UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
[ ] 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 0-22282.
USCI, INC. .
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(Exact name of registrant as specified in its charter)
Delaware 13-3702647
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Waterford Centre, 5555 Triangle Parkway, Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (678) 268-2300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
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(Title of class)
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. [ ]
Based on the average of the closing bid and ask price on March 13,
2001, the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant was approximately $844,000.
At March 13, 2001, 98,525,029 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
USCI, INC.
TABLE OF CONTENTS
Page
PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 8
Item 3 Legal Proceedings........................................... 8
Item 4 Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6 Selected Financial Data..................................... 9
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7A Quantitative And Qualitative Disclosures About Market Risk.. 19
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 20
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 25
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 26
Signatures........................................................... 29
Index to Financial Statements........................................ 30
PART I
ITEM 1. BUSINESS
General Development of Business
USCI, Inc. ("USCI") is a holding company organized under the laws of the
State of Delaware with principal offices located at Waterford Centre, 5555
Triangle Parkway, Norcross, Georgia 30092, telephone number (678) 268-2300.
Through our subsidiaries, we are engaged in (1) the marketing of
telecommunications products and services with an emphasis on two principal
markets: (a) Internet telephony products and services ("IP Telephony"), and (b)
wireless services ("Wireless Services"), and (2) the delivery of web-based
accounts receivable management and recovery services ("A/R Management
Services").
USCI is the result of a merger, in May 1995, between U.S. Communications,
Inc. and Trinity Six, Inc. Since 1996, we have been engaged in wireless services
marketing through our wholly-owned subsidiary, Ameritel Communications, Inc.
("Ameritel"). As a result of ongoing losses, during 1999, Ameritel restructured
certain loan provisions, converted certain preferred stock into common stock and
filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code.
In conjunction with the restructuring of Ameritel, during 1998 and 1999, we
restructured our management team and board of directors and adopted a revised
operating strategy. See "Ameritel Bankruptcy and Restructuring" and "Business
Strategy".
Pursuant to our ongoing efforts to improve operating results, in 1999, we
entered the IP Telephony marketing business with the formation of
AmericomOnline.com. ("Americom"). During 2000, we formed TelCollect, Inc.
("TelCollect") to deliver specialized A/R Management Services based on a
developed IT platform.
Business Overview
Since the fourth quarter of 1997, our operations have consisted primarily
of the resale of wireless services in the United States. We purchase cellular
telephone access and airtime from facilities-based carriers at wholesale rates
and resell cellular services to subscribers at retail rates. Previously, we
acted as an agent for major United States cellular and paging carriers in the
sale of cellular and paging services through national distribution channels.
In 1999 and the first quarter of 2000, with the formation of Americom and
the conclusion of a marketing and distribution agreement with Net2Phone, we
established a nationwide sales and marketing organization, and began building a
network of distribution channels for IP Telephony services and products. Online
marketing efforts and the establishment of relationships with retail outlets for
IP Telephony services and products began in the second quarter of 2000 and the
commencement of delivery of those services and products began in the fourth
quarter of 2000.
In the fourth quarter of 2000, with the formation of TelCollect, we
launched our web-based A/R Management Services built upon internally developed
web-based software to offer technologically advanced accounts receivable
management and recovery solutions.
We have never operated profitably since inception. In the second half of
1999, we substantially altered our operations in an effort to achieve
profitability. These efforts included establishing an e-commerce platform to
market services and products, downsizing of staff and facilities and other cost
cutting efforts to reduce overhead and adoption of our IP Telephony and A/R
Management Services initiatives. While we expect that those efforts will
position us favorably to grow revenues, improve operating margins and minimize
operating costs, there can be no assurance that we will be successful in
implementing IP Telephony marketing services and A/R Management Services,
growing revenues or operating profitably.
1
Ameritel Bankruptcy and Restructuring
In order to provide a national footprint for the sale of wireless
services, between 1996 and 1998, our subsidiary, Ameritel, negotiated contracts
with more than 20 cellular carriers. Ameritel also developed software systems
and processes to permit our customers to promptly and efficiently process the
subscriber applications necessary to activate cellular and paging services
purchased through these national channels of distribution.
In October 1997, Ameritel entered into an agreement with RadioShack, a
division of Tandy Corporation, under which we were appointed the exclusive
provider of cellular communications services to RadioShack's approximately 250
retail locations in the greater New York metropolitan area. Subsequently, the
agreement was amended to cover Puerto Rico and the Virgin Islands. In order to
fulfill its business strategy, the company hired outside consultants to assist
in analyzing and developing business plans and cash flow projections necessary
to undertake this business. Thereafter such consultants were engaged to identify
and negotiate different terms with trade vendors and to create a strategy for
the profitability of the Company and to stem its operating losses. In addition,
a restructuring of its debt and the creation of a business plan was instituted
in order to make the company viable on a go forward basis. Customer service was
bolstered to service the RadioShack clientele, as well as the other clients of
Ameritel who were in need of customer relations. In October 1998, RadioShack
summarily terminated its agreement with Ameritel and instituted a lawsuit in
which they claimed to be owed $11.2 million in commissions and other fees.
Ameritel filed an answer denying RadioShack's claims and also filed a
counterclaim against RadioShack/Tandy in which we claimed that, through their
actions and conduct, we incurred substantial damages in excess of their claims.
Amongst myriad other problems both in the industry and at the company, Ameritel
and the Company were forced to seek financing necessary to support the servicing
of cellular subscriber clients.
RadioShack's termination of the Ameritel contract contributed
significantly to an inability on our part to secure financing necessary to
support the servicing of our cellular subscriber base. The termination of the
RadioShack contract also created defaults under our loan agreement with Foothill
Capital Corp
On April 14, 1999, we entered into an Amended and Restated
Loan and Security Agreement with Foothill Capital Corp. in which the original
Loan and Security Agreement entered into on June 5, 1998 was amended to
restructure the existing credit facility by reducing the total facility to $17.5
million from which an additional multiple draw term loan in an amount up to $7
million was made available. The $7 million was funded into escrow by certain
preferred shareholders and others through a participation agreement with
Foothill.
Following the closing of the Foothill Amended Loan Agreement, all of
the holders of our preferred shares entered into an agreement under which they
converted $1.5 million stated value of preferred stock for 75 million shares of
our common stock at $0.02 per share, agreed to waive all future dividends on the
outstanding preferred shares, waived all defaults under the terms of the
preferred shares, and cancelled all outstanding options and warrants held by
them covering 4,485,707 shares of common stock. The Company had previously
issued 5,000,000 shares of common stock to the consultant for services rendered
to the Company.
In conjunction with our ongoing efforts to restructure outstanding
indebtedness, in May 1999, our then current Board of Directors resigned and were
replaced by three new directors. Mr. Bruce A. Hahn, our former Chairman and
Chief Executive Officer, resigned as an officer of USCI and entered into a
consulting agreement with Americom, effective December 1, 1999, pursuant to
which he provides sales, marketing and strategic planning services, and in July
1999, Mr. Lee Feist joined USCI as Chairman of the Board, President and Chief
Executive Officer.
In October 1999, Ameritel filed a voluntary petition under Chapter 11
of U.S.C. Title 11 with the United States Bankruptcy Court for the Southern
District of New York (Case No. 99-11081)(the "Bankruptcy Court"). Since the
filing date, Ameritel has operated its business as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. Any reorganization plan
submitted by Ameritel will be subject to approval of the Bankruptcy Court.
2
On April 28, 2000, Tranche B, Inc., the Company, Ameritel and Foothill
Capital Corp. entered into a Purchase and Assignment Agreement which assigned
all rights, title and interest in and to the claims of Foothill against
Ameritel, the Company and guarantors to Tranche B, Inc. Tranche B is owned and
controlled by shareholders who hold a controlling interest in the Company.
Concurrent with this agreement, Tranche B released the Company from all
obligations related to the revolving credit and term loan facility, but retained
its rights against Ameritel. The Company issued 4,000,000 shares of its common
stock to Foothill as consideration for release from its guarantees, and could be
required to issue up to an additional 2,000,000 shares of common stock to
Foothill, depending upon the market price of the stock eighteen months after the
transaction.
In June 2000, the RadioShack litigation was settled pursuant to the
terms of a Compromise Settlement Agreement and Mutual Release Agreement under
which the Company issued 500,000 shares of common stock to Ameritel
Communications, Inc. and each party was released with no further obligations or
liability, except that the Company could be required to issue up to 250,000
additional shares of common stock to Ameritel, depending upon the market price
of the stock eighteen months after the transaction.
Business Strategy
Beginning in October 1998, and continuing through 2000, we adopted a
major shift in strategy, emphasizing (1) entry into the IP Telephony market, (2)
implementation of an e-commerce platform to supplement, and reduce costs
associated with our marketing, distribution, customer service and related
activities, and (3) implementation of various cost control measures to improve
profitability of our historical Wireless Services.
Our objective is to (1) become a leading marketer of IP Telephony
products and services, including prepaid long distance calling cards utilizing
IP Telephony technology and related equipment necessary to facilitate IP
Telephony, (2) become a leading provider of specialized A/R Management Services,
and (3) improve profitability and subscriber retention rates within our Wireless
Services business through improved customer service and adoption of
technologies, processes and systems designed to reduce operating costs. Among
the specific steps taken to date, or planned to be taken, to attain our
objectives are:
* adoption,in October 1998, of a freeze in marketing efforts to add new
Wireless Service subscribers in order to focus our resources on servicing
and preserving the existing subscriber base and lowering the operating cost
of that business.
* sale, in November 1998, subject to certain conditions, of the bulk of our
paging services subscriber base, to Metrocall for cancellation of the debt
to Metrocall in the amount of $876,000 representing the sums due and owing
for paging services previously purchased from Metrocall.
* launch, in January 2000, of our e-commerce platform,
www.AmericomOnline.com, as a principal marketing tool for our products and
services.
* execution, in April 2000, of a Marketing and Distribution Agreement with
Net2Phone to market IP Telephony products and services of Net2Phone,
including Internet telephone and prepaid long distance calling cards.
* launch, in October 2000, of our web-based accounts receivable management
and recovery platform.
The specific steps taken to date have been supplemented by, and will in the
future be supplemented by: (1) efforts to expand our electronic media channels
and link our new internet e-commerce site to other strategic sites to increase
site traffic and promote our products and services, (2) efforts to expand into
new specialized distribution channels, and (3) implementation of a centralized
order processing platform and the development of browser based technology to
improve customer service and reduce operating costs.
3
Wireless Services
Historically our core operations were in the marketing of wireless
services. From 1992 to 1997, our subsidiary, Ameritel acted as an agent for
major United States cellular and paging carriers in the sale of cellular and
paging services through national distribution channels. Since 1997, Ameritel's
wireless services operations have consisted primarily of the resale of wireless
services.
-- Carrier Relationships. Ameritel provides cellular services by purchasing
access and airtime from facilities-based carriers at wholesale rates and
reselling those services at retail rates. In the past, Ameritel was able to
negotiate favorable carrier agreements that provided coverage throughout
substantially all of the United States and did not require "take-or-pay
conditions." These multiple carrier agreements have given Ameritel the ability
to control the structure of national rate plans and distribute services through
national distribution channels.
Ameritel presently has carrier agreements with three nonaffiliated
facilities-based cellular service providers which authorize Ameritel to resell
the cellular service provided by these carriers for existing subscribers: (1)
AT&T Wireless Services, (2) Celulares Telephonica, (3) GTE Mobilnet and (4)
Verizon Wireless.
-- Marketing and Customer Support. Since October 1998, we have undertaken
no marketing efforts to add Wireless Service customers. We do not presently
intend to commence any such marketing efforts in the foreseeable future.
Instead, our efforts have been, and are expected to continue to be, focused on
improving our customer support in order to retain and improve the profitability
of Ameritel's existing Wireless Service subscriber base. At March 2001, Ameritel
had approximately 4,100 Wireless Service subscribers.
Internet Telephony
In 1999, we formed AmericomOnline.com ("Americom") for the purpose of
commencing marketing of IP Telephony products and services as well as prepaid
communications products and services through our proprietary e-commerce platform
and through mass market general merchandise retailers, grocery stores, drug
stores and TV direct response.
IP Telephony is a service that enables users to make high quality, low-cost
telephone calls over the Internet. In April 2000, Americom entered into an
agreement with Net2Phone, a leading provider of IP Telephony services and
products, to be the exclusive marketer of Net2Phone services and products
throughout the United States to selected general merchandise mass marketers and
to all convenience stores and supermarkets.
In the fourth quarter of 2000, we began offering web-based telephony
services which enable customers to make calls using their personal computers as
well as basic IP Telephony devices which enable customers to make calls using
traditional telephones. In addition we market long distance calling cards,
powered by the Net2Phone Internet Telephony Network which may be used from any
private or public phone in the United States.
-- Development of IP Telephony. IP Telephony has emerged as a low-cost
alternative to traditional long distance calls. International Data Corporation
projects that the IP Telephony market will grow from approximately $100 million
in 1998 to more than $11.9 billion in 2003. Internet telephone calls are less
expensive than traditional long distance calls primarily because these calls are
carried over the Internet and therefore bypass a significant portion of
traditional long distance tariffs. This is especially true for international
calls where international long distance tariffs can be significant.
Historically the communications services industry has transmitted voice and
data over separate networks using different technologies. Traditionally, long
distance carriers have built a telephone network based on circuit-switching
technology, which establishes and maintains a dedicated path for each call until
the call is terminated. Although a circuit-switch system reliably transmits
voice communications, circuit switching does not efficiently utilize
transmission capacity. When a telephone call is placed, a circuit connection is
established, and the circuit remains dedicated for transmission of that call and
is unable to transmit any other call.
4
Data networks have typically been built utilizing packet-switching
technology which divides signals into packets that are simultaneously routed
over different channels to a final destination where they are reassembled in the
original order in which they were transmitted. Packet-switch technology provides
for a more efficient use of the capacity because the network does not establish
dedicated circuits and does not require the same amount of band width to be
reserved for each transmission. As a result, substantially greater traffic can
be transmitted over apacket-switch system, such as the Internet, than over a
circuit-switch network.
