UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---- to ----
Commission File Number: 0-25632
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GUINNESS TELLI*PHONE CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 68-0310550
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(State or Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
655 Redwood Hwy., # 273, Mill Valley, California 94941
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 389-94420
Securities Registrant pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
$.001 Par Value
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. /X/
There is no current market for the Registrant's common stock. The number of
outstanding shares of the Registrant's Common Stock on March 24, 1997 was
14,103,160.
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TABLE OF CONTENTS
PART I
Page
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ITEM 1. BUSINESS ................................................... 1
(a) Overview ................................................... 1
(b) Registrant's Plan of Operation................................. 3
Necessity to Raise Additional Capital.................... 11
Research and Development to be Performed................. 12
Anticipated Material Acquisition of Plant and Equipment.. 13
Anticipated Material Changes in Number of Employees...... 13
Material Areas Peculiar to Registrant's Business......... 13
(c) Financial Information about Industry Segments.................. 13
(d) Narrative Description of Business.............................. 14
Telli*Phone Products and Services........................ 14
Status of Product........................................ 22
Sources and Availability of Raw Materials................ 25
Patents, Trademarks, Licenses, Franchises and
Concessions.............................................. 26
Seasonal Business........................................ 27
Significant Working Capital Required..................... 27
Dependence on a Single Customer.......................... 28
Backlog Orders........................................... 28
Government Regulation.................................... 28
Competition.............................................. 28
Research and Development................................. 32
Environmental Impacts.................................... 33
Employees and Management of Growth....................... 33
(e) Financial Information about Foreign and
Domestic Operations and Export Sales..................... 34
Revenues from Prior Operations........................... 34
(f) Factors Affecting Company's Business Operating Results and
Financial Condition...................................... 34
ITEM 2. PROPERTIES ................................................... 49
ITEM 3. LEGAL PROCEEDINGS.............................................. 49
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 49
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................. 49
Market Information...................................... 49
Holders................................................. 50
Dividends............................................... 50
ITEM 6. FINANCIAL INFORMATION.......................................... 51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION..................... 52
Overview............................................... 52
Liquidity and Capital Resources ....................... 53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS............................... 56
Backgrounds of Directors and Executive Officers.......... 57
Directorships............................................ 60
Involvement in Certain Legal Proceedings................. 60
Promoters and Control Persons............................ 60
ITEM 11. EXECUTIVE COMPENSATION......................................... 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................. 61
Controlling Interest..................................... 61
Security Ownership of Management......................... 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 62
Notes Due By Lawrence A. Guinness; Dilution of Guinness'
Ownership in the Company............................... 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...................................... 63
Financial Statements..................................... 63
Exhibits................................................. 64
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PART I
ITEM 1. BUSINESS
(a) Overview
Guinness Telli*Phone Corporation is an author and developer of a proprietary
community household online system that enables people without any computer
experience to exchange information and conduct business over local telephone
lines (the "MiniNet") from a simple-to-use computerized consumer telephone
appliance with a display screen and online capabilities for transmitting,
receiving, and processing information (the "Telli*Phone").
The Telli*Phone is approximately the size of a standard telephone, plugs into an
ordinary telephone outlet, and utilizes an internal proprietary operating system
developed by the Company that combines the power of a personal computer with the
simplicity of a telephone. The Telli*Phone also operates as a personal address
directory/auto-dialer, answering machine, and voice/mail and fax
receiving/sending system. It contains a smart card reader for the distribution
and accumulation of discount offers and commercial credits like frequent shopper
awards.
To establish immediate marketplaces for the MiniNet, the Company offers local
online service in the form of a continually updatable telephone and community
information directory (the "Telli*Phone Directory"). The Telli*Phone Directory
is stored in a computer (the "Server") maintained and operated by the Company
and located centrally within the community to be served by the MiniNet. It is
connected to the local telephone system through ordinary telephone lines.
People access the MiniNet from the telephone keypad of the Telli*Phone and it
provides the community with a do-it-yourself "small town" communication forum
for local businesses, groups, associations, and local residents to broadcast
items, newsletters, reports, schedules, reviews, responses, and comments.
Through the Telli*Phone Directory users can distribute movie reviews and
purchase theater tickets, broadcast school reports and transmit parental
responses and comments, reserve, order, and purchase food and merchandise, and
distribute, accumulate, and maintain special discount offers and preferred
commercial arrangements.
Subscriptions to the Telli*Phone Directory are planned to be offered initially
for $6.00 per month through local school districts in return for a percentage of
Telli*Phone revenues to help fund education. Subscribers will receive a free
Telli*Phone to plug into their existing telephone outlet for free access to the
Telli*Phone Directory and the MiniNet.
Revenues for the Company are expected to be generated from subscriptions to the
online Telli*Phone Directory, storage of commercial advertising and community
information in the Telli*Phone Directory, and licensing fees from companies and
organizations with online servers that wish to communicate or transact business
with Telli*Phone Subscribers or use the Telli*Phone Smart Card system. The
Company also plans to promote the sale of complete Telli*Phone systems to
businesses, associations, and government agencies to establish internal
telecommunications information network.
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Guinness Telli*Phone Corporation, a Nevada corporation, (hereinafter referred to
either as "Registrant" or "the Company") was originally incorporated on July 8,
1993 as U.S. Telli*Phone Corporation. Effective August 4, 1993, U.S. Telli*Phone
acquired all of the outstanding shares of Innstar Corporation, an inactive
company having no assets, in exchange for 1,551,480 shares of the Company's
stock. Innstar Corporation was then merged into the Company. U.S. Telli*Phone
did not receive any consideration beyond the exchange of shares. The merger was
accounted for as a recapitalization and Innstar had no assets, liabilities or
operations to include in the accompanying financial statements. The purpose of
the merger was to acquire a company whose shares were registered with the
Securities and Exchange Commission and to change its domicile to Nevada which is
where U.S.
Telli*Phone was incorporated.
The corporate name was changed to Guinness Telli*Phone Corporation effective on
September 13, 1993. On March 15, 1994, through a series of agreements among
Registrant, CoNetCo, a California corporation, and Lawrence A. Guinness,
CoNetCo's founder and its principal shareholder, Registrant, pursuant to a
Reorganization in accordance to section 368 (a) (1) (b) of the Internal Revenue
Code, as amended, acquired all of the issued and outstanding stock of CoNetCo in
exchange for 11,041,000 shares of the common stock of Registrant.
Registrant, through this acquisition, acquired the rights to a telephone and
community news and information computer software directory (the "Telli*Phone
Directory") and the Telli*Phone, a combined telephone and computer
communications product with a small screen, that has the ability of accessing
the Telli*Phone Directory through ordinary telephone lines. The Telli*Phone has
the potential of replacing the standard telephone now used in virtually every
household and office in the United States. Through the Telli*Phone's combined
digital answering machine and interactive networking access system, users will
have the ability to send, receive, and store vast amounts of electronic
information and transactions locally and worldwide.
Effective February 18, 1990 (as amended by the March 15, 1994 agreement),
CoNetCo, currently the Company's wholly-owned subsidiary, acquired from
CoNetCo's major stockholder the assets of the businesses known as Guinness
Productions, Inc. and Guinness Computer Television Corp. (the Guinness
Companies) in exchange for 8,000,000 shares of CoNetCo stock and royalty rights.
The assets acquired from the Guinness Companies consisted primarily of product
development efforts performed by the Guinness Companies to further develop the
Telli*Phone. For accounting purposes, all costs incurred by the Guinness
Companies to develop the Telli*Phone have been expensed in accordance with
Financial Accounting Standards Board Statements No. 2, Accounting for Research
and Development Costs. The assets acquired from the Guinness Companies have been
valued at their historical cost basis and not current fair market value, if any,
because all entities are under common control. The liabilities incurred and
assumed by the Guinness Companies during its development of the Telli*Phone have
been assumed by the shareholder of the Guinness Companies. The liabilities
assumed by the Guinness Companies= shareholder total approximately $7.2 million,
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which include approximately $2.3 million of investor notes payable and related
delinquent compounded interest of $3.6 million. Such liabilities were incurred
by the Guinness Companies primarily during the years 1982 to 1989. Such
liabilities assumed have been treated as a capital contribution and increased
paid-in capital. CoNetCo and the Guinness Companies are predecessors of the
Company and their activities are included in the cumulative financial data.
Included in the deficit accumulated during development stage is approximately
$7.2 million relating to the Guinness Companies.
(b) Registrant's Plan of Operation
The Company's general plan of operation beginning the calendar year 1997 is to
assemble Telli*Phones, based on the design of its working model and constructed
from hardware components the Company has determined are available in the
marketplace, and establish a Beta Test of the Telli*Phone Directory in
cooperation with a local school district to establish credibility for its
business assumptions and create specific value for its operating systems and
programming assets. Through the Beta Test the Company hopes to be able to
attract sufficient financing to assemble additional Telli*Phones and extend its
Initial Market Test to cover an entire community by the end of 1997.
The Telli*Phone and the MiniNet are currently at the ALPHA stage of development.
The first MiniNet server is stationed in the Company's administrative offices in
Mill Valley California. The computer operating as the server contains the
Company's proprietary Telli*Phone operating system and over 10,000 programs that
operate the indexing system for the Telli*Phone directories. The system needs
minor cosmetics to its indexing pages and the insertion of an up-to-date listing
of the businesses in the Marin County area for the telephone directory. The
server is connected to the local telephone system and is fully operational.
Six working models of the Telli*Phone have been produced for ALPHA testing
purposes and to establish the mechanical specifications for production of the
consumer designed Telli*Phone case. The Telli*Phone proprietary operating system
is functional including applications software for the telephone and speaker
phone, answering machine, address book, auto-dialer, screen graphics and text,
access to the MiniNet, and engineering functions for the Telli*Phone's hardware.
The smart card reader is installed but no commercial software application's
programs have been developed at this time.
The Company plans to bring the Telli*Phone and the MiniNet into the BETA stage
and implement a marketing test of the system in Marin County California to
prepare the products for large-scale production. The bulk of the effort required
to bring the Telli*Phone and the MiniNet to the production state will take place
in parallel with the BETA efforts, with fine tuning done on the production
versions from results obtained from the BETA test.
The Company is now in a position to manufacture its own Telli*Phone computer
servers based on the proprietary operating system it developed for the
Telli*Phone. At the initial stage of the market test it will use the present
computer for its server. However, during the market test it plans to install a
Telli*Phone computer server, designed and manufactured by the Company. The
engineers will transfer the present indexing and Telli*Phone navigational
systems over to the new Telli*Phone computer server for the final stage of the
BETA test of the entire Telli*Phone MiniNet system.
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The Company's engineers will upgrade the Telli*Phone operating system to
interface with the new Telli*Phone design, implement security features for the
MiniNet to protect users, and implement the World Wide Web and e-mail
Telli*Phone format conversion functions. The Company also plans to implement
remote authoring software to enable businesses and consumers to conveniently
input advertising and other information into the Telli*Phone Directories from
the field.
During the final stages of the Beta test the Company will implement the
Telli*Phone tracking devices that will check subscriber telephone ID codes for
security and track subscriber movement on the system to generate reports. Upon
completion of the market test the Company will have created complete engineering
specifications for the MiniNet system architecture.
In addition to entering address information on the businesses in Marin County
under their appropriate categories, the Company editors will modify the
Telli*Phone indexing system to correct any difficulties subscribers may have
responding to the Telli*Phone software while using the MiniNet during the Beta
test.
During the BETA test the Company's engineers will redesign the analog telephone
board in the Telli*Phone to move from operating with a PCIMCA S-Mos card to a
CAD PC board design using a new chip that will soon be available. As a result,
Telli*Phone production models will use the very latest technology. With
continual software upgrading through automatic downloads from MiniNet servers
when subscribers are on-line, the Company believes that Telli*Phones and the
MiniNet system should remain continually up-to-date.
The Company's engineers will also design custom keypad digital keys for the
Telli*Phone, modify all the analog keys and functions, and optimize the interior
of the Telli*Phone for BETA manufacture and government compliance. Additional
software systems will be developed for the Telli*Phone including functions such
as fax, e-mail, voice messaging, VGA Telli*Phone graphics, notepad writer,
metering, user interfacing systems, smart card functions, and complete
engineering specifications.
Approximately two years ago the Company approached, on an informal basis, a
number of major retail establishments and a limited number of consumer product
manufacturers to discuss their interest in working with the Company during its
Beta Test for the purpose of experimenting with Telli*Phones as a marketing
tool. All parties verbally expressed enthusiasm about the proposal and indicated
a willingness to work with the Company. They also verbally expressed their
willingness to make a financial contribution to the project in return for their
exclusive participation and to give them an edge on their competition.
When the Beta Test of the Telli*Phone Directory is underway the Company plans to
return to these potential partners to renew the discussions to arrange financing
through the licensing of its technology for their use. The Company has no
assurance that it will he able to renew past discussions or that, if discussions
are opened once again, it will be successful in reaching any agreements with the
parties.
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During the Beta Test, the Company anticipates that Subscribers to the system
will demonstrate a willingness to keep the product in their homes and that
additional corporations will become interested in considering the use of the
Telli*Phone as a marketing tool. Registrant anticipates being able to solicit
additional organizations to generate additional agreements to expand the number
of participants committed to the project. With additional financial support
Registrant anticipates being able to raise the capital necessary to begin full
scale operations within the Initial Market Test area by the end of 1997.
Early in 1997 the Company anticipates being able to reach an agreement with the
school district within the Initial Market Test area to sell subscriptions to the
Telli*Phone Directory throughout the community commencing in September 1997.
Within the last five years the Company has approached two major school districts
and discussed its plan to involve school districts in the sale of Telli*Phone
Subscriptions within their community in return for a share of the revenues
generated from the use of Telli*Phones by subscribers within their community.
Both districts responded favorably to the plan and verbally indicated that there
was no obstacle standing in the way of their working with the Registrant on the
project.
The school districts in the Beta Test area operate in a similar manner to
districts previously approached. They sell magazine subscriptions each year and
participate in various other projects to raise funds for schools in their
districts. However, the Company has not approached any of the school districts
in the Beta Test area and there is no assurance that they would respond in the
same manner as the other school districts approached, or that they would be
willing to work with the Company on such a plan.
Network Geographical Access Area
The Telli*Phone Directory Computer Station is located in Mill Valley,
California. The office is in a building adjacent to Highway 101, the main artery
freeway running through Marin County servicing all its main populated areas. The
building contains small businesses, medical offices, retail establishments
including a deli, hair salon, nail salon, and major restaurant.
Mill Valley is 20 minutes north of the center of San Francisco across the Golden
Gate Bridge. To the south it borders the town of Sausalito, a popular tourist
center. To the west is Mount Tamalpais, a huge State Recreational Area. Across
the freeway to the east are the wealthy towns of Tiburon and Belvedere. To the
north is the Town of Corte Madera with the largest shopping center in the North
Bay and just beyond is the City of San Rafael, a large metropolitan center with
a population of over 50,000.
The area of Marin to be covered by the Network contains approximately 100,000
households. This represents less than 5% of the total population of the Bay
Area. The median income in Marin County is over $53,000 per household.
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Most of the population in and around Mill Valley works in San Francisco. The
people live in expensive homes and care about their community, their children's
education and protecting their quality of life. There are Little League Baseball
teams, soccer leagues, Boy Scout Troops, service clubs, recreation centers,
church groups, sailing clubs, and hiking and biking trails.
Pacific Bell's Yellow Pages for Marin County generates advertising revenues in
excess of $20 million annually from approximately 40,000 listings. It produces
461,000 purchases every month (National Yellow Pages Monitor Ratings). The cost
of a l.5" x 1.5" column ad (black type only) is $48.00 per month. The cost of a
3" x 1.5" column ad (black type only) is $111.50 per month.
The Yellow Pages is printed only once a year. Due to its inflexible format, it
does not contain much advertising from major department stores, grocery stores,
recreation departments (clubs, community centers, etc.), real estate brokers,
airlines, ground transportation agencies, movie and live theaters, government
agencies, consumer agencies, or service bureaus.
The Yellow Pages does not allow for advertising from individuals such as tutors
of academic studies or sports, house cleaners and maintenance, entertainers (for
parties, etc.), local rentals (tools, sports equipment), and second hand items
(books, clothes, etc.).
Individuals cannot distribute controlled advertising to generate part-time extra
income through arts, crafts, and hobbies. With the Telli*Phone people could
offer sewing, baking, maintenance, video production, and word processing.
Collectors of baseball cards through to antiques could trade and barter.
Corporate Marketing Plan
The initial success of the Telli*Phone Directory is dependent on the Company's
ability to supply Telli*Phones to a great number of homes in a concentrated area
within a very short period of time. The Company's goal is to deliver a
Telli*Phone to the home of every family with school age children within the area
adjacent to the central computer. The Company plans to involve the local school
district in the sale of subscriptions to the Telli*Phone Directory and in the
distribution of Telli*Phones.
Each fall many school districts embark on fund raising programs. Part of the
program in some districts is a drive to sell magazine subscriptions to local
residents. One person from a magazine distribution company works with the
district to encourage the junior high school children to solicit homes in the
area and sell the residents annual subscriptions to popular magazines. The
school district receives a percentage of the revenues generated from the
subscription sales and the children receive prizes for their efforts. The whole
process, from organization to the handing in of orders, takes approximately two
weeks.
The Company intends to offer a plan whereby the school district can generate an
on-going income to help fund education. The income earned by the school district
will be a percentage of the revenues from the sale of Telli*Phone Subscriptions
and a percentage of the advertising revenues generated from the Telli*Phone
Directory. The percentage will be a calculation of the population of the area
served by the school district as a percentage of the total population in the
area covered by the local Telli*Phone Directory.
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Secure Distribution Agreement
The Company must finalize a Telli*Phone distribution agreement with a local
school district within the area to be served by the Telli*Phone Directory. At a
minimum the Company feels that it can expect a best efforts agreement from
school districts. School districts are establishing an electronic line of
communication between the home and the school. Many school districts have been
installing a voice/mail type system to automatically report student absences to
the home and for parents to access a voice recording of important announcements
and homework assignments. In some cases, where the system has been installed, it
costs the school district as much as $10 per student per month.
All these services and more can be available within the school district through
the Telli*Phone, at no cost to the district, and with the added bonus of
generating income for the schools.
The Company feels that it is possible for an arrangement to be established
whereby the school district makes it obligatory for parents to sign up with the
Telli*Phone Directory for $6.00 per month to receive school information and news
on an ongoing basis (similar to the schools requiring students to purchase gym
outfits, school notebooks and supplies, and supplementary materials from time to
time throughout the year).
The issues for the parents to consider are that they will be reducing the
administrative overhead of the schools by eliminating the cost of electronic
communications with the home, they will be providing the schools with an
additional source of funding, school information will now be available on a
telephone display screen at the push of a button at any time, and special offers
through local merchants will be available to Telli*Phone Subscribers to reduce
their monthly costs.
To further encourage people to acquire subscriptions to the Telli*Phone
Directory, the Company plans to offer subscriptions to the Telli*Phone Directory
on a free, 30 day, "on approval" trial basis within the area where the first
Telli*Phones will be distributed. It is anticipated that this will encourage
people without school age children to test this new voice/mail answering machine
and on-screen telephone directory.
Building Directory Listings
An agreement from the local school district for distribution of Telli*Phones
will establish proof that there will be a critical mass of users in the
community with Telli*Phones in their homes. Local merchants will be encouraged
to purchase advertising space in the Telli*Phone Directory immediately and enter
information about their goods and services under their Telli*Phone Directory
listing.
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Company Sponsored Advertising
The Company plans to send an advertising package to all businesses in the area
served by the Telli*Phone Directory. The package will provide them with
information on the Telli*Phone and the Telli*Phone Directory. It will announce
that the Telli*Phone is being introduced into their area and that many affluent
consumers, located near their place of business, will have access to
Telli*Phones and the Telli*Phone Directory.
They will be informed that a listing of the name of their establishment, the
address, and telephone number already appears in the Telli*Phone Directory along
with those of their competitors. The package will include a return postage paid
Telli*Phone Screen Card for them to create a screen of material that they would
like to be available to consumers under their listing in the Telli*Phone
Directory. They will be offered one free listing of one advertising screen of
information Aon approval@ for a period of 60 days to give them a chance to
evaluate the system.
To support this mailing program, the Company will purchase significant
advertising space in the local newspapers to promote the fact that "the
Telli*Phone is here" and is being made available to households in the area. The
advertising will be to encourage support for the program throughout the
community, make merchants aware of the marketplace available to them to
encourage them to return their Telli*Phone Screen Cards as soon as possible, and
to evaluate the response to the Telli*Phone from the people and schools in
districts where the Telli*Phone has yet to be introduced ("market research to
evaluate and determine future budgeting for advertising and promotion").
Free Newspaper and Magazine Articles
Human interest stories and Telli*Phone background articles will be prepared by
Telli*Phone Editors and sent to the local newspaper, magazine, radio, and
television stations. Some of the articles to be written or subjects to be
promoted are:
a) the Telli*Phone, the local schools, and funding for education.
b) the MiniNet vs. the Internet.
c) the Telli*Phone and its use to your government and local politicians.
d) the Telli*Phone and its importance to community groups and associations.
e) individual accounts and ideas from people in the community on how they plan
to use the Telli*Phone Directory for their benefit.
