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 March 31, 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 July 29, 1999, 92,826,872 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 March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of
Operations and Accumulated Deficit for
the Three months ended March 31, 1999 and
March 31, 1998 4
Condensed Consolidated Statements of Cash
Flows for the Three months ended
March 31, 1999 and March 31, 1998 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2 Management's Discussion and Analysis of 7-12
Financial Condition and Results of
Operations for the Three months ended
March 31, 1999 and March 31, 1998
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
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 13
</TABLE>
2
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998*
(unaudited)
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents, including restricted
cash of $310,000 in 1999 and $454,124 in 1998 $ 320,823 $ 754,758
Accounts receivable--trade, net of allowances of
$11,484,469 in 1999 and $11,787,545 in 1998 8,801,086 8,212,484
Accounts receivable-other 36,270 47,533
Prepaid expenses 299,514 310,000
------------ ------------
Total current assets 9,457,693 9,324,775
------------ ------------
PROPERTY AND EQUIPMENT, net 1,318,537 1,555,366
OTHER ASSETS 1,292,010 1,531,740
------------ ------------
Total Assets $12,068,240 $12,411,881
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Credit Facility $ 9,135,172 $2,955,232
Other payables 2,700,000 2,700,000
Accounts payable and bank overdraft 9,989,115 10,805,063
Accrued expenses 4,468,807 4,069,927
Commissions payable 362,416 362,416
------------ ------------
Total current liabilities 26,655,510 20,892,638
------------ ------------
OTHER LIABILITIES 10,193,045 14,354,096
------------ ------------
Total liabilities 36,848,555 35,246,734
------------ ------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $.01 par value;
5,000 shares authorized, 1,910 shares issued at
March 31, 1999 and December 31, 1998 19 19
Common stock, $.0001 par value; 100,000,000 shares
authorized; 12,006,828 shares issued at March 31,
1999 and December 31, 1998 1,201 1,201
Additional paid-in capital 63,724,812 63,453,345
Accumulated deficit (88,478,297) (86,261,368)
Treasury stock, at cost, 5,500 shares in 1999 and 1998 (28,050) (28,050)
------------ -------------
Total stockholders' deficit (24,780,315) (22,834,853)
------------ -------------
Total liabilities and stockholders' deficit $12,068,240 $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 March 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============ ============
<S> <C> <C>
REVENUES
Subscriber Sales $5,797,402 $ 9,178,056
------------ ------------
Total Revenues 5,797,402 9,178,056
------------ ------------
COST OF SALES
Cost of subscriber sales 3,001,272 5,480,765
------------ ------------
Total cost of sales 3,001,272 5,480,765
------------ ------------
GROSS MARGIN 2,796,130 3,697,291
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 3,157,573 6,194,721
Subscriber acquisition and promotional costs 737,156 6,633,512
------------ ------------
Total Operating Expenses 3,894,729 12,828,233
------------ ------------
OPERATING LOSS (1,098,599) (9,130,941)
Interest expense, Net 846,861 2,427,748
------------ ------------
LOSS BEFORE INCOME TAXES (1,945,460) (11,558,689)
Income Taxes 0 0
------------ ------------
NET LOSS (1,945,460) (11,558,689)
Preferred Dividends 271,469 0
Deficit at Beginning of Period (86,261,368) (43,122,578)
------------ ------------
Deficit at End of Period $(88,478,297) $(54,681,267)
============= ============
Basic and Diluted Net Loss per Share $ (0.18) $ (1.11)
============ ============
Basic and Diluted Weighted
Average Shares Outstanding 12,006,828 10,409,044
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
USCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
============= =============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 1,945,460) $(11,558,689)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 361,676 597,941
Amortization of discount on notes payable 0 2,035,000
Amortization of deferred financing costs 0 310,750
Provision for losses on accounts receivable 325,000 548,381
Changes in operating assets and liabilities:
Accounts receivable - trade (913,602) (4,916,479)
Accounts receivable - other 11,263 270,262
Inventory 0 22,532
Prepaids and other assets 125,369 (50,802)
Commissions payable 0 2,731,811
Accounts payable and accrued expenses 2,255,216 3,407,041
Promotional deposits 0 (200,000)
----------- -------------
Total adjustments 2,164,922 4,756,437
----------- ------------
Net cash provided by (used in)
operating activities 219,462 (6,802,252)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures 0 (105,047)
----------- -------------
Net cash provided by (used in)
investing activities 0 (105,047)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and line of credit 4,524,945 6,000,000
Repayments of notes payable (5,178,342) (4,500,000)
Issuance of common stock 0 2,437,500
Costs associated with issuance of common stock 0 (170,625)
Issuance of preferred stock 0 5,000,000
Costs associated with issuance of
preferred stock 0 (530,237)
Issuance of stock upon exercise of warrants 0 3,751
Issuance of stock upon exercise of options 0 893
------------ ------------
Net cash provided by (used in)
financing activities (653,397) 8,241,282
------------ ------------
NET INCREASE (DECREASE) IN CASH (433,935) 1,333,983
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 754,758 1,105,530
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 320,823 $ 2,439,513
============ =============
INTEREST PAID DURING THE PERIOD $ 277,768 $ 102,042
============ =============
WARRANTS ISSUED IN CONNECTION WITH DEBT
FINANCING $ 0 $ 2,269,000
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
USCI, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 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 three month period ended March
31, 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 three month period ended March 31, 1999 is adjusted by
dividend requirements of $271,469 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. Two million dollars has already 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 May 31, 1999, we had violated the cash receipt
and revenue covenants. As a result, we have reclassified approximately $7
million in long-term debt to current liabilities. On July 20, 1999, Foothill
waived these non-compliance violations. We are working with Foothill to amend
the Amended and Restated Loan and Security Agreement to better match our
current business model.