IP Telephony uses packet-switching technology whereas traditional
telecommunications carriers have historically avoided the use of
packet-switching for transmitting voice calls due to poor sound quality
attributable to delays and lost packets which prevent real time transmission.
However, recent improvements in packet-switching, compression and improved
hardware as well as the use of privately managed networks have significantly
improved the quality of packet-switched voice calls allowing for real time
transmission.
As a result, packet-switching technology is now allowing services to
converge their traditional voice and data networks and more efficiently utilize
their networks by carrying voice, fax and data traffic over the same network.
These improved efficiencies in packet-switching technologies have resulted in
network cost savings that can be passed on to the consumer in the form of lower
long distance rates. In addition, international telephone calls carried over the
Internet or private IP networks are less expensive than similar calls carried
over circuit-switched networks, primarily because they by-pass the international
settlement process which represents a significant portion of international long
distance tariffs.
-- Marketing Agreement with Net2Phone. In April 2000, we entered into an
agreement with Net2Phone to market IP Telephony services and products of
Net2Phone. Pursuant to the terms of that agreement, Americom was appointed as
exclusive marketing representative for the sale of Net2Phone's IP Telephony
products and services to selected mass merchandise retailers and to all
convenience stores and supermarkets.
-- The Net2Phone Network. Through an agreement with its affiliate, IDT
Corporation, Net2Phone leases capacity on an Internet network comprised of
leased high-speed fiber optic lines connecting eight major cities across the
United States, and leases high-speed fiber optic lines connecting smaller cities
to the network. Net2Phone has a right to use network capacity leased by IDT. The
network backbone uses state-of-the-art hardware including Cisco Series 7000
routers and Nortel Passport switches. Their high-speed backbone connects traffic
at four major public Internet exchange points with other networks. Through
peering arrangements, Net2Phone exchanges Internet traffic with numerous other
Internet backbone providers at these points. Net2Phone operates IDT's network,
one of the largest Internet access networks, providing local dial-up access. The
IDT network also includes hundreds of additional network access locations owned
by local and regional Internet service providers.
Net2Phone is able to provide service in areas where they do not have
dial-up equipment by utilizing call-forwarding technology to expand their
coverage areas by increasing the total number of local access numbers. They have
been closing multiple network access points in a number of states in order to
consolidate their equipment into central "Super Point of Presence" locations.
For example, one Super Point of Presence in New Jersey can supply local access
for the entire state of New Jersey.
Net2Phone manages its network hardware remotely. It is compatible with a
variety of network systems around the world. They have stated that they believe
that their IP Telephony network can currently support approximately 12,000
simultaneous calls and that their systems are scalable to 4 times their current
capacity through the purchase and installation of certain additional hardware.
5
A/R Management Services
In 2000, we formed TelCollect to develop and offer web-based accounts
receivable management and recovery services.
TelCollect's A/R Management Services are delivered through a web-based
software platform which provides to clients a variety of accounts receivable
management and recovery services including fraud detection and management, third
party collections, skip tracing, consumer payment arrangement monitoring and fee
collection services. Initial marketing efforts for A/R Management Services are
directed to the financial services, telecommunications, and bank card
industries. A/R Management Services are offered throughout the United States,
Puerto Rico and Mexico and include multi-lingual capabilities.
Marketing and Distribution Channels
With the changes in our business strategy implemented between the fourth
quarter of 1998 and 2000, we have refined our strategies and channels with
respect to the marketing and distribution of products and services. Our current
strategy with respect to marketing and distribution channels includes the
following: (1) implementation of a e-commerce platform to market and distribute
products and services from our www.AmericomOnline.com web site, (2)
establishment of a national sales organization to sell to mass market retailers,
and (3) the launch of a major campaign directed towards the telecommunications
industry to market our A/R Management Services. All of our marketing efforts are
presently focused on, and for the foreseeable future are expected to continue to
focus on, IP Telephony products and services and A/R Management Services. We are
continuing our current policy of undertaking no active marketing efforts to add
new Wireless Service subscribers.
-- Internet Channels. We plan to market and distribute IP Telephony
products and services directly to consumers utilizing the Internet. Our web site
(www.AmericomOnline.com) will serve to sell, promote and serve customers 24
hours a day 7 days a week. We intend to undertake efforts to link our web site
to other strategic sites in order to increase site traffic to targeted consumers
and to promote our site through specialized distribution channels, which may
include television, radio and print media, all intended to increase public
awareness of our site and the products and services offered. As of May 2000, our
web site was fully operational.
-- Retail Mass Merchandise Channels. Until the termination of the agreement
with our principal customer, we utilized the retail mass market channel as a
major source of Wireless Service distribution and entered into distribution
agreements with several national and regional retail chains. Following the
termination of the RadioShack agreement in October 1998, we did not have the
capital to fund the acquisition of new wireless subscribers and either
terminated or suspended our agreements with the national chains which we
previously serviced.
We have resumed our marketing efforts to the retail mass market to market
products and services that we represent on behalf of Net2Phone. We assembled a
distribution network to offer IP Telephony services and products through retail
mass merchandisers and, as of the fourth quarter of 2000, commenced actual
marketing efforts through those channels.
Research and Development
We historically conducted research and software development activities to
support our carriers, our customers and our distribution channels. With the
shift in our corporate strategy, during 2000 we conducted limited research and
development activities primarily related to the development of our A/R
Management Services software platform. We do not presently plan to conduct any
material research and development activities in the foreseeable future. We will,
however, continue to undertake efforts to upgrade our management information
systems and customer support and related systems to assure that those systems
meet the needs of our clients and customers. We do not have a research and
development budget.
6
Intellectual Property
We do not own any patents and have not filed any patent applications. We
rely, primarily, on third party software and technology to support our
operations
On July 28, 1998, "Ameritel" became registered as a service mark for
cellular telephone and pager services in the U.S. Patent and Trademark Office.
We have filed trademark applications for "RAP," "Cellular on the Go" and "Family
Link." We expect to file additional trademark applications from time-to-time in
the future as necessary.
Competition
-- IP Telephony. The long distance telephony market and, in particular, the
IP Telephony market, is extremely competitive. Our efforts in that market are
highly dependent upon the cost, quality and features of the products and
services of Net2Phone. There are several large and numerous small competitors,
and we expect to face continuing competition based on price and service
offerings from existing competitors and new market entrants in the future. The
principal competitive factors in the market include price, quality of service,
breadth of geographic presence, customer service, reliability, network capacity
and the availability of enhanced communications services. The principal
competitors in the IP Telephony market include AT&T, Deltathree, MCI WorldCom
and Sprint in the United States and foreign telecommunications carriers.
Net2Phone recognizes the following as its competitors:
o Internet Telephony Service Providers. Internet telephony service providers
such as AT&T Jens (a Japanese affiliate of AT&T), deltathree.com (a
subsidiary of RSL Communications), I-Link, iBasis (formerly known as VIP
Calling), ICG Communications, IPVoice.com, ITXC and OzEmail (which was
acquired by MCI WorldCom) route voice traffic over the Internet.
o Software/Hardware Providers. Companies such as VocalTec, Netspeak and e-Net
produce software and other computer equipment that may be installed on a
user's computer to permit voice communications over the Internet.
o Telecommunications Companies. A number of telecommunications companies,
including AT&T, Deutsche Telekom, MCI WorldCom and Qwest, currently
maintain, or plan to maintain, packet-switched networks to route the voice
traffic of other telecommunications companies.
o Network Hardware Manufacturers. A number of large telecommunications
providers and equipment manufacturers, including Alcatel, Cisco, Lucent,
Northern Telecom and Dialogic (which was acquired by Intel), have announced
that they intend to offer products similar to Net2Phone's. Cisco Systems
has also taken additional steps by recently acquiring companies that
produce devices that help Internet service providers carry voice over the
Internet while maintaining traditional phone usage and infrastructure.
o Voice-Enabled Online Commerce Providers. Several companies, including USA
Global Link and AT&T's Inter@active Communications, have begun to apply
Internet telephony technologies in connection with online commerce
transactions. These providers compete with services of Net2Phone such as
Click2Talk by integrating voice communications into commercial Web sites.
Many of our competitors, and the competitors of Net2Phone, have
substantially greater financial, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than we have or Net2Phone has. As a
result, certain of these competitors may be able to adopt more aggressive
pricing policies, which could hinder our ability to market the IP Telephony
products and services of Net2Phone. One of the key competitive advantages of
Net2Phone is the ability to route calls through Internet service providers,
which allows Net2Phone to bypass the international settlement process and
realize substantial savings compared to traditional telephone service. A change
in the regulation of Internet service providers, which is currently being
considered by a number of regulators and legislatures around the world, could
force Net2Phone to increase prices and offer rates that are comparable to
traditional telephone call providers.
7
As consumers and telecommunications companies have grown to understand
the benefits that may be obtained from transmitting voice over the Internet, a
substantial number of companies have emerged to provide voice over the Internet.
In addition, companies currently in related markets have begun to provide voice
over the Internet services or adapt their products to enable voice over the
Internet services. These related companies may potentially migrate into the IP
Telephony market as direct competitors.
-- Accounts Receivable Management Services. The accounts receivable
management/collection industry is highly competitive and is characterized by
rapidly changing technologies. Competitors include a wide array of large
national companies as well as local and regional companies many of which have
greater experience, financial and other resources and name recognition.
Competition in the A/R Management Service business is based primarily on quality
of service, price and effectiveness of services in maximizing collections.
-- Wireless Services. The wireless communications industry is
highly competitive and is characterized by rapidly changing technologies. In the
cellular industry, our principal competitors are cellular and PCS carriers and
other resellers who market their services directly to the public. In every area
where we offer our cellular services, we compete with incumbent local cellular
service providers in the region, as well as with PCS providers that operate on
both a local and a national basis. Competition in the Wireless Service business
is based primarily on quality of service, coverage area and price.
Employees
As of March 15, 2001, we employed a total of approximately 45 people,
including information systems personnel, customer service and collections
personnel, clerical and administrative staff. None of our employees are
represented by a labor union or is subject to a collective bargaining agreement.
We believe that our relations with employees are good.
ITEM 2. PROPERTIES
Our executive offices and other facilities are located in Norcross, Georgia, a
suburb of Atlanta. The premises, comprising approximately 12,000 square feet,
are occupied pursuant to a lease running through September 14, 2002 and
providing for current monthly rent payments of approximately $8,000. In addition
to our offices, the facility houses our customer service center and computer
facilities.
ITEM 3. LEGAL PROCEEDINGS
In October 1999, our wholly-owned subsidiary, Ameritel, filed a
voluntary petition under Chapter 11 of U.S.C. Title 11 with the United States
Bankruptcy Court for the Southern District of New York (Case No. 99-11081)(the
"Bankruptcy Court"). Since the filing date, Ameritel has operated its business
as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
As of March 15, 2001, all claims of Foothill Capital were resolved, whereby USCI
was released from its guarantees, but claims against Ameritel were preserved and
assigned to Tranche B, Inc. Ameritel's reorganization plan with respect to
claims of unsecured creditors has not been completed and is subject to approval
by the Bankruptcy Court. No plan of reorganization has yet been submitted to the
court, and there is no assurance that any plan of reorganization will be
confirmed by the Court. A motion is currently pending before the Court to
dismiss or convert the Ameritel case.
As a result of our lack of capital following the termination our RadioShack
contract, various vendors instituted lawsuits against our inactive subsidiary,
U.S. Communications, Inc., some of which have been reduced to judgment. U.S.
Communications has been inactive for a number of years and has no assets, and
the creditors who have filed suit against U.S. Communications have been so
advised.
We do not believe that failure to settle these matters will have a
material adverse effect on our business, our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 2000.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock was quoted on the Nasdaq National Market
System ("NNM") under the symbol "USCM" until November 13, 1998, at which time it
was delisted and began trading on the over-the-counter electronic bulletin board
("OTCBB"). The following table sets forth the range of high and low bid prices
for each quarter during the past two fiscal years.
High Low
------ ------
Calendar Year 2000
Fourth Quarter..................... $0.0650 $0.0100
Third Quarter...................... 0.1400 0.0600
Second Quarter..................... 0.3500 0.0900
First Quarter...................... 0.8000 0.2600
Calendar Year 1999
Fourth Quarter..................... $0.5469 $0.0938
Third Quarter...................... 0.6250 0.2031
Second Quarter..................... 0.9375 0.0938
First Quarter...................... 0.5000 0.0938
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 13, 2001, the closing bid price of the Common Stock was $0.0156
As of March 28, 2001, there were 117 holders of record of the Company's
Common Stock. The Company believes there were in excess of 3,000 beneficial
holders of the Common Stock as of such date.
The Company has not declared any cash dividends on its Common Stock and
does not intend to pay cash dividends on its Common Stock for the foreseeable
future.
(b) Recent Sales of Unregistered Securities
None
9
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
Company's consolidated financial statements.
Because our wholly-owned subsidiary, Ameritel Communications, Inc.,
filed for protection under Chapter 11 of the U.S. Bankruptcy Code in 1999,
financial statements for the year ended December 31, 20000 and 1999 have been
presented separately for (1) Ameritel Communications, Inc. and (2) USCI and
subsidiaries, other than Ameritel. The financial statements of USCI, and the
financial data which follows, reflects accounting for the operations of Ameritel
under the equity method and those operations are not consolidated with USCI.
The comparability of our operating results over the past five years has
been materially impacted by the change in accounting for Ameritel's operations
to use the equity method instead of consolidating those operations with USCI's
other operating results. For the convenience of readers and ease of comparison,
in addition to the five year comparison of results for USCI on a consolidated
basis, selected financial data relating to Ameritel for 2000 and 1999, has been
provided herewith along with pro forma combined financial data of USCI including
Ameritel for 2000 and 1999.