Workshops, Sales Demonstrations, and Seminars
A small marketing staff will work with local clubs, associations, and community
groups to conduct workshops and demonstrations in the geographic area served by
the Telli*Phone Directory. The purpose will be to demonstrate the Telli*Phone
and the Telli*Phone Directory to business and professional members of the
community and inform them of the advantages provided everyone by communicating
through the Telli*Phone.
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The marketing staff will encourage these people to work with the local
Telli*Phone Licensed Editors to help them understand how the Telli*Phone is used
in the community, how to use the Telli*Phone to their benefit, and how easy it
is to create screens for the Telli*Phone Directory. In addition, the marketing
staff will assist advertisers in using the media to draw people's attention to
their Telli*Phone Directory listings.
Members of local groups, associations. and organizations will be invited to
attend seminars in the Company's offices to learn how to use many of the
functions of the Telli*Phone and promote its use through their network of
members to reduce their costs, simplify their operations, and generate income.
People attending these seminars will be invited to take a Telli*Phone home and
test it with members of their household.
The Company believes that a cooperative marketing effort among many people,
businesses, and organizations who agree to use the Telli*Phone Directory to
broadcast information will encourage the growth of the Telli*Phone into other
communities. Through advertising and articles in the local media, the
information available through the Telli*Phone will be highlighted by those who
have created it.
Telli*Phone Subscriber Smart Cards
The Company intends to issue plastic Telli*Phone smart cards ("Telli*Cards") to
Subscribers of the Telli*Phone Directory at the time their Telli*Phones are
delivered. Businesses in the community will be encouraged to offer special
discounts to Telli*Phone Subscribers who show their cards at the time of
purchase. These offers may not be advertised or made available through any other
medium. As a result, businesses will be able to determine the return they are
experiencing from the use of Telli*Phone.
The Company believes that as Telli*Phone Subscribers hear about these saving
plans and special offers, they will be encouraged to check their Telli*Phone
before going to shop, even if they have decided what they are going to buy.
Beta Test
The Company will introduce its products to the marketplace through a Beta Test
in a single local community. The Beta Test is important in that it will allow
the Company to debug its systems, modify any design flaws to insure that the
products will meet the needs of the marketplace, and establish verification of
the Company's Business Plan before it makes any significant investment in the
manufacture of Telli*Phones. The goals to be verified are the following:
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a) The Telli*Phone Directory can be distributed successfully through the sale of
subscriptions by the local school district and families will come to rely on the
Telli*Phone as their primary source of school news and student information.
b) People will come to rely on the Telli*Phone Directory as their local
telephone book.
c) The Telli*Phone will grow within the community primarily through promotion
and support from local businesses and community groups who will use it for their
own benefit.
d) People will come to rely on the Telli*Phone as the new home communications
appliance to replace their answering machine and manage most of their
telecommunications needs.
e) Major information providers will demonstrate their confidence that the
Telli*Phone will allow them to expand their marketplace of users beyond that of
users of personal computers by purchasing Telli*Phone licensing contracts to
reach Telli*Phone Subscribers.
f) The Telli*Phone MiniNet will operate successfully and profitably as a small
business within a single community.
Product Distribution
The initial success of each district Telli*Phone MiniNet will be the Company's
ability to create a critical mass of Subscribers in a community within a short
period of time. The Company's goal will be to deliver a Telli*Phone to the home
of every family with school age children within a nucleus of the district served
by a Telli*Phone Directory (the "Geographical Access Area"). Each Geographical
Access Area is comprised of approximately 5 different areas called "Geographical
Access Units."
The Company plans to offer school districts encompassing the most affluent
Geographical Access Unit in the Geographical Access Area a plan whereby it can
generate funds for school projects. The minimum goal will be to have every
family in the school district purchase at least a single month's subscription to
the Telli*Phone Directory from their son or daughter.
A Company representative will conduct a workshop at meetings of the P.T.A., and
meetings of other parent groups responsible for raising funds for schools in the
district. At these meetings, parents will be shown the Telli*Phone and the
Telli*Phone Directory including the school news and information directory. The
Company will work with school representatives to establish a group of parent
volunteers to help enter school district information and class news in the
school news section of the Telli*Phone Directory.
Page 10
<PAGE>
A Telli*Phone marketing representative will conduct teacher workshops at every
school within the school district to familiarize teachers with the Telli*Phone,
the Telli*Phone Directory, and the process by which funds will be generated for
the school district. A Telli*Phone will be left in the school office or teachers
lounge for teachers to operate and discover ways they can use the school news
and information section of the Telli*Phone Directory. By allowing the teachers
this hands-on experience, they will become familiar with the Electronic Teacher
section of the Telli*Phone Directory. Some teachers may be interested in writing
material that will be published by the Company and distributed through the
Telli*Phone.
- -------------------------------------------------------------------------------
DEL MAR SCHOOL 435-1468
105 Avenieda Miraflores Tiburon, CA 94920
1. SCHOOL BULLETIN
2. GRADE and CLASS NEWS
3. EVENTS and MEETINGS
4. P.T.A. DIRECTORY and NEWS
5. GENERAL INFORMATION and RULES
6. YOUR CHILD (Confidential)
7. LEAVE A MESSAGE FOR A TEACHER
TYPE A NUMBER - then PRESS the SEND key.
- -------------------------------------------------------------------------------
Necessity to Raise Additional Capital
It is the opinion of the Company, that in the next six months, it will be
necessary to raise additional funds to meet the expenditures required for
operating the business of the Company. The Company has been in the development
stage since inception and has no history of revenues. Realization of the
Company's objectives is dependent upon the Company's ability to pay its
obligations, raise additional capital and introduce its product to the
marketplace to establish the success of future operations. The success of the
product in the marketplace, and the ability of the Company to continue as a
going concern cannot be determined at this time. The report of the independent
Certified Public Accountant expresses substantial doubt about the Company's
ability to continue as a going concern.
Page 11
<PAGE>
The Company will require funds for:
- - Office Rent and General Office Expense
- - Administrative Salaries (CEO, COO, and Secretary)
- - Product Development Salaries (Engineer, Editor, and Programmers)
- - Telli*Phone Prototype Engineering Expense
- - Data Base Software Programming Expense
- - Capital Purchases:
- - Central Computer for Telli*Phone Directory
- - Telli*Phone Production Models for Initial Market Test (100 - 200)
- - Marketing Expense
- - Legal and Audit Expense
The Company plans to use a variety of means to raise the required capital,
including the sale of Common or Preferred stock or debt instruments.
Most of the initial funds will be used to establish a fully operational
Telli*Phone Directory central computer system with a number of commercial
listings. In addition, the Company plans to have distributed, through a local
school district, at least two hundred Telli*Phones to households within the area
served by the central computer Telli*Phone Directory. Once the system is in
place the Company believes a significant value will have been established for
its technology. The Company anticipates being able to attract financial support
from at least one major corporation that will have an interest in reaching
Telli*Phone Subscribers. This financial support will help to increase the number
of Subscribers to the Company's Telli*Phone Directory and increase revenues to
support ongoing operations.
Research and Development to be Performed
The Company has no plans for the establishment of any significant new research
projects during the year 1997. Additional programming development of a cosmetic
nature is required to prepare the Telli*Phone Directory for use by the general
public.
In addition, directory listings have to be acquired from the State of California
and entered into the central computer to be able to market the Telli*Phone
Directory as a complete directory of commercial establishments within the
geographic area to be served by the Telli*Phone Directory.
Management feels that approximately three months of software development will be
required to complete the above and programming enhancements.
Anticipated Material Acquisition of Plant and Equipment
The Company does not plan to set up any manufacturing facilities of its own;
therefore it will not be making any material acquisition of plant and equipment
within the next fiscal year of operations.
Page 12
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Approximately 30% of the capital required to establish a Telli*Phone Directory
within a limited geographical area for the Beta Test will be used to set up and
purchase Telli*Phones and the central computer system to store the Telli*Phone
Directory. The Company believes that there will be no market for this equipment
other than for use by the Company to operate the Telli*Phone Directory.
Following the Beta Test, the Company believes that over 60% of the capital
required to maintain a Telli*Phone Directory within a specific geographical area
and increase the number of Subscribers and advertisers to the Telli*Phone
Directory in that area will be used for the purchase of Telli*Phones and other
computer equipment.
Anticipated Material Changes in Number of Employees
The Company presently employs a CEO, COO, Secretary, and Systems Engineer and
Programmer. Within the first six months of 1997 Registrant plans to employ at
least two more programmers, an editor, and two marketing directors in
preparation of the Beta Test.
Material Areas Peculiar to Registrant's Business
The Company is not aware of any areas of its business not similar to the
publishing and distributing of interactive information through the telephone
network.
(c) Financial Information About Industry Segments
<TABLE>
<CAPTION>
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
AND CLASSES OF PRODUCTS OR SERVICES
- ------------------------------------------------------------------------------
YEAR 1994 1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $(353,954) $(199,556) $(491,369)
Identifiable assets 19,828 229,416 39,528
</TABLE>
There were no sales during the three years ended December 31, 1996, as the
Company is still in the development stage.
NOTE: CoNetCo, Guinness Productions, Inc., and Guinness Computer Television
Corporation are predecessors of the Registrant and the activities of the
predecessors are included in the cumulative financial data of the Registrant
(See notes to Financial Statements).
Page 13
<PAGE>
(d) Narrative Description of Business
Telli*Phone Products and Services
The Telli*Phone MiniNet
The Company believes that MiniNet hardware and Telli*Phone software navigational
tools and services are uniquely positioned to capitalize on the shortcomings of
the Internet as an advertising medium, a system that requires people to be
computer literate, and a system where participation requires a substantial
investment into computer equipment and software.
The Company believes that by supplying consumers with access to media properties
focused on local interest areas, local demographic groups, and community
geographical areas, the Company can provide advertisers with a greater ability
to target their advertising messages to relevant audiences.
The Telli*Phone Directory
The Telli*Phone Directory is a library of information stored in a computer
maintained by the Company and located in the community being served. The Company
has programmed an intelligent, interactive indexing system into the Directory
establishing categories where information can be entered by businesses, groups,
and associations within the community. These authors can update their
information at any time directly from a Telli*Phone.
The principal elements of any computer information network are the computer
software programs through which the central computer and the end-user terminals
interact and the pages of information contained in the computer programming
system. The computer programming system determines the manner in which
information is presented on terminal screens and the ease with which users can
connect with the appropriate pages of information. The pages of information
stored in the computer programming system make up the library of information and
their content impacts directly on the usefulness of the network.
The intelligence of the Telli*Phone programming system is unique compared to the
operation of traditional programming systems. The brain of the Company's Server
is made up of individual programmed concept cells. Each cell contains a complete
software program developed by an author experienced in the subject matter being
investigated by a Subscriber and edited by an editor experienced in the Guinness
Tri-Stage Learning Systems programming techniques. The cells work together to
clarify the thinking process in the mind of the Subscriber relative to the
subject matter being investigated and then define a location on the computer
disk where pages of information about the subject are stored.
Telli*Phone Subscribers respond to pages of questions, choices, directions, or
instructions presented on the Telli*Phone screen. Based on each response, the
cell program connected to that page of information evaluates the thought process
in the mind of the Subscriber and displays specific pages of information
relative to that thought process. The pages displayed on the screen may be
further questions for clarification, a list of facts, or a story presentation of
ideas to give the user a greater perspective of the options that may be explored
within a particular subject.
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<PAGE>
The Telli*Phone Directory is divided into four main categories. These categories
are divided into subjects that have been dissected many times by the Company's
editors creating many additional subject levels containing a total of over
10,000 programmed cells. The Telli*Phone cell programming system contains a high
level of intelligence that allows people to simply "talk" to the Telli*Phone to
locate what they want. At the present time, Subscribers use the Telli*Phone
keypad to enter numbers corresponding to their choices from the options
displayed on the screen.
GUIDELINE (free to Subscribers) - An electronic directory of all retail
businesses and service vendors in the area including a detailed
description of their location, products, services, and special offers.
Advertisers may enter, update, or change their information at any time
through a Telli*Phone.
COMMUNITY NEWS AND INFORMATION (free to Subscribers) - A library of information
from local government and service organizations listing services,
meetings, special events, educational information, and programs offered.
BUYLINE (free to Subscribers) - A listing of buy and sell items offered by
Telli*Phone Subscribers. Information may be created in the Buyline,
changed, or updated by Telli*Phone Subscribers at any time.
COMMUNITY ON-LINE (free to Subscribers) - A chat service for members of the
community.
Each programmed cell pertains to a specific topic and contains coded information
from different authors in the form of digital pages. Authors, businesses,
groups, and associations are assigned coded pages within the topic cells. These
coded pages contain details about their ideas, products, or services. Through a
Telli*Phone Authoring Subscription people can write, edit, and update their
information at any time on a Telli*Phone, or a personal computer with a modem,
using the Company's AMENU authoring and programming system. At the push of a
button, their pages of information are sent to the Company's Server via
telephone lines where they are automatically placed in the appropriate sections
of the Telli*Phone Directory. Since each cell has the potential of containing
pages of information from many sources, Subscribers have the opportunity of
analyzing specific topics from a variety of angles.
People are charged a per page, monthly fee to store their pages of information
in the Telli*Phone Directory. The Telli*Phone Directory is maintained by the
Company in a central computer, connected to the local telephone system, and
located in the community served by the Directory listings. The central computer
is designed to support up to 64 telephone line connections and each telephone
line supports one Telli*Phone. Based on this design, each Telli*Phone Server is
capable of communicating with 64 Telli*Phones at the same time. It is expected
that each Server will service as many as 1,280 Telli*Phone Subscribers due to
the fact that not all Subscribers will be communicating with the Server at the
same time.
Page 15
<PAGE>
The Company has not conducted a test of the ability of the Server to support a
large number of Subscribers accessing the Telli*Phone Directory at the same
time. There is no assurance that the software in the Server will be successful
in accommodating a large number of Subscribers. It may be necessary for the
Company to purchase additional central computers to reduce the number of
Subscribers accessing a single computer at one time. This may result in a
substantial increase in the amount of working capital necessary to operate a
community Server and provide adequate service for Subscribers to the Telli*Phone
Directory.
The Telli*Phone
The Telli*Phone is a telephone, speakerphone, and digital answering system with
a super twist LCD screen. Inside the case is a high powered personal computer
with a modem and a smart card reader.
People operate the Telli*Phone by pressing keys on the Telli*Phone's telephone
keypad or on the optional remote control keyboard. They are guided by
instructions that are displayed on the Telli*Phone screen.
The internal operations of the Telli*Phone are controlled by proprietary
software developed by the Company. The software which controls the operation of
the Telli*Phone can be accessed only by a Telli*Phone central computer. People
can make ordinary telephone calls from the Telli*Phone but to access a central
computer the telephone number for the computer must be entered into the
Telli*Phone's automatic dialing system from a Telli*Phone central computer. In
this way the Company will be able to assess licensing fees and transaction fees
for the use of the Telli*Phone for anything other than as a telephone and
answering system.
The Telli*Phone includes the following essential components:
a) a two-line telephone with 16 telephone keys;
b) a speaker and microphone;
c) a 14,400 baud modem chip set (data rate up to v.32 with compression) which
includes data, fax, and voice;
d) a PC-XT 20 MHz processor, 386sl SMOS card IO motherboard, IM x 8 DRAM
memory and 2M x 8 FLASH program and data storage;
e) a 6.5", 80 character 25 line LCD screen with 640 x 480 graphics grid;
f) ROM based custom real time executive controlling the phone; and,
g) an external custom XT infra red keyboard.
The Telli*Phone can serve as a digital answering machine with 16 minutes of
storage. It has full voice mail features including the ability to create, edit,
and send faxes. The Telli*Phone has an address book that can store up to 500
names, addresses, and phone numbers with the ability of dialing automatically
from the list and sending voice, data, or fax messages. The phone can up/down
load data while on line with a network or directly from a PC via an external
serial port. In addition, the Telli*Phone supports a dot matrix printer, card
swipe reader and scanner pen.
Page 16
<PAGE>
Basic Customer Features
The Company proposes to have available the following features on the first
Telli*Phones that it intends to distribute to the marketplace:
a) touch tone dialing;
b) speakerphone;
c) personal auto dial directory for storing telephone numbers and other
information relating to directory listings that will display on dialing;
d) automatic redial of last number dialed;
e) call freezing to prevent calls being made to numbers that involve charges
including long distance and toll calls;
f) automatic recorded voice and/or data message taking;
g) calculator;
h) automatic multidial calling from a list of numbers;
i) a hold button;
j) two telephone line capability;
k) conference calling if two telephone lines are connected; and,
I) a smart card reader.
Optional Add-on Features
The following optional add-on features are planned to be available for
Telli*Phone Subscribers for an additional monthly fee:
a) expanded memory;
b) appointment and information reminder;
c) visual, on-screen caller identification (actual name of caller if listed in
personal directory) to avoid having to answer unwanted calls or calls to
members of the household who are not available (can be used without having
to subscribe to Caller ID from the telephone company);
d) distinctive ringing to alert members of the household who an incoming call
is for;
e) message leaving for storing individual messages that may be picked up by
designated callers when they call;
f) multiple message sending to automatically send a recorded voice or data
message to a list of people; and,
g) messages forwarded automatically to another number.
Page 17
<PAGE>
Summary of Telli*Phone Features
AUTO SCREEN DIALING - Over 500 telephone numbers and related personal
reference notes can be stored in the Telli*Phone auto-dial screen display
directory. Telephone calls are made by pressing the number on the
telephone keypad that corresponds to the correct listing on the screen.
As the number is being automatically dialed, prerecorded personal notes
relative to that listing are displayed on the Telli*Phone screen for
convenient reference during the call.
MESSAGETAKING - The Telli*Phone automatically answers incoming calls and
digitally stores voice messages, faxes, printed memos, and
correspondence. This information may be reviewed later on the Telli*Phone
screen (voice through the speaker) or the Telli*Phone will send it to
another location where it may be listened to, viewed, or printed out on a
fax machine.
Since messages are in digital format, they may be erased individually
(keeping some and deleting others). Codes may be entered so each member
of the business or household may view only his or her messages,
maintaining privacy.
MESSAGELEAVING - Voice messages, faxes, or other typed memos may be recorded in
the Telli*Phone to be picked up later by specific authorized callers.
MESSAGESENDING - Voice messages, faxes, typed messages, and correspondence may
be recorded on the Telli*Phone and automatically sent to one or more
people. Information can be sent to a large audience by using the auto
dialing directory.
CALLER IDENTIFICATION - When activated, the Telli*Phone asks callers to identify
themselves by entering their telephone number on the keypad of their
telephone. The Telli*Phone scans its directory, displays the caller's
name on its screen, and then begins ringing. If the caller is not in the
Telli*Phone directory, or if the caller is reluctant to enter a telephone
number, the Telli*Phone will switch on its answering system to record the
caller's incoming message.
If the Telli*Phone Subscriber has "Caller ID" from the local telephone
company, the Telli*Phone immediately checks its directory and displays
the name of the caller. If the telephone number is not found, it may be
because the caller is not calling from a recognized phone; therefore, the
Telli*Phone asks the caller to enter his or her telephone number as a
double check.
APPOINTMENT AND INFORMATION REMINDER - The Telli*Phone will ring at specified
times and display or broadcast information previously recorded.
CALL FREEZING - Passcodes may be recorded to restrict the use of the
Telli*Phone for normal calling, long distance calling, dialing specific
area codes like A800" or A900" numbers, or individual numbers.
Page 18
<PAGE>
SMART CARD READER - A credit card size smart card is available and may be
inserted into the Telli*Phone to enhance its features. The card can be
used to store and maintain information accessed through the Telli*Phone
including telephone and mailing lists, banking transactions, faxes,
messages, correspondence, voice recordings, and health, medical, and
insurance information.
EXTERNAL KEYBOARD - A wireless IR keyboard is available for typing information
and faxes from the Telli*Phone.
EXTERNAL PRINTER AND OTHER PORTS - The Telli*Phone has inputs to plug in an
external printer, monitor, fax machine, disk drive, and computer
keyboard.
The Telli*Phone Central Computer (the "Server")
The Telli*Phone Directory is stored in an Alpha Micro computer that resides in
the Company's offices in Mill Valley, California. The central computer functions
through a proprietary operating system that contains a simple software mapping
structure. The central computer has 16 disks and each disk is divided into
approximately 300 files through a geometric plotting procedure Each file is
divided further into approximately 300 sections and each section contains
numerous categories containing pages of information.
A particular piece of information can be located by entering the code that
represents its location on the computer disk. The following represents a
specific page of information.
DSK9:E29R4B.F1D[5,1]
DSK9: The information is located on the ninth disk in the central computer.
[5,1] The information is located in the 5th file in section 1.
.F1D F = The information appears under the "Food and Dining" Section of the
Telli*Phone Directory.
1 = The information was written by a restaurant entered under
a "general" category.
D = The content is a page of information about the restaurant
("M" would mean the page of information is a program to analyze the
Subscriber's response to the display page of information and
determine the next page of information to be displayed).
E29R4B This code represents a specific page of information relating to a
particular customer who has placed advertising material in the Telli*Phone
Directory. No other customer within the geographic area represented by the
Telli*Phone Directory will have this code.
Page 19
<PAGE>
E2 = The first three digits of the customer's telephone number are 332.
9R = The second three digits of the customer's telephone number are 924.
4 = The last digit of the customer's telephone number is 4.