Note 4: RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
6
<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 the Company's 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 85 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."
7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998
Revenues
Total revenues for the three months ended March 31, 1999 ("1999 Quarter),
consisting primarily of subscriber sales, were $5,797,402 as compared to
$9,178,056 for the three months ended March 31, 1998 ("1998 Quarter"). The
decreased revenues for 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 $3,001,272 and $5,474,305 for the 1999 Quarter and
the 1998 Quarter, respectively. The gross margin for subscriber sales was
$2,796,130 or 48.2% and $3,695,106 or 40.3% for the 1999 Quarter and the
1998 Quarter, respectively. The increase is in the 1999 Quarter's gross
margin percentage is attributable to better wholesale rates experienced in
areas currently serviced by Ameritel..
Following the completion of our transition from agent to reseller, our
agency commission expenses were immaterial in both the 1999 Quarter and the
1998 Quarter. Such expenses consisted primarily of commissions paid to our
mass market distribution channels in 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 $737,156 and
$6,633,512 for the 1999 Quarter and the 1998 Quarter, respectively. This
decrease reflects the substantial curtailing of the acquisition of new
subscribers. The decrease in these costs in the 1999 Quarter is
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 Quarter aggregated
$3,157,573 as compared to $6,194,721 for the 1998 Quarter, reflecting the
Company's staff reductions and curtailment of other operating expenses.
Salaries and related employee benefits decreased by 64.4% to approximately
$1,039,534 for the 1999 Quarter from $2,922,625 for the 1998 Quarter.
Telecommunications and facilities expense decreased by 66.1% to $150,205 for
the 1999 Quarter from $442,795 for the 1998 Quarter and billing and credit
review services decreased to $504,322 in the 1999 Quarter from $523,468 in
the 1998 Quarter. Travel expense decreased by 92% to approximately $14,898
for the 1999 Quarter from $191,144 for the 1998 Quarter. Professional and
other fees increased to approximately $621,101 in the 1999 Quarter from
$340,292 for the 1998 Quarter 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 Quarter
was $361,676 as compared to $597,941 for the 1998 Quarter. As a percentage
of revenues, the selling, general and administrative expenses were 54.5% for
the 1999 Quarter compared to 136% in the fourth quarter of 1998 reflecting
the Company's emphasis on controlling overhead costs.
8
Interest expense (net of income) aggregated $846,861 in the 1999 Quarter and
$2,427,748 in the 1998 Quarter.
Between January 1, 1999 and March 31, 1999, we did not add any new
subscribers and our active cellular subscriber base was reduced from
approximately 60,000 to 42,000.
The decrease in interest expense during the 1999 Quarter is related to
approximately $2.3 million of non-cash interest expense in the 1998 Quarter
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."
We incurred net losses of $1,945,460 and $11,558,689 for the 1999 Quarter
and the 1998 Quarter, respectively.
Liquidity and Capital Resources
Working capital deficiency at March 31, 1999 was $17,197,817 compared to
$11,567,863 at December 31, 1998. Cash and cash equivalents at March 31,
1999 totaled $320,823 (of which $310,000 was restricted). We have a
stockholders' deficit of $24,780,315 at March 31, 1999 compared to
$22,834,853 at December 31, 1998. The increase in working capital
deficiency is mostly due to the reclassification of approximately $7 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 covenants. See
Note 3. The decrease in cash and stockholders' equity is attributable to
our operating loss in the three months ended March 31, 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.