The following data should be read in conjunction with the financial
statements and related notes appearing elsewhere in this report on Form 10-K.
10
Statement of Operations Data:
-----------------------------
Year Ended December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- -------- --------
Total revenues $ 114,726 $ - $ 41,089,160 $ 9,811,890 $ 7,073,167
Operating Expenses:
Commissions pass-through
and other direct costs 9,858 - 24,694,501 5,052,205 3,598,952
Selling, general and
administrative 1,674,597 764,088 32,791,669 18,967,189 12,128,111
Restructuring and other
charges - 3,431,387 - 1,100,000 -
Subscriber acquisition and
promotional costs - - 18,920,271 12,385,662 114,986
---------- ------------ ------------- ------------- ------------
Operating loss (1,569,729) (4,195,475) (35,317,281) (27,692,986) (8,768,882)
Other income (expense):
Gain on sale of subscribers - - 876,164 - -
Interest income (expense), net 1,269 12,310 (8,053,256) (1,093,618) 985,169
Guarantor release expense (717,159) - - - -
Income (loss) from investment
in Ameritel - (10,406,884) - - -
----------- -------------- -------------- -------------- ------------
Net loss $ (2,271,360) $(14,590,049) $(42,494,373) $(28,786,604) $ (7,783,713)
=========== ============== =============== =============== =============
Net loss per
common share-diluted $ (.02) $ (.22) $ (3.90) $ (2.81) $ (0.76)
=========== ============== =============== =============== =============
Basic and diluted weighted
average common shares
outstanding 96,751,900 67,174,007 11,072,905 10,251,402 10,187,909
============ ============== =============== ============== =============
Balance Sheet Data:
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- --------- -------- --------- ----------
Working capital (deficit) $(5,599,229) $(4,658,208) $(11,567,863) $(12,643,491) $13,177,931
Total assets 466,500 1,152,491 12,411,881 13,594,047 26,394,982
Long term debt - - 14,354,096 - -
Investment in Ameritel - 30,592,037 - - -
Total stockholders'
equity (deficit) $(5,536,479) $(35,088,771) $(22,834,853) $(6,312,978) $19,312,420
11
Ameritel and Pro Forma Combined
Statement of Operations Data
-----------------------------------------------
Year ended December 31,
----------------------------------------------------------------------
2000 1999
--------------------------------------- -----------------------------
Unaudited Unaudited
Ameritel Pro Forma Ameritel Pro Forma
Communications, Combined Communications, Combined
Inc. Financial Financial Inc. Financial Financial
Data Data Data Data
--------------- --------------- ---------------- -------------
Total Revenues $ 4,678,385 $ 4,793,111 $ 15,360,812 $ 15,360,812
Operating Expenses
Commission pass-through and
other direct costs
2,052,716 2,062,574 7,847,964 7,847,964
Selling, general & administrative
4,156,521 5,831,118 13,765,016 14,529,104
Subscriber acquisition and
promotion costs 522,153 522,153 1,617,913 1,617,913
Restructuring and other charges - - 395,164 2,107,087
-------------- ---------------- ---------------- ---------------
Operating loss (2,053,005) (3,622,734) (8,265,245)
(12,460,720)
Interest income (expense) 2,718 3,987 (2,141,639) (2,121,329)
Guarantor release expense - (702,900) - -
Gain on settlement of liabilities - -
2,086,510 2,086,510
-------------- ---------------- ---------------- ---------------
Net Income (loss) $ 36,223 $ (2,235,137) $ (10,406,884) $ (14,590,049)
============== ================ ================ ===============
Ameritel and Pro Forma Combined
Balance Sheet Data:
---------------------------------
December 31,
-------------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------------
Unaudited Unaudited
Ameritel Pro Forma Ameritel Pro Forma
Communications, Combined Communications, Combined
Inc. Financial Financial Inc. Financial Financial
Data Data Data Data
---------------- --------------- ---------------- ---------------
Working Capital (deficit) (1) $ (33,585,312) $ (39,184,541) $ (30,625,835) $ (35,284,043)
Total Assets $ 546,441 $ 1,064,608 $ 2,373,951 $ 3,526,442
(1) Working capital (deficit) of Ameritel, and on a pro forma basis, excludes
amounts owed to USCI and affiliates in the amount of $18,854,608 at
December 31, 2000 and $21,856,306 at December 31, 1999.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed herein.
Bankruptcy of Ameritel
During 1999, Ameritel Communications, Inc., our primary operating
subsidiary, substantially downsized its operations, restructured certain loan
provisions, converted certain preferred stock into common stock and filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. As a result of the
bankruptcy filing, operations of Ameritel have been presented under the equity
method and are not included in the consolidated financial statements of USCI.
For the convenience of readers and ease of comparison, selected financial data
of Ameritel and pro forma combined financial data of USCI including Ameritel for
1999 and 2000 has been presented in Selected Financial Data appearing herein.
Overview
Historically, our revenues consisted of commissions earned by Ameritel
as an activation agent for cellular and paging carriers and, since the last
quarter of 1996, revenues from the resale of cellular and paging services. Since
completion of our transition in 1998 to becoming a reseller, we have not
received material revenues from agency commissions. Other than revenues
generated by Ameritel, we have historically generated no other operating
revenues.
Ameritel bills its customers for monthly access to the underlying
carrier's cellular network, cellular usage based on the number, time and
duration of calls, the geographic location of both the originating and
terminating phone numbers, extra service features, and the applicable rate plan
in effect.
The wholesale cost of subscriber service includes monthly access, usage
(home and roaming, long distance) and special features charges paid by us to the
cellular carriers.
Subscriber acquisition and promotional costs includes commissions
earned by Ameritel's channels of distribution (or to equipment suppliers on
their behalf) for each activation by their customers of a cellular telephone,
certain advertising costs incurred by Ameritel or its distribution channels and
reduced access and/or free airtime for a limited period to Ameritel's cellular
subscribers. In view of the substantial reduction in Ameritel's subscriber base,
only a small part of these costs may be recoverable from the long-term revenue
stream created by the continuation of subscribers services. Ameritel's ability
to capture such revenue streams has been substantially reduced by early service
cancellations, known as churn, and by losses caused by fraudulent use of service
by third persons which are not recoverable from subscribers. Under existing
agreements with the carriers which provide Ameritel with cellular service,
Ameritel has recovered access fraud in some instances and, although not
generally recoverable, subscriber fraud is also recoverable under certain
circumstances. It should be noted that Ameritel has already suffered substantial
losses in subscriber fraud, which materially contributed, to our deficit.
Selling, general and administrative expense include all personnel
related costs of both USCI and Ameritel, including Ameritel's costs of providing
sales and support services for customers, personnel required to support
Ameritel's operations, and commissions to Ameritel's independent sales
representatives. It also includes the costs of the billing and information
systems, other administrative expenses, bad debt expense, facilities related
expenses, travel, professional fees, as well as all depreciation and
amortization expenses.
13
We, have experienced and will continue to experience significant
operating and net losses and negative cash flow from operations. Ameritel has
generally been unprofitable, (2000 being the exception with a small profit) and
has generated negative cash flows from operations. The loss of the RadioShack
account in 1998 further accelerated our losses and negative cash flow. In
response to the RadioShack termination, Ameritel reduced its workforce from 280
to 115 employees, which included a substantial number of customer service and
collection personnel and reduced its leased facilities from 23,000 square feet
to 18,000 square feet. Since that time, we have made further reductions in our
leased facilities to approximately 12,000 square feet as well as personnel
reductions in which our executive staff has been reduced to 1 individual and our
employee roster consists of 45 employees. The reductions in both executive and
other personnel have resulted in reduced effectiveness of Ameritel's customer
service and collection departments causing higher churn rates.
In the second half of 1999 and 2000, we substantially altered our
operations in an effort to achieve profitability, including establishing an
e-commerce platform to market services and products, downsizing of staff and
facilities and other cost cutting efforts to reduce overhead and adoption of our
IP Telephony and A/R Management Services initiatives. While we expect that those
efforts will position us favorably to grow revenues, improve operating margins
and minimize operating costs, those operations began on a limited scale in 2000
and there can be no assurance that we will be successful in growing revenues or
operating profitably within those markets.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Total pro forma revenues for the year ended December 31, 2000 ("2000"),
consisting primarily of subscriber sales of Ameritel, were $4,793,111 as
compared to $15,360,812 for the year ended December 31, 1999 ("1999").
Consolidated revenues of USCI, excluding Ameritel, were $114,726 during
2000 and $nil during 1999.
The decreased revenues of Ameritel for 2000 are attributable to
decreased sales of our branded cellular services due to a loss of cellular
subscribers during the year. We ceased marketing efforts to add wireless service
customers in 1998, and there are no plans to start any such marketing efforts.
Between January 1, 1999 and December 31, 2000, Ameritel did not add significant
numbers of new subscribers and its active cellular subscriber base was reduced
from approximately 15,000 to approximately 4,100.
Consolidated revenues during 2000 were attributable $49,000 to IP
Telephony sales and $65,000 to A/R Management Services, each of which commenced
during the fourth quarter of 2000.
Cost of Sales
Pro forma costs of subscriber services, which consist of direct charges
from cellular carriers for access, airtime and services resold to Ameritel's
subscribers, amounted to $2,062,574 and $7,847,964 for 2000 and 1999,
respectively. The gross margin for subscriber sales was $2,625,669, or 56%, and
$7,512,848 or 49% for 2000 and 1999, respectively. The increase in gross margin
percentage is attributable to the higher profitability of an existing subscriber
base as contrasted with one that has a high percentage of new customers added
each year.
Excluding Ameritel, USCI reported $9,858 of cost of sales and $104,868
of gross margin on a consolidated basis during 2000 and no cost of sales or
gross margin during 1999. Consolidated cost of sales during 2000 were
attributable to IP Telephony operations.
14
Operating Expenses
Subscriber Acquisition and Promotional Costs. Pro forma subscriber
acquisition and promotional costs represent expenses incurred by Ameritel to
acquire new subscribers for its cellular services. These costs consist primarily
of commissions paid to retailers and outside sales representatives, below cost
discounts (i.e. reduced monthly access charges or free minutes) granted to
subscribers when purchasing cellular services, rebates issued to subscribers and
certain advertising costs. Subscriber acquisition and promotional costs amounted
to $522,153 and $1,617,913 for 2000 and 1999, respectively. The decrease in
these costs in 2000 is also attributable to lower promotional costs due to the
termination of promotions during a subscriber's term. These costs are expected
to decrease since Ameritel is not adding new subscribers and the promotional
costs associated with current subscribers continue to decline.
Excluding Ameritel, USCI reported no subscriber acquisition and promotional
costs on a consolidated basis during 2000 or 1999.
Selling, General and Administrative Expense. Pro forma combined selling,
general and administrative expenses aggregated $5,831,118 for 2000 as compared
to $14,529,104 for 1999, reflecting staff reductions and reduction of other
operating expenses at both USCI and Ameritel due to reduced activity. Of the
total pro forma selling, general and administrative expense reported during
2000, $1,674,597 was attributable to USCI and $4,156,521 was attributable to
Ameritel and, during 1999, $764,088 was attributable to USCI and $13,765,016 was
attributable to Ameritel. Salaries and related employee benefits decreased by
45% to approximately $2,470,000 for 2000 from $4,474,000 for 1999, due to
significant reductions in overall personnel levels and the elimination of most
executive level positions. Telecommunications and facilities expense decreased
by 44% to $452,000 for 2000 from $801,000 for 1999 and billing and credit review
services decreased by 67% to $426,000 for 2000 from $1,274,000 in 1999. The
reductions in telecommunications and facilities expense is due to lower rent
from moving to smaller and less expensive office space, the reduced telephone
traffic associated with a smaller staff, a less expensive telephone system. The
reduction in billing and credit review services is attributable to the dwindling
wireless subscriber base which results in fewer bills each month and the
decision to cease marketing efforts aimed at generating new wireless subscriber
accounts. Professional and other decreased to approximately $1,065,000 for 2000
from $2,972,000 in 1999 due to reduced legal, accounting fees and consulting
fees. Depreciation and amortization for 2000 was $163,000 as compared to
$971,000 for 1999 as a result of the adjustment in 1999 that wrote down most of
the long lived assets to zero value, leaving very little to depreciate or
amortize.
Provisions for losses on accounts receivable decreased to $801,000 in 2000
from $7,300,000 in 1999. Most of the uncollectible accounts were identified and
reserved for in 1999 so the provision for losses in 2000 relates solely to the
significantly lower revenue base in 2000.
Restructuring and Other Charges
During 1999, USCI and Ameritel reported pro forma restructuring and related
charges of $2,107,087, of which $1,711,923 was reported on the consolidated
financial statements of USCI and $395,164 were reported by Ameritel. There were
no restructuring charges in 2000.
During 1999 USCI issued common shares or options to purchase common shares
below market value to various individuals for either services or for replacement
of shares previously used as collateral. Valuation for the shares issued for
services amounted to approximately $1,720,000 for the year ended 1999. There
were no shares issued for services in 2000, and the minimal options granted were
at or above market at the date of grant.
As a result of a review of the certain long-lived assets of U.S.
Communications, Inc., USCI recognized a loss due to impairment of such assets in
the approximate amount of $1,712,000 for the year ended 1999.
Reorganization costs totaling $395,164 were recorded by Ameritel during
1999. Those costs consisted of certain deferred financing costs that were
written off in accordance with Statement of Position 90-7 governing financial
reporting of entities in bankruptcy.
15
Other Income (Expense)
Consolidated other income (expense) consists of net interest income
(expense) and, on a consolidated basis, the gain or loss attributable to
investment in Ameritel.
Consolidated interest income (expense), excluding Ameritel, was income
of $15,528 in 2000 as compared to income of $12,310 in 1999. Ameritel had
interest income of $2,718 in 2000 and $10,163 in 1999. There was consolidated
interest expense, excluding Ameritel, of $14,259 in 2000 and $0 in 1999.