B = The page is the second page of the customer's information.
The telephone number 332-9244 identifies CHRISTOPHE'S RESTAURANT, 1919 Bridgeway
Avenue, Sausalito, California.
The System Operator of the Telli*Phone Central Computer can easily access a
particular page of information or the program that controls the direction
determined at a specific page. To view a copy of the above page from a
Telli*Phone terminal the System Operator would first identify himself or herself
by typing the appropriate passcodes into the terminal. Once identified, the
central computer will give the System Operator a dot prompt (".") to signify
that he or she is in a command mode and the system is waiting for further
instructions. The System Operator will then enter the following information to
access the specific page of information.
.LOG FlD: = Go to disk 9 and access file 5, section 1.
.VIEW E29R4B = On the screen display page 2 of the information for
Christophe's Restaurant in Sausalito.
Telli*Phone Authoring and Programming Language
The Telli*Phone Directory contains display pages of information written by
editors trained in Guinness Tri-Stage Learning Systems. The pages of information
are composed from a small strategic set of questions that the editors feel are
important in determining the mind set of the Telli*Phone Subscriber viewing the
display. Telli*Phone Subscribers read the information on the Telli*Phone screen
and press keys on the Telli*Phone keypad to indicate decisions that they have
made about the information displayed, thus supplying answers to the editor's
questions.
Attached to each page of information is a small computer program written by a
Telli*Phone Editor that transforms Subscribers' choices into instruction codes.
These codes direct the computer to specific disk locations, files, and sections
where pages of information appropriate to each Subscriber's response can be
found. Each page of information may solicit more answers for clarification,
display additional material to help Subscribers focus on the issues most
important to them, or present the information that will meet their needs.
Guinness Telli*Phone Corporation does not want an editorial staff limited by
their engineering skills in computer programming. Therefore the Company has
written a software authoring program that allows anyone without any programming
experience to create pages of information and instruction codes in the central
computer. The Company's authoring and display programming system is called
AMENU.
Page 20
<PAGE>
AMENU is a central application computer software program that establishes the
guidelines for writing Telli*Phone Directory programs and the pages of
information that represent the content of the Telli*Phone Directory. The program
is written in Assembler Language and takes up approximately 64K of memory. AMENU
interprets a Telli*Phone Editor's instructions into a language understood by the
central computer's operating system and sees that the author's instructions are
carried out.
The AMENU Authoring Program has two significant pants.
- -------------------------------------------------------------------------------
.G11
1, M, G111
2, B, F1:BEGIN
MARIN, B, G11263
3, R, GE:MAPS
0, M, G1
00, B, GI:BEGIN
$ M, HELP
- -------------------------------------------------------------------------------
AMENU Directional Software
Using ordinary English and a few simple codes, Telli*Phone editors can design
AMENU Directional Programs for Telli*Phone Subscribers. Each AMENU Directional
Program displays one page of information and contains the parameters for
evaluating each Subscriber's response to determine the next page of information
to be displayed.
The following is an example of a AMENU Directional Program.
Explanation of Program:
.G11 Clear the screen, display the page titled "G11" on disk 9, file 5, section
1, and wait for Subscriber's response to the information on the screen.
1, If the Subscriber types in the number 1, maintain a record of the previous
pages displayed in the memory stack and run a new program titled AG111@ in
this same section.
2, If the Subscriber types in a number 2, clear the memory stack of the
previous pages displayed, go to disk 8, file 101, section 1, and run the
program "BEGIN" which will display the introduction page ("Begin") of the
Restaurant Directory.
MARIN, If the Subscriber types in the word "MARIN", clear the memory stack of
the previous pages displayed and run the program "G11263", in this section,
to help the Subscriber target an area of Marin County before continuing to
look for the information he or she wants.
3, If the Subscriber types in the number 3, clear the memory stack of the
previous pages displayed and go to disk 9, file 6, section 1, and load into
memory the educational program "MAPS", written in BASIC, to help the
Subscriber learn how to read a map of the United States
Page 21
<PAGE>
0, If the Subscriber presses the ABACK@ key on the Telli*Phone keypad, go back
and display the previous screen in the memory stack.
00, If the Subscriber presses the "HOME" key on the Telli*Phone keypad, go hack
and display the introduction screen in the existing file.
$ ( ), If the Subscriber enters anything that is not designated above, then,
without clearing the memory stack, load in the program "HELP" that gives
further instructions to the Subscriber on using the Telli*Phone and
responding to the information in this file
AMENU Display Software
The AMENU Display Software allows display screen editors to create pages of
information as easily as typing a page on an ordinary typewriter. What appears
on the Telli*Phone Editor's terminal screen is exactly what will appear on the
Subscriber's Telli*Phone screen.
Special Telli*Phone formatting codes and graphics codes are available for
authors who want to create more sophisticated pages of information. These
special codes may be entered into the page by pressing specially marked keys on
a Telli*Phone remote control keyboard.
The Telli*Phone Security Program
The Company has written a security software program that prohibits Telli*Phone
Subscribers from entering or changing information in the Telli*Phone Directory
without receiving prior authorization. Each Subscriber's account file contains
details about a Subscriber's privileges in using the Telli*Phone Directory that
is linked to the Telli*Phone's tracking code. Every time a Subscriber sends
information to the Telli*Phone Directory, the central computer checks his or her
account to determine whether or not he or she has the authorization to proceed.
Telli*Phone Installation
The Telli*Phone, like a fax machine, plugs into an ordinary telephone outlet and
operates through existing telephone lines without any additional
telecommunication device or installation charges from the local telephone
company.
Status of Product
A Telli*Phone Directory presently resides in a central computer located at the
Company's business office. Only a few business names and addresses, with
accompanying advertising, have been entered into a small number of
classifications within the Telli*Phone Directory. This information was entered
for demonstration and testing purposes only. The Company does not feel it is
financially practical to enter current listings until just before the product
becomes available to Subscribers. At this time, the Telli*Phone Directory is
accessed through the telephone system from an existing working bench model of
the Telli*Phone plugged into a telephone outlet.
Page 22
<PAGE>
During the first six months of 1997 the Company intends to purchase computer
hardware components for the assembly of Telli*Phones, assemble Telli*Phones and
prepare the Telli*Phone Directory and the central network data base for a Beta
Test. Also, during this same six month period the Company will be working with a
plastics manufacturer to design and produce a limited quantity of plastic cases
to house the Telli*Phone hardware.
During the second and third quarters of 1997 the Company plans to program the
content for the Telli*Phone Directory to provide sufficient advertising
information and commercial listings to make it a profitable product. It is
anticipated, because of the extensive work that has been completed in preparing
the indexes for the Telli*Phone Directory, that this work can be accomplished by
an editorial staff at the same time Telli*Phones are being assembled for the
Beta Test. These lists are available through state agencies and private vendors
and contain businesses broken down into many categories that coincide with the
Company's data base. During this period a mailing will be sent to all businesses
within the area telling them that they are listed in the Telli*Phone Directory
and encouraging them to create promotional screens to be tied to their listing.
Through a telemarketing program Telli*Phone Free Lance Editors will assist them
in creating their first Telli*Phone Directory Screens.
Following the Beta Test the Company plans to contract a manufacturer to
manufacture large runs of Telli*Phones to bring down the cost of the product to
the Company and increase its profit potential. To facilitate this the Company's
engineer, Mr. Richard Morse, will redesign the main mother board of the
Telli*Phone to eliminate many hardware components that are not necessary to the
operation of the Telli*Phone as a product to distribute the Company's software
products. Management anticipates that approximately six months of hardware and
software engineering will be required to design a final high run production
model of the Telli*Phone. This will allow a manufacturer of telecommunications
and computer equipment to produce large runs of Telli*Phones at a cost
considerably below the cost of the Telli*Phones that were assembled for the Beta
Test.
As the Beta Test is underway the Company will begin preparing the final
production model of the Telli*Phone by designing a proprietary PC board to
eliminate computer components usually found on PC boards but not necessary for
the operation of the Telli*Phone. Also, the Telli*Phone is an instrument
designed to handle a limited number of specific tasks. Many hardware components
can be eliminated from the typical PC board because the Telli*Phone programming
system is able to do many of its tasks in software. PC boards are usually
designed with hardware components that permit users to manage a variety of
different tasks. The Company anticipates that the unit price of a large run of
Telli*Phone PC boards will be reduced considerably from the present cost of a
standard PC board for a personal computer.
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<PAGE>
Management must emphasize that the Telli*Phone, as a hardware product, is not a
product of the Company. The Company plans to either assemble Telli*Phones from
hardware components that are presently available in the marketplace, or
establish a strategic alliance with a manufacturer of hardware products to
manufacturer Telli*Phones on its behalf, The Company views the Telli*Phone as a
marketing incentive to encourage customers to sign up to receive the Company's
software products. The Company will supply customers with Telli*Phones, free of
charge, for as long as they are subscribers to its software products.
For the Beta Test the Company estimates that it will pay approximately $600 for
the hardware components of each Telli*Phone assembled. The Company has received
estimates from consultants experienced in the manufacturer of hardware
components of a price of less than $200 per Telli*Phone. It is difficult to
predict an accurate price until the Company learns from its Beta Test the level
of consumer response to the Company's software products to determine the size of
runs that are most feasible. If the Company's product is very successful then
there will be available to the Company many methods of financing the manufacture
of Telli*Phones that will allow the Company to order larger runs and further
reduce the cost to manufacture Telli*Phones.
The cost of engineering is relative to the cost of manufacturing the product.
The more engineering done prior to manufacturing the product, the lower the cost
to manufacture the product. The Company will not be able to determine the amount
of engineering it is prepared to do until it sees the results of the Beta Test.
The Company plans that the majority of the cost to make these changes will be
absorbed by the manufacturer of Telli*Phones as a condition of the strategic
alliance. To negotiate a strategic alliance that will be to the benefit of the
Company will require that the Beta Test reveal significant statistics as
insuring the potential success of the Company's software products in the
marketplace.
The Company plans to announce its product publicly, and make available public
information about its product during the second quarter of 1997.
An important ingredient of the Company's marketing plan is making Telli*Phones
available to Subscribers at no additional charge for as long as they maintain a
subscription to the Telli*Phone Directory. The Company feels it will not be
successful unless it is able to attract a manufacturer of Telli*Phones that is
willing to make a large financial commitment to the project. The Company had
successful discussions in 1988 with Northern Telecom, a leading manufacturer of
equipment, to supply it with Telli*Phones through an agreement supported with
financial commitments. Northern Telecom was not able to develop an instrument
sufficiently inexpensive to attract the general public. In the past few years
the cost of computer and telecommunications equipment has fallen dramatically.
The Company has completed a working model and design of a Telli*Phone that can
be produced for a price that the Company feels will attract the general public.
However, it has not yet received a financial commitment from a manufacturer of
equipment to enable the Company to proceed to manufacture its product.
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By the end of the third quarter of 1997, the Company plans to be working with a
local school district to test the use of the product in their area.
By the end of summer of 1997, the Company plans to have entered into the
appropriate sections of the Telli*Phone Directory the names, addresses, and
telephone numbers of all businesses, groups, and associations within the county
and to have distributed 100 Telli*Phones to 100 households in the test area.
During the summer of 1997 the Company plans to complete the manufacture of at
least one Telli*Phone server and have it operational within the test area.
By September of 1997 the Company plans to have finalized a contract with the
Beta Test school district to begin selling Telli*Phone Directories and
distributing Telli*Phones beginning in the new school year of 1997 (October
1997).
In the fall of 1997 the Company plans to have manufactured a minimum of 5,000
production Telli*Phones and have a major marketing effort underway to sell
advertising pages in the Directory.
By the end of 1997 the Company expects to have distributed its first production
run of Telli*Phones to over 5,000 households within Southern Marin County,
California.
Sometime during the 1997 the Company expects to have signed a contract with at
least one major corporation to use the Telli*Phone Smart Card as a means of
encouraging consumers to use the smart card to earn and maintain "frequent
shopper bonuses".
By the beginning of 1998 the Company plans to be well into the marketplace with
its product and be able to demonstrate the following:
- - At least 90% of households that sign up for the Telli*Phone directory keep
the system in their homes for a period of at least six months.
- - All Telli*Phone Subscribers access the Telli*Phone Directory frequently and
on a daily basis.
- - Over 90% of Telli*Phone Subscribers consider the Telli*Phone to be the
device they use for almost all of their household communications (answering
machine, e-mail, and telephone directory).
Sources and Availability of Raw Materials
The Company does not plan to manufacture Telli*Phones itself, nor does it have
any significant expertise in this area. However, Telli*Phones will be
manufactured from the same materials used to manufacture personal computers and
telephones. The Company is not aware of any problem that exists at the present
time or that is projected to occur within the near future that will materially
affect the source and availability of raw materials for the manufacture and
supply of personal computers and telecommunications equipment.
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Patents, Trademarks, Licenses, Franchises and Concessions
The Company's success and ability to compete in the marketplace is dependent in
part upon its proprietary technology. Principally, the Company is a publisher of
information and therefore relies on trade secret and copyright laws of the
United States and worldwide to protect its content, authoring systems, and
programming technology. To distribute its works the Company will purchase
existing hardware technology from computer hardware developers and
manufacturers.
On July 31, 1996, the Company filed a U.S. Trademark Application with the
Assistant Commissioner for Trademarks in Arlington, Virginia for the name
"Telli*Phone", with declaration, Under 15 U.S.C. '1051(b), as amended (Intent to
Use) for the following goods:
"COMMUNICATION DEVICE CONTAINING ANSWERING MACHINE, VOICE/MAIL, FAX, MODEM,
AND COMPUTER SCREEN TO PROVIDE INTERACTIVE NETWORK CAPABILITY"
The Company does not presently hold any patents, trademarks, licenses,
franchises, or concessions. It does not feel that any patents or trademarks,
other than the above, it may hold or may apply for in the future will affect
materially its ability to create information or distribute that information to
the marketplace. The Company feels that the success of its business is dependent
on the kind of information it distributes and not the technology used to
distribute it. The Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition, and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position.
There can he no assurance that others will not develop technologies that are
similar or superior to the Company's technology. The source code for the
Company's proprietary software is protected both as a trade secret and as a
copyrighted work. The Company generally enters into confidentiality or license
agreements with its employees, consultants, and vendors, and generally controls
access to and distribution of its software, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. In addition,
effective copyright and trade secret protection may he unavailable or limited in
certain foreign countries. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or content or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products or
content is difficult. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology or content or that such
agreements will he enforceable. In addition, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement, invalidity, or
liability. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results, or financial condition.
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<PAGE>
Except for acquiring a local business license in areas where it plans to
establish a Telli*Phone Directory, the Company is not, at this time, subject of
any federal, state, or local licensing requirements or regulations.
Seasonal Business
The Company feels that directories of information are so diverse that the use of
them to provide information or to acquire information is not seasonal. The
Company will be selling subscriptions to consumers to access information from
the Telli*Phone Directory and will sell space to businesses and organizations to
advertise their products and services in its Directory. While there may be an
increase in advertising revenues leading up to the holiday season in December,
the Company does not expect any increase to materially effect its flow of income
or play any role in any change in its profits.
Significant Working Capital Required, Critical Mass of Users
The Company business requires it to purchase a significant amount of equipment
and then to attempt to generate income from its use on a month to month basis.
Paid subscriptions to the Telli*Phone Directory by consumers may not generate
enough revenue to support the capital required to distribute Telli*Phones on an
on-going basis. The Company will need significant revenues from paid advertising
in the Telli*Phone Directory to support its capital expenditures. To generate
significant income from businesses and organizations wishing to advertise in the
Telli*Phone Directory, it must distribute enough Telli*Phones to create a
critical mass of users within the area the Telli*Phone Directory is intended to
serve. No one can guess how many users will be required to obtain that critical
mass, or the amount of equipment, including Telli*Phones, that will have to be
purchased and distributed to create this critical mass of users.
The Company has developed specific plans in an attempt to reduce the size of the
critical mass of users that will be required to generate enough income from
advertisers in the Telli*Phone Directory to maintain its operations.
These strategies are:
- - Limiting the marketplace to a confined area (a small community) where the
critical mass of users needed to generate income will be minimal, the flow
of word of mouth advertising will be maximum, and where there will be a
number of businesses that primarily serve households close to their
establishments.
- - Entering the name and address of every business within the geographic area
to be served by the Telli*Phone Directory to provide a product that will
have limited but immediate use.
- - Offering free pages of advertising in the Telli*Phone Directory to
businesses operating within the area to be served by the Telli*Phone
Directory, for the first few months of operations to immediately begin
building the Telli*Phone Directory and giving Subscribers the opportunity
to compare the effectiveness of the Telli*Phone Directory to traditional
directories.
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<PAGE>
- - Delivering a number of Telli*Phones to select homes with high income
families within the area to be served, for a free, on approval period, to
create a minimum mass of preferred customers for potential advertisers.
Dependence on a Single Customer
The Company feels that the success of its business is dependent on the success
of its Beta Test. The business of the Company will not be successful until
enough advertising revenues are generated to cover its monthly expenses. If the
Company is not able to reach a critical mass of users, significant enough to
attract enough businesses to create a significant number of paid advertising
screens in the Telli*Phone Directory during the Beta Test, the Company will
sustain substantial losses and may not be able to attract any additional capital
to expand its subscriber base and reach the necessary critical mass of
subscribers.
Backlog Orders
The Company has not yet gone to the marketplace with its product and therefore
has no backlog orders of any kind.
Government Regulation
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access or conduct
commerce on the Internet or for access through an online service or to establish
an online service. However, due to the increasing popularity and use of the
Internet and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet and online services in
general, covering issues such as user privacy, pricing, and characteristics and
quality of products, services, and content. For example, the Exon Bill would
prohibit distribution of obscene, lascivious, or indecent communications on the
Internet. The adoption of any such laws or regulations may cause the Company to
limit the scope of the Company's products and services in the marketplace and
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, operating results, or financial condition.
Moreover, the applicability to the Internet, other online services, a MiniNet
service, the Telli*Phone Directory, and the Telli*Phone of existing laws
governing issues such as property ownership, libel, and personal privacy is
uncertain.
Competition
The Company plans to distribute Telli*Phones to Subscribers to encourage them to
replace their existing telephones with Telli*Phones. Subscribers will be able to
keep their Telli*Phones free of charge for as long as they remain subscribers to
the Telli*Phone Directory and the Company is able to generate enough revenues
from paid advertising in the Directory to support its monthly operations. At
this time the Company sees no competition from computer hardware and
telecommunications equipment manufacturers and vendors.
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Although the Company has targeted online community information, local directory
services, and telecommunications products for consumers who are not computer
literate, other companies offer products similar to the Company's software and
publishing products and target the same customers as the Company. The Company
believes its ability to compete depends on many factors within and outside its
control, including the timing and market acceptance of the products developed by
the Company and its competitors, performance, price, reliability, and customer
service and support.
The marketplace for online products and services is highly competitive and
competition is expected to continue to increase significantly. In addition, the
Company expects the market for online advertising, to the extent it develops, to
be intensely competitive. There are no substantial barriers to entry, and the
Company expects that competition will continue to intensify. Although the
Company believes that the diverse segments of the online market will provide
opportunities for more than one supplier of products and services similar to
those of the Company, it is possible that a single supplier may dominate one or
more market segments. The Company competes with other providers of online
navigational tools, products, and services, including directory and Web server
review services and search engine services. Many companies offer competitive
products or services addressing certain of the Company's target markets,
including online companies like America On Line and the French Minitel;
suppliers of Internet products and services like Netscape, Microsoft, and Yahoo;
the Regional Bell Operating Companies offering Yellow Pages and
telecommunication products and services like voice mail and caller
identification; MCI offering Internet connections; newspaper publishing
companies offering local and classified advertising including, including, in
many cases, telecommunication and online community information and news;
printers, distributors, agencies, and clubs offering or managing retail discount
coupons and redemption certificates and awards.
In addition, entities that sponsor or maintain high-traffic Web sites and
manufacturers of telecommunications and computer equipment could develop or
acquire simple search and navigation functions that would produce simple
computerized information products and services that compete with those offered
by the Company.
Many of the Company's competitors are substantially larger than the Company and
have significantly greater financial, technical. and marketing resources. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, and sale of their products than the Company. It is also
possible that new competitors may emerge and acquire significant market share to
the extent that smaller providers of online tools, services, or products may be
acquired by, receive investments from, or enter into other commercial
relationships with larger, well-established and well-financed companies, such as
Microsoft, Netscape, Regional Bell Operating Companies, and long distance
telecommunications companies like AT&T, MCI, and Sprint. Possible new
competitors include large foreign corporations, major telecommunications
companies, and other entities with substantial resources.
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The most significant market where the Company competes is in the area of
telephone directories. The Telli*Phone Directory will compete primarily with the
local Telephone Company Yellow Pages directory in areas where it establishes a
MiniNet Telli*Phone Directory central computer system. Specifically, it may be
competing for advertising dollars. Even though the local Telephone Companies are
regulated by the State Public Utilities Commissions, they have, unlike the
Company, major financial resources available to them. If the Yellow Pages
publishers see the MiniNet system and Telli*Phone Directory as a major threat to
their profits, it is possible that they would use their resources to attempt to
eliminate competition from the MiniNet and Telli*Phone Directory. How the
Telephone Companies would attempt to eliminate competition from the MiniNet and
Telli*Phone Directory is not clear at this time.
