bankruptcy Court, focuses the Company's resources on the sale
of its consumer accounts receivable and the related subscriber contracts. It is
too early to determine other elements of a proposed plan. However, when other
elements are determined, they may result in additional restructuring charges,
as well as the impairment of certain assets. The plan or sale will have a
significant effect upon the value of certain assets and liabilities included in
these financial statements. Subject to completion and approval of the plan or
sale, the Company is unable to predict the potential financial impact of this
matter.
The Company believes that amounts available from operating cash flows and funds
available from its cash collateral financing with Foothill Capital Corporation
("Foothill") will not be sufficient to meet its expected operating needs
through the end of 1999. The Company is seeking additional DIP financing, an
expansion of the current cash collateral financing and restructuring of certain
debt. The Company does not have any commitments with regard to additional
sources of financing and there can be no assurance that any such commitments
will be obtained in the foreseeable future.
Failure to obtain such financing or restructure its debt may compel the Company
and all of its subsidiaries to seek protection under the federal bankruptcy
statutes or otherwise cease operating and wind up its business affairs.
The financial statements as of and for the period ended September 30, 1999 do
not include any effect of the bankruptcy which was filed on October 29, 1999 or
the proposed sale or reorganization plan.
Note 4: ASSET IMPAIRMENT
In connection with the Company's change in business strategy, certain long
lived assets owned by the Company's wholly-owned subsidiary, U.S.
Communications, Inc. ("U.S. Communications Assets") were reviewed. As a result
of this review and based on an independent third party valuation, the Company
has recorded a loss on the impairment of the U.S. Communications Assets in the
amount of $1,711,923. The Company intends to sell the U.S. Communications
Assets to another subsidiary of the Company for approximately $155,000 (the
approximate valuation for these assets). It is expected that these proceeds
will be used to reduce amounts due to the Company's secured creditor, Foothill.
If the sale of the U.S. Communications Assets takes place, the Company will be
required to either lease or purchase replacements to be able to continue to
service its subscribers pending the sale of the consumer accounts receivable
and related subscribers contracts of Ameritel, of which there is no assurance.
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 services. Since
completion of our transition in 1998 to becoming a reseller, we do not
receive material revenues from agency commissions.
We bill our customers for monthly access to the underlying carrier's
cellular 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 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. In view of the substantial reduction in our subscriber base,
only a small part of these costs, if any, may be recoverable from the long-
term revenue stream created by the continuation of subscriber's services.
Our ability to capture such revenue streams has been substantially reduced
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 but it should be noted that we have already
suffered substantial losses in subscriber fraud during 1998 which materially
contributed to our deficit.
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. Since that time, we have made further reductions in our
leased facilities to approximately 13,000 square feet as well as personnel
reductions in which our executive staff has been reduced to two individuals
and our employee roster consists of 55 employees. The reductions in both
executive and other personnel have resulted in reduced effectiveness of our
customer service and collection departments causing higher churn rates. We
believe that through sales opportunities afforded by e-commerce expected to
begin in the fourth quarter of 1999, we will seek to achieve positive
operating margins and cash flow over time, provided that we have sufficient
capital to fund the introduction of this new marketing strategy. We can
make no representation that we will achieve these results or that we will
have the capital to do so. See "Risk Factors- We Need Additional Financing
to Continue Business Operations; We Have Experienced a History Of Losses;
Any Future Profitability is Uncertain;." in Exhibit 99 filed herewith.
9
<PAGE>
RESULTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues
Total revenues for the nine months ended September 30, 1999 ("1999 Nine
Months"), consisting primarily of subscriber sales, were $12,627,075
compared to $32,517,023 for the nine months ended September 30, 1998 ("1998
Nine Months"). Total revenues for the three months ended September 30, 1999
("1999 Quarter"), consisting primarily of subscriber sales, were
$2,703,650 as compared to $11,214,089 for the three months ended September
30, 1998 ("1998 Quarter"). The decrease in revenues for the 1999 Nine
Months and the 1999 Quarter is directly attributable to a substantial net
decline in our subscriber base.