Ameritel had interest expense of $2,151,802 in 1999 and $0 in 2000. The decrease
is the result of the bankruptcy filing by Ameritel which resulted in interest
charges ceasing. The contractual interest that Ameritel would have reported if
not for the bankruptcy was $2,508,510. In conjunction with the restructuring of
the secured debt to Foothill (which resulted in the Company being released from
its guarantee thereof) and the settlement of the RadioShack litigation against
Ameritel and the Company, the Company issued 4,500,000 shares of stock as
consideration or added inducement. The market value of the stock at the date of
the agreements was recorded as "Guarantor release expense" totaling $702,900 in
2000.
Ameritel reported a gain on settlement of liabilities of $2,086,510 in
2000. This was the result of the settlement of the dispute with RadioShack.
On a consolidated basis, USCI reported as other expense a loss
attributable to its investment in Ameritel of $10,406,884 during 1999. During
2000, the Company was able to extricate itself from guarantees of all Ameritel
debt. There were no losses recognized during 2000 under the equity method of
accounting.
The Company incurred net losses of $2,271,360 and $14,590,049 for 2000
and 1999, respectively.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Total revenues for the year ended December 31, 1999 ("1999"),
consisting primarily of subscriber sales of Ameritel, were $15,360,812 as
compared to $41,089,160 for the year ended December 31, 1998 ("1998"). Excluding
Ameritel, USCI had no consolidated revenue during 1999.
The decreased revenues for 1999 are attributable to decreased sales of
our branded cellular services due to a loss of cellular subscribers during the
year.
Between January 1, 1999 and December 31, 1999, Ameritel did not add any
new subscribers and its active cellular subscriber base was reduced from
approximately 60,000 to approximately 15,000.
Cost of Sales
Costs of subscriber services, which consist of direct charges from
cellular carriers for access, airtime and services resold to Ameritel's
subscribers, amounted to $7,847,964 and $24,683,121 for 1999 and 1998,
respectively. The gross margin for subscriber sales was $7,512,848 or 49% and
$16,391,114 or 40% for 1999 and 1998, respectively. The increase in gross margin
percentage is attributable to better wholesale rates experiences in the areas
Ameritel serviced during 1999. Excluding Ameritel, USCI reported no cost of
sales and no gross profits on a consolidated basis during 1999.
Operating Expenses
Subscriber Acquisition and Promotional Costs. Subscriber acquisition
and promotional costs represent expenses incurred by Ameritel to acquire new
subscribers for its cellular services. These costs consist primarily of
commissions paid to retailers and outside sales representatives, below cost
discounts (i.e. reduced monthly access charges or free minutes) granted to
subscribers when purchasing cellular services, rebates issued to subscribers and
certain advertising costs. Subscriber acquisition and promotional costs amounted
to $1,617,913 and $18,920,271 for 1999 and 1998, respectively. The decrease in
these costs in 1999 is also attributable to lower promotional costs due to the
termination of promotions during a subscribers term. These costs are expected to
decrease since Ameritel is not adding new subscribers and the promotional costs
associated with current subscribers continues to decline. Excluding Ameritel,
USCI reported no subscriber acquisition and promotional costs on a consolidated
basis during 1999.
16
Selling, General and Administrative Expense. Pro forma combined
selling, general and administrative expenses aggregated $14,529,104 for 1999 as
compared to $32,791,669 for 1998, reflecting staff reductions and reduction of
other operating expenses at both USCI and Ameritel due to reduced activity. Of
the total pro forma selling, general and administrative expense reported during
1999, $764,088 was attributable to USCI and $13,765,016 was attributable to
Ameritel. Salaries and related employee benefits decreased by 52% to
approximately $4,474,000 for 1999 from $9,384,000 for 1998, reflecting
significant workforce reductions that began in the fourth quarter of 1998 due to
the termination of the contract with RadioShack. This reduction included the
termination of sales, activation and field personnel due to reduced sales as
well as customer service, collections and other personnel. Telecommunications
and facilities expense decreased by 63% to $801,000 for 1999 from $2,189,000 for
1998 and billing and credit review services decreased by 53% to $1,274,000 from
$2,686,000 in 1998 due, in substantial part, to decreased activity. Professional
and other increased to approximately $2,972,000 from $1,165,000 due to legal,
consulting and other fees incurred in connection with the restructuring and
reorganization. Depreciation and amortization for 1999 was $970,252 as compared
to $2,664,476 for 1998 due in part to losses realized as a result of the write
down of certain long lived assets of U.S. Communications, Inc.
Provisions for losses on accounts receivable decreased to $7,300,000 in
1999 from $11,500,000 in 1998 due to write off of uncollectible accounts
resulting from age, lack of resources and damage caused by the RadioShack
termination offset by a reduction of losses suffered from fraud.
Restructuring and Other Charges
During 1999, USCI and Ameritel reported pro forma restructuring and
related charges of $3,826,551, of which $3,431,387 were reported on the
consolidated financial statements of USCI and $395,164 were reported by
Ameritel.
During 1999 USCI issued common shares or options to purchase common
shares below market value to various individuals for either services or for
replacement of shares previously used as collateral. Valuation for the shares
issued for services amounted to approximately $1,720,000 for the year ended
1999.
As a result of a review of the certain long lived assets of U.S.
Communications, Inc., USCI recognized a loss due to impairment of such assets in
the approximate amount of $1,712,000 for the year ended 1999.
Reorganization costs totaling $395,164 were recorded by Ameritel during
1999. Those costs consisted of certain deferred financing costs which were
written off in accordance with Statement of Position 90-7 governing financial
reporting of entities in bankruptcy.
Other Income (Expense)
Consolidated other income (expense) consists of net interest income
(expense), a one time gain on the sale of subscribers and income (loss)
attributable to Ameritel.
During 1998, we recorded other income resulting from the sale of our
subscriber base of approximately 22,000 paging subscribers to Metrocall for
$876,000 representing the sums we owed to Metrocall. That sale was a one time
event and no similar gain was recorded during 1999.
Consolidated interest income, net of interest expense, excluding
Ameritel, aggregated $12,310 in 1999 as compared to net expense of $8,053,256 in
1998. Ameritel reported net interest expense of $2,141,639. Pro forma combined
net interest expense for 1999, totaled $2,129,329. The decrease in interest
expense during 1999 is related to a reduction in 1999 of non cash interest
charges attributable to the fair value of warrants offset by higher loan levels
in 1999. See "Liquidity and Capital Resources."
On a consolidated basis, USCI reported as other income (expense) a loss
attributable to its investment in Ameritel of $10,406,884.
We incurred net losses of $14,590,049 and $42,494,373 for 1999 and
1998, respectively.
17
Liquidity and Capital Resources
Pro forma working capital deficiency at December 31, 2000 was
$5,536,479 compared to $35,284,043 at December 31, 1999. USCI had a consolidated
working capital deficiency of $5,600,000 at December 31, 2000 and $4,658,000 at
December 31, 1999 and Ameritel had a working capital deficiency of $33,585,000
at December 31, 2000 and $30,626,000 at December 31, 1999, excluding amounts due
to USCI and affiliates. Pro forma cash and cash equivalents at December 31, 2000
totaled $686,000 compared to $604,000 at December 31, 1999 (of which $350,500
was restricted at December 31, 2000 and 1999). USCI had a cash balance at
December 31, 2000 of $400,000 and Ameritel had a cash balance of $286,000, of
which $300,000 and $50,500 were restricted, respectively. The increase in pro
forma working capital deficiency is primarily due to losses suffered in 2000. We
expect to continue to experience monthly losses and negative cash flow from
operations.
We continue to operate at a loss and have limited capital resources.
Our subsidiary, Ameritel, continues to operate as a debtor-in-possession, under
the jurisdiction of the United States Bankruptcy Court for the Southern District
of New York.
We currently require substantial amounts of capital to fund current
operations, for the settlement and payment of past due obligations, and the
deployment of our new business strategy. Due to recurring losses from
operations, an accumulated deficit, stockholders' deficit, negative working
capital, being in default under the terms of our letters of credit advances, and
our inability to date to obtain sufficient financing to support current and
anticipated levels of operations, our independent public accountant audit
opinion states that these matters raise substantial doubt about our ability to
continue as a going concern.
To date, we have funded operations and growth primarily through
financing activities.
On April 14, 1999, we entered into an Amended and Restated Loan and
Security Agreement with Foothill Capital ("Foothill") in which the original Loan
and Security Agreement entered into on June 5, 1998 was amended to restructure
the existing credit facility by reducing the total facility to $17.5 million.
Additionally, certain of our preferred shareholders and certain other persons
have entered into a Participation Agreement with Foothill in connection with the
restructuring of the outstanding $20 million credit facility with Foothill. An
aggregate of $7 million was made available by the participants in the Foothill
facility as term loans.
On April 28, 2000, a Release of Guaranty and Termination of Security
Interests was reached between Tranche B, Inc. and Foothill. Tranche B, Inc. is
owned and controlled by shareholders that hold a controlling interest in the
Company. Under the terms of the agreement, Foothill agreed to sell, transfer and
assign without recourse, all rights, title and interest in and to claims of
Ameritel, including any and all security interests against Ameritel and
guarantees against the Company, together with their right to receive cash,
instruments or other property issued in connection with the proceedings in the
United States Bankruptcy Court. In addition, the transaction included the
release of all guarantees of that indebtedness by the Company and its affiliates
other than Ameritel. As consideration for the release and termination, the
secured lender received 4,000,000 shares of common stock of the Company. On the
eighteenth month anniversary of the agreement date, the Company shall also issue
to the secured lender, such additional shares of common stock of the Company to
make the aggregate fair market value of the shares in the initial transfer equal
to $4,000,000, based on an agreed upon weighted average formula. The maximum
additional shares to be issued is 2,000,000.
Our operations continue to be dependent upon operating cash flow and
funding pursuant to the credit facility assumed by Tranche B. At March 28, 2001,
approximately $13.4 million had been advanced under our credit facility. The
term credit facility is due in September 2002. There is no assurance that we
will be able to pay the credit facility when it comes due or that the credit
facility will be adequate to meet our capital needs for the next 12 months. The
amounts available from operating cash flows and funds available from our credit
facility with Tranche B are not expected to be adequate to meet our expected
operating needs through the end of 2001. We are seeking an expansion of our cash
collateral financing and restructuring certain debt. We do not have any
commitments with regard to additional sources of financing and there can be no
assurance that any such commitments will be obtained in the foreseeable future.
18
On October 29, 1999, Ameritel Communications, Inc., a wholly owned
subsidiary of the Company ("Ameritel"), filed a voluntary petition under Chapter
11 of U.S.C. Title 11 with the United States Bankruptcy Court for the Southern
District of New York (Case No. 99-11081)(the "Bankruptcy Court"). Since the
filing date, Ameritel has operated its business as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. In connection with its
Chapter 11 bankruptcy filing on October 29, 1999, the Company obtained cash
collateral financing from Foothill. This financing, which has since been assumed
by Tranche B, Inc., after several extensions expires on September 2002. All
claims against Ameritel in existence prior to the Chapter 11 filing are subject
to payment only when and as provided for by an order of the Bankruptcy Court.
Ameritel's reorganization plan, which has not been completed and is
subject to approval by the Bankruptcy Court, focuses the Company's resources on
the sale of its consumer accounts receivable and the related subscriber
contracts. It is too early to determine other elements of a proposed plan.
However, when other elements are determined, they may result in additional
restructuring charges, as well as the impairment of certain assets. The plan or
sale will have a significant effect upon the value of certain assets and
liabilities included in these financial statements. Subject to completion and
approval of the plan or sale, the Company is unable to predict the potential
financial impact of this matter.
The financial statements as of and for the year ended December 31, 2000
do not include any effect of the bankruptcy which was filed on October 29, 1999
or the proposed sale or reorganization plan.
There is no assurance that we will be able to effect a sale of the
Ameritel Assets on a timely basis or that we will be able to use cash collateral
as scheduled for in a Bankruptcy approved budget, obtain an extension or
expansion of the cash collateral order, obtain Debtor-in-Possession ("DIP")
financing or restructure certain debt.
In the event that we are not successful in obtaining the aforementioned
financing, sale of the Ameritel Assets, or debt restructuring, we may be
required to convert the Ameritel Chapter 11 filing to a liquidation under
Chapter 7 of the U.S. Bankruptcy Code or move for a dismissal of the case, and
the Company and all of its subsidiaries may also be required to join Ameritel in
filing for protection under the U.S. Bankruptcy statutes or otherwise cease
operating and wind up their business affairs.
Because the cost of implementing our new e-commerce strategies, which
began in the fourth quarter of 1999 with immaterial operations will depend upon
a variety of factors (including our ability to negotiate additional distribution
agreements, our ability to negotiate favorable wholesale prices with carriers,
the number of new customers and services for which they subscribe, the nature
and penetration of services that we may offer, regulatory changes and changes in
technology), actual costs and revenues will vary from expected amounts, possibly
to a material degree, and such variations will affect our future capital
requirements.
Inflation
To date, inflation has not had any significant impact on our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements for the
Years Ended December 31, 2000, 1999, and 1998 and Notes thereto together with
Auditors' Report comprising a portion of this Annual Report on Form 10-K.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 29, 2000, Arthur Andersen LLP notified us that it was
resigning as the Company's independent accountant.
Arthur Andersen LLP's reports on the financial statements for the years
ended December 31, 1998 and 1999 did not contain an adverse opinion or
disclaimer, and were not qualified or modified as to uncertainty, audit scope,
or accounting principles, except that the reports for both years contained a
"going concern" paragraph.
During our two most recent fiscal years and any subsequent interim
period preceding the resignation of Arthur Andersen LLP, there were no
disagreements with Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement(s) if not resolved to the satisfaction of Arthur Andersen LLP,
would have caused Arthur Andersen LLP to make reference to the subject matter of
the disagreement(s) in connection with its report.