Since 1983 many major organizations have spent hundreds of millions of dollars
in an attempt to establish an interactive telecommunications service for the
home. Most of the methods tried have involved an attempt to encourage consumers
to attach a videotex telecommunications/terminal box to their television sets
for people to access interactive listings and directories through their
televisions. These systems are no longer in use due to the lack of customer
demand. More recently, some organizations with significant financial resources
have made similar attempts at establishing an interactive service in the home
through the television set by encouraging consumers to attach
cablevision/terminal boxes to their television sets. These terminals are
connected to outside fiber optic cable systems and are promoted principally as a
means of receiving home movies on demand. These services are available only to a
limited marketplace and it is too soon to project whether or not consumers will
utilize the service or be willing to pay for it.
Some organizations have attempted to offer consumer oriented interactive
directory services to the householder through personal computers. It has been
reported that IBM invested over $1 billion into the Prodigy service which has
yet to show a significant profit. CompuServe is well established but has
announced the closure of WOW, a family-oriented online service and has lost
users to America Online which is currently the most popular and profitable of
the consumer oriented computer networks in spite of current access problems.
Attempts have been made by financial organizations to offer home banking
services through a telephone which includes a computer processor, a modem, and a
digital video screen.
Many businesses, schools, local government agencies and associations are using
the Internet and setting up their own home pages on the World Wide Web,
encouraging the computer-literate to contact them for information and
transactions. To date, these attempts have met varying degrees of success, and
some of them are as yet unproven. As announced in the February 21,1997 issue of
Information & Interactive Services Report, Digital City Inc., a spin off from
America Online, and associated with the Tribune Co., currently offers service to
the PC marketplace in 13 cities. As a network of online community information,
it has launched a national affiliate program targeted at newspapers and other
media wanting to increase their online presence.
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Also competing online for the potentiality huge market of "local" advertising
dollars will be CitySearch, funded by AT&T and Compaq Computer Corp., among
others and Microsoft Corporation's Sidewalk, its own local service, expected to
debut early in 1997. Cox Interactive Media plans a local service as does US West
Interactive Services. AT&T is developing a local Web information service called
Hometown Network, now being test marketed in Sacramento, Zip2, another newspaper
affiliate network (Knight-Ridder and Landmark Communications), plans to offer
automotive and real estate listings, arts and entertainment guides, and Yellow
Pages and community mapping services, with editorial content generated by local
affiliates.
All of these services could be accessible to Telli*Phone MiniNet Subscribers
once they are available to the marketplace and if the pricing makes access
practicable. All basically promise the same thing; movie reviews, restaurant
listings and reservation capabilities plus community and school information,
area maps and travel information.
A new generation of telephones with screens for accessing the Internet are
currently being tested. These phones, which are less expensive and easier to use
than computers are expected to bring millions of new users to the Web's home
pages. Among them, Philips Home Services is conducting a test in Garden City,
New York using Philips screen phones and Oracle Corporation's interoffice
software enabling 6,500 businesses and consumers to access the Web and send and
receive e-mail. The Philips screen phone utilizes special software to translate
Web graphics to telephone compatible text based menus and contains Web content
developed by Garden City's newspaper, including movie listings and local
notices. US West is conducting a trial of its TransPhone screen phone in 30
homes in Spokane, Washington claiming it is really a test of the concept rather
than the device. Motorola is developing a screen phone as is Northern Telecom
whose phone is to be released in early 1997 using Sun Microsystems, Inc.'s Java
language to translate data from Web pages into a format readable on the phone's
small screen. Navitel Communication's TouchPhone which will ship in spring 1997,
uses Microsoft's Windows CE operating system and web browser, will allow users
to surf the Net, exchange e-mail and voice mail, and receive personalized
information downloaded from the Web.
Various sources, including Probe, a US research company, project a 9.5 m
penetration level of smart phones in the US by the year 2000, which may be a
conservative estimate. These phones and related products such as Internet phones
should appeal to the 65 percent of homes which do not have a personal computer.
The US Electronic Industries Association currently reports that 95 percent of
households have a telephone, with 2.4 as the average number of phones per
household.
There is no assurance that the Company can compete successfully for advertising
dollars with other local media, the community newspapers, radio, and TV, or that
the Company can compete with current and future sources of competition or that
the competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company cannot make any assurances that it will be able to obtain financing
to take its products to the marketplace in a profitable manner, or that if its
products receive favorable acceptance by the general consumer public, that it
will have the resources to sustain itself while competing with major
organizations with similar goals. The Company can provide no assurance that it
can protect itself from providing potential competitors additional information
from its business plan that will assist them in determining ways to make their
present products successful in the marketplace. In addition, there can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful introduction and marketing of its products or that they
will meet the requirements of the marketplace and achieve market acceptance.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, operating results and
financial condition.
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Research and Development
The Company's current development efforts are focused on new products and
product enhancements. The Company believes that its software and its software
and engineering development team represent a significant competitive advantage
for the Company. The Company's ability to attract and retain highly qualified
employees will be the principal determinant of its success in maintaining
technological leadership in its field. The Company intends to have a policy of
using equity-based compensation programs to reward and motivate significant
contributors among its employees. The Company determined that, effective
December 31, 1994, all significant research and development had been completed
regarding the development of the Telli*Phone.
In the last three fiscal years the Company has spent and accrued approximately
the following amounts on company-sponsored product development activities
determined in accordance with generally accepted accounting principles. The
entire amounts were spent and accrued on activities relating to the enhancement
of software for the Company's new product, the Telli*Phone.
1994 $194,000
1995 nil
1996 nil
The Company, including any of its predecessors, has not, during each of the
three fiscal years immediately prior to the filing of this registration
statement, received any revenues from operations,
There can be no assurance that the Company will be successful in getting the
marketplace to accept its product or that the Company will generate any
significant income from the use of its products in the marketplace. There can be
no assurance that the Company will be successful in developing and marketing new
software and hardware products and enhancements that meet changing customer
needs and in responding to such technological changes or evolving industry
standards. The Company's current products are designed around certain standards,
including, for example, simple-to-use computer programming systems and future
sales of the Company's products will be dependent, in part, on industry
acceptance of such standards. Microsoft and IBM are each proposing alternative
programming standards and widespread adoption of either standard could have a
material adverse effect on the Company's business, operating results, or
financial condition.
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In addition, there can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction, and marketing of new products and enhancements, or that its new
products and enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Further, because the Company has not
commenced shipment of its products, there can be no assurance that, despite
testing by the Company and potential customers, errors will not be found in the
Company's products, or, if discovered, successfully corrected in a timely
manner. If the Company is unable to develop on a timely basis new software
products, enhancements to existing products, or error corrections, or if such
new products or enhancements do not achieve market acceptance, the Company's
business, operating results, and financial condition will be materially
adversely affected.
Environmental Impacts
The Company does plan to manufacture the hardware necessary to distribute its
products and will use existing telecommunications services to communicate with
its Subscribers. The Company does not feel that it is affected by any rules
which have been enacted or adopted regulating the discharge of material into the
environment. On the contrary, the Company feels that its system may reduce the
number of trees cut down every year to supply the paper industry.
Employees and Management of Growth
The Company has five full-time employees, including three in administration and
finance and two in research and product development. The Company plans to hire
an additional 15 employees, including two in technical maintenance, three in
marketing, and ten in directory advertising sales and listings.
The Company's future success is substantially dependent on the performance of
its senior management, key technical personnel, and marketing and sales team and
its continuing ability to attract and retain highly qualified technical,
managerial, marketing, and sales personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be able to retain
its key managerial personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
The Company intends to establish Telli*Phone MiniNet Sites in other geographic
locations, which will create additional operational and management complexities,
including the need for continual updating and maintenance of directory listings.
There can be no assurance that the Company will be able to effectively manage
the expansion of its operations, that the Company's systems, procedures, or
controls will be adequate to support the Company's operations, or that Company
management will be able to achieve the rapid execution necessary to fully
exploit the market opportunity for the Company's products and media properties.
Any inability to manage growth, if any, effectively could have a material
adverse effect on the Company's business, operating results, and financial
condition.
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(e) Financial Information About Foreign and Domestic Operations and Export Sales
The Company has had no history of operating revenues, domestic or foreign. In
addition, the Company will not be conducting any business that would generate
foreign sales in the foreseeable future.
Revenues from Prior Operations
The Company, including any of its predecessors, has not, during each of the
three fiscal years immediately prior to the filing of this registration
statement, received any revenues from operations.
(f) Factors Affecting Company's Business Operating Results & Financial Condition
Development Stage Company; Limited Operating History
The Company has been in the development stage since its inception and has not
commenced a public operation of the MiniNet, has not begun generating any
advertising revenues for the Telli*Phone Directory, nor has it commenced
shipment of any Telli*Phones. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company and its prospects can
be based. The Company and its prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, continue
to respond to competitive developments, attract, retain, and motivate qualified
personnel, implement and successfully execute its advertising sales strategy,
develop and market additional media properties, and continue to upgrade its
technologies and commercialize products and services incorporating such
technologies. There can be no assurance that the Company will be successful in
addressing such risks. The report of the independent Certified Public Accountant
expresses substantial doubt about the Company's ability to continue as a going
concern.
No Assurance of Successful Operations
The Company will attempt to establish a computer information network, the
Telli*Phone MiniNet. An internal test of its computer information network was
initiated in Marin County, California, during March 1987, on a very limited
scale, but it has not begun any operations of the network involving the use of
the MiniNet by the general public and has not received any revenues from
operations. There is no assurance that the Company will be able to successfully
commence or establish a large scale operation of the MiniNet and no assurance
that the user public will accept a new way to access local community information
or that community businesses and groups will adopt new communications
strategies. The Company's receipt of significant revenues is dependent on the
successful operation of its MiniNet, the outcome of which cannot be determined
at this time. Any failure to develop or maintain the MiniNet could adversely
affect the Company's business, results of operations and financial condition.
This condition raises substantial doubt about the Company's ability to achieve
or sustain profitability.
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No Revenues From Product Sales; Significant and Continuing Operating Losses;
Accumulated Deficit
Since the incorporation of Guinness Productions, Inc., the first predecessor of
the Company, in November 1980, the Company has not shipped any products nor
generated any revenues from sales of its products. Accordingly, the Company has
no operating history upon which an evaluation of its prospects can be made.
There is no assurance that the Company's operations will be successful or that
it will meet its stated objectives. Such prospects must be considered in light
of the risks, expenses and difficulties frequently encountered in the
establishment of a new business in the consumer computer telephony and
information network development industry, which is a continually evolving
industry characterized by an increasing number of market entrants and intense
competition, as well as the risks, expenses and difficulties encountered in the
shift from development to commercialization of new products based on innovative
technology. There can be no assurance that the Company will be successful in
addressing such risks. As of December 31, 1996, the Company and its predecessor
had an accumulated deficit of $10,224,698 with current liabilities of
$1,637,033. The Company currently expects to significantly increase its
operating expenses to develop and expand its sales and marketing operations, to
fund greater levels of product development, and to develop and commercialize
additional media properties. As a result of the foregoing factors, the Company
expects to continue to incur significant losses on a quarterly and annual basis
for the foreseeable future. There can be no assurance that the Company will
achieve or sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Potential Fluctuations in Quarterly Operating Results
As a result of the Company's limited operating history, the Company does not
have historical financial data on which to base planned operating expenses.
Quarterly revenue and operating results will depend substantially upon the
advertising revenues received within the quarter from the Telli*Phone Directory,
which are difficult to forecast accurately. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenues shortfall.
Accordingly, any significant shortfall of demand for the Company's products and
services in relation to the Company's expectations would have an immediate
adverse impact on the Company's business, operating results, and financial
condition. In addition, the Company plans to increase its operating expenses to
fund greater levels of research and development, increase its sales and
marketing operations, develop new distribution channels, and broaden its
customer support capabilities. To the extent that such expenses precede or are
not substantially followed by increased revenues, the Company's business,
operating results and financial condition will be materially adversely affected.
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The Company's operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside the Company's control.
These factors include the number of Telli*Phone Subscribers operating
Telli*Phones within the geographic area covered by the Telli*Phone Directory
(the MiniNet), the level of usage of the Telli*Phone Directory, demand for
Telli*Phone Directory advertising, seasonal trends in both MiniNet usage and
advertising placements, the advertising budgeting cycles of individual
advertisers, the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's operations, the introduction of new
products or services by the Company or its competitors, pricing changes in the
industry, technical difficulties with respect to the use of the Telli*Phone or
accessing the Telli*Phone Directory through the MiniNet or other media
properties developed by the Company, general economic conditions and economic
conditions specific to the MiniNet and online media. As a strategic response to
changes in the competitive environment, the Company may from time to time make
certain pricing, service, or marketing decisions or acquisitions that could have
a material adverse effect on the Company's business, results of operations, and
financial condition. The Company also expects that it may experience seasonality
in its business, with advertising impressions (and therefore revenues) being
somewhat lower during the summer and after year-end vacation and holiday
periods, when usage of the Telli*Phone Directory may he expected to decline.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations."
Financial Condition of the Company
The Company does not have an earning history. In addition, the Company is a
development stage company which is in the process of initiating a market test of
its computer information network and access device, the Telli*Phone. The Company
will require additional capital to finance its current and proposed operations.
There is no assurance that the Company will be able to raise any additional
capital or that such additional capital will be available at the time required
by the Company to successfully promote and operate the MiniNet. There is no
assurance of the Company's ability to receive significant revenues from
subscriptions to the Telli*Phone Directory, advertising in the Telli*Phone
Directory, licensing fees to communicate through the MiniNet with Telli*Phone
Subscribers, or from the operation of the MiniNet.
New Concept and Emerging Markets; Uncertainty of Market Acceptance and
Commercialization Strategy
The utilization of combination telephone-information network products for
consumer applications represents a relatively new business activity
characterized by emerging markets and an increasing number of market entrants
who have introduced or are developing an array of new telecommunications
products and services, some of which will compete in some segments (i.e. home
banking) against the Telli*Phone and the Telli*Phone MiniNet (Network) and any
other products which may be developed by the Company. The Company is currently
assessing market acceptance and demand with the intent of minimizing the risks
involved with the financing and distribution of the Telli*Phone Directory and
the Telli*Phone on a large scale. Market acceptance for the Telli*Phone
Directory, the Telli*Phone, and MiniNet will require substantial marketing
efforts and expenditure of funds to create awareness and demand by potential
customers. There can be no assurance either that a market will develop or that
it will become sustainable.
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Uncertainty of Market Acceptance of New Technology
The Telli*Phone MiniNet involves the use of a new communications device or tool.
It may or may not be accepted by the marketplace. Similar, but not identical,
approaches have been undertaken in the United Kingdom, where it had limited
success, and in France, where it is succeeding with government assistance. Until
the Company's marketing plans have been completed, one will not know what degree
of success can reasonably be anticipated. Extensive use of the Telli*Phone
MiniNet will require what amounts to a cultural change in the user-public
comparable to the FAX revolution now underway in America. Whether a market will
develop for the Company's products, or if it develops more slowly than expected
or becomes saturated with more well-funded competitors, or if it cannot
effectively manage expansion, the Company's business, operating results, and
financial condition will be materially adversely affected.
Dependence on Continued Growth in Use of the MiniNet
The Company's future success is substantially dependent upon continued growth in
the use of the MiniNet, the Telli*Phone, and the Telli*Phone Directory in order
to support the sale of advertising in the Telli*Phone Directory and other online
media properties under development by the Company.
There is no assurance that communication or commerce over the MiniNet will
develop or that content will be provided in the Telli*Phone Directory. The
MiniNet may not prove to be a viable commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
performance improvements including high speed modems. In addition, to the extent
that the MiniNet may experience significant growth in the number of users and
level of use, there can be no assurance that the MiniNet infrastructure will
continue to be able to support the demand placed upon it by such potential
growth. In addition, the MiniNet could lose its viability due to delays in the
development of adoption of new standards and protocols required to handle
increased levels of MiniNet activity, or due to increased government regulation.
Changes in or insufficient availability of telecommunications services to
support the MiniNet also could result in slower response times and adversely
affect usage of the MiniNet and the Telli*Phone Directory. If use of the
Telli*Phone Directory does not continue to grow, or if the MiniNet
infrastructure does not effectively support growth that may occur, the Company's
business, results of operations, and financial condition would be materially and
adversely affected.
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Uncertain Adoption of the MiniNet as an Advertising Medium
Because the Company expects to derive most of its revenues in the foreseeable
future from the sale of pages of advertising in the Telli*Phone Directory, the
future success of the Company is highly dependent on the development of the
MiniNet as an advertising medium. Some of the Company's potential advertisers
may have some limited experience or knowledge of advertising on the Internet
through the World Wide Web, however, the Company's advertising customers have no
experience with the MiniNet as an advertising medium, have not devoted a
significant portion of their advertising expenditures to Web-based advertising,
and may not find such advertising to be effective for promoting their products
and services relative to traditional print and broadcast media. No standards
have yet been widely accepted for the measurement of the effectiveness of
Web-based advertising, and there can be no assurance that such standards will
develop sufficiently to support Web-based advertising as a significant
advertising medium. Moreover, critical issues concerning the commercial use of
the Internet (including security, reliability, cost, ease of use and access,
quality of service and acceptance of advertising) remain unresolved and may
negatively affect the growth of Internet use and the acceptance of the MiniNet
as an advertising medium. In addition, the MiniNet serves a very limited
marketplace unlike the Internet which has a worldwide marketplace. If widespread
commercial use of the Internet does not develop, or if the Internet does not
develop as an effective and measurable medium for advertising, the success of
the MiniNet and the Company's business, results of operations, and financial
condition will be materially and adversely affected.
Reliance on Advertising Revenues
The Company expects to derive substantially most of its revenues from the sale
of pages of advertising in the Telli*Phone Directory, and expects to continue to
do so for the foreseeable future. The Company has not introduced the Telli*Phone
Directory to the marketplace, has not attempted to sell any pages of
advertising, and has not generated any revenues from the sale of pages of
advertising in the Telli*Phone Directory. There can be no assurance that
advertisers will purchase advertisements in the Company's Telli*Phone Directory.
The Company's ability to generate advertising revenues will depend, among other
factors, on advertisers acceptance of the MiniNet as an attractive and
sustainable medium, the development of a large base of users of the Telli*Phone,
and the effective development of media properties that provide user demographic
characteristics that will be attractive to advertisers.
No Assurance of Content Development or Advertising Revenues
A key element of the Company's strategy involves the implementation of a
Telli*Phone MiniNet operation and the distribution of the Telli*Phone Directory
within limited geographical areas, to generate the maximum number of Telli*Phone
Subscribers (critical mass of users) that will generate the maximum amount of
advertising revenues from the maximum number of advertisers, at minimum cost.
Each area targeted for the establishment of a MiniNet will be approximately the
same geographic area covered by the local telephone directory for that area. In
these efforts, the Company will rely and will continue to rely substantially on
content development and localization efforts of third parties. For example,
businesses advertising products and services, community groups and associations
publishing news and directory information, and individuals selling products and
services will create and update their pages of information using the Telli*Phone
or the assistance of local freelance editors. There can be no assurance that the
Company's marketing and educational efforts will encourage people to use the
Telli*Phone Directory or that pages of information will be placed by third
parties in the Telli*Phone Directory or that pages of information placed in the
Directory will encourage people to become Subscribers of the Telli*Phone and use
the Telli*Phone Directory or that the Telli*Phone Directory will result in
significant revenue to the Company. Any failure of these parties to develop and
maintain high quality and successful Telli*Phone Directory pages also could
result in dilution to the names Telli*Phone and MiniNet, which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
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The Company's future success also depends in part upon the timely processing and
updating of Telli*Phone Directory listings created by users, businesses, groups,
and associations. The Company may experience significant delays in the
processing and updating of information that could have a material adverse effect
on the usefulness of the Telli*Phone Directory for Telli*Phone Subscribers which
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
Dependence on Third Party Distribution of Content
The Company will be dependent on local telephone companies to provide
transmission of Telli*Phone Directory information to Telli*Phone Subscribers.
The telephone companies may assess data transmission rates that are sufficiently
high to make use of the MiniNet too expensive for most subscribers. In addition,
disruptions in the Company's ability to carry on its business due to phone
system transmission or equipment failures causing interruptions, delays or
cessation in service to users could result in a material adverse effect on the
Company's business, results of operations, and financial condition.
Dependence on Suppliers of Telli*Phone Components; Single Sources of
Supply; Assembly of Telli*Phones; Cost of Telli*Phones
The Company currently assembles Telli*Phones from components or assemblies that
are purchased from single sources, The Company believes that there are
alternative sources of supply for most of the components and assemblies
currently purchased from single sources. Some of the components and assemblies
used by the Company for which there are not immediately available alternative
sources of supply are provided to the Company under standard purchase
arrangements. If a shortage or termination of the supply of any one or more of
such components or assemblies were to occur, however, the Company's business
could be materially and adversely affected. In such event, the Company would
have to incur the costs associated with redesigning the Telli*Phone to include
available components or assemblies or otherwise obtain adequate substitutes,
which costs could be material. Also, there is no assurance that in redesigning
the Telli*Phone to include available components or assemblies that the operation
of the Telli*Phone could be materially and adversely affected. Any delays with
respect to redesigning the Telli*Phone or obtaining substitute components would
materially and adversely affect the Company's business, results of operations,
and financial condition.