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 is collateralized by
company common stock pledged by certain of our current and former officers,
directors and other stockholders. We were obligated to replace this
collateral with 125% cash or cash equivalent (Treasury Bills) of
approximately $3,825,000 which was due on January 31, 1998. We were unable
to replace the collateral and we are now in default. 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.
9
<PAGE>
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. Two million dollars has already 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 May 31, 1999,
we had violated the cash receipt and revenue covenants. As a result, we
have reclassified approximately $7 million in long-term debt to current
liabilities. On July 20, 1999, Foothill waived these non-compliance
violations. We are working with Foothill 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
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.
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.
10
<PAGE>
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.
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 mid-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.
11
<PAGE>
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 mid-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 mid-year 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.
12
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the disclosure provided under Part 3 of Item 1 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
On June 7, 1999, OfficeMax Inc. served the Registrant with a Complaint in a
civil action in the Court of Common Please, Cuyahoga County, Ohio, Case No.
385088, alleging that U.S. Communications, Inc., a wholly-owned subsidiary
of the Registrant is indebted to OfficeMax for at least $2.2 million for
commissions, cooperative advertising and other credits arising the referral
of cellular service customers to the Registrant. The action has been
removed to the United States District Court for the Northern District of
Ohio, Eastern Division, Case No. 1:99 CV 1561.
U.S. Communications, Inc. intends to vigorously defend the action and file
an answer denying the material allegations of the Complaint and intends to
file counterclaims against OfficeMax.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Consulting Agreement dated as of May 1, 1999 between the
Registrant and Howard Zuckerman
27 Financial Data Schedule
99 Risk Factors
(b) REPORTS ON FORM 8-K
On January 15, 1999, the Registrant filed a report on Form 8-K disclosing
that (1) by Third Amended Forebearance Agreement dated January 12, 1999,
Foothill Capital Corporation agreed to forbear from exercising its rights
under the Loan and Security Agreement until January 31, 1999 and was
continuing to advance funds to Ameritel under the terms of the Loan and
Security Agreement; and (2) by Agreement dated December 4, 1998, Ameritel
agreed to sell its paging services subscriber base to Metrocall, Inc.
On January 29, 1999, the Registrant filed a report on Form 8-K disclosing
that it and Ameritel itend to file a counterclaim against Tandy Corp.
alleging substantial set-offs to a lawsuit filed by Tandy against the
Registrant and Ameritel.
On February 9, 1999, the Registrant filed a report on Form 8-K disclosing
that by Fourth Amended Forebearance Agreement dated February 8, 1999,
Foothill Capital Corporation agreed to forbear from exercising its rights
under the Loan and Security Agreement until February 16, 1999 and was
continuing to advance funds to Ameritel under the terms of the Loan and
Security Agreement.
On February 25, 1999, the Registrant filed a report on Form 8-K disclosing
that by Fifth Amended Forebearance Agreement dated February 18, 1999,
Foothill Capital Corporation agreed to forbear from exercising its rights
under the Loan and Security Agreement until March 5, 1999 and was continuing
to advance funds to Ameritel under the terms of the Loan and Security
Agreement.
On March 11, 1999, the Registrant filed a report on Form 8-K disclosing that
by Sixth Amended Forebearance Agreement dated March 5, 1999, Foothill
Capital Corporation agreed to forbear from exercising its rights under the
Loan and Security Agreement until March 15, 1999 and was continuing to
advance funds to Ameritel under the terms of the Loan and Security
Agreement.
13
<PAGE>
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 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: July 29, 1999
CONSULTING AGREEMENT
This Agreement made as of May 1, 1999, by and between USCI, INC., a
Delaware corporation, having its business address at 6115-A Jimmy Carter
Blvd., Norcross GA 30071 (hereinafter the "Company") and Howard Zuckerman,
with an address of 6 Sands Point Rd., Monsey NY 10952 (hereinafter
"Consultant").
WHEREAS, the Consultant has rendered consulting services to the
Company and agrees to continue to render consulting services to the Company;
NOW THEREFORE, in consideration of the mutual promises contained
herein and on the terms and conditions hereinafter set forth, the Company
and Consultant agree as follows:
1. Provision of Services.
(a) Consultant agrees, to the extent reasonably required in the
conduct of the business of the Company, to place at the disposal of the
Company his judgment and experience and to provide business development
services to the Company including the following:
(i) evaluate the Company's managerial and financial
requirements and assist in financial arrangements;
(ii) assist when requested by the Company in recruiting,
screening, evaluating and recommending key personnel,
directors, accountants, commercial and investment bankers,
underwriters, attorneys, and other professional
consultants;
(iii) assist in the negotiation of settlement of claims of trade
creditors and others;
(iv) assist in preparation of budgets and business plans;
(v) advise with regard to Company operation;
(vi) retain outside professionals to provide specialized
services to the Company, including attorneys, accountants
and consultants;
(b) Consultant agrees to use his best efforts in the furnishing of
advice and recommendations.