Cost of Sales
Costs of subscriber services, which consist of direct charges from cellular
carriers for access, airtime and services resold to our subscribers,
amounted to $5,986,770 and $19,175,248 for the 1999 Nine Months and the 1998
Nine Months, respectively and $1,281,978 and $6,467,391 for the 1999 Quarter
and the 1998 Quarter, respectively. The gross margin for subscriber sales
was $6,640,305 or 52.6% and $13,341,775 or 41.0% for the 1999 Nine Months
and the 1998 Nine Months, respectively, and $1,421,672 or 52.6% and
$4,746,698 or 42.3% for the 1999 Quarter and the 1998 Quarter,
respectively. The increase in the 1999 Nine Months' and the 1999 Quarter's
gross margin percentage is attributable to better wholesale rates
experienced in the areas we currently service.
Operating Expenses
Subscriber acquisition and promotional costs represent expenses which we
incurred to acquire new subscribers for our cellular 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 services,
rebates issued to subscribers and certain advertising costs. Subscriber
acquisition and promotional costs amounted to $1,385,106 and $16,695,726 for
the 1999 Nine Months and the 1998 Nine Months, respectively, and $269,027
and $3,909,224 for the 1999 Quarter and the 1998 Quarter, respectively. The
decrease reflects our cessation of acquisition efforts to obtain new
subscribers. The decrease in these costs in the 1999 Nine Months and the
1999 Quarter is also attributable to lower promotional costs due to the
termination of promotions during a subscriber's term. These costs are
expected to decrease since we are not adding new subscribers and the
promotional costs associated with current subscribers continues to decline.
Selling, general and administrative expenses for the 1999 Nine Months were
$8,231,015 as compared to $19,614,796 for the 1998 Nine Months and were
$2,471,969 for the 1999 Quarter as compared to $7,636,591 for the 1998
Quarter, reflecting our staff reductions and reduction of other operating
expenses due to reduced activity and lack of funding. Salaries and related
employee benefits decreased by 56.1% to $3,473,365 for the 1999 Nine Months
from $7,920,302 for the 1998 Nine Months and decreased by 46.1% to
$1,244,925 for the 1999 Quarter from $2,309,444 for the 1998 Quarter.
Telecommunications and facilities expense decreased by 63.0% to $647,886 for
the 1999 Nine Months from $1,749,247 for the 1998 Nine Months and decreased
by 60.4% to $182,119 for the 1999 Quarter from $460,457 for the 1998
Quarter. Billing and credit review services decreased to $1,094,150 in the
1999 Nine Months from
10
<PAGE>
$1,884,447 in the 1998 Nine Months and decreased to $287,778 in the 1999
Quarter from $735,619 in the 1998 Quarter. Travel expense decreased by 87.1%
to $70,593 for the 1999 Nine Months from $546,890 for the 1998 Nine Months
and decreased by 83.1% to $30,989 for the 1999 Quarter from $183,777 for
the 1998 Quarter. Professional and other fees increased to $1,353,317 in
the 1999 Nine Months from $1,234,808 in the 1998 Nine Months and decreased
to $312,199 in the 1999 Quarter from $449,534 for the 1998 Quarter. The
increase in the professional and other fees in the 1999 Nine Months compared
to the 1998 Nine Months is due to legal, consulting and other fees incurred
in connection with our restructuring and reorganization as well as the
defense of material litigation instituted by former customers and vendors
including RadioShack and others. Depreciation and amortization for the 1999
Nine Months was $969,639 as compared to $2,016,985 for the 1998 Nine Months
and was $246,287 for the 1999 Quarter as compared to $815,924 for the 1998
Quarter. As a percentage of revenues, the selling, general and
administrative expenses were 65.2% for the 1999 Nine Months and 91.4% for
the 1999 Quarter compared to 136% in the fourth quarter of 1998 reflecting
the Company's emphasis on reducing and controlling overhead costs.
During the nine months ended September 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 $843,000 and $463,000 for the
nine months and three months ended September 30, 1999, respectively, and are
included in other operating expenses.
As a result of a review of the certain long lived assets of U.S.
Communications, Inc. (see Note 4), the Company recognized a loss due to
impairment of such assets in the amount of $1,711,923 for the 1999 Nine
Months and the 1999 Quarter.