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There is no assurance that the components or assemblies purchased, when
delivered, that some or all the components will not be defective or that all of
the components can be delivered in accordance with the intended delivery
schedule. Significant defects in the components and/or a delay in the delivery
of the components could significantly and adversely affect the success of the
Company's business, results of operations, and financial condition.
The Company is designing its own main board to eliminate many of the computer
components presently used in the assembly of Telli*Phones but not necessary for
the operation of the Telli*Phone. Also, the Telli*Phone is an instrument
designed to handle a limited number of specific tasks and many hardware
components can be eliminated from the present model because the Telli*Phone
programming system is able to do many of the tasks through software. The Company
anticipates that the unit price of a large run of Telli*Phone main boards to be
designed by the Company will considerably reduce the present cost to assemble
Telli*Phones. There is no assurance that the Company will be successful in
designing such a board or when designed that the Telli*Phone will function with
the capabilities of the previous models. If the Company is not able to reduce
the present cost of the assembly of Telli*Phones there is substantial doubt
about the Company's ability to generate enough income to justify the cost of its
products in the marketplace. This condition would raise substantial doubt about
the Company's ability to continue as a going concern.
Dependence on Reliable Source of Telli*Phones; Limited Market for the
Telli*Phone
The Company plans to contract qualified manufacturers of computer and
telecommunications equipment to produce large runs of Telli*Phones on its
behalf. It also anticipates being able to raise the capital required to purchase
large runs of Telli*Phones. The Company believes that it will be able to raise
this capital through a variety of methods including the sale of securities, debt
financing, and limited partnerships. There can be no assurance that the Company
will be able to raise the capital required to interest a manufacturer to produce
large runs of Telli*Phones or that if the financing is available and a
manufacture produces large runs of Telli*Phones that some or all of the
Telli*Phones will not be defective or that all of the Telli*Phones can be
delivered in accordance with the intended delivery schedule. Significant defects
in the Telli*Phones and/or a delay in the delivery of the Telli*Phones could
significantly, materially, and adversely affect the Company's business, results
of operations, and financial condition.
Although the Telli*Phone can be used as an ordinary telephone with stand-alone
voice mail features, it is designed primarily for use as a device to access
information from the Telli*Phone Directory through the MiniNet. The Company
anticipates that, if the MiniNet is not successful, there may not be an
alternative computer information network to which the Company could lease or
sell Telli*Phones. The Company further anticipates that it would realize a
substantial loss on the Telli*Phones if it were forced to lease or sell
Telli*Phones for use other than in a computer information network which would
materially and adversely affect the Company's business, results of operations,
and financial condition.
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In the intensely competitive telephone-computer industry, large companies such
as NorTel, Panasonic, and Philips which have significantly greater financial and
management resources than the Company, could produce a substitute for the
Telli*Phone appliance at a better price. In that case it is possible that the
Company could use that source for Telli*Phones. Also, there can be no assurance
that competitors will not identify, develop, manufacture and offer products to
the marketplace rendering the Company's products obsolete.
Dependence on Reliable Computer Equipment for the MiniNet Server;
Dependence on Additional Financing for Growth
The computer equipment that maintains the Telli*Phone Directory (the "Server")
and the telecommunications assemblies connecting the Server to the local
telephone system are purchased from single sources under standard purchase
arrangements. The Company believes that there are alternative sources of supply
for most of the equipment and assemblies currently purchased from single
sources. If a shortage or termination of the supply of any one or more of such
equipment and assemblies were to occur, the Company's business could be
materially and adversely affected. Also, the Company anticipates that the
continuing success of the MiniNet in the initial markets will depend on the
Company's ability to acquire additional equipment and assemblies to establish
MiniNet Sites and distribute Telli*Phones into additional markets. The Company
anticipates using various financing methods including debt financing and equity
financing to raise capital for the purchase of additional MiniNet equipment and
assemblies to establish additional MiniNet Sites. There is no assurance that
these funds will be raised or that if funds are raised and equipment and
assemblies are purchased that some or all the equipment and assemblies will not
be detective or that all of the equipment and assemblies can be delivered in
accordance with the intended delivery schedule. Significant defects in the
equipment and assemblies and/or a delay in the delivery of the equipment and
assemblies could significantly and adversely affect the success of the Company's
business, results of operations, and financial condition.
Enhancement of the Telli*Phone, the Telli*Phone Directory, and the MiniNet
Substantially all of the Company's revenues in the foreseeable future are
expected to be derived from Subscriptions to the Telli*Phone Directory. The
purchase of advertising pages in the Telli*Phone Directory, and the license of
the Company's software and the right to communicate with Telli*Phone Subscribers
through their Telli*Phones from a computer networking data base. Accordingly,
broad acceptance of the Company's software products and services by customers is
critical to the Company's future success, as is the Company's ability to design,
develop, test, and support new software products and enhancements on a timely
basis that meet changing customer needs and respond to technological
developments and emerging industry standards.
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, and features of the Telli*Phone, the Telli*Phone
Directory, and the MiniNet Server, as well as other branded media properties
that may be developed. There can be no assurance that the Company will be able
to successfully maintain competitive user response time or implement new
features and functions, such as user personalization and protection, which will
involve the development of increasingly complex technologies. There can be no
assurance that the company will not experience difficulties that could delay or
prevent the successful development, introduction, and marketing of new products
and enhancements, or that its new products and enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance.
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Further, because the Company has not commenced shipment of its products, there
can be no assurance that, despite testing by the Company and by potential
customers, errors will not be found in the Company's products, or, if
discovered, successfully corrected in a timely manner. In addition, any
enhancements of or improvements to the Telli*Phone, the Telli*Phone Directory,
the MiniNet Servers or new media properties may contain undetected errors that
require significant design modifications, resulting in a loss of customer
confidence and user support and a decrease in the value of the Company's brand
name recognition. Any failure of the Company to effectively develop and
introduce these properties, or failure of such properties to achieve market
acceptance, could adversely affect the Company's business, results of
operations, and financial condition.
Need for Additional Equipment
The Company anticipates that the Telli*Phones and Server equipment to be
acquired for the market launch will be sufficient to successfully operate a
single MiniNet Station in the initial markets targeted by the Company. However,
the Company also anticipates that the continuing success of the MiniNet in the
initial markets will depend on the Company's ability to acquire additional
Telli*Phones and Server equipment to expand its network into additional markets.
There is no assurance that the Company will be able to acquire such additional
Telli*Phones and Server equipment or to successfully expand into additional
markets.
Lack of Intellectual Property Protection
The Company has applied for Copyright/Trademark protection of the Telli*Phone
name but does not possess any patent or registered intellectual property rights
with respect to any of its technology and has not filed any concept patent
applications. In addition, much of the technology utilized in the development of
the Telli*Phone is generally available to other manufacturers. Some of the
technology utilized in the Telli*Phone hardware is licensed to the Company on a
world-wide perpetual basis. The Company may find that it has to make royalty or
licensing payments for using the technology of other companies. In addition,
other companies with greater financial, marketing and other resources than the
Company could produce products similar to the Telli*Phone, the Telli*Phone
Directory, and the MiniNet which if produced, may have features, pricing and
other characteristics which would make them more acceptable to the market than
the products of the Company. Despite precautions, there is the possibility of a
third party accessing and copying the Company's proprietary technology or
independently developing similar or superior technology. In this case,
litigation could have an adverse effect on the Company.
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The Company depends in part upon certain technology and know-how to
differentiate its products from those of its competitors, and relies on a
combination of trade secret laws and nondisclosure and confidentiality
agreements with its employees. consultants, researchers and advisors to protect
its technology. There can be no assurance that such laws or agreements will
provide meaningful protection for the Company's trade secrets or proprietary
know-how in the event of any unauthorized use or disclosure of such trade
secrets or know-how. In addition, others may obtain access to or independently
develop technologies or know-how similar to the Company's. The
telecommunications industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
Although the Company believes that its products and technology do not infringe
on the proprietary rights of others and has not received any notice of claimed
infringement, it is possible that an infringement of proprietary rights may
occur. In such event, the Company may be required to modify its products or
obtain a license. There can be no assurance that the Company will have the
financial or other resources necessary to successfully defend a claim of
violation of proprietary rights. Failure to do any of the foregoing could have a
material adverse effect on the Company. Furthermore, if the Company's products
or technologies are deemed to infringe patents or proprietary rights of others,
the Company could, under certain circumstances, become liable for damages, which
would have a material adverse effect on the Company's business, results of
operations, and financial condition.
Dependence on Key Man; Need to Assemble Management Team
The Company's performance is dependent on its President and CEO, Lawrence
Guinness. The Company has no "key person" life insurance policy, and his loss
would adversely affect the Company. Moreover, the Company's performance is
dependent on hiring and retaining high quality personnel for assembling a
management team, and developing marketing systems and personnel to deal with
expansion in the marketplace. There is competition for top personnel and no
assurance that the Company will be able to attract, assimilate, or retain the
necessary personnel which could have an adverse effect on the business,
operating results or financial condition of the Company.
Substantial Dependence Upon Internal Operations; Personnel for Growth
The Company plans to use an internal sales and marketing force for the marketing
and sale of its products and not outside, unrelated third parties. The Company
will be required to expand its field sales force and telesales organization as
it establishes new Telli*Phone MiniNet Sites. Growth of the Company could
possibly be affected by its dependence on outside sources for management,
personnel and other resources for several critical elements of its business
including advertising and marketing, technology, assembly, development of
Telli*Phone Directory content and Telli*Phone distribution among others. There
can be no assurance that such internal operations or expansion will be
successfully managed, that the cost of such expansion will not exceed the
revenues generated, or that the Company's sales and marketing organization will
be able to successfully compete against the significantly more extensive and
well-funded sales and marketing operations of many of the Company's potential
competitors. The Company's inability to effectively manage its internal
expansion could have a material adverse effect on the Company's business,
operating results, and financial condition.
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Management of Growth
The rapid execution necessary for the Company to fully exploit the market window
for its products and services requires an effective planning and management
process. The Company's potential rapid growth, which is essential to the
Company's success, has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational, and financial
resources. As of December 31, 1996, the Company had five full-time employees,
three in administration and finance and two in research and product development.
To manage its growth, the Company must implement and improve its operational and
financial systems and expand, train, and manage its employee base. For example,
the company is currently in the process planning the building of its internal
maintenance and support organization, and sales and marketing team. There can be
no assurance that the Company will be able to build or successfully implement
this organization or team on a timely basis. Further, the Company will be
required to manage multiple relationships with various customers and third
parties to generate revenues from licensing its technology to other Information
Providers to communicate and transact business with Telli*Phone Subscribers.
Although the Company believes that it has made adequate allowances for the costs
and risks associated with this expansion, there can be no assurance that the
Company's systems, procedures, or controls will be adequate to support the
Company's operations or that Company management will be able to achieve the
rapid execution necessary to fully exploit the market window for the Company's
products and services. The Company's future operating results will also depend
on its ability to expand its sales and marketing organizations, implement and
manage new distribution channels to penetrate different and broader markets and
expand its support organization commensurate with the increasing base of its
installed products. If the Company is unable to manage growth effectively, the
Company's business, operating results, and financial condition will be
materially adversely affected.
Competition
Other companies offer products similar to the Company's products and target the
same customers as the Company. The Company believes its ability to compete
depends upon many factors within and outside its control, including the timing
and market acceptance of the products developed by the Company and its
competitors, performance, price, reliability, and customer service and support.
Many of the Company's competitors are substantially larger than the Company and
have significantly greater financial, technical, and marketing resources. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, and sale of their products than the Company. It is also
possible that new competitors may emerge and acquire significant market share.
Possible new competitors include large foreign corporations, major
telecommunications companies, and other entities with substantial resources.
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The most significant market where the Company competes is in the area of
telephone directories. The Telli*Phone Directory will compete primarily with the
local Telephone Company Yellow Pages directory in areas where it establishes a
MiniNet Telli*Phone Directory central computer system. Specifically, it may be
competing for advertising dollars. Even though the local Telephone Companies are
regulated by the State Public Utilities Commissions, they have, unlike the
Company, major financial resources available to them. If the Yellow Pages
publishers see the MiniNet system and Telli*Phone Directory as a major threat to
their profits, it is possible that they would use their resources to attempt to
eliminate competition from the MiniNet and Telli*Phone Directory. How the
Telephone Companies would attempt to eliminate competition from the MiniNet and
Telli*Phone Directory is not clear at this time.
Since 1983 many major organizations have spent hundreds of millions of dollars
in an attempt to establish an interactive telecommunications service for the
home. Most of the methods tried have involved an attempt to encourage consumers
to attach a videotex telecommunications/terminal box to their television sets
for people to access interactive listings and directories through their
televisions. These systems are no longer in use due to the lack of customer
demand. More recently, some organizations with significant financial resources
have made similar attempts at establishing an interactive service in the home
through televisions by encouraging consumers to attach cablevision/terminal
boxes to their television sets.
The Company cannot make any assurances that it will be able to obtain financing
to take its products to the marketplace, or that if it is able to take its
products to the marketplace and the products receive favorable acceptance by the
general consumer public, that it will have the resources to sustain itself while
competing with major organizations with similar goals. The Company can provide
no assurance that it can protect itself from providing potential competitors
additional information from its business plan that will assist them in
determining ways to make their present products successful in the marketplace.
In addition, there can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful introduction and
marketing of its products or that they will meet the requirements of the
marketplace and achieve market acceptance. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Business...Competition."
Security Risks and System Disruptions; Lack of Product Liability Insurance
The Company has developed software for a security protocol which operates in
conjunction with encryption and authentication technology. Despite the existence
of this technology, the Company's products may be vulnerable to break-ins and
similar disruptive problems caused by MiniNet users and Subscribers. Such
computer break-ins and other disruptions would jeopardize the security of
information stored in and transmitted through the computer systems of the
Company's MiniNet Servers and the computer systems of other Telli*Phone
Information Providers, which may result in significant liability to the Company
and may also deter potential customers. Persistent security problems continue to
plague public and private data networks. Recent break-ins reported in the media
occurred at General Electric Co. ("GE"), Spring Corporation ("Sprint") and IBM,
as well as the computer systems of NETCOM ON-Line Communication services, Inc.
("NETCOM"), Netscape Communications Corporation ("NETSCAPE") and the San Diego
Supercomputer Center. Such incidents involved hackers bypassing firewalls and
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misappropriating confidential information. Alleviating problems caused by third
parties may require significant expenditures of capital and resources by the
Company and may cause interruptions, delays, or cessation of service to the
Company's customers; such expenditures or interruptions could have a material
adverse effect on the Company's business, operating results, and financial
condition. Moreover, the security and privacy concerns of potential customers as
well as concerns related to computer viruses, may inhibit the growth of the
MiniNet marketplace generally, the use of Telli*Phone technology to communicate
with consumers and transact business, and the Company's customer base and
revenues in particular. The Company intends to limit its liability to customers,
including liability arising from a failure of the security features contained in
the Company's products, through contractual provisions. However, there can be no
assurance that such limitations will be enforceable The Company currently does
not have product liability insurance to protect against these risks and there
can be no assurance that such insurance will be available to the Company on
commercially reasonable terms or at all.
In addition, the Company intends to maintain secure MiniNet Servers which will
contain customer information for public access. The Company's advertising
revenues from the Telli*Phone Directory are dependent in part upon the Company's
ability to protect its internal MiniNet infrastructure and the pages of
information in the Telli*Phone Directory against damage from physical break-ins,
copyright infringements, manipulation of information by unauthorized persons,
natural disasters, operational disruptions, and other events. Any such break-in
or damage or failure that causes interruptions in the Company's operations or a
loss of customer confidence and user support and a decrease in the value of the
Company's brand name recognition could materially adversely affect the Company's
business, operating results, or financial condition.
Extensive Capital Needs
The Company will have extensive capital needs to finance the establishment and
growth of its business. There will be a need for Telli*Phones, MiniNet Server
equipment, marketing, overhead and further development. It is anticipated that
the Company may use a variety of means to raise capital, including the sale of
Common or Preferred Stock or debt instruments. There is a risk that sufficient
capital will not be raised. Income will come from Telli*Phone Directory
subscriptions and from fees charged to individuals, businesses, groups, and
associations for the storage of their pages of information in the appropriate
sections of the MiniNet's Telli*Phone Directory. The Company intends to generate
profits through licensing its technology (software systems) to major retailers,
commercial organizations, agencies, groups, and associations who wish to
establish sites on the MiniNet's Telli*Phone Directory and to communicate and
transact business with Subscribers in their homes over their Telli*Phones. There
can be no assurance that this income will cover the cost of Telli*Phones and
MiniNet Server equipment or the overhead of the Company. In the event that the
Company's plans or the basis for its assumptions change or prove to be
inaccurate or cash flow proves to be insufficient to fund the Company's
operations (due to unanticipated expenses, loss of sales revenues, problems,
operating difficulties, or otherwise), the Company would be required to seek
additional financing. In such event, there can be no assurance that additional
financing will be available to the Company on commercially reasonable terms, or
at all.
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Changing Regulatory Environment
The Company believes that the regulatory climate in the United States over
recent years has begun to influence the Regional Bell Operating Company's (the
"RBOCs") deployment of public communication products. The Company believes that
the RBOCs have begun to upgrade their telecommunications product base with smart
products that reduce their cost of management, maintenance, administration, and
equipment that includes revenue enhancement features. The deployment and
business strategies of the public communication divisions of the RBOCs have
affected and will continue to affect the Company's business. To the extent that
these business strategies were to change, for regulatory reasons or otherwise,
the Company's prospects would be materially and adversely affected. On February
8, 1996, the President signed into law the Telecommunications Act of 1996, which
deregulates many elements of the telecommunications industry as a means of
stimulating competition. The deregulation could affect the telecommunications
products industry. Although the Company believes that deregulation generally
will benefit the Company, there can be no assurance that the Company will
benefit from deregulation or that it will not be adversely affected by
deregulation.
Government Regulation and Legal Uncertainties
Currently the Company's business is not affected by direct regulation by any
government agency other than by general business regulations, but in the future,
laws or regulations may influence Company operations, as with the Exon Bill,
prohibiting obscene, lascivious or indecent communications on the Internet. The
adoption of any such laws or regulations would similarly apply to the MiniNet
and may decrease the growth of the MiniNet, which could in turn decrease the
demand for the Company's products and increase the Company's cost of doing
business or otherwise have an adverse effect on the Company's business,
operating results, and financial condition. Moreover, the applicability to the
MiniNet of existing laws governing issues such as property ownership, libel, and
personal privacy is uncertain. Issues such as privacy and libel may be addressed
in the future by government agencies reaching decisions or passing laws which
could adversely affect the Company's business, operating results, and financial
condition.
Concentration of Stock Ownership
The present directors, executive officers and their respective affiliates
beneficially own approximately 69.60% of the outstanding Common Stock. As a
result, these stockholders will be able to exercise significant influence over
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in control
of the Company.
Page 47
<PAGE>
No Prior Public Market
There has been no public market for the Company's Common Stock, and there can be
no assurance that an active public market for the Common Stock will develop or
be sustained.
Effects of Certain Charter Provisions; Antitakeover Effects of Certificate
of Incorporation; Bylaws and Nevada Law
The Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue shares of
Preferred Stock.
Dilution
It should be noted that there will be dilution of the issued and outstanding
shares of the Company by the issuance of shares for future financing and by the
installation of an Employee Stock Option Plan. In addition, the Company may sell
substantial amounts of equities to investors in the future in order to meet its
capital needs. The Company's business can be characterized as "capital
intensive" and to the extent funds are not derived from debt securities,
borrowing or limited partnerships, equity may be used.
Dividend Policy
The company has never paid cash dividends on its Common Stock or other
securities The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and does
not anticipate paying any cash dividends in the foreseeable future.
Notes Payable; Royalty Agreements
There are 17 individuals who advanced cash to the Company in exchange for notes
payable and royalty rights (the "Royalty Holders"). Under the agreement, the
Company will pay royalties aggregating 2.267% of the manufacturer's actual net
price for which each Telli*Phone is sold.
As part of CoNetCo's acquisition of Guinness Production, Inc., Guinness Computer
Television Corporation (the "Guinness Companies"), in the Agreement dated
February 18, 1990, CoNetCo also acquired all of the concepts previously
developed by Lawrence A. Guinness ("Guinness") in both Canada and the United
States. Part of the consideration for the acquisition of Guinness' rights in the
United States and Canada to the theoretical models of the Telli*Phone and the
Telli*Phone Directory, as well as all of Guinness' rights to the products
previously developed by the Guinness Companies, was the issuance to Guinness of
Common Stock in CoNetCo and a continuing royalty of 5% of all revenues generated
by CoNetCo or any of its subsidiaries.
Page 49
<PAGE>
ITEM 2. PROPERTIES
The Company currently occupies approximately 1,000 square feet of space located
in Mill Valley, California, where it maintains its administrative offices and
MiniNet Server. In addition, the Company currently occupies approximately 900
square feet of space in Sausalito, California, approximately two miles from its
administrative offices and Server, where it maintains its engineering, research,
and product development facilities. This space is leased on a month-to-month
basis and is sufficient to meet the current requirements of the Company and the
business which it conducts All production of the final product will, in the near
future, be sub-contracted to other manufacturers and suppliers.