During our two most recent fiscal years and any subsequent interim
period preceding the resignation of Arthur Andersen LLP, there have been no
reportable events of the type required to be disclosed by Item 304(a)(1)(v) of
Regulation S-K.
On February 2, 2001, our board approved the engagement Tauber & Balser
("T&B") as our new independent accountants. Prior to the engagement of T&B, we
did not consult with such firm regarding the application of accounting
principles to a specific completed or contemplated transaction, or any matter
that was either the subject of a disagreement or a reportable event. We also did
not consult with T&B regarding the type of audit opinion which might be rendered
on our financial statements and no oral or written report was provided by T&B.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information Regarding Executive Officers and Directors
The following table sets forth the names, ages and offices of the
present executive officers and directors of the Company. The periods during
which such persons have served in such capacities are indicated in the
description of business experience of such persons below.
Name Age Position
------ ----- ------------
Lee Feist 58 Chairman of the Board; Chief
Executive Officer; Chief
Financial Officer
Bryan Finkel 38 Director
Henry Reinhold 56 Director
On May 11, 1999, the previous Board of Directors resigned their
directorships and Messrs. Joshua Berkowitz, Bryan Finkel and Henry Reinhold were
elected directors in their place and stead. Mr. Berkowitz subsequently resigned
as a director. Mr. Bruce Hahn also resigned as Chief Executive Officer of USCI,
Inc. and all of its subsidiaries, but continues as consultant to
Americomonline.com, Inc. focusing his attention on the sales and marketing of
our new prepaid wireless and e-commerce strategies.
Lee Feist, Chairman of the Board, Chief Executive Officer and Chief
Financial Officer. Mr. Feist has been Chairman the Board and Chief Executive
Officer of the Company since July 1999 and Chief Financial Officer since January
2001. From 1990 until June 1999, Mr. Feist served as Chief Executive Officer of
LifeSavers International, a privately held turnaround and start-up management
company, where he filled various senior management roles for various
organizations.
20
Bryan Finkel, Director. Mr. Finkel has been a director of Company since May
11, 1999. Since January 1996, Mr. Finkel has served as a Managing Director of
Advanta Growth Capital LP an operating and financial advisory firm specializing
in the information technology industry. Prior to founding Advanta, from 1992 to
1996, Mr. Finkel was a Senior Associate at Broadview Associates, an information
technology mergers and acquisitions advisory firm.
Henry Reinhold, Director. Mr. Reinhold has been a director of Company since
May 11, 1999. For the past five years, Mr. Reinhold has been engaged in private
practice as a certified public accountant and as Controller of American Stock
Transfer & Trust Co. which serves as the Company's transfer agent.
Compliance With Section 16(a) of Exchange Act
Under the securities laws of the United States, the Company's directors,
its executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose in this report any
failure to file by these dates during 2000. During 2000, all reports required to
be filed during 2000 were filed on a timely basis. In making these disclosures,
the Company has relied solely on written statements of its directors, executive
officers and shareholders and copies of the reports that they filed with the
Commission.
Committees and Attendance of the Board of Directors
In order to facilitate the various functions of the Board of Directors,
the Board has created a standing Audit Committee and a standing Compensation
Committee.
The functions of the Company's Audit Committee are to review the
Company's financial statements with the Company's independent auditors; to
determine the effectiveness of the audit effort through regular periodic
meetings with the Company's independent auditors; to determine through
discussion with the Company's independent auditors that no unreasonable
restrictions were placed on the scope or implementation of their examinations;
to inquire into the effectiveness of the Company's financial and accounting
functions and internal controls through discussions with the Company's
independent auditors and officers of the Company; to recommend to the full Board
of Directors the engagement or discharge of the Company's independent auditors;
and to review with the independent auditors the plans and results of the
auditing engagement. The members of the Audit Committee are Mr. Finkel,
Chairman, and Mr. Reinhold.
The functions of the Company's Compensation Committee include reviewing
the existing compensation arrangements with officers and employees, periodically
reviewing the overall compensation program of the Company and recommending to
the Board modifications of such program which, in the view of the development of
the Company and its business, the Committee believes are appropriate,
recommending to the full Board of Directors the compensation arrangements for
senior management and directors, and recommending to the full Board of Directors
the adoption of compensation plans in which officers and directors are eligible
to participate and granting options or other benefits under such plans. The
members of the Compensation Committee are Mr. Reinhold, Chairman, and Mr.
Finkel.
The Board of Directors does not have a standing nominating committee or
a committee performing similar functions.
During the year ended December 31, 2000, the Board of Directors held
two meetings, all telephonic, and acted through unanimous written consent on
other occasions, the Audit Committee held no meetings and the Compensation
Committee held no meetings. Each director (during the period in which each such
director served) attended at least 75% of the meetings of the Board of
Directors.
21
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to the
Chief Executive Officer of the Company and the other executive officers whose
compensation exceeded $100,000 ("named executive officers") during the fiscal
year ended December
Summary Compensation Table
--------------------------------------------------------------------------------
Annual Compensation Long Term
--------------------------------------------------------
Name and Other Annual Compensation
Principal Position Year Salary ($) Bonus ($) Compensation ($) Stock Options (#)
--------------------- ------------ ------------ ------------ --------------- ----------------
Lee Feist (1) 2000 253,846 - (2) -
Chairman and Chief 1999 (2) 798,156
132,212 -
Executive Officer 1998 - - - -
-------------
(1) Mr. Feist was hired as Chairman and Chief Executive Officer on July 6,
1999.
(2) Although the officer receives certain perquisites such as company provided
life insurance, the value of such perquisites did not exceed the lesser of
$50,000 or 10% of the officer's salary and bonus.
Compensation of Directors
Non-employee directors currently receive reimbursement of out-of-pocket
expenses, for attendance at each meeting of the Company's Board and any
committee meeting thereof not held in conjunction with a Board Meeting. Each
non-employee director also receives an annual grant of non-qualified stock
options to acquire shares of the Company's Common Stock in an amount to be
determined each year by the entire Board of Directors. No options were granted
to the directors in 2000. In May 1999, each non-employee director received
100,000 common shares of USCI, Inc.
Stock Option Exercises
The following table sets forth information concerning the exercise of
stock options during 2000 by each named executive officer and the number and
value of unexercised options held by the named officers at the end of 2000:
Number of Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired on Value Year End at Year End ($) (1)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
-------------- ------------ ------------- ------------- -------------- ------------- -------------
Lee Feist - $ - 798,156 - $ - $ -
------------
1. Based on the fair market value per share of the Common Stock at year end,
minus the exercise price of "in-the-money" options. The closing price for
our Common Stock on December 31, 2000 on the OTC Bulletin Board was $
0.018.
22
Employment Contracts, Termination of Employment and Change in Control
Arrangements
Effective July 6, 1999, we entered into an employment agreement with Lee
Feist pursuant to which Mr. Feist was hired as Chief Executive Officer.
Pursuant to such agreement, Mr. Feist receives a base salary of (1)
$275,000 during the first year of employment, (2) $295,000 during the second
year, (3) 315,000 during the third year, (4) $335,000 during the fourth year,
and (5) $355,000 during the fifth year. In addition to his base salary, Mr.
Feist is entitled to (1) a $75,000 bonus at the end of his first year of
employment (which has subsequently been deferred until the Company reports a
quarterly profit), (2) incentive compensation equal to 5% of the first $4
million of earnings before depreciation, interest, amortization and taxes
("EBITDA") and 2% of EBITDA in excess of $4 million for each year, (3) use of a
leased automobile (which has subsequently been deferred until the Company
reports a quarterly profit), (4) reimbursement of certain relocation expenses,
and (5) insurance and other benefits customarily provided to senior management
personnel. Mr. Feist's employment agreement also provides for the grant of the
following stock options: (1) ten year non-qualified stock options to be granted
on the date of the employment agreement and on the second and third
anniversaries of the employment agreement, each grant to be in an amount equal
to 0.5% of the outstanding shares on a fully diluted basis on the date of grant
and exercisable at par value, (2) ten year incentive stock options to be granted
on the date of the employment agreement and on the second, third and fourth
anniversaries of the employment agreement, each grant to be in an amount equal
to 0.5% of the outstanding shares on a fully diluted basis and exercisable at
fair market value on the date of grant, and (3) ten year stock options to
purchase 1,500,000 shares at $1.50 per share and exercisable if the common stock
is traded on an exchange, Nasdaq or the pink-sheets and the closing price or
closing bid price has equaled or exceed $1.50 for 25 consecutive trading days.
The obligations of USCI under the employment are secured by a $300,000 letter of
credit in favor of Mr. Feist.
The employment agreement with Mr. Feist is for a term of five years and is
subject to automatic renewal for additional two year terms unless notice of
non-renewal is provided.
The employment agreement prohibits Mr. Feist from competing, directly or
indirectly, with USCI for a period of one year following termination of
employment or disclosing confidential matters with respect to USCI for three
years after termination of employment.
In the event of the termination of Mr. Feist's employment within 90 days of
the occurrence of various change in control events, USCI must pay Mr. Feist's
salary and continue to provide certain insurance coverage for a period of one
year following such termination of employment. As used in the employment
agreement of Mr. Feist, a "change in control" is defined to be (1) a merger or
consolidation pursuant to which USCI is not the surviving corporation and USCI's
stockholders do not have the same proportionate ownership following the
transaction, (2) a sale, lease, exchange or other transfer of all or
substantially all of the assets of USCI, (3) approval by the stockholders of a
plan for liquidation or dissolution of USCI, or (4) the acquisition by any
person or group of 51% of USCI's common stock.
USCI has no other employment agreements with any other officers or
employees.
Compensation Report
General. The Compensation Committee of the Board of Directors establishes
the general compensation policies of the Company and the compensation plans and
specific compensation levels for executive officers.
The Committee believes that the Company is best served by a program that is
designed to motivate, reward and retain the management team to achieve the
objectives of the Company. To this end, the Committee has adopted a program
designed to focus on the Company's long-term goals. Accordingly, a significant
portion of the senior executive compensation is dependent upon achieving these
long-term goals.
The philosophical basis of the Committee is to compensate executives based
on performance and on the level of responsibility of the executive. Salary
ranges are established based on such criteria. Salaries of key executives are
set by measuring performances against the benchmark and by determining the value
of the executive's contribution towards the Company's long-term goals. In
addition, consideration is given to the individual's experience and past
performance because the Committee also believes that any program must recognize
performance and encourage initiative.
23
The Committee also reviews management's response to the changing business
environment in which the Company operates. A timely and effective response by
management to changing business conditions while continuing to focus on the
long-term objectives is considered essential by the Committee. Management is
also evaluated on its ability to evaluate and adjust the long-term goals in
response to the evolving business climate.
Base Salary. For fiscal 2000, the base salary of executive officers, other
than the Chief Executive Officer whose base salary is determined by an
employment agreement, were set based upon the results of the executive's
performance review. Each executive is reviewed annually by the Chief Executive
Officer and Chairman and given specific objectives, with the objectives varying
based upon the executive's position and responsibilities and the specific
objectives for that position. At the next annual review, the performance of each
executive is reviewed versus the objectives established for each executive and
the Company's overall performance. The results of the review are then reported
to the Committee along with senior management's compensation recommendation. The
Committee then determines whether the base salary should be adjusted for the
coming year.
Long-Term Incentive Compensation. Each executive officer of the Company was
granted options at the time of the initial adoption of the Company's stock
option plans or at the time the officer joined the Company. The Committee makes
option grants to executive officers on a case-by-case basis relative to the
annual performance reviews and the recommendations of senior management. Grants
of options are designed to align the interests of executive officers with those
of stockholders. The size of these grants is generally set at a level which the
Committee feels is in proportion with the role and responsibility of the
executive, as well as his or her opportunity to effect the Company's
performance, while also being sufficient to attract and retain qualified
executives.
Chief Executive Officer Compensation. With respect to the compensation of
the Chief Executive Officer, compensation is fixed pursuant to the terms of an
employment agreement. Given the difficult financial condition of the Company at
the time Mr. Feist was hired as Chief Executive Officer, the Committee felt it
both necessary and appropriate to provide an attractive compensation arrangement
with substantial performance based compensation in order to attract and retain
Mr. Feist's services. Based on that criteria, the Committee agreed to a
compensation arrangement with an initial base salary of $275,000 with
predetermined annual increases and a first year bonus and annual performance
bonuses based on EBITDA as well as a package of stock options. The Committee
believed that such a compensation package was essential to attract a qualified
CEO in the Company's efforts to achieve profitability.
The Committee believes these executive compensation policies and programs
serve the interests of stockholders and the Company effectively. The various pay
vehicles offered are appropriately balanced to provide increased motivation for
senior executives to contribute to the Company's overall future success, thereby
enhancing the value of the Company for the stockholder's benefit.
Compensation Committee
HENRY REINHOLD, Chairman
BRYAN FINKEL
24
Company Performance
The following graph compares the cumulative total investor return on the
Company's Common Stock for the five year period ended December 31, 2000 with an
index consisting of returns from a peer group of companies, consisting of the
Nasdaq US Index (the "Nasdaq US Index"), and the Nasdaq Non-Financial Index (the
"Nasdaq Non-Financial Index").
The graph displayed below is presented in accordance with Securities and
Exchange Commission requirements. Shareholders are cautioned against drawing any
conclusions from the data contained herein, as past results are not necessarily
indicative of future performance. This graph in no way reflects the Company's
forecast of future financial performance.