Interest expense (net of income) was $1,748,621 for the 1999 Nine Months
compared to $7,330,250 for the 1998 Nine Months and was $477,081 for the
1999 Quarter compared to $1,992,012 for the 1998 Quarter. The decrease in
interest expense during the 1999 Nine Months and the 1999 Quarter is related
to a reduction in 1999 of $6,274,250 and $1,394,380, respectively, of non-
cash interest charges attributable to the fair value of warrants offset by
higher loan levels in 1999. See "Liquidity and Capital Resources".
Between January 1, 1999 and September 30, 1999, we did not add any new
subscribers and our active cellular subscriber base was reduced from
approximately 60,000 to approximately 20,000.
We incurred net losses of $7,279,193 and $30,298,997 for the 1999 Nine
Months and the 1998 Nine Months, respectively, and $3,970,828 and $8,791,129
for the 1999 Quarter and the 1998 Quarter, respectively.
Liquidity and Capital Resources
Working capital deficiency at September 30, 1999 was $20,193,595 compared to
$11,567,863 at December 31, 1998. Cash and cash equivalents at September
30, 1999 totaled $460,797 (of which $451,000 was restricted). We have a
stockholders' deficit of $27,984,030 at September 30, 1999 compared to
$22,834,853 at December 31, 1998. The increase in working capital
deficiency is primarily due to the reclassification of approximately $10.4
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. The decrease in cash and stockholders' equity is
attributable to our operating loss for the nine months ended September 30,
1999. We expect to continue to experience monthly losses and negative cash
flow from operations.
Our rapid 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'
11
<PAGE>
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.
In addition, we intend to sell certain assets of U.S. Communications, Inc.
(i.e. computer hardware, software and other fixed assets) (the "U.S.
Communications Assets"), valued by an independent third party at
approximately $155,000, to another wholly-owned subsidiary of the Company.
It is expected that these proceeds will be used to reduce amounts due to our
secured creditor, Foothill. If the sale of the U.S. Communications Assets
takes place, we will be required to either lease or purchase replacements to
be able to continue to service our subscribers pending the sale of the
consumer accounts receivable and related subscribers contracts of Ameritel
("Ameritel Assets"), of which there is no assurance. In connection with our
efforts to sell the Ameritel Assets, Ameritel retained Houlihan Lokey Howard
and Zukin Capital, an investment banking firm, and have paid them an initial
retainer of $75,000. They will receive an additional $350,000 upon the
successful completion of the sale of the Ameritel Assets, of which there is
no assurance. Implementation of this arrangement is pending approval of the
U.S. Bankruptcy Court. Subsequent to the proposed sale of the Ameritel
Assets, we expect to market telecommunications products over the Internet.
To date, we have funded operations and growth primarily through financing
activities. As a consequence of a 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 former investment banker, and short term loans totaling $6.0 million
from private individuals (the short term loans have 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
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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 September 30, 1999, $4.2 million had been
advanced. 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 month ending
September 30, 1999, we were not in compliance with certain financial and
other covenants. As a result, we have reclassified approximately $10.4
million of long-term debt to current liabilities. Foothill has not declared
the Company in default and the obligations have not been accelerated. At
September 30, 1999, the Company had no availability under the Credit
Facility.
As of September 30, 1999, lawsuits aggregating approximately $14,395,801 had
been filed against the Company and its wholly-owned subsidiaries, Ameritel
Communications, Inc. ("Ameritel"), U.S. Communications, Inc. ("U.S.
Communications") and Wireless Communications Centers, Inc. ("WCCI"). In
October, 1999, additional lawsuits aggregating $54,247 have been filed
against USCI and Ameritel. Lawsuits aggregating approximately $300,000 have
been reduced to judgment. If the Company does not obtain the funding
necessary to pay legal fees to defend these lawsuits, or reach satisfactory
settlements of these lawsuits, of which there is no assurance, additional
judgments will be filed against the Company and its subsidiaries, which may
require the Company and its remaining subsidiaries to join Ameritel in
filing for protection under the U.S. Bankruptcy statutes or otherwise cease
operating and wind up their business affairs. See "Litigation" under Part
II, Item 1 of this Report.