The Company will be required to expand when operations commence. There is
adequate space in the County of Marin, State of California, the area in which
the Company is currently located, to allow for expansion.
The Company does not intend to consider setting up its own facilities to
manufacture Telli*Phones until after the initial testing of its products, and
the systems which it is developing have been fully tested. Management expects an
increase in facilities requirements during 1997.
ITEM 3. LEGAL PROCEEDINGS
Registrant is not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies,
or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Market Information
The shares of stock of the Company are currently not listed on an exchange and
there has been no established public trading market for the Company's common
equity within the last five years. No current market exists for any of its
shares.
There is currently no common equity that is subject to outstanding options or
warrants to purchase, or securities convertible into, common equity of which
have been issued by the Company that are capable of being sold pursuant to Rule
144 under the Act until two years after March 15, 1994. The Company has not
agreed to register any common equity for sale by security holders.
Page 49
<PAGE>
Holders
As of March 24, 1997, there are 533 shareholders, holding a total of 14,103,160
shares of Common Stock of the Company. The Company has no knowledge of any
matter since that date that would effect any change to that total.
Lawrence A. Guinness, President and Director of the Company, is the holder of
8,515,166 shares of the Common Stock of the Company which represents 60.44% of
the Company's common equity. Other than Mr. Guinness, no other persons have a
beneficial ownership of five percent (5%) or more of the Common Stock in the
Company.
Dividends
Registrant is a development stage company and, since its inception, has not yet
generated any sales. As a result, it is not in a position to declare any
dividends, nor does it intend to declare any dividends in the near future.
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<PAGE>
ITEM 6. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
GUINNESS TELLI*PHONE CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1996
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales None None None None None
Income (Loss) from Continuing
Operations(A) $(491,369) $(199,556) $(353,954) $(447,142)$(225,952)
Income (Loss) from
Continuing Operations
Per Share (.04) (.02) (.03) (.04) (.02)
TOTAL ASSETS $ 39,528 $ 229,416 $ 19,828 $ 68,567 $ 7,015
Weighted Average
Number of Common
Shares Outstanding (B) 13,427,480 12,738,397 12,592,480 11,541,740 10,491,000
Long-term
Obligations (C) None None None None None
Cash Dividends Declared
Per Share None None None None None
</TABLE>
(A) Cumulative results of operation since inception are losses totaling
$(10,224,698).
(B) Giving effect to amended agreement on March 15, 1994 increasing the
5,880,246 shares issued on February 18, 1990 to 8,000,000 shares.
(C) Excludes $435,000 of notes payable which are classified as a current
liability since the original due date was in 1991.
NOTE: CoNetCo, Guinness Products, Inc., and Guinness Computer Television
Corporation are predecessors of the Registrant and the activities of the
predecessors are included in the cumulative financial data of the Registrant.
Page 51
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was founded in 1993 and has been principally engaged in the research
and development activities related to advanced navigational and integrated
applications software system that enables people to exchange information and
conduct business over local telephone lines from a computerized consumer
telephone appliance (Telli*Phone) with a display screen and online capabilities
for transmitting, receiving and processing information. Prior to the formation
of the Company, research and development of the Telli*Phone was undertaken
through predecessor companies, Guinness Productions and Guinness Computer
Television which commenced operations in 1981. The cumulative operating results
of the Company include those operations of companies deemed to be predecessors
to the Company. As of December 31, 1994, the Company determined that research
and development of the Telli*Phone has been completed. The Company's major
emphasis during fiscal 1995 and 1996 has been the refinement of the Telli*Phone
and the generation of working capital.
Guinness Telli*Phone has generated no revenues and incurred cumulative losses of
approximately $10.2 million dollars since inception, of which approximately $7
million of such losses relate to those of the predecessor companies. The Company
expects to incur operating losses through 1997 as it continues to devote the
majority of its available financial resources to the commercialization of the
Telli*Phone. Future profitability of the Company is dependent upon successful
commercialization of the Telli*Phone. Furthermore, as the Company attempts to
achieve commercialization of the Telli*Phone, it could encounter seasonality or
other currently unforeseen factors causing additional variability in its future
operating results.
The financial statements have been prepared assuming the Company will continue
as a going concern. Although the Company is still in the development stage,
management is currently negotiating to raise adequate financing to produce and
place Telli*Phone units into a test market. The Company is continuing to pursue
additional debt and equity financing while continuing to modify and improve the
Telli*Phone. The Company's ability to continue as a going concern is dependent
on management's success in obtaining financing, repaying past due debt
obligations and the acceptance of the Telli*Phone by the test market.
Because of recurring losses, negative working capital and shareholders' deficit
there is substantial doubt about the ability of the Company to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
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<PAGE>
Liquidity and Capital Resources
The Company is not in a liquid position at this time nor does it possess any
assets that could be deemed liquid, other than cash. Liquidity of the Company is
expected to be severely impacted until operations commence and revenues are
generated.
Since inception, the Company and its predecessors have funded its research and
development efforts by selling equity securities and borrowing capital.
Approximately $7 million of additional paid-in capital represents liabilities of
the predecessor companies operations which were personally assumed by the
Company's primary shareholder. During the first six months of fiscal 1997, the
Company plans to raise a minimum of $550,000 through the private or public sale
of equity securities. The Company intends to use such funds for the Initial
Market Test of the Telli*Phone concept in a single community. The following
details the anticipated use of the $550,000:
On the assumption the Company is able to raise capital to finance the Beta
Test of the product, Management plans to utilize the funds raised, as follows:
Investment Banker Consultant Fees.................................... 25,000
Office Rent and Expense.............................................. 15,000
Administrative Salaries & Office Expense (CEO, CFO,
Engineer, Network Editor, Programmers).............................. 150,000
Telli*Phone Prototype Engineering Expense........................... 25,000
Telli*Phone Production Models (100 - 200)........................... 150,000
Network Hardware Set Up Expense..................................... 25,000
Network Software/Programming Expense................................ 90,000
Preparatory Marketing Expense....................................... 35,000
Initial Promotional Layout Expense.................................. 10,000
Legal, Audit and Miscellaneous Expense.............................. 25,000
- ------------------------------------------------------------------------------
Total $ 550,000
The above expenses reflect the 6-month budget for the Company while operating in
a development mode. If capital is not raised in a timely manner Management will
either delay entry into the marketplace or reduce the number of Telli*Phones
required for the Beta Test.
By the end of the six-month period Registrant anticipates attaining the
following objectives.
1. A fully operational community Telli*Phone Directory in place and
operating with a significant number of community listings.
2. At least 200 Telli*Phones being used by households within the community
on an experimental basis.
3. An agreement signed by a school district to distribute Telli*Phones
throughout the Initial Market Test community.
4. At least one Telli*Phone Licensing Agreement signed with a major
corporation presently using a commercial computer network to communicate with
its customers through personal computers.
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<PAGE>
The Company anticipates that after the Beta Test they will need to raise
additional working capital through the sale of equity securities or the
borrowing of capital. The Company's current working capital is not adequate for
the Company to commence the Beta Test. There can be no assurance that any
necessary working capital will be available on acceptable terms or at all. If
adequate funds are not available, the Company may be required to change, delay,
reduce or eliminate its product commercialization.
For the Beta Test of its products the Company plans to produce a limited number
of Telli*Phones and begin distributing them to homes in the Southern Marin
County Area. The Company anticipates being able to produce at least 200
Telli*Phones for this test.
During the Beta Test, the Company's engineers will assign an inexpensive
Telli*Phone computer board that eliminates many hardware components necessary
for the operation of a personal computer but unnecessary for the successful
operation of the Telli*Phone as the everyday consumer product for which it was
designed. For the Beta Test the Company estimates that it will pay approximately
$600 for the hardware components of each Telli*Phone assembled. The Company has
received estimates from consultants experienced in the manufacturer of hardware
components of a price of less than $200 per Telli*Phone. It is difficult to
predict an accurate price until the Company learns from its Initial Market Test
the level of consumer response to the Company's software products to determine
the size of runs that are most feasible. If the Company's product is very
successful then there will be available to the Company many methods of financing
the manufacture of Telli*Phones that will allow the Company to order larger runs
and further reduce the cost to manufacture Telli*Phones.
To this end, the Company has begun discussions with a major manufacturer of
telecommunications equipment that is capable of producing Telli*Phones and at a
favorable price.
When the Beta Test of the Telli*Phone Directory is underway the Company plans to
approach potential partners to renew discussions to arrange financing through
the licensing of its technology for their use. The Company has no assurance that
it will be able to renew the discussions or, that if discussions are opened once
again, it will be successful in reaching any agreements with the parties.
During 1996 the Company was advanced various non-interest bearing funds from a
minority shareholder to fund operating expenses. As of December 31,1996, total
funds advanced were $250,000. Approximately $122,000 of the funds were received
directly by the Company's primary shareholder. Although the primary shareholder
anticipates repaying such advances in the future, there is currently no
agreement requiring repayment. Accordingly, the amount has been treated as
officer's salary for the year ended December 31,1996. In January 1997, the
minority shareholder advanced additional funds totaling $93,000.0 In February
1997, the Company and the minority shareholder completed negotiations to convert
the $343,000 of advances to common stock. The Company issued 675,680 shares of
stock under Regulation S of the Securities Act of 1933 as repayment in full for
such advances.
Page 54
<PAGE>
On October 19, 1995, the Company sold and issued a total of 700,000 shares of
the common stock for a total of $301,000. On December 15, 1995, the Company sold
and issued a total of 135,000 shares of the common stock for a total of
$101,250. The capital has been used to secure the components that will be used
to produce Telli*Phones for the Beta Test and to complete the Telli*Phone
software to manage the components in the working model.
The Company has 17 notes, dated July 7, 1989, due to individuals who advanced
cash to the Company in exchange for promissory notes and royalty rights. These
notes continue to bear interest at 10% per annum and all are in default. It is
the intention of the Company to offer stock to those note holders who wish to
receive common stock in Guinness Telli*Phone Corporation and a repayment
proposal for those investors who wish to receive cash. The Company feels that it
will not be in a position to determine the conditions of such a proposal until
the Initial Market Test of its product is underway.
The Company, after the Securities and Exchange Commission permits it to trade
its securities, plans to search for an investment banker to assist the Company
in developing various alternatives, including joint venture arrangements with
companies in the telecommunications field and the sale of common shares, to
raise the funds it will require to take its product to the marketplace, conduct
the Beta Test, and meet its future debt obligations.
A few investment bankers have indicated to Management that they would be willing
to work with the Company on a best efforts basis if it would increase the amount
of capital it would be willing to raise. Management felt that none of these
investment bankers possessed the kind of contacts, background, and expertise
necessary to raise the amount of capital they indicated they would be prepared
to provide.
Management anticipates potential future revenues will be generated from three
sources.
(a) Sales of Subscriptions to the Telli*Phone Directory to Consumers.
(b) Purchases of commercial space in the Telli*Phone Directory by local
businesses and community groups and associations.
(c) Licensing fees from organizations that wish to communicate with
Telli*Phone Subscribers through their Telli*Phones.
During the Beta Test, Management will explore the feasibility of selling
franchises to qualified organizations for the right to operate a Telli*Phone
Directory within a defined geographical area as a method of financing the
establishment of new Telli*Phone Directory MiniNet geographical sites.
Page 55
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Company's Consolidated Financial Statements, and the related notes thereto,
submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In August 1996, the Company's Board of Directors dismissed Arthur Korn, CPA, as
its independent accountant and appointed BDO Seidman, LLP.
The independent auditor's report of Arthur Korn, CPA, on the consolidated
financial statements of the Company for the three years ended December 31, 1995,
dated March 17, 1996, included in Form 10-K for the fiscal year ended December
31, 1995, contained an explanatory paragraph raising substantial doubt about the
Company's ability to continue as a going concern. Additionally, the audit report
included an explanatory paragraph regarding the Company's accounting principle
relating to capitalized research and development and that such accounting
principle was being challenged by the SEC.
In connection with the Company's audits for the fiscal years ended December 31,
1995 and 1994, there were (i) no disagreements with Arthur Korn, CPA, on any
matter of accounting principle or practice, financial statement disclosure or
auditing scope or procedure which disagreements, if not resolved to the
satisfaction of Arthur Korn, CPA, would have caused Arthur Korn, CPA, to make
reference to the subject matter of the disagreement in connection with his
report; (ii) no reportable events as described in Item 304(a)(1)(5) of
Regulation S-K. During fiscal 1996, after lengthy discussions with the SEC
regarding the Company's capitalized research and development costs, the Company
corrected the accounting for such costs and restated the financial statements to
expense such costs.
The company has finished a copy of the disclosure contained in this section to
Arthur Korn, CPA, as to whether he agrees. Arthur Korn, CPA, has responded that
he agrees with the statements made herein and, as required by Item 304 of
Regulation S-K, to furnish to the Company a letter addressed to the Securities
and Exchange Commission to that effect.
During the recent fiscal years 1995 and 1994 and through July 1996, the Company
had not consulted with BDO Seidman regarding either (1) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements and either a written report was provided to the Company or oral
advice was provided that BDO Seidman concluded was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
of financial reporting issue; or (2) any matter that was either the subject of a
"disagreement" or a "reportable event" (as such terms are defined in Item
304(a)(1) of Regulation S-K).
Page 56
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, and their ages and
positions as of March 24,1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------------------------------------------------------------
<S> <C> <C>
Lawrence A Guinness 53 President, Chief Executive
Officer and Director
Dixie K. Tanner 54 Vice President,
Publishing and Director
Arthur Korn 59 Chief Financial Officer
and Director
Richard A. Morse 47 Vice President,
Engineering and Technology
John Willis 54 Director
</TABLE>
There are no arrangements or understanding between any of the directors or
executive officers of the Company and any other person or persons pursuant to
which they were selected as directors or officers. All officers plan to devote
full time to the Company No other person has been nominated or chosen to become
an officer at the present time.
There is no family relationship between any director or executive officer of the
Company. No other person has been nominated or chosen to become an officer at
the present time.
Background of Directors and Executive Officers
Lawrence A. Guinness, a founder of the Company, has served as the Company's
President, Chief Executive Officer, and a member of the Company's Board of
Directors since its founding. He has devoted most of his adult life to various
ventures in the publishing business.
In 1967, Mr Guinness, with $300,000 in private funding, founded Guinness
Publishing Ltd., Toronto, Canada, a company that published educational textbooks
for the elementary school curriculum. The company's publications became an
instant success with the schools in Canada and sales were made to United States
and other foreign countries. Mr. Guinness was a publisher in the true sense in
that his company (1) thoroughly researched the marketplace to target product
before development of a publication, (2) authored all its publications in-house,
and (3) marketed. shipped, and maintained an inventory from its own offices and
warehouses. The company became a recognized leader in the field of Canadian
educational textbook publishing and, because of its successful record of sales,
the company was awarded Canadian distribution rights to publications published
by companies in Great Britain and the United States to expand its line of
products.
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<PAGE>
In 1969, with $500,000 obtained from a New York venture capital firm, Mr.
Guinness founded Guinness Publishing Ltd., New York, to publish educational
textbooks for the entire North American marketplace. In addition to producing
and marketing its own successful publications, it authored material, under
contract, for American Book Company, a division of Lytton Industries.
In 1979, Mr. Guinness sold his foreign publications to finance the
development of computer programmed materials and educational programs.
From 1980 to the present, using $1,000,000 of his own funds and an additional
$5,000,000 raised from various private sources, he founded Guinness Productions,
Inc., to develop various computer software programs and authoring systems, and
Guinness Computer Television Corporation to develop software for a computer
networking and navigational system to distribute the programs that he had
created. In 1989 be founded CoNetCo, now a subsidiary of Guinness Telli*Phone
Corporation, to develop an easy-to-use, inexpensive screen telephone (the
Telli*Phone) to access these and other programs and to receive information from
computer network information servers. The materials, products, and computer
software programs developed since 1980 have been incorporated and integrated
into Guinness Telli*Phone Corporation.
From 1980 until 1987, while operating Guinness Productions, Inc., and Guinness
Computer Television Corporation, Mr. Guinness borrowed funds from time to time
from certain qualified private individuals for the development of some of the
software being utilized by Guinness Telli*Phone Corporation. Some of these
investors of Guinness Productions, Inc., and Guinness Computer Television
Corporation hold notes payable by Mr. Guinness that are in default. Even though
the Statute of Limitations has run regarding the right of the holders of these
securities to rescind, Mr. Guinness intends to offer to all investors, who have
invested in the development of the software utilized by Guinness Telli*Phone
Corporation an opportunity to have all their cash, plus interest, returned or,
as an alternative, to receive shares of his Common Stock in Guinness Telli*Phone
Corporation. at their option.
Dixie K. Tanner serves as Secretary, Vice President and Director of the Company.
She has worked with Mr. Guinness on various publishing projects since 1977.
Since graduating from the University of British Columbia in 1964 with a BA in
Anthropology and Psychology, she has been a tutor for handicapped children and a
buyer, manager, and proprietor for retail businesses. From 1977 to 1979 she
served as an author and editor of Guinness Publishing Limited in Canada. After
Guinness Publishing Limited was sold, until 1986, Ms. Tanner returned to
community work as a volunteer and successful fund raiser.
In 1986 Ms. Tanner joined Guinness Computer Television Corporation as the
Editor-in-Chief of programming and development . In 1989 she joined CoNetCo, a
subsidiary of the Company, as Vice President and Editor-in-Chief of the
Telli*Phone Directory. Arthur Korn joined the Company as Chief Financial Officer
and Director in August 1996. From 1962 to 1979 Mr. Korn held various positions
with J.H. Cohn & Company, a large regional CPA firm in New Jersey, including the
partner in charge of the quality control department and from 1976 to 1979 was
the Managing Partner of the firm's Nevada offices. In 1979, Mr. Korn joined the
San Francisco office of Mann Judd Landau, Certified Public Accountants, a small
national firm, and was the Managing Partner from 1981 to 1984. In 1984, Mr. Korn
merged his office into the San Francisco office of Moss Adams, a large regional
West Coast CPA firm, and was the partner in charge of that office's audit and
accounting department. In 1988 he opened his own practice serving a wide variety
of industries with clients from closely held corporations to publicly owned
corporations registered with the Securities and Exchange Commission.
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<PAGE>
Mr. Korn is currently licensed as a CPA in California and Nevada. He is a member
of the American Institute of CPAs, the California Society of CPAs, the New York
State Society of CPAs, the New Jersey State Society of CPAs and the American
Arbitration Society. He has been a member of the California State Board of
Accountancy Report Quality Monitoring Committee since January, 1994. He was a
member of the State Accounting Principles and Auditing Standards Committee (AP &
AS) for the California Society of CPAs for seven years and Chairman of the San
Francisco Chapter AP & AS for three years. He is a member of the East Bay
Chapter AP & AS, Managing an Accounting Practice Committee and the Litigation
Support Committee. Mr. Korn holds a BS degree in Accounting from Fairleigh
Dickinson University.
Richard Alden Morse serves as Vice President of Engineering and Technology for
the Company. Since 1986 Mr. Morse has served as a consultant on various computer
related development projects. Since 1989 he has consulted with CoNetCo, a
subsidiary of the Company, and has been instrumental in the designing,
development, and building of the hardware and software operating systems for the
Telli*Phone.
From 1985 to 1986 Mr. Morse worked for NEC as the Technical Manager for the
Single Chip Microcomputer Product Group. He supported three families of
microcomputers and helped the Japanese design a new set of single chip
microcomputers for American managed groups of engineers. From 1979 to 1984 he
was employed with Fairchild Semiconductor and in 1983 and 1984 he served as
Product Planning Manager for the Microprocessor Division where he managed a
group of engineers who designed advanced telcom chips (x.25 and MPCC). Mr. Morse
holds a BS degree in Physics from the University of New Hampshire.
John Willis became a director of the Company in August 1996. From 1991 to 1994
Mr. Willis served as Senior Manager of the Capital Markets Group and later as
Vice President of Sanwa Financial Products with the London, England, Branch of
Sanwa Bank Limited responsible for marketing to the FTSE 100, the one hundred
largest public limited corporations in the UK.
From 1968 to 1988 Mr. Willis was associated with various investment and
investment management firms as a principal or equity owner in either a
management or sales position. His experience included Registered Representative
with Dean Witter & Co., Denver, Colorado; Manager and equity owner of the West
Coast Regional Office in Los Angeles of Ameritrade, a discount brokerage firm
with headquarters in Omaha, Nebraska; and Vice President and Manager for
Richardson Greenshields, Spear Financial Services, and a nationally known
investment management firm. In 1988 he rejoined Dean Witter & Co, in their San
Francisco Office where he served as Vice President presiding over assets
exceeding $50 million. From 1963 to 1968 he was employed with the Office of the
Comptroller of the Currency, U.S. Treasury Department as a National Bank
Examiner for the Twelfth National Bank Region. Mr. Willis holds a BS degree in
Business Administration from the University of Denver.
Page 59
<PAGE>
Directorships
No Director of the Company or person nominated or chosen to become a Director
holds any other directorship in any company with a class of securities
registered pursuant to section 12 of the Exchange Act or subject to the
requirements of section 15(d) of such Act or any company registered as an
investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1, et
seq., as amended.
Involvement in Certain Legal Proceedings
None of the directors of the Company or persons nominated are involved in any
legal proceedings as outlined in Item 401 (f) that are material to the
evaluation of their ability or integrity.