(graph appears at this location depicting the following stock performance)
1995 1996 1997 1998 1999 2000
-------- --------- --------- --------- --------- ---------
USCI, Inc. 100 54.43 70.89 0.51 3.54 0.18
Nasdaq US Index 100 123.03 150.68 212.46 394.82 237.37
Nasdaq Non-Financial 100 121.47 142.19 208.68 409.12 238.41
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 21, 2001, based
on information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock held by (i) each
person known by the Company to be the owner of more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each director, (iii) each named
executive officer, and (iv) all executive officers and directors as a group:
Name and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned (1) of Class (2)
------------------------------- ------------------------ --------------
JNC Opportunity Fund Ltd.
c/o Olympia Capital Cayman Ltd
20 Reid St, Hamilton HM 11
Bermuda 19102 197,073,319 (3) 72.8%
Lee Feist 1,596,316 (4) 1.6%
Bryan Finkel 100,000 *
Henry Reinhold 135,500 *
All directors and executive officers
as a group (three persons) 1,831,816 (5) 1.9%
-----------------------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has both sole voting and
sole investment power with respect to the shares beneficially owned by such
person, entity or group. The number of shares shown as beneficially owned
include all options, warrants and convertible securities held by such
person, entity or group which are exercisable or convertible within 60 days
of March 21, 2001.
(2) The percentages of beneficial ownership as to each person, entity or group
assume the exercise or conversion of all options, warrants and convertible
securities held by such person, entity or group which are exercisable or
convertible within 60 days, but not the exercise or conversion of options,
warrants and convertible securities held by others shown in the table.
(3) Based solely on information contained in a Schedule 13D dated April 26,
1999. Includes 172,073,137 shares issuable to JNC Opportunity Fund upon
conversion of (a) 385 shares of Series A Convertible Preferred Stock, (b)
500 shares of Series B Convertible Preferred Stock and (c) 500 shares of
Series C Convertible Preferred Stock held by JNC Opportunity Fund. This is
derived from a conversion formula described in an agreement dated April 26,
1999 between JNC, the Company and certain other preferred shareholders and
assumes conversion of all preferred shares held by JNC as of the date of
the agreement. The Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, each in a face amount of $10,000 per share, is
convertible, at the option of JNC, at a conversion price equal to the
lesser of $1.00 per share or 85% of the average closing bid price of the
Company's common stock over the five trading days preceding conversion.
Since the number of shares that are issuable upon conversion of the
Preferred Shares is derived from a conversion formula which is based in
part upon the market price of the shares prior to a conversion of a
Preferred Shares, the actual number of shares that will be issued upon a
conversion of the Preferred Shares (and therefore beneficially owned by
JNC) cannot accurately be determined at this time.
(4) Includes 798,156 shares issuable upon the exercise of currently exercisable
options.
(5) Includes 798,156 shares issuable upon the exercise of currently exercisable
options held by officers and directors of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2000, Tranche B, Inc. a company owned
and controlled by stockholders that hold a controlling interest in the
Registrant acquired from a secured lender all rights, title and interest in
claims against USCI, Inc. and Ameritel Communications, Inc., a wholly owned
subsidiary operating as a debtor-in-possession subject to the jurisdiction of
the United States Bankruptcy Court for the Southern District of New York. The
transaction included the release of all guarantees of indebtedness of Ameritel
to the secured lender by USCI, Inc. At December 31, 2000, the outstanding
indebtedness included in the transaction totaled $13,413,905.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index to Financial Statements on page 30 of this report for
financial statements and supplementary data filed as part of this report.
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby is
included in the financial statements filed, including the notes thereto.
(b) Reports on Form 8-K
On December 29, 2000, the Registrant filed a report on Form 8-K
disclosing under Item 4 the resignation of Arthur Andersen LLP as certifying
accountants.
(c) Exhibits
Number Description of Exhibit
-------- -------------------------
3.1 Certificate of Incorporation of Trinity Six Inc. (1)
3.2 Certificate of Amendment of Certificate of Incorporation of Trinity
Six Inc. (4)
3.2A Certificate of Designation for Series A Convertible Preferred Stock
(11)
3.3 By-Laws of Registrant (1).
4.1 Form of Certificate evidencing shares of Common Stock (5).
10.1 Amended and Restated 1992 Stock Option Plan (6).
10.1A 1997 Stock Option Plan. (7)
10.2 Agreement dated October 1996 between Ameritel Communications, Inc. and
GTE Mobilenet Service Corp. (7)
10.3 Stock Option Agreements dated as of October 30, 1997 with certain
stockholders of the Registrant. (9)
10.4 Warrant Agreement dated October 30, 1997 between the Registrant and
PaineWebber. (9)
10.5 Shareholder Collateral Agreement dated as of October 30, 1997. (9)
10.6 Warrant issued by the Registrant to Alan R. Dresher. (9)
10.7 Warrant issued by the Registrant to Decameron Partners. (9)
10.8 Warrant issued by the Registrant to Alan Baron. (9)
10.9 Warrant dated February 2, 1998 issued by the Registrant to Decameron
Partners, Inc. (10)
10.10Warrant dated February 2, 1998 issued by the Registrant to Alan R.
Dresher. (10)
10.11Warrant dated February 2, 1998 issued by the Registrant to Alan
Baron. (10)
10.12Private Placement Purchase Agreement dated February 24, 1998 among
the Registrant, George Karfunkel, Michael Karfunkel, Huberfeld Bodner
Family Foundation, Inc., Laura Huberfeld/Naomi Bodner Partnership and
Ace Foundation, Inc. (10)
10.13Convertible Restated Note dated February 24, 1998 issued by the
Registrant in favor of George Karfunkel. (10)
10.14Convertible Restated Note dated February 24, 1998 issued by the
Registrant in favor of Michael Karfunkel. (10)
10.15Convertible Restated Note dated February 24, 1998 issued by the
Registrant in favor of Laura Huberfeld/Naomi Bodner Partnership. (10)
10.16Convertible Restated Note dated February 24, 1998 issued by the
Registrant in favor of Huberfeld Bodner Family Foundation, Inc. (10)
10.17Warrant dated February 24, 1998 issued by the Registrant to George
Karfunkel. (10)
10.18Warrant dated February 24, 1998 issued by the Registrant to Michael
Karfunkel. (10)
10.19Warrant dated February 24, 1998 issued by the Registrant to Laura
Huberfeld/Naomi Bodner Partnership. (10)
10.20Warrant dated February 24, 1998 issued by the Registrant to Huberfeld
Bodner Family Foundation, Inc. (10)
27
10.21Convertible Note dated February 24, 1998 issued by the Registrant in
favor of George Karfunkel. (10)
10.22Convertible Note dated February 24, 1998 issued by the Registrant in
favor of Ace Foundation. (10)
10.23Warrant dated March 5, 1998 issued by the Registrant to Alan R.
Dresher. (10)
10.24Warrant dated March 5, 1998 issued by the Registrant to Bulldog
Capital Management. (10)
10.25Warrant dated March 5, 1998 issued by the Registrant to Alan Baron.
(10)
10.26Convertible Preferred Stock Purchase Agreement between the Registrant
and JNC Opportunity Fund Ltd. dated March 24, 1998 (11).
10.27Registration Rights Agreement dated March 24, 1998 between the
Registrant and JNC Opportunity Fund, Ltd. (11)
10.28Escrow Agreement dated March 24, 1998 among the Registrant, JNC
Opportunity Fund, Ltd. and Robinson Silverman Pearce Aronsohn & Berman
LLP (11)
10.29Warrant dated March 24, 1998 granted by the Registrant to JNC
Opportunity Fund Ltd. (11)
10.30Warrant dated March 24, 1998 granted by the Registrant to Wharton
Capital Partners, Ltd. (11)
10.31Amended and Restated Loan and Security Agreement dated as of April
14, 1999 (11)
10.32Preferred Stockholders Conversion Agreement dated as of April 26,
1999 (11)
10.33Consulting Agreement dated as of May 1, 1999 between the Registrant
and Howard Zuckerman (12)
10.34+ Employment Agreement dated as of July 6, 1999 between the Registrant
and Lee Feist (13)
10.35Sublease dated February 24, 2000 between Factory Mutual Insurance
Company and Americomonline.com, Inc. (14)
10.36Marketing and Distribution Agreement dated April 3, 2000 between
Net2Phone, Inc. and Americomonline.com, Inc. (14)
10.37Purchase and Assignment of Claim dated April 28, 2000 between
Foothill Capital Corporation, Tranche B, Inc. and USCI, Inc. (14)
21.1* Subsidiaries of Registrant
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Tauber & Balser
-------------
* Filed herewith.
+ Compensatory plan or management agreement.
(1) Incorporated by reference to an Exhibit filed as part of Trinity's
Registration Statement on Form S-1 (File No. 33-64489).
(2) Incorporated by reference to Exhibit C of Trinity's Proxy Statement dated
April 17, 1995.
(3) Incorporated by reference to an Exhibit filed as part of the Registrant's
Registration Statement on Form S-1 on Form S-4 (File No. 33-88828).
(4) Incorporated by reference to an Exhibit to the Registrant's Transition
Report on Form 10-K for the Transition Period from October 1, 1994 to May
14, 1995.
(5) Incorporated by reference to an Exhibit filed as part of Post-Effective
Amendment No. 1 on Form S-3 to the Registrant's Registration Statement on
Form S-1 on Form S-4 (File No. 33-88828).
(6) Incorporated by reference to an Exhibit filed as part of the Registrant's
Registration Statement on Form S-8 (File No. 333-16291).
(7) Incorporated by reference to an Exhibit filed as part of the Registrant's
Registration Statement on Form S-8 (File No. 333-37329).
(8) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 10-K for the period ended December 31, 1996.
(9) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 8-K dated and filed on January 13, 1998.
(10) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 8-K dated and filed on March 12, 1998.
(11) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 10-K for the year ended December 31, 1999.
(12) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 10-Q for the quarter ended March 31, 1999.
(13) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 10-Q for the quarter ended June 30, 1999.
(14) Incorporated by reference to an Exhibit filed as part of the Registrant's
Form 10-K for the year ended December 31, 1999
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned thereunto duly authorized.
USCI, INC.
By: /s/ Lee Feist
-----------------------------------
Lee Feist, Chief Executive Officer
Dated: April 11, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ Lee Feist Chairman of the Board, Chief April 11, 2001
---------------------- Executive Officer and Director
Lee Feist (Principal Executive Officer
and Principal Financial and
Accounting Officer)
/s/ Bryan Finkel Director
-----------------------
April 11, 2001
Bryan Finkel
/s/ Henry Reinhold Director April 11, 2001
-----------------------
Henry Reinhold
29
INDEX TO FINANCIAL STATEMENTS
Page
USCI, Inc. and Subsidiaries
Reports of Independent Public Accountants........................... F-1 - 2
Consolidated Balance Sheets as of December 31, 2000 and 1999........ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998................................. F-4
Consolidated Statements of Stockholders' Deficit for the Years
Ended December 31, 2000, 1999 and 1998........................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998................................. F-6 - 7
Notes to Consolidated Financial Statements.......................... F-8-19
Ameritel Communications, Inc.
Reports of Independent Public Accountants........................... F-20-21
Balance Sheets as of December 31, 2000 and 1999..................... F-22
Statements of Operations for the Year Ended December 31, 2000
and 1999.......................................................... F-23
Statement of Stockholders' Deficit for the Year Ended December
31, 2000 and 1999................................................. F-24
Statement of Cash Flows for the Years Ended December 31, 2000
and 1999.......................................................... F-25
Notes to Financial Statements.................................. F-26-30
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
USCI, Inc.:
We have audited the accompanying consolidated balance sheet of USCI, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. 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 audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of USCI, Inc. and
subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes A and G to the
financial statements, the Company has suffered recurring losses from operations,
has an accumulated deficit, has a stockholders' deficit, has negative working
capital, has triggered default provisions under the terms of its letters of
credit, has uncertainties related to significant litigation, and has not yet
obtained sufficient financing commitments to support the current or anticipated
level of operations. In addition, on October 29, 1999, Ameritel Communications,
Inc., a wholly-owned subsidiary of the Company filed a voluntary petition under
Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
TAUBER & BALSER, P.C.