On October 29, 1999, Ameritel Communications, Inc., a wholly owned
subsidiary of the Company ("Ameritel"), filed a voluntary petition under
Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court for
the Southern District of New York (Case No. 99-11081)(the "Bankruptcy
Court"). Since the filing date, Ameritel has operated its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. In
connection with its Chapter 11 bankruptcy filing on October 29, 1999, the
Company obtained cash collateral financing from Foothill. This financing
expires on December 31, 1999. All claims against Ameritel in existence
prior to the Chapter 11 filing are subject to payment only when and as
provided for by an order of the Bankruptcy Court.
Ameritel's reorganization plan, which has not been completed and is subject
to approval by the Bankruptcy Court, focuses the Company's resources on the
sale of its consumer accounts receivable and the related subscriber
contracts. It is too early to determine other elements of a proposed plan.
However, when other elements are determined, they may result in additional
restructuring charges, as well as the impairment of certain assets. The plan
or sale will have a significant effect upon the value of certain assets and
liabilities included in these financial statements. Subject to completion
and approval of the plan or sale, the Company is unable to predict the
potential financial impact of this matter.
The amounts available from operating cash flows and funds available from its
cash collateral financing with Foothill Capital Corporation ("Foothill")
will not be sufficient to meet our expected operating needs through the end
of 1999. The Company is seeking additional DIP financing, an expansion of
the current cash collateral financing and restructuring of certain debt.
The Company does not have any commitments with regard to additional sources
of financing and there can be no assurance that any such commitments will be
obtained in the foreseeable future.
The financial statements as of and for the period ended September 30, 1999
do not include any effect of the bankruptcy which was filed on October 29,
1999 or the proposed sale or reorganization plan.
13
<PAGE>
There is no assurance that we will be able to effect a sale of the Ameritel
Assets on a timely basis or that we will be able to use Cash collateral as
scheduled for in a Bankruptcy approved budget, obtain an extension or
expansion of the Cash collateral order, obtain DIP financing or restructure
certain debt. In the event that we are not successful in obtaining the
aforementioned financing, sale of the Ameritel Assets, or debt
restructuring, we may be required to convert the Ameritel Chapter 11 filing
to a liquidation under Chapter 7 of the U.S. Bankruptcy Code or move for a
dismissal of the case, and the Company and all of its subsidiaries may also
be required to join Ameritel in filing for protection under the U.S.
Bankruptcy statutes or otherwise cease operating and wind up their business
affairs.
Because the cost of implementing our new e-commerce strategies, anticipated
to begin in the fourth quarter of 1999, of which there is no assurance, will
depend upon a variety of factors (including our ability to negotiate
additional distribution agreements, 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.
14
<PAGE>
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 fourth 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 fourth 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 fourth 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.
15
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PART II
Item 1 - LEGAL PROCEEDINGS
As of September 30, 1999, lawsuits aggregating approximately $14,395,801 had
been filed against the Company and its wholly-owned subsidiaries, Ameritel
Communications, Inc. ("Ameritel"), U.S. Communications, Inc. ("U.S.
Communications") and Wireless Communications Centers, Inc. ("WCCI"). In
October, 1999, additional lawsuits aggregating $54,247 have been filed
against USCI and Ameritel.
Ameritel is subject to lawsuits aggregating $440,456 in addition to the
$11,200,000 Tandy lawsuits. On October 29, 1999, (the "filing date"),
Ameritel Communications, Inc., a wholly owned subsidiary of the Company
("Ameritel"), filed a voluntary petition under Chapter 11 of U.S.C. Title 11
with the United States Bankruptcy Court for the Southern District of New
York (Case No. 99-11081)(the "Bankruptcy Court"). Since the filing date,
Ameritel has operated its business as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. All lawsuits against Ameritel in
existence prior to the filing date are subject to payment only when and as
provided for by an order of the Bankruptcy Court. Reference is made to the
disclosure provided under Item 1 of Part 3 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998 for a complete description
of the Tandy litigation.