From 1980 until 1987 Guinness borrowed funds from time to time from certain
qualified private individuals for the development of some of the software being
utilized by Guinness Telli*Phone Corporation. In 1987 the Commissioner of
Corporations of the State of California issued a "Cease and Desist" order
preventing Guinness from borrowing any further monies and claiming these loans
involved the sale of securities. The matter was referred by the Commissioner to
the District Attorney in Marin County, California, who met with Guinness and
after informing him that the County had investigated the loans thoroughly,
dismissed the matter without taking any formal action. The District Attorney
also advised Guinness to consult a securities attorney before making any future
financial transactions. To this day Guinness has complied.
Promoters and Control Persons
From 1980 until 1987 Guinness borrowed funds from time to time from certain
qualified private individuals for the development of some of the software being
utilized by Guinness Telli*Phone Corporation. In 1987 the Commissioner of
Corporations of the State of California issued a "Cease and Desist" order
preventing Guinness from borrowing any further monies and claiming these loans
involved the sale of securities. The matter was referred by the Commissioner to
the District Attorney in Marin County, California, who met with Guinness and
after informing him that the County had investigated the loans thoroughly,
dismissed the matter without taking any formal action. The District Attorney
also advised Guinness to consult a securities attorney before making any future
financial transactions. To this day Guinness has complied.
Page 60
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Long-term
Name and Annual Compensation Compensation
Principal Position Year Salary Bonus Awards Other
- ------------------ ---- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Lawrence Guinness 1996 $185,682 -- -- --
President and CEO 1995 $56,511(1) -- -- --
1994 $52,067(1) -- -- --
</TABLE>
(1) The Company does not have a formal employment contract. Compensation
has been based upon annual discretionary factors such as technical advancements
of the Telli*Phone and the generation of capital. During 1994 and 1993 a portion
of the annual compensation was allocated to research and development costs.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Controlling Interest
Lawrence A. Guinness is the only person who has beneficial ownership of
over Five percent (5%) of the Common Stock in the Company:
<TABLE>
<CAPTION>
Percent
Title of Name and Address of Amount and Nature of of
Class Beneficial Owner Beneficial Ownership Class
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Lawrence A. Guinness 8,515,166 shares 60.44%
3 Venus Ct.
Tiburon. CA 94920
</TABLE>
Security Ownership of Management
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 13, 1996, and is
adjusted to reflect the sale of Common Stock offered hereby for (i) each person
or entity who is known by the company to beneficially own five percent or more
of the outstanding Common Stock of the Company, (ii) each of the Company's
directors, (iii) each of the Names Officers, and (iv) all directors and
executive officers of the Company as a group. Except as noted below, the address
for each such person is c/o Guinness Telli*Phone Corporation, 655 Redwood
Highway, Suite 219, Mill Valley, CA 94941.
Page 61
<PAGE>
<TABLE>
<CAPTION>
Percent
Title of Name and Address of Amount and Nature of of
Class Beneficial Owner Beneficial Ownership Class
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Lawrence A. Guinness(1) 8,515,166 shares 60.44%
3 Venus Ct.
Tiburon. CA 94920
Common Dixie K. Tanner 500,000 shares 3.55%
Secretary, Director
Common Arthur Korn(2) 250,000 shares (2) 1.78%
CFO, Director
Common Richard A. Morse 200,000 shares 1.42%
V.P. Engineering
and Product Development
Common John L. Willis 100,000 shares 0.71%
Director
- -------------------------------------------------------------------------------
Total: 9,565,166 shares 67.90%
</TABLE>
(1) Excludes options to purchase 634,834 shares of common stock. No other
stock options have been granted nor does a stock option plan exist.
(2) To be acquired in fiscal year end December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Notes Due By Lawrence A. Guinness; Dilution of Guinness' Ownership In the
Company
All of the investors who loaned funds to Guinness to invest in the Guinness
Companies hold notes payable by him that are in default. Even though the Statute
of Limitations has run regarding the right of the holders of these securities to
rescind, Guinness intends to offer his note holders an opportunity to have all
their notes payable, plus interest (totaling approximately $6.5 million)
repaid, or, as an alternative, to receive Common Stock in the Company, at their
option. Guinness plans to offer his personal stock in Guinness Telli*Phone
Corporation to those investors who wish to receive Common Stock in the Company,
thus there will be no dilution to the issued and outstanding shares of the
Company. However, this will dilute Guinness' present ownership in the Company
and have an impact on his control of the Company's operations. The outcome from
this event and its effect on the future of the Company cannot be determined at
this time. For those investors who wish to receive cash, it is the intention of
Guinness to arrange financing through an investment banker. This financing may
take the form of debt financing, securities financing, or a public sale of
enough of Guinness' Guinness Telli*Phone Corporation shares of Common Stock to
satisfy the debt to the note holders remaining.
Page 62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
---------
Report of Independent Certified Accountants .......................... F-l
Consolidated Balance Sheet at
December 31, 1996, and 1995 .......................................... F-2
Consolidated Statement of Operations
for the Years Ended December 31, 1996, 1995, and 1994 ................ F-3
Consolidated Statement of Changes in
Stockholders' Equity for the Years
Ended December 31, 1996, 1995, 1994, 1993 and 1992 ................... F-4
Consolidated Statement of Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994 ................. F-5
Summary of Accounting Policies ....................................... F-8
Notes to Consolidated Financial Statements ........................... F-11
Page 63
<PAGE>
Exhibits
INDEX OF EXHIBITS
Attached hereto and made a part hereof are the following exhibits:
EXHIBIT 1 - OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT - dated January
6,1997 between the Company and Mexscape Investments SA DE CV.
EXHIBIT 2 - OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT - dated March 12,
1997 between the Company and Mexscape Investments SA DE CV.
Page 64
<PAGE>
Pursuant to the requirements of section 12 of the securities act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GUINNESS TELLI*PHONE CORPORATION
(Registrant)
Date: March 31,1997 /S/ Lawrence A. Guinness
---------------------------------
By: Lawrence A. Guinness
Its: President
Date: March 31, 1997 /S/ Arthur Korn
---------------------------------
By: Arthur Korn
Its Chief Financial Officer
Date: March 31, 1997 /S/ Dixie K. Tanner
---------------------------------
By: Dixie K. Tanner
Its: Secretary
Page 65
<PAGE>
REPORT OF INDEPENDENT CERTIFIED ACCOUNTANTS
Board of Directors
Guinness Telli*Phone Corporation
Mill Valley, California
We have audited the accompanying consolidated balance sheets of Guinness
Telli*Phone Corporation and Subsidiary (a development stage company) as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996 and the period from November 12, 1980
(inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Guinness
Telli*Phone Corporation and Subsidiary at December 31, 1996 and 1995, and
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 and the period from November 12, 1980
(inception) to December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 1, the Company has been in the development stage since its inception and
has sustained recurring losses, has negative working capital and a shareholders'
deficit. This condition raises substantial doubt about the Company's ability to
continue as a going concern. Continuation as a going concern is dependent upon
the Company's ability to meet its past due debt obligations and future financing
requirements, and the success of future operations, the outcome of which cannot
be determined at this time. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
San Francisco, California
March 10, 1997
F-1
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 9,805 $ 97,997
Stock subscription receivable (Note 6) - 101,250
Due from stockholder (Note 2) - 27,195
- ------------------------------------------------------------------------------
Total current assets 9,805 226,442
Equipment, net of accumulated depreciation of
$30,395 and $22,663 29,723 2,974
Total Assets $ 39,528 $229,416
=============================================================================
Liabilities and Stockholders' Equity
Current
Notes payable (Note 3) $435,000 $435,000
Accounts payable 630,733 659,372
Accrued interest payable (Note 3) 446,300 366,180
Deferred royalty income (Note 3) 125,000 125,000
- -----------------------------------------------------------------------------
Total current liabilities 1,637,033 1,585,552
- -----------------------------------------------------------------------------
Advances from stockholder (Note 2) 250,000 -
- -----------------------------------------------------------------------------
Total Liabilities 1,887,033 1,585,552
- -----------------------------------------------------------------------------
Commitments, contingencies and
subsequent events (Notes 2 and 4)
Stockholders' equity (Notes 2, 4 and 6)
Common stock, $.001 par value; authorized,
25,000,000 shares; issued and outstanding,
1996 and 1995 13,427,480 shares 13,427 13,427
Additional paid-in capital 8,363,766 8,363,766
Deficit accumulated during development stage (10,224,698) (9,733,329)
- -----------------------------------------------------------------------------
Total Stockholders' Deficit (1,847,505) (1,356,136)
- -----------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $ 39,528 $ 229,416
=============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Page F-2
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Cumulative
During Year ended December 31,
Development ----------------------------------
Stage 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating expenses
Research and development
(Note 7) $ 4,551,152 $ - $ - $194,463
Interest expense
(Note 3) 4,171,019 80,120 72,834 66,214
Officer's salary
(Note 2 and 7) 482,989 185,682 56,511 18,191
Rent (Note 7) 313,453 24,600 7,202 27,445
Other administrative
expenses 706,085 200,967 63,009 47,641
- -----------------------------------------------------------------------------
Net loss $(10,224,698) $(491,369) $(199,556) $(353,954)
==============================================================================
Loss per share $ (.04) $ (.02) $ (.03)
=============================================================================
Weighted average common
and common equivalent
shares outstanding 13,427,000 12,738,000 12,592,000
===============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Page F-3
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Consolidated Statements of Changes in Stockholders Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During
Common Stock Paid- In Development
Shares Amount Capital Stage Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stock issued for product
rights 2,350,000 $2,350 $ 2,350
Stock issued for predeces-
sor company assets, in-
cluding assumption of
predecessor company debt 8,000,000 8,000 $7,147,091 7,155,091
Sale of common stock 141,000 141 134,364 134,505
Contributed capital by
majority shareholder
through sale of personal
stock (Note 4) 285,366 285,366
Net loss from November 12,
1980 (inception) to
December 31, 1992 $(8,732,677) (8,732,677)
- ------------------------------------------------------------------------------
Balance, December 31, 1992 10,491,000 10,491 7,566,821 (8,732,677)(1,155,365)
Stock sold for cash of
$240,570 and a receivable
of $55,930 550,000 550 295,950 296,550
Stock issued for all of
the outstanding shares
of Innstar Corporation 1,551,480 1,551 1,551
Contributed capital (Note 6) 47,250 47,250
Net loss (447,142) (447,142)
- ------------------------------------------------------------------------------
Balance, December 31, 1993 12,592,480 12,592 7,910,021 (9,179,819)(1,257,206)
Contributed capital (Note 6) 52,330 52,330
Net loss (353,954) (353,954)
- ------------------------------------------------------------------------------
Balance, December 31, 1994 12,592,480 12,592 7,962,351 (9,533,773)(1,558,830)
Stock sold for cash of
$301,000 and a receivable
of $101,250 (Note 6) 835,000 835 401,415 401,250
Net loss (199,556) (199,556)
- ------------------------------------------------------------------------------
Balance,
December 31, 1995 13,427,480 $13,427 $8,363,766 $(9,733,329) $(1,356,136)
Net Loss ( 491,369) ( 491,369)
==============================================================================
Balance,
December 31, 1996 13,427,480 $13,427 $8,363,766 $(10,224,698) $(1,847,505)
==============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Page F-4
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Consolidated Statements of Cash Flows
Incease (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Cumulative
During Year ended December 31,
Development ----------------------------------
Stage 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash used in operations
Net loss $(10,224,698) $(491,369) $ (199,556) $(353,954)
Adjustments to reconcile net loss
to cash used in operations:
Depreciation 30,395 7,732 1,923 1,899
Increase (decrease) in accounts
payable 630,733 (28,639) (65,940) 185,182
Increase in
accrued interest 466,300 80,120 72,834 66,214
Deferred royalty income 125,000 - - -
- ------------------------------------------------------------------------------
Net cash used in operating
activities (8,992,270) (432,156) (190,739) (100,659)
- ------------------------------------------------------------------------------
Cash used in investing activities
Additions to fixed assets (60,118) (34,481) (2,851) -
- ------------------------------------------------------------------------------
Cash provided by financing
activities
Contributed
capital(Note 8) 7,543,938 - - 52,330
Sale of stock 676,075 - (301,000) -
Notes payable 435,000 - - -
Stockholder advances 250,000 277,195 (20,268) -
Collection of stock
subscriptions receivable 157,180 101,250 10,855 45,075
- ------------------------------------------------------------------------------
Net cash provided by
financing activities 9,062,193 378,445 291,587 97,405
- ------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 9,805 (88,192) 97,997 (3,254)
Cash and cash equivalents,
beginning of year $ - $ 97,997 $ - $ 3,254
- ------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 9,805 $ 9,805 $ 97,997 $ -
==============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Page F-5
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Summary of Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Guinness
Telli*Phone Corporation (the Company) and its wholly-owned subsidiary, CoNetCo,
a California corporation. All significant intercompany balances and transactions
have been eliminated in consolidation. As discussed below, the cumulative
operating data of Guinness Productions, Inc. and Guinness Computer Television
Corp. are included in historical financial information since they are deemed to
be predecessor companies.
Description of Business
The Company and its predecessors have been in the development stage since
inception. The Company is engaged in developing an interactive networking
system, the Telli*Phone, which will allow access to electronic information. The
Company determined that effective December 31, 1994 all significant research and
development regarding the Telli*Phone had been completed.
Business Combinations
In 1989, CoNetCo was formed and acquired the theoretical rights to the
Telli*Phone from a predecessor company in exchange for 2,350,000 shares of
CoNetCo stock, which were valued at par value.
Effective February 18, 1990 (as amended by the March 15, 1994 agreement),
CoNetCo, currently the Company's wholly-owned subsidiary, acquired from
CoNetCo's major stockholder the assets of the businesses known as Guinness
Productions, Inc. and Guinness Computer Television Corp. (the Guinness
Companies) in exchange for 8,000,000 shares of CoNetCo stock and royalty rights.
The assets acquired from the Guinness Companies consisted primarily of product
development efforts performed by the Guinness Companies to further develop the
Telli*Phone. For accounting purposes, all costs incurred by the Guinness
Companies to develop the Telli*Phone have been expensed in accordance with
Financial Accounting Standards Board Statements No. 2, Accounting for Research
and Development Costs. The assets acquired from the Guinness Companies have been
valued at their historical cost basis and not current fair market value, if any,
because all entities are under common control. The liabilities incurred and
assumed by the Guinness Companies during its development of the Telli*Phone have
been assumed by the shareholder of the Guinness Companies. The primary
shareholder of Guinness Telli*Phone is also the primary shareholder of the
Guinness Companies. The liabilities assumed by the Guinness Companies'
shareholder total approximately $7.2 million, which include approximately $2.3
million of investor notes payable and related delinquent compounded interest of
$3.6 million. Such liabilities were incurred by the Guinness Companies primarily
during the years 1982 to 1989. Such liabilities assumed have been treated as a
capital contribution and increased paid-in capital. CoNetCo and the Guinness
Companies are predecessors of the Company and their activities are included in
the cumulative financial data. Included in deficit accumulated during
development stage is approximately $7.2 million relating to the Guinness
Companies.
F-8
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Summary of Accounting Policies
Effective August 4, 1993, Guinness Telli*Phone Corporation, through an
inactive predecessor company, U.S. Telli*Phone, acquired all of the outstanding
shares of Innstar Corporation, an inactive company having no assets, in exchange
for 1,551,480 shares of the Company's stock. Innstar Corporation was then merged
into the Company. U.S. Telli*Phone did not receive any consideration beyond the
exchange of shares. The merger was accounted for as a recapitalization and
Innstar had no assets, liabilities or operations to include in the accompanying
financial statements. The purpose of the merger was to acquire a company whose
shares were registered with the Securities and Exchange Commission and to change
its domicile to Nevada which is where U.S. Telli*Phone was incorporated.
Effective March 15, 1994, Guinness Telli*Phone Corporation acquired all of
the outstanding shares of CoNetCo in exchange for 11,041,000 shares of the
Company's stock. The issuance of shares is accounted for as the issuance of
shares by CoNetCo, who is considered the acquirer for accounting purposes, in
exchange for monetary assets rather than a business combination since U.S.
Telli*Phone, now Guinness Telli*Phone, was an inactive corporation. The assets
acquired, principally the product development efforts, which for accounting
purposes have zero book value, of the Telli*Phone network, were recorded at the
historical cost basis of CoNetCo because of common control amongst current and
predecessor entities.
Depreciation
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, ranging from 5 to 12 years. Depreciation expense of $7,732
in 1996, $1,923 in 1995 and $1,899 in 1994 and $30,395 cumulative during
development stage has been charged to operations.
Cash and Cash Equivalents
The Company considers investments purchased with an initial maturity of
three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Summary of Accounting Policies
Loss Per Share
Loss per common share has been computed following Accounting Principles
Board Opinion No. 15. Loss per share has been computed by dividing the loss by
the weighted average number of common shares outstanding. Common stock
equivalents such as common stock options and warrants and convertible debentures
were not included in the computation of average shares outstanding because their
inclusion would be anti-dilutive.
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
establishes new standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly-held common stock or potential common
stock. This Statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires a reconciliation
of the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15.
This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of all prior-period EPS
data presented. The Company does not believe adoption will cause a significant
change in earnings per share.
Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires that the Company disclose the estimated
fair value for its financial instruments for which it is practicable to estimate
their values. The Company's financial instruments include cash, due from
stockholders, notes payable and accounts payable. The carrying value of cash
approximates fair value due to the short maturities of these instruments. The
fair value of other financial instruments is not practical to estimate because
of the current financial condition of the Company.
F-10
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Notes to Consolidated Financial Statements
1. Statement of Presentation
The financial statements have been prepared assuming the Company will
continue as a going concern. Although the Company is still in the development
stage, management is currently negotiating to raise adequate financing to
produce and place Telli*Phone units into a test market. The Company is
continuing to pursue additional debt and equity financing while continuing to
modify and improve the Telli*Phone. The Company's ability to continue as a going
concern is dependent on management's success in obtaining financing, repaying
past due debt obligations and the acceptance of the Telli*Phone by the test
market. However, the Company has significantly curtailed expenditures with only
necessary costs being paid from the sale of stock (see Note 6). Once the system
is in place, the Company anticipates being able to attract financial support
from those having an interest in reaching subscribers.
Because of recurring losses, negative working capital and a stockholder
deficit, there is substantial doubt about the ability of the Company to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
2. Transactions with Stockholders
During 1996, the Company was advanced various non-interest bearing funds
from a minority shareholder to fund operating expenses. As of December 31, 1996,
total funds advanced were $250,000. Approximately $122,000 of the funds were
received directly by the Company's primary shareholder. Although the primary
shareholder anticipates repaying such advances in the future, there is currently
no agreement requiring repayment. Accordingly, the amount has been treated as
officer's salary for the year ended December 31, 1996. In January 1997, the
minority shareholder advanced additional funds totaling $93,000. In February
1997, the Company and the minority shareholder completed negotiations to convert
the $343,000 of advances to common stock. The Company issued 675,680 shares of
stock under Regulation S of the Securities Act of 1933 as repayment in full for
such advances.
The amounts due from stockholder at December 31, 1995 represents the
balance of short-term advances in excess of reimbursements by the primary
stockholder. The amount is unsecured and does not bear interest. The balance was
repaid in 1996.
3. Notes Payable
The Company, through its wholly-owned subsidiary, CoNetCo, entered into
approximately 20 different royalty agreements prior to 1990. The terms of the
agreements required a fixed payment of cash for the future rights to a
percentage of the future Telli*Phone sales proceeds. The agreements also
provided the holders of the royalty agreements the option to convert its royalty
interest into common stock of CoNetCo on the basis of eight times the royalty
payment divided by the greater of $3 per share or three times the average bid
price on the day the Company's stock is traded after its initial public
offering. During 1990, approximately 17 of the notes holders modified their
royalty agreements to a conventional note payable.
F-11
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Notes to Consolidated Financial Statements
These notes bear interest at 10%, are in default at December 31, 1996, and
require future royalty payments but do not contain any features allowing the
conversion to common stock. The Company is currently negotiating with the note
holders to convert their debt and accrued interest into common stock. As of
December 31, 1996, the Company had received $125,000 of advance royalty payments
which had not been converted to notes payable. This amount will begin to be
amortized into income once sales of the Telli*Phone commence. The amortization
period of deferred revenue has not yet been determined.
4. Commitments
Royalty Agreements
As part of CoNetCo's acquisition of the Guinness Companies, CoNetCo granted
royalty rights of 5% of all future revenues generated by the sale or lease of
the Community News Network and the Telli*Phone instrument to the shareholder of
the Guinness Companies. In addition, royalty and note holders received royalty
rights. Under these agreements, the Company will pay royalties aggregating 2.26%
of the manufacturer's actual net price for which each Telli*Phone is sold.
Stock Options
In order to provide interim funds for the development of the Telli*Phone
instrument, CoNetCo's major stockholder agreed in September 1989 that he would
sell some of his stock in CoNetCo to "qualified investors" and remit the
proceeds as donated capital to CoNetCo. In exchange for the donated capital, he
received an option to purchase a like number of shares sold by him at the same
price he received from their sale and contributed to CoNetCo. This option to
purchase shares vests upon the Company reporting earnings per share of $1 before
giving effect, if any, to these options. The options expire in the lesser of 10
years from September 1, 1989, or two years following the year the options are
vested. The option has been assumed by Guinness Telli*Phone Corporation on a
share-for-share basis. The total number of shares sold by the stockholder with
the proceeds contributed to CoNetCo was 634,834 at a price of $285,366, or $0.45
per share.