Atlanta, Georgia
March 30, 2001
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To USCI, Inc.:
We have audited the accompanying consolidated balance sheet of USCI, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 financial position of USCI, Inc. and subsidiaries as
of December 31, 1999 and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations,
has an accumulated deficit, has a stockholders' deficit, has negative working
capital, has triggered default provisions under the terms of its letters of
credit, has uncertainties related to significant litigation, and has not yet
obtained sufficient financing commitments to support the current or anticipated
level of operations. In addition, on October 29, 1999, Ameritel Communications,
Inc., a wholly-owned subsidiary of the Company filed a voluntary petition under
Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 14, 2000
F-2
USCI, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents,including restricted cash
of $300,000 in 2000 and 1999 $ 400,140 $ 300,000
Prepaid expenses and other 3,610 691,017
--------------- ----------------
Total current assets 991,017
403,750
PROPERTY AND EQUIPMENT, net 6,276 155,000
OTHER ASSETS 56,474 6,474
--------------- ----------------
TOTAL ASSETS $ 466,500 $ 1,152,491
=============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Letter-of-credit advances $ 2,491,982 $ 2,491,982
Notes payable -
183,497
Accounts payable 2,598,715 2,612,152
Commissions payable 225,571 225,571
Accrued expenses 503,213 319,520
--------------- ----------------
TOTAL CURRENT LIABILITIES 6,002,979 5,649,225
--------------- ----------------
COMMITMENTS AND CONTINGENCIES
INVESTMENT IN AMERITEL - 30,592,037
--------------- ----------------
STOCKHOLDERS' DEFICIT
Convertible Preferred Stock, $.01 par value;
5,000 shares authorized, 18 18
Common stock, $.0001 par value; 100,000,000 shares authorized; 9,898 9,398
Additional paid-in capital 66,853,573 66,131,173
Accumulated deficit (72,371,918) (101,201,310)
Treasury stock, at cost, 5,500 shares in 2000 and 1999 (28,050) (28,050)
--------------- ----------------
Total stockholders' deficit (5,536,479) (35,088,771)
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 466,500 $ (29,439,546)
=============== ================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
USCI, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
-------------- ----------- -----------
REVENUES
Subscriber sales $ - $ - $ 41,074,235
Activation commissions - - 14,925
Other operating revenue 114,726 - -
-------------- ----------- -------------
Total revenues 114,726 - 41,089,160
-------------- ----------- -------------
COST OF SALES
Cost of subscriber sales - - 24,683,121
Cost of agency commissions - - 11,380
Cost of other operating revenue 9,858 - -
-------------- ----------- -------------
Total cost of sales
9,858 - 24,694,501
-------------- ----------- -------------
GROSS MARGIN 104,868 - 16,394,659
-------------- ----------- -------------
SELLING, GENERAL AND ADMINISTRATIVE, NET 1,674,597 764,088 32,791,669
STOCK COMPENSATION EXPENSE - 1,719,464 -
SUBSCRIBER ACQUISITION AND
PROMOTIONAL COSTS - - 18,920,271
WRITEDOWN OF LONG-LIVED ASSETS - 1,711,923 -
-------------- ----------- -------------
1,674,597 4,195,475 51,711,940
-------------- ----------- -------------
OPERATING LOSS (1,569,729) (4,195,475) (35,317,281)
-------------- ----------- -------------
OTHER INCOME (EXPENSE)
Gain on sale of subscribers - - 876,164
Interest income 15,528 12,310 86,601
Interest expense (14,259) - (8,139,857)
Guarantor release expense (702,900) - -
Income (loss) from investment in Ameritel - (10,406,884) -
-------------- ------------ -------------
Total other income (expense) (701,631) (10,394,574) (7,177,092)
-------------- ------------ -------------
NET LOSS $ (2,271,360) $(14,590,049) $(42,494,373)
============== ============ =============
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.22) $ (3.90)
============== ============ =============
WEIGHTED AVERAGE SHARES OUTSTANDING 96,751,900 67,174,007 11,072,905
============== ============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
USCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Preferred Stock Common Stock Additional
------------------ ---------------------- Paid In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-------- -------- ---------- ----------- ----------- ------------- --------- -----------
BALANCE, December 31, 1997 - $ - 10,267,309 $ 1,027 $ 36,836,625 $ (43,122,580) $ (28,050) $(6,312,978)
Issuance of Convertible
Preferred Stock 1,500 15 - - 13,384,497 - - 13,384,512
Sale of common stock
- - 423,913 43 2,258,354 - - 2,258,397
Exercise of stock options
- - 3,043 - 5,221 - - 5,221
Exercise of warrants
- - 987 - 3,751 - - 3,751
Warrants issued in connection
with debt financings - - - - 4,647,000 - - 4,647,000
Dividends on Convertible
Preferred Stock - - - - 644,415 (644,415) -
Common stock issued in lieu of
interest - - 34,000 3 135,317 - - 135,320
Conversion of preferred stock
to common stock (90) (1) 814,939 82 (4,350) - - (4,269)
Conversion of notes payable to
common stock - - 462,637 46 1,542,520 - - 1,542,566
Conversion of notes payable to
preferred stock 500 5 - - 3,999,995 - - 4,000,000
Net loss - - - - - (42,494,373) - (42,494,373)
--------- --------- ------------ --------- ------------ -------------- ---------- -----------
BALANCE, December 31, 1998 1,910 19 12,006,828 1,201 63,453,345 (86,261,368) (28,050) (22,834,853)
Issuance of common stock
- - 6,170,045 617 2,167,901 - - 2,168,518
Dividends on Convertible
Preferred Stock - - - - 349,893 (349,893) -
Exercise of stock options - - 798,156 80 167,533 - - 167,613
Conversion of preferred stock to
common stock (175) (1) 75,000,000 7,500 (7,499) - -
Net loss - - - - - (14,590,049) - (14,590,049)
--------- --------- ------------ --------- ----------- -------------- ---------- -----------
BALANCE, December 31, 1999 1,735 18 93,975,029 9,398 66,131,173 (101,201,310) ( 28,050) (35,088,771)
Issuance of common stock - - 50,000 50 19,950 20,000
Release of subsidiary debt guarantee - - - - - 31,100,752 - 31,100,752
Issuance of stock for settlement
of liabilities - - 4,500,000 450 702,450 - - 702,900
Net loss - - - - - (2,271,360) - (2,271,360)
--------- --------- ------------ --------- ----------- -------------- ---------- ----------
BALANCE, December 31, 2000 1,735 $ 18 98,525,029 $ 9,898 $66,853,573 $ (72,371,918) $ (28,050) $(5,536,479)
========= ========= ============ ========= =========== ============== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
USCI, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
--------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,271,360) (14,590,049) (42,494,373)
---------- ------------ ------------
Adjustments:
Depreciation and amortization 156,409 732,685 2,664,476
Amortization of discount on notes payable - - 5,342,000
Amortization of deferred financing costs - - 1,124,509
Provision for losses on accounts receivable - 12,166 11,539,141
Gain from sale of subscribers - - (876,164)
Stock compensation expense - 1,719,464 -
Stock issued for settlement of liabilities 702,900 - -
(Income) loss from investment in subsidiary - 10,406,884 -
Restructuring and other special charges - 1,711,923 -
Changes in:
Accounts receivable:
Trade - - (17,131,129)
Other - 35,366 1,091,551
Prepaid expenses and other 687,407 230,650 361,005
Commissions payable - (17,607) (874,561)
Accounts payable and accrued expenses 170,257 745,328 10,923,310
Promotional deposits (50,000) (1,053,387) (642,668)
----------- ------------ -----------
Total adjustments
1,666,973 14,523,472 13,521,470
----------- ------------ -----------
Net cash used by operating activities
(604,387) (66,577) 28,972,903)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (7,685) - (601,427)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, long-term debt and
credit facility
183,497 - 26,631,199
Payments received from Ameritel
- 366,577 -
Repayment of notes payable and credit facility
- - (12,642,631)
Change in Investment in Ameritel
508,715 - -
Exercise of stock options
- - 8,972
Issuance of Convertible Preferred Stock
- - 15,000,000
Sale of common stock
20,000 - 2,489,999
Costs associated with debt offerings - - (416,891)
Costs associated with equity offerings - - (1,847,090)
----------- ------------ -----------
Net cash provided by (used in) financing
activities 712,212 366,577 29,223,558
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH 100,140 300,000 (350,772)
CASH AND CASH EQUIVALENTS, beginning of year $ - - $ 1,105,530
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of year $ 100,140 $ - $ 754,758
=========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
USCI, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
SUPPLEMENTAL INFORMATION:
Interest paid
$ - $ - $ 796,067
========= ========== ============
Noncash financing activities:
Warrants issued in connection with
letter-of-credit $ - $ - $4,467,000
========= ========== ============
Conversion of notes payable
$ - $ - $5,542,566
========= ========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
USCI, INC., AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE A - OPERATIONS
USCI, Inc. (the "Company") is a marketer of IP Telephony products and services,
an accounts receivable management and debt recovery agency, and a reseller of
cellular services to subscribers via reselling agreements with carriers through
its wholly-owned subsidiary, Ameritel Communications, Inc. ("Ameritel"). Prior
to November 1996, before becoming a reseller, the Company was a nationwide agent
for companies providing cellular and paging communication services through
national distribution channels.
On October 29, 1999, Ameritel filed a voluntary petition for reorganization
under Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court for
the Southern District of New York (Case No. 99-11081) (the "Bankruptcy Court").
Under Chapter 11, certain claims against Ameritel in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are stayed
while Ameritel continues business operations as a debtor-in-possession.
The Company has never operated at a profit since its inception in 1991 and had
losses of $2,271,360, $14,590,049, and $42,494,373 for the years ended December
31, 2000, 1999, and 1998 respectively. Additionally, at December 31, 2000, the
Company had an accumulated deficit of $72,371,918 a stockholders' deficit of
$5,536,479 and a working capital deficiency of $5,599,229. The Company will
require substantial financing for working capital for a period of time until
profitability is achieved, if ever, and there can be no assurance that the
Company will be successful in its efforts to arrange this financing.
In the second half of 1999, the Company altered its operations in an effort to
achieve future profitability, including establishing an e-commerce platform to
market services and products, downsizing of staff and facilities and other cost
cutting efforts to reduce overhead and the adoption of its internet telephony
initiative. During the first half of 2000, AmericomOnline.com, Inc. a wholly
owned subsidiary, entered into an agreement with Net2Phone, Inc. to market their
IP Telephony products and services to specific mass-market channels. During the
second half of 2000, Telcollect, Inc., a wholly owned subsidiary specializing in
accounts receivable management and the recovery of past due consumer and
commercial debts was established. While the Company believes that these efforts
will position it favorably to grow revenues, improve operating margins and
minimize operating costs, there can be no assurance that the Company will be
successful in growing revenues or operating profitably.
The factors discussed above raise substantial doubt about the ability of the
Company to continue as a going concern, which contemplates the realization of
assets and the liquidation of liabilities in the normal course of business. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-8
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
subsidiaries include the assets, liabilities, revenues and expenses of all
majority-owned subsidiaries over which the Company exercises control, and for
which control is other than temporary. Intercompany transactions and balances
are eliminated in consolidation. The Company's subsidiary, Ameritel, filed for
reorganization under Chapter 11 in October 1999, and effectively the Company no
longer exercises control over this subsidiary. Investments in nonconsolidated
affiliates (majority-owned subsidiaries over which the Company does not exercise
control) are accounted for on the equity basis. Accordingly, the Company began
accounting for its investment in Ameritel under the equity method of accounting
retroactively, as of January 1, 1999.
Revenue Recognition
For the year ended December 31, 1998, Ameritel accounted for all of the
Company's revenue. For the year ended December 31, 1999, all revenue was
generated by Ameritel and thus the consolidated statement of operations reflects
no revenue for the year as a result of the de-consolidation of Ameritel
discussed above. For the year ended December 31, 2000, the consolidated
statement of operations includes only revenue from marketing of IP telephony
products and services to consumers and providing accounts receivable management
and past due debt recovery services to other companies.
The Company recognizes an activation commission pursuant to the activation of
cellular and paging devices with a contracted carrier at a contracted amount per
activation. The Company simultaneously recognizes a related commission
pass-through expense at a contracted amount per activation. The Company reserves
a portion of these commission revenues for estimated chargebacks to the Company
arising from deactivations of cellular and paging devices by customers during
specified contract periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Included in cash and cash
equivalents at December 31, 2000 and 1999 was $300,000 of certificates of
deposit which were restricted to cover letters-of-credit required as collateral
by an employment agreement with an officer of the Company.
Fair Value of Financial Instruments
Fair value of financial instruments that are assets are estimated to approximate
their carrying value December 31, 2000. It is not practicable to estimate the
fair value of the Company's liabilities at that date because of the Company's
inability to fund its liabilities.
F-9
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost except as discussed below.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets which are five years for equipment and furniture and
fixtures and the shorter of the useful life or lease term for leasehold
improvements.
Property and equipment, at cost, consist of the following at December 31, 2000
and 1999:
2000 1999
------------- -------------
Equipment $ 7,685 $155,000
Less accumulated depreciation
1,409 -
------------- -------------
$ 6,276 $155,000
============= =============
As of December 31, 1999, the Company had pledged all of its fixed assets in
connection with Ameritel's credit facility agreement. During 2000, Ameritel's
lender foreclosed on all of the fixed assets.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of," the Company evaluates whether events and circumstances have
occurred that indicate possible impairment. As a result of this review and based
upon an independent third party valuation, the Company recorded an impairment
loss of $801,590 related to certain equipment in 1999. The impairment loss for
these assets to be held and used was included in the writedown of long-lived
assets within the statement of operations.
Other Assets
Other assets at December 31, 2000 and 1999 consisted of the following:
2000 1999
------------ ------------
Deposits $ 55,374 $ 5,374
Other
1,100 1,100
------------ ------------
$ 56,474 $ 6,474
============ ============
During 1999, the Company reviewed certain of its long-lived assets including its
capitalized system development costs and purchased software. As a result of this
review and based upon an independent third party valuation, the Company recorded
an impairment loss related to systems development costs and purchased software
of $910,333. This amount is included in the writedown of long-lived assets
within the statement of operations.
F-10
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Ameritel
As discussed above, due to the Chapter 11 bankruptcy filing by Ameritel, USCI
began accounting for its investment in Ameritel under the equity method of
accounting as of January 1, 1999. Summarized financial information of Ameritel
as of and for the years ended December 31, 2000 and 1999 were as follows:
December 31, 2000 1999
-------------- ---------------
Total assets $ 546,441 $ 2,373,951
Total liabilities 52,950,760 54,822,294
-------------- ---------------
Stockholder's deficit $(52,404,319) $(52,448,343)
============== ===============
For the year ended December 31,
Revenues $ 4,678,385 $ 15,360,812
Costs 4,642,162 25,767,696
-------------- ---------------
Loss before extraordinary items and income $ 36,223 $(10,406,884)
taxes ============== ===============
Total liabilities include intercompany payables to USCI, Inc. of $18,854,608 and
$21,856,306 at December 31, 2000 and 1999, respectively. The Investment in
Ameritel is shown in the accompanying Consolidated Balance Sheets as of December
31, 1999 as a liability and consists of the intercompany amounts due to USCI
offset by the Stockholder's deficit of Ameritel. No adjustments have been made
to this Investment in Ameritel to reflect the impact that would result if any
adjustments of Ameritel's assets or liabilities are made as part of its Chapter
11 reorganization case. Therefore, this Investment in Ameritel does not purport
to represent the net liability of USCI in connection with the Bankruptcy
proceedings.
In 2000, the Company was released from its guarantee of Ameritel's debt (See
Note C) and accordingly reduced its investment balance to zero as is required
under the equity method.
Subscriber Acquisition and Promotional Costs
Subscriber acquisition costs and promotional costs include costs incurred to
acquire subscribers, including commissions, discounts given to consumers for
reduced airtime and other promotions, and advertising.
Other Income
In November 1998 the Company sold its paging services subscriber base to a
paging vendor for the amount owed to the vendor, which resulted in a gain of
$876,164.