USCI, Inc. is the subject of lawsuits aggregating approximately $121,457 in
addition to the Tandy action. Reference is made to the disclosure provided
under Item 1 of Part 3 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 for a complete description of the Tandy
litigation.
U.S. Communications, Inc. is the subject of lawsuits aggregating
approximately $471,047, of which approximately $300,000 has been reduced to
judgment, in addition to the OfficeMax lawsuits in the amount of $2,200,000.
Reference is made to the disclosure provided under Item 1 of Part II of the
Registrant's Annual Report on Form 10-Q for the quarter ended March 31, 1999
for a complete description of the OfficeMax litigation.
WCCI is the subject of one lawsuit in the amount of $17,088 in which summary
judgment has been entered.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
27 Financial Data Schedule
99 Risk Factors
(b) Reports on Form 8-K
We filed two reports on Form 8-K during the quarter
ended September 30, 1999:
Date Items Reported
- ------------------------------------------------------------
August 2, 1999 Announcing Lee Feist as our new President,
Chief Executive Officer and Board member
November 1, 1999 Reporting the October 29, 1999 Chapter 11
filing by our wholly-owned subsidiary,
Ameritel Communications, Inc.
16
<PAGE>
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 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: December 10, 1999
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<NAME> USCI, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 460,797
<SECURITIES> 0
<RECEIVABLES> 18,296,250
<ALLOWANCES> 9,904,060
<INVENTORY> 0
<CURRENT-ASSETS> 10,468,927
<PP&E> 544,189
<DEPRECIATION> 372,911
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<CURRENT-LIABILITIES> 30,662,522
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0
17
<COMMON> 9,284
<OTHER-SE> (27,993,331)
<TOTAL-LIABILITY-AND-EQUITY> 10,752,059
<SALES> 0
<TOTAL-REVENUES> 12,627,075
<CGS> 0
<TOTAL-COSTS> 5,986,770
<OTHER-EXPENSES> 12,170,877
<LOSS-PROVISION> 5,530,572
<INTEREST-EXPENSE> 1,748,621
<INCOME-PRETAX> (7,279,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,279,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (7,279,193)
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Exhibit 99.1
RISK FACTORS
WE NEED ADDITIONAL FINANCING TO CONTINUE BUSINESS OPERATIONS;
WE HAVE EXPERIENCED A HISTORY OF LOSSES; ANY FUTURE PROFITABILITY IS
UNCERTAIN;
We require substantial additional capital to meet past due obligations, to
implement our new e-commerce strategy and to fund the pending Ameritel Chapter
11 proceeding. To date we have been unsuccessful in raising 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 if 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.
We have had a history of losses in each year of our operation. We have
never operated at a profit, and have experienced increasing losses and
negative operating cash flow in each year of our operation. We expect that
such losses and negative operating cash flow will continue for the
foreseeable future as we develop a new marketing strategy. As of September
30, 1999, we had an accumulated deficit of approximately $94,000,000 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 our recently adopted e-commerce strategy of selling
telecommunication services to meet our working capital and debt service
requirements.
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 future business plans,
results of operations and financial condition and our ability to compete. The
Company and all of its subsidiaries may also be required to join Ameritel in
filing for protection under the U.S. Bankruptcy statutes or otherwise cease
operating and wind up their business affairs.
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
- - create a sales presence in new markets.
- - negotiate settlements of our past due indebtedness.
- - successfully complete the Chapter 11 federal bankruptcy reorganization or
the sale of the assets of Ameritel Communications, Inc.
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 SUCCESSFUL
IMPLEMENTATION OF OUR NEW E-COMMERCE STRATEGY
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 and are seeking to
sell our remaining Ameritel subscriber base, of which there is no assurance.
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 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 service
providers for the supply of cellular services being 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, which has been
substantially reduced through cost reduction measures, 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 our 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. Since we have reduced our management staff, new executives
will have to be recruited. 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 have already experienced the loss of experienced personnel,
especially immediately prior to and following the Ameritel's Chapter 11
filing. Retaining skilled personnel is highly competitive and has been and
will be extremely difficult. If we cannot successfully retain skilled
personnel, our financial results will be adversely affected.
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 continue to 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 tradable, 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.