Shareholder and Predecessor Company Obligations
A creditor of the Guinness Companies, and now a creditor of the Guinness
Companies' former shareholder, has filed a lien against the shareholder and has
also named CoNetCo as an additional judgment debtor. The creditor is seeking to
recover approximately $650,000 related to $500,000 of loans and related accrued
interest borrowed by the Guinness Companies. The Company does not believe that
it has any legal obligation to repay the debt of the Guinness Companies and that
all such liabilities were assumed by the shareholder of the Guinness Companies.
The shareholder of the Guinness Companies is currently the majority shareholder
of the Company. The ultimate outcome of this matter is unknown and nothing has
been recorded relating to the matter.
F-12
<PAGE>
Guinness Telli*Phone Corporation
Subsidiary (A Development Stage Company)
Notes to Consolidated Financial Statements
5. Income Tax
Since the Company is in the development stage and management cannot
determine that it is more likely than not the asset will be recovered, it has
provided a 100% valuation allowance against the deferred tax asset resulting
from its net operating loss carry-forward and no deferred tax asset is reflected
in the accompanying financial statements. There are no deferred tax liabilities.
The deferred tax assets and valuation allowances for the years ended
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss Carry-forward $1,306,000 $1,139,000
Valuation allowances (1,306,000) (1,139,000)
- ------------------------------------------------------------------------------
$ - $ -
</TABLE>
The Company has approximately $1,200,000 of Federal net operating loss
carry-forwards expiring between 2004 and 2011. The losses accumulated by the
Company for tax purposes is significantly lower than the accumulated losses in
these financial statements because the accumulated losses for financial
statement purposes includes approximately $7.2 million of losses incurred by
predecessor companies. Additionally, the accumulated loss for financial
statement purposes was also increased by approximately $2 million relating to
costs improperly capitalized by CoNetCo since 1989 to develop the Tell*Phone.
For tax purposes, the Company must amend its prior tax returns to correct for
CoNetCo's accounting for the product development costs.
6. Equity Transactions
On October 19, 1995, the Company sold 700,000 shares of its common stock
for $301,000 which was all received in 1995. On December 15, 1995, the Company
sold 135,000 shares of its common stock for $101,250 which was not received
until January 1996. Both of these transactions were executed in accordance with
Regulation S under the Securities Act of 1933.
In fiscal 1994 and 1993, the principal shareholder paid operating expenses
on behalf of the Company totaling $52,330 and $47,250. These amounts were
accounted for as contributed capital and increased paid in capital.
F-13
<PAGE>
Guinness Telli*Phone Corporation and
Subsidiary (A Development Stage Company)
Notes to Consolidated Financial Statements
7. Research and Development
Research and development costs represent costs the Company (including the
predecessor companies) believes are directly related to the development of the
Telli*Phone. Included in cumulative research and development costs is
approximately $1,077,000 of officer compensation and approximately $800,000 of
rent expense. During the period of product development, the Company estimated
that, excluding interest, approximately 80% of all expenses incurred have
related directly to the development of the Telli*Phone.
8. Cash Flow Statement
There were no cash payments for interest or taxes during the periods
presented. In 1993, the Company acquired the stock of Innstar Corporation for
1,551,480 shares of the Company's common stock, valued at $.001 per share.
Because the cumulative statement of operations includes the predecessor
companies' operations, accumulated loss includes approximately $7.2 million from
the predecessor companies. Additionally, contributed capital includes
approximately $7.2 million of liabilities assumed personally by the predecessor
company shareholder, who is also the primary shareholder of the Company.
F-14
<PAGE>
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
January 6, 1997
Agreement dated January 6, 1997, between Guinness Telli*Phone Corporation and
Mexscape Investments SA DE CV, for the sale of One Hundred and Six Hundred Sixty
Thousand Shares (660,000) shares of the common stock of Guinness Telli*Phone
corporation at Forty-Nine cents (U.S. $0.49) per share.
Exhibit 1 - Page 1
<PAGE>
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
This Offshore Securities Subscription Agreement is executed in reliance
upon the transaction exemption offered by Regulation S ("Regulation S" as
promulgated by the Securities and Exchange Commission ("SEC", under the
Securities Act of 1933, as amended ("1933 Act").
This Agreement has been executed by the undersigned in connection with the
private placement of shares of Common Stock (hereinafter referred to as the
Shares") of:
GUINNESS TELLI*PHONE CORPORATION
Symbol: TELI Exchange: NASDAQ (Have Applied)
a corporation organized under the laws of the State of Nevada, United
States of America (hereinafter referred to as the "SELLER"), and
The undersigned:
Mexscape Investments SA DE CV
c/o Mail Box 375
Boulevard de la Marina 39-F
Cabo San Lucas, BCS, Mexico
individuals who are non-USA resident, (hereinafter referred to as the
"PURCHASER"), who represents and warrants to, and agrees with Seller, as
follows:
1. Agreement to Subscribe; Purchase Price.
a. The undersigned hereby subscribes for Six Hundred Sixty Thousand (660,000)
shares at Forty-Nine cents (US$0.49) per share payable in United States
Dollars.
b. Form of Payment: Purchaser shall pay the purchaser by good funds in United
States Dollars to the designated depository for closing by delivery of
security versus payment.
2. Subscriber Representation; Access to Information; Independent Investigation:
a. Offshore Transaction: Purchaser represents and warrants to Seller as
follows:
(1) Purchaser is not a U.S. person as that term is defined under Regulation
S.
(2) At the time the buy order was originated, Purchaser was outside the
United States and is outside the United States as of the date of the execution
and delivery of this agreement.
Exhibit 1 - Page 2
<PAGE>
(3) Purchaser is purchasing the Shares for his own account and not on
behalf of any U.S. person, and the sale has not been pre-arranged with a
purchaser in the United States.
(4) Each distributor participating in the offering of the securities, if
any, has agreed in writing that all offers and sales of the securities prior to
the expiration of a period commencing on the date of the transaction and ending
40 days thereafter shall only be made in compliance with the safe harbor
contained in Regulation S, pursuant to registration of shares under the
Securities Act of 1933 or pursuant to an exemption from registration.
(5) Purchaser represents and warrants and hereby agrees that all offers and
sales of the shares prior to the expiration of a period commencing on the date
of the transaction and ending 40 days thereafter shall only be made in
compliance with the safe harbor contained in Regulation S, pursuant to
registration of the securities under the Securities Act of 1933 or pursuant to
an exemption from registration, and all offers and sales after the expiration of
the 40 day period shall he wade only pursuant to such a registration or to such
exemption from registration.
(6) All offering documents received by Purchaser include statements to the
effect that the Shares have not been registered under the Securities Act of 1933
and may not be offered or sold in the United States or to U.S. persons during a
period commencing on the date of the transaction and ending 40 days thereafter
unless the shares are registered under the Securities Act of 1933 or an
exemption from the registration requirements is available.
(7) Purchaser acknowledges that the purchase of the shares involves a high
degree of risk and further acknowledges that he can bear the economic risk of
the purchase of the shares, including the total loss of his investment.
(8) Purchaser understands that the shares are being offered and sold to him
in reliance on specific exemptions from the registration requirements of Federal
and State securities laws and that the Seller is relying upon the truth and
accuracy of the representations, warranties, agreements, acknowledgements and
understandings of Purchaser set forth herein in order to determine the
applicability of such exemptions and the suitability of Purchaser to acquire the
shares.
b. Current Public Information. Purchaser acknowledges that Purchaser has been
furnished with or has acquired copies of the Company's Form 10, as well as
copies of the Form 10-Q for the first, second and third quarters of 1995,
as well as copies of the Form 10K/A for 1995, which are on file with the
Securities and Exchange Commission, as required by the Securities Act, and
other publicly available documents.
c. Independent Investigation; Access. Purchaser acknowledges that Purchaser is
making the decision to purchase the shares subscribed for, has relied upon
independent investigations made by him and his purchaser representatives,
if any, and Purchaser and such representatives, if any, have, prior to any
sale to him, been given access and the opportunity to examine all material
books and records of the Corporation, all material contract and documents
relating to this offering and an opportunity to ask questions of, and to
receive answers from Seller or any person acting on its behalf concerning
the terms and conditions of this offering. Purchaser and his advisors, if
any, have been furnished with access to all publicly available materials
relating to the business, finances and operations of the Seller and
materials relating to the offer and sale of the shares which have been
requested. Purchaser and his advisors, if any, have received complete and
satisfactory answers to any such inquiries.
Exhibit 1 - Page 3
<PAGE>
d. No Government Recommendation or Approval. Purchaser understands that no
federal or state agency has passed on or made any recommendation or
endorsement of the Shares.
3. Issuer Representations:
a. Reporting Company Status. Seller is a reporting issuer. Seller has complied
with all reporting obligations under either Section 12 (b), 12(g) or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). It
has on file with the Securities and Exchange Commission a Form 10, Form
10-Q filings required to be filed for the first, second and third quarters
of 1996, and a Form 10K/A required to be filed for 1995.
b. Offshore Transaction.
(1) Seller has not offered these securities to any person in the United
States or to any U.S. person as that term is defined in Regulation S.
(2) At the time the buy order was originated, Seller and/or its agent
reasonably believed Purchaser was outside of the United States and was not a
U.S. person.
(3) Seller and/or its agent reasonably believe that the transaction has not
been pre-arranged with a Purchaser in the United States.
c. No Directed Selling Efforts. In regard to this transaction Seller has not
conducted any "directed selling efforts" as that term is defined in rule
902 of Regulation S nor has Seller conducted any general solicitation
relating to the offer and sale of the within securities to persons resident
within the United States or elsewhere.
4. Legends on Certificates. The transaction restriction in connection with
this offshore offer and sale restrict Purchaser from offering and selling to
U.S., persons or for the account or benefit of a U.S. person for a forty (40)
day period. The rules do not require the placement of such a restrictive legend
on the share certificate. Rule 903 (c)(2) governs the forty (40) day transaction
restriction.
5. Exemption; Reliance on Representations. Purchaser understands that the
offer and sale of the Shares is not being registered under the 1933 Act. Seller
is relying on the rules governing offers and sale made outside the United States
pursuant to Regulation S. Rules 901 through 904 of Regulation S govern this
transaction.
6. Transfer Agent Instructions. Seller's transfer agent will be instructed
to issue one or more share certificates representing shares without restrictive
legend in the names of purchaser to be specified prior to closing and that the
shares have been issued pursuant to Regulation S. Seller further warrants that
no instructions other than these instructions have been given to the transfer
agent and that these shares shall be freely transferable on the books and
records of the company subject to compliance with applicable securities laws.
Exhibit 1 - Page 4
<PAGE>
7. Stock Delivery Instructions. The share certificates shall be delivered
to the Purchaser on a delivery versus payment basis at such times and places to
be mutually agreed.
8. Closing Date. The date of the issuance of the sale of the Shares (the
"Closing Date" shall be January 6, 1997, or such other mutually agreed to time
and place.
9. Conditions to the Company's Obligation to Sell. Purchaser understands
that Seller's obligation to sell the Stock is conditioned upon:
a. The receipt and acceptance by Seller of this Subscription Agreement for all
of the shares as evidenced by execution of this subscription agreement by
the President or any Vice President of the Seller.
b. Delivery into the closing depository by Purchaser of good funds (i.e. the
letter of credit) as payment in full for the purchase of the shares.
10. Conditions to Purchaser's Obligation to Purchase. Seller understands
that Purchaser's obligation to purchase the stock is conditioned upon:
a. Acceptance by Purchaser of a satisfactory Subscription Agreement for the
sale of Shares;
b. Delivery of shares of common stock without restrictive legend.
11. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the rulings of the laws of the State of Nevada.
IN WITNESS WHEREOF, this Offshore Securities Subscription Agreement was duly
executed on the date first written below.
PURCHASER
MEXSCAPE INVESTMENTS SA DE CV
- -----------------------------------
Morton Weisbrot
- -----------------------------------
John F. Parks
Exhibit 1 - Page 5
<PAGE>
Accepted this 6th day of January, 1997.
GUINNESS TELLI*PHONE CORPORATION
- --------------------------------------
By: Lawrence A. Guinness, President
<PAGE>
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
March 12, 1997
Agreement dated March 12, 1997, between Guinness Telli*Phone Corporation and
Mexscape Investments SA DE CV, for the sale of One Hundred and Fifteen Thousand
Six Hundred Eight Shares (15,680) of the common stock of Guinness Telli*Phone
corporation at One Dollar and Twenty-Five cents (U.S. $1.25) per share.
Exhibit 2 - Page 1
<PAGE>
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
This Offshore Securities Subscription Agreement is executed in reliance
upon the transaction exemption offered by Regulation S ("Regulation S" as
promulgated by the Securities and Exchange Commission ("SEC", under the
Securities Act of 1933, as amended ("1933 Act").
This Agreement has been executed by the undersigned in connection with the
private placement of shares of Common Stock (hereinafter referred to as the
Shares") of:
GUINNESS TELLI*PHONE CORPORATION
Symbol: TELI Exchange: NASDAQ (Have Applied)
a corporation organized under the laws of the State of Nevada, United States of
America (hereinafter referred to as the "SELLER"), and
The undersigned:
Mexscape Investments SA DE CV
c/o Mail Box 375
Boulevard de la Marina 39-F
Cabo San Lucas, BCS, Mexico
individuals who are non-USA resident, (hereinafter referred to as the
"PURCHASER"), who represents and warrants to, and agrees with Seller, as
follows:
1. Agreement to Subscribe; Purchase Price.
a. The undersigned hereby subscribes for Fifteen Thousand Six Hundred
Eighty Shares (15,680) at One Dollar and Twenty-five cents (US$1.25) per share
payable in United States Dollars.
b. Form of Payment: Purchaser shall pay the purchaser by good funds in
United States Dollars to the designated depository for closing by delivery of
security versus payment.
2. Subscriber Representation; Access to Information; Independent Investigation:
a. Offshore Transaction: Purchaser represents and warrants to Seller as
follows:
(1) Purchaser is not a U.S. person as that term is defined under Regulation
S.
(2) At the time the buy order was originated, Purchaser was outside the
United States and is outside the United States as of the date of the execution
and delivery of this agreement.
Exhibit 2 - Page 2
<PAGE>
(3) Purchaser is purchasing the Shares for his own account and not on
behalf of any U.S. person, and the sale has not been pre-arranged with a
purchaser in the United States.
(4) Each distributor participating in the offering of the securities, if
any, has agreed in writing that all offers and sales of the securities prior to
the expiration of a period commencing on the date of the transaction and ending
40 days thereafter shall only be made in compliance with the safe harbor
contained in Regulation S, pursuant to registration of shares under the
Securities Act of 1933 or pursuant to an exemption from registration.
(5) Purchaser represents and warrants and hereby agrees that all offers and
sales of the shares prior to the expiration of a period commencing on the date
of the transaction and ending 40 days thereafter shall only be made in
compliance with the safe harbor contained in Regulation S, pursuant to
registration of the securities under the Securities Act of 1933 or pursuant to
an exemption from registration, and all offers and sales after the expiration of
the 40 day period shall he wade only pursuant to such a registration or to such
exemption from registration.
(6) All offering documents received by Purchaser include statements to the
effect that the Shares have not been registered under the Securities Act of 1933
and may not be offered or sold in the United States or to U.S. persons during a
period commencing on the date of the transaction and ending 40 days thereafter
unless the shares are registered under the Securities Act of 1933 or an
exemption from the registration requirements is available.
(7) Purchaser acknowledges that the purchase of the shares involves a high
degree of risk and further acknowledges that he can bear the economic risk of
the purchase of the shares, including the total loss of his investment.
(8) Purchaser understands that the shares are being offered and sold to him
in reliance on specific exemptions from the registration requirements of Federal
and State securities laws and that the Seller is relying upon the truth and
accuracy of the representations, warranties, agreements, acknowledgements and
understandings of Purchaser set forth herein in order to determine the
applicability of such exemptions and the suitability of Purchaser to acquire the
shares.
b. Current Public Information. Purchaser acknowledges that Purchaser has been
furnished with or has acquired copies of the Company's Form 10, as well as
copies of the Form 10-Q for the first, second and third quarters of 1995,
as well as copies of the Form 10K/A for 1995, which are on file with the
Securities and Exchange Commission, as required by the Securities Act, and
other publicly available documents.
c. Independent Investigation; Access. Purchaser acknowledges that Purchaser is
making the decision to purchase the shares subscribed for, has relied upon
independent investigations made by him and his purchaser representatives,
if any, and Purchaser and such representatives, if any, have, prior to any
sale to him, been given access and the opportunity to examine all material
books and records of the Corporation, all material contract and documents
relating to this offering and an opportunity to ask questions of, and to
receive answers from Seller or any person acting on its behalf concerning
the terms and conditions of this offering. Purchaser and his advisors, if
any, have been furnished with access to all publicly available materials
relating to the business, finances and operations of the Seller and
materials relating to the offer and sale of the shares which have been
requested. Purchaser and his advisors, if any, have received complete and
satisfactory answers to any such inquiries.
Exhibit 2 - Page 3
<PAGE>
d. No Government Recommendation or Approval. Purchaser understands that no
federal or state agency has passed on or made any recommendation or
endorsement of the Shares.
3. Issuer Representations:
a. Reporting Company Status. Seller is a reporting issuer. Seller has complied
with all reporting obligations under either Section 12 (b), 12(g) or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). It
has on file with the Securities and Exchange Commission a Form 10, Form
10-Q filings required to be filed for the first, second and third quarters
of 1996, and a Form 10K/A required to be filed for 1995.
b. Offshore Transaction.
(1) Seller has not offered these securities to any person in the United
States or to any U.S. person as that term is defined in Regulation S.
(2) At the time the buy order was originated, Seller and/or its agent
reasonably believed Purchaser was outside of the United States and was not a
U.S. person.
(3) Seller and/or its agent reasonably believe that the transaction has not
been pre-arranged with a Purchaser in the United States.
c. No Directed Selling Efforts. In regard to this transaction Seller has not
conducted any "directed selling efforts" as that term is defined in rule
902 of Regulation S nor has Seller conducted any general solicitation
relating to the offer and sale of the within securities to persons resident
within the United States or elsewhere.
4. Legends on Certificates. The transaction restriction in connection with
this offshore offer and sale restrict Purchaser from offering and selling to
U.S., persons or for the account or benefit of a U.S. person for a forty (40)
day period. The rules do not require the placement of such a restrictive legend
on the share certificate. Rule 903 (c)(2) governs the forty (40) day transaction
restriction.
5. Exemption; Reliance on Representations. Purchaser understands that the
offer and sale of the Shares is not being registered under the 1933 Act. Seller
is relying on the rules governing offers and sale made outside the United States
pursuant to Regulation S. Rules 901 through 904 of Regulation S govern this
transaction.
6. Transfer Agent Instructions. Seller's transfer agent will be instructed
to issue one or more share certificates representing shares without restrictive
legend in the names of purchaser to be specified prior to closing and that the
shares have been issued pursuant to Regulation S. Seller further warrants that
no instructions other than these instructions have been given to the transfer
agent and that these shares shall be freely transferable on the books and
records of the company subject to compliance with applicable securities laws.
Exhibit 2 - Page 4
<PAGE>
7. Stock Delivery Instructions. The share certificates shall be delivered
to the Purchaser on a delivery versus payment basis at such times and places to
be mutually agreed.
8. Closing Date. The date of the issuance of the sale of the Shares (the
"Closing Date" shall be March 12, 1997, or such other mutually agreed to time
and place.
9. Conditions to the Company's Obligation to Sell. Purchaser understands
that Seller's obligation to sell the Stock is conditioned upon:
a. The receipt and acceptance by Seller of this Subscription Agreement for all
of the shares as evidenced by execution of this subscription agreement by
the President or any Vice President of the Seller.
b. Delivery into the closing depository by Purchaser of good funds (i.e. the
letter of credit) as payment in full for the purchase of the shares.
10. Conditions to Purchaser's Obligation to Purchase. Seller understands
that Purchaser's obligation to purchase the stock is conditioned upon:
a. Acceptance by Purchaser of a satisfactory Subscription Agreement for the
sale of Shares;
b. Delivery of shares of common stock without restrictive legend.
11. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the rulings of the laws of the State of Nevada.
IN WITNESS WHEREOF, this Offshore Securities Subscription Agreement was duly
executed on the date first written below.
PURCHASER
MEXSCAPE INVESTMENTS SA DE CV
- -----------------------------------
Morton Weisbrot
- -----------------------------------
John F. Parks
Exhibit 2 - Page 5
<PAGE>
Accepted this 12th day of March, 1997
GUINNESS TELLI*PHONE CORPORATION
- ------------------------------------
By: Lawrence A. Guinness, President
Exhibit 2 - Page 5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,805
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,805
<PP&E> 60,118
<DEPRECIATION> 30,395
<TOTAL-ASSETS> 39,528
<CURRENT-LIABILITIES> 1,637,033
<BONDS> 0
0
0
<COMMON> 13,427
<OTHER-SE> (1,860,932)
<TOTAL-LIABILITY-AND-EQUITY> 39,528
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 491,369
<OTHER-EXPENSES> 411,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,120
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (491,369)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