(c) The Company will instruct its officers and other employees that
they are to follow Consultant's instructions and advice with respect to
Company matters.
2. Compensation. In consideration of Consultant's services, the
Company agrees to pay the Consultant a non-refundable consulting fee of (i)
$100,000 through the issuance of 5,000,000 shares of Common Stock of the
Company, and (ii) the amount of $12,000 per month to the Consultant, or his
designee(s), payable in advance during the term of this Agreement.
Consultant hereby accepts such compensation. The Company agrees to
reimburse Consultant for reasonable expenses incurred by the Consultant in
connection with services hereunder.
3. Expenses Payment Schedule. Consultant will invoice the Company
in advance for his estimated expenses for each month. Payment of invoices
will be due upon receipt. A reconciliation of actual versus estimated
expenses will be made and adjusted on a monthly basis.
4. Liability of Consultant. In furnishing the Company with
management advice and other services as herein provided, the Consultant
shall not be liable to the Company or its creditors for errors of judgment
or for anything except willful malfeasance, bad faith or gross negligence in
the performance of his duties or reckless disregard of his obligations and
duties under the terms of this Agreement.
It is further understood and agreed that Consultant may rely upon
information furnished to him reasonably believed to be accurate and reliable
and that, except as herein provided, Consultant shall not be accountable for
any loss suffered by the Company by reason of the Company's action or
non-action on the basis of any advice, recommendation or approval of the
Consultant.
At all times during and after the date of this Agreement, the Company
shall indemnify the Consultant to the fullest extent permitted by law for
all expenses, costs, liabilities and legal fees which the Consultant may
incur in the discharge of his services hereunder and shall at all times
maintain appropriate provisions in its articles of incorporation and bylaws
which mandate that the Company provide such indemnification.
5. Status of Consultant. Consultant shall be deemed to be an
independent contractor and, except as expressly provided or authorized in
this Agreement, shall have no authority to act or represent the Company.
6. Other Activities of Consultant. The Company recognizes that
Consultant now renders and may continue to render management and other
services to other companies which may or may not have policies and conduct
activities similar to those of the Company. Consultant shall be free to
render such advice and other services and the Company hereby consents
thereto. Consultant shall not be required to devote his full time and
attention to the performance of his duties under this Agreement, but shall
devote only so much of his time and attention as he deems reasonable or
necessary for such purposes.
7. Control. Nothing contained herein shall be deemed to require
the Company to take any action contrary to its Certificate of Incorporation
or By-Laws, or any applicable statute or regulation, or to deprive its Board
of Directors of their responsibility for any control of the conduct or the
affairs of the Company.
8. Term. Consultant's retention hereunder shall be for a term of
one year commencing on the date hereof, which shall be automatically renewed
each year unless terminated by either party upon 60 days' written notice
prior to the end of the term.
9. Miscellaneous. This Agreement sets forth the entire agreement
and understanding between the parties and supercedes all prior discussions,
agreements and understandings of every and any nature between them. This
Agreement is executed in and shall be construed and interpreted according to
the laws of the State of Georgia.
IN WITNESS WHEREOF, the parties have caused this Consulting Agreement
to be signed by their respective officers or representatives duly authorized
the day and year first above written.
USCI, INC.
By:
Authorized Officer
CONSULTANT
Howard Zuckerman
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 320,823
<SECURITIES> 0
<RECEIVABLES> 20,321,825
<ALLOWANCES> 11,484,469
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<CURRENT-ASSETS> 9,457,693
<PP&E> 8,031,312
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19
<COMMON> 1,201
<OTHER-SE> (24,781,535)
<TOTAL-LIABILITY-AND-EQUITY> 12,068,240
<SALES> 0
<TOTAL-REVENUES> 5,797,402
<CGS> 0
<TOTAL-COSTS> 3,001,272
<OTHER-EXPENSES> 3,894,729
<LOSS-PROVISION> 1,098,599
<INTEREST-EXPENSE> 846,861
<INCOME-PRETAX> (1,945,460)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,945,460)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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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 December 31, 1998, we had an
accumulated deficit of approximately $86,000,000 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 its 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 existing and 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 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 some 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 and paging services
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 both
cellular and paging services to our customers. We cannot be sure that third
party cellular and paging 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 and paging 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 and paging 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 89% 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.