F-11
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Share
The Company calculates and presents net loss per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings per share are based on the weighted average number of
shares outstanding. Diluted earnings per share are based on the weighted average
number of shares outstanding and the dilutive effect of outstanding stock
options and warrants (using the treasury stock method). For all periods
presented, outstanding options and warrants have been excluded from diluted
weighted average shares outstanding, as their impact was antidilutive.
Net loss attributable to common stockholders for the years ended December 31,
1999 and 1998, as adjusted by dividend requirements on the Company's convertible
preferred stock was $14,939,942 and $43,138,788, respectively. There were no
preferred dividend requirements for the year ended December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Long-Lived Assets
The Company periodically evaluates the carrying values of its long-lived assets,
such as property and equipment and systems development costs, to determine
whether any impairment is other than temporary. Management believes the
long-lived assets in the accompanying balance sheets, as adjusted, are
appropriately valued after the impairment charges discussed above.
Significant Concentrations
For the year ended December 31, 1998, approximately 75% of subscriber revenue
was attributable to one merchandiser's activation's with the Company. In October
1998, the Company's relationship with the merchandiser was terminated.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
F-12
NOTE C - LETTER -OF-CREDIT ADVANCES AND NOTES PAYABLE
Credit Facility
On April 14, 1999, Ameritel Communications, Inc., a wholly owned subsidiary of
the Company ("Ameritel") entered into an Amended and Restated Loan and Security
Agreement with Foothill Capital Corp. ("Foothill") in which the original Loan
and Security Agreement entered into on September 5, 1998 was amended to
restructure the existing credit facility by reducing the total facility to $17.5
million. Additionally, certain of our preferred shareholders and certain other
persons entered into a Participation Agreement with Foothill in connection with
the restructuring of the outstanding $20 million credit facility with Foothill.
The participants in the Foothill facility made an aggregate of $7 million
available as term loans. Although the limit of the credit facility was reduced
from $20 million to $17.5 million, the $7 million allocated for term loans was
available for working capital upon certain conditions. The $10.5 million limit
was structured as part revolver, part term loan and part letter of credit. Also,
there were approximately $1 million in standby letters of credit outstanding
under the line. The Company guaranteed payment of amounts due under the above
Agreement.
On April 28, 2000, a Release of Guaranty and Termination of Security Interests
was reached between Tranche B, Inc. and Foothill. Tranche B, Inc. is owned and
controlled by shareholders that hold a controlling interest in the Company.
Under the terms of the agreement, Foothill agreed to sell, transfer and assign
without recourse, all rights, title and interest in and to claims of Ameritel,
including any and all security interests against Ameritel and guarantees against
the Company, together with their right to receive cash, instruments or other
property issued in connection with the proceedings in the United States
Bankruptcy Court of the Southern District of New York. In addition, the
transaction included the release of all guarantees of that indebtedness by the
Company and its affiliates other than Ameritel. As consideration for the release
and termination, Foothill received 4,000,000 shares of common stock of the
Company.
On the eighteenth month anniversary of the agreement date, Foothill is to
receive such additional shares of common stock of the Company as to make the
aggregate fair market value of the shares in the initial transfer equal to
$4,000,000, based on an agreed upon weighted average formula. The additional
shares to be issued, if any, under this formula cannot exceed 2,000,000 shares.
If additional shares are issued, the value of the stock issued will be recorded
as an expense at that date. The value of the stock will be based on the market
price at the date the number of shares to be issued is determined.
NOTE D - STOCKHOLDERS' DEFICIT
Common Stock
During 1999, the Company issued 6,170,045 shares of common stock. The Company
issued 5,000,000 shares to an independent consultant pursuant to a consulting
agreement, 300,000 shares to the new Board of Directors (100,000 shares per
member), 350,000 shares to a then current employee and an additional 520,045
shares to current employees and directors for the shares utilized in October
1997 as collateral for a letter-of-credit issued by an investment banker. The
value of these issuances totaled $2,168,518, of which $691,017 remained in
prepaid expenses at December 31, 1999.
F-13
NOTE D - STOCKHOLDERS' DEFICIT (CONTINUED)
During 2000, the Company issued 4,550,000 shares of common stock. The Company
issued 4,000,000 shares in connection with the Release of Guaranty and
Termination of Security Interests between Tranche B Inc. and the secured lender
providing the credit facility to Ameritel (see Note C), 500,000 in connection
with the RadioShack settlement (see Note G), and 50,000 shares for $20,000 cash.
Preferred Stock
On April 26, 1999, pursuant to an agreement between the Company and its
preferred shareholders ("Preferred Agreement"), the holders of the Convertible
Preferred Stock converted $1,500,000 stated value of Convertible Preferred Stock
into 75,000,000 shares of common stock at $.02 per share, agreed to waive all
future dividends on the outstanding Convertible Preferred Stock, and canceled
all outstanding options and warrants held by them covering 4,485,707 shares of
common stock.
At December 31, 2000, the Company had a total of 1,735 shares of Preferred stock
outstanding, comprised of 385 shares of Series A, 500 shares of Series B, 500
shares of Series C and 350 shares of Series D. The Series A, B, and C Preferred
shares each have a stated value of $10,000 per share and the Series D Preferred
shares each have a stated value of $8,000. The Preferred stock is convertible
into common stock of the Company at a conversion price equal to the lesser of
$1.00 per share or 85% of the average closing bid price of the Company's common
stock over the five trading days preceding conversion.
Stock Options
The Company's 1992 Stock Option Plan (the "1992 Plan"), as amended, provides for
the issuance of up to 750,000 incentive and nonqualified stock options to key
employees and nonemployee directors. In March 1997, the Company adopted the 1997
Stock Option Plan (the "1997 Plan"), which also provides for the issuance of up
to 750,000 incentive and nonqualified stock options. In 1999, the Company
adopted the 1999 Stock Option Plan (the "1999 Plan"), which provides for the
issuance of up to 5,000,000 incentive and nonqualified stock options. The 1992
Plan, the 1997 Plan, and the 1999 Plan are hereafter referred to as the "Option
Plans."
Options are granted at an exercise price which is not less than fair value as
estimated by the Board of Directors and become exercisable as determined by the
Board of Directors, generally over a period of four to five years. Options
granted under the Option Plans expire ten years from the date of grant. At
December 31, 2000, options to purchase 4,325,844 shares of common stock were
available for future grant under the Option Plans.
Additionally, the Company from time to time grants options outside of the Option
Plans to nonemployee directors, employees, and consultants. The Company granted
no options outside the Option Plans during the three years ended December 31,
2000.
F-14
NOTE D - STOCKHOLDERS' DEFICIT (CONTINUED)
Transactions related to stock options for each of the three years in the period
ended December 31, 2000 are as follows:
Weighted
Average
Shares Price
------------ -----------
Options outstanding at December 31, 1997 1,526,170 $5.13
Granted 377,500 5.55
Forfeited (240,879) 6.34
Exercised (3,043) 1.72
------------
Options outstanding at December 31, 1998 1,659,748 4.99
Granted 2,478,312 0.32
Forfeited (981,764) 4.55
Exercised (798,156) 0.21
------------
Options outstanding at December 31, 1999 2,358,140 2.68
Granted 60,000 0.14
Forfeited (563,479) 0.70
Exercised
-
------------
Options outstanding at December 31, 2000 1,854,661 2.27
============
Exercisable at December 31, 2000 1,693,501 2.45
============
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Prices of Shares Price Life of Shares Price
----------------- ------------ ----------- ----------- ----------- ---------
$0.14 - $3.00 1,216,156 $ 0.31 6.6 1,057,396 $ 0.32
$3.01 - $4.50 109,000 4.22 1.3 106,600 4.23
$4.51 - $6.75 479,505 6.16 1.5 479,505 6.16
$6.76 - $8.50 50,000 8.25 0.3 50,000 8.25
--------- -----------
1,854,661 1,693,501
========= ===========
F-15
NOTE D - STOCKHOLDERS' DEFICIT (CONTINUED)
The Company accounts for the stock purchase and stock option plans under
Accounting Principles Board ("APB") Opinion No. 25, which requires compensation
costs to be recognized only when the option price differs from the market price
at the grant date. SFAS No. 123 allows a company to follow APB Opinion No. 25
with additional disclosure that shows what the Company's net loss and loss per
share would have been using the compensation model under SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
2000 1999 1998
----------- ---------- -----------
Risk-free interest rate 6.0% 6.0% 5.9%
Expected dividend yield 0.00 0.00 0.00
Expected lives Five years Five years Five years
Expected volatility 50% 50% 50%
The total values of the options granted during the years ended December 31,
2000, 1999, and 1998 were computed as approximately $40,828, $282,240, and
$1,138,000 respectively, which would be amortized over the vesting period of the
options. If the Company had accounted for these plans in accordance with SFAS
No. 123, the Company's reported pro forma net loss and pro forma net loss per
share for the years ended December 31, 2000, 1999 and 1998 would have been as
follows:
2000 1999 1998
---------- ------------- -------------
Net loss:
As reported $(2,271,360) $(14,590,049) $(42,494,373)
Pro Forma $(2,312,188) $(14,730,789) $(43,141,051)
Basic and diluted loss per share:
As reported $ (0.02) $ (0.22) $ (3.90)
Pro Forma $ (0.02) $ (0.22) $ (3.95)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
Outstanding Warrants
At December 31, 2000, the Company had outstanding warrants to purchase 1,172,282
shares of common stock at a weighted average exercise price of $6.07.
NOTE E -- WRITEDOWN OF LONG-LIVED ASSETS
During 1999, the Company conducted a review of certain long lived assets owned
by the Company's wholly-owned subsidiary, U.S. Communications, Inc. (the "U.S.
Communications assets"). As a result of this review, based upon an independent
third party valuation, the Company recorded a loss on the impairment of the U.S.
Communications assets in the amount of $1,711,923 (See Note B).
F-16
NOTE F - EXPENSES RELATED TO SETTLEMENTS
As noted, the Company issued 4,500,000 shares of common stock in conjunction
with settlements of claims by a vendor of Ameritel and as consideration for its
release as guarantor of certain secured debt of Ameritel (see Note G). The terms
of the transactions were finalized and approved by the Board of Directors in a
meeting on April 29, 2000. The value of the stock issued was determined by the
closing price of the stock on the day preceding and the day following the
Board's action. The resulting charge of $702,900 is included in guarantor
release expense for the year ended December 31, 2000.
NOTE G - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company and subsidiaries lease office space under noncancellable operating
leases. Total operating lease expenses for 2000 and 1999 were $90,140 and
$156,600, respectively.. In 1999, lease expense was included in "Income (loss)
from investment in Ameritel" in the accompanying Consolidated Statements of
Operations.
In February 2000, the Company entered into a sublease for office space more
suitable to its reduced level of operations. The sublease runs for 31 months,
terminating September 14, 2002. Under the terms of the sublease, the Company
pays rent of $8,333 per month from September 1, 2000 through August 31, 2001 and
$10,000 per month for the period September 1, 2001 through September 14, 2002.
The Company occupied the space rent free until September 1, 2000. $73,333 of
rent expense was recognized in 2000.
Future minimum lease payments on this noncancelable operating lease as of
December 31, 2000 are as follows:
Year ending December 31,
2001 $ 106,664
2002 75,000
-----------
$ 181,664
===========
Contract Termination and Litigation
Ameritel had an agreement with RadioShack, a division of Tandy, to be the
exclusive provider of analog cellular communications services to RadioShack's
retail locations in the greater New York metropolitan area. The contract was
guaranteed by the Company. In October 1998, the contract was terminated and
RadioShack initiated legal action in December 1998 seeking more than
$11,000,000. During 2000, the parties agreed to a mutual release of all claims
against each other (the Company had filed a counterclaim) which was approved by
the Bankruptcy Court. As a condition to the mutual release, the Company issued
500,000 shares of common stock to Ameritel Communications, Inc. in August 2000,
and may be required to issue as many as 250,000 additional shares in eighteen
months, depending upon the price of the stock at that time. If additional shares
are issued, the value of the stock issued will be recorded as an expense at that
date. The value of the stock will be based on the market price at the date the
number of shares to be issued is determined.
F-17
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Various vendors have instituted lawsuits against the Company or its subsidiaries
(excluding Ameritel Communications, Inc.) demanding payment of amounts owed. The
Company is attempting to negotiate settlements of the outstanding claims, some
of which have been reduced to judgement. There can be no assurance that the
Company will successfully defend or settle these lawsuits or prevail in any
counterclaim. Most of these actions involve an inactive subsidiary, which has
virtually no assets and generated no revenue in the three years ended December
31, 2000. Failure to favorably resolve these matters will have a material
adverse effect on the Company and could compel the Company, or at least the
subsidiary, to seek protection under the federal bankruptcy system, either
voluntarily or involuntarily. The ultimate outcome of these matters cannot be
determined at this time.
Employee Contracts
During 1999, the Company entered into an employee contract with a senior
executive for a term expiring in 2005. The contract provides for an annual
salary ranging from $275,000 to $355,000. In addition, the employee is to
receive incentives based on performance, a guaranteed bonus of $75,000 after the
first year of employment (which the executive has deferred until the Company
reports a profit for any quarter) and stock options dependent on certain
conditions. The contract includes a provision for a lump sum cash severance
payment of $600,000 in the event the contract is terminated for certain reasons
and is partially secured by a $300,000 letter-of-credit.
Letter of Credit Advances
In 1997, the Company and Ameritel entered an agreement with an investment
banking firm which provided that the investment bank would establish standby
letters of credit for up to $3,750,000 to satisfy requirements of certain
Ameritel clients and vendors. Under the terms of the agreement, the Company was
required to pledge 545,045 shares of common stock of the Company. Some of the
Company's officers, directors and other stockholders agreed to deposit the
required shares in return for options to purchase 54,505 shares of common stock
at $6.00 per share.
In October 1998, two vendors received $2,700,000 under the letter-of-credit. The
investment bank took control of the common stock held for collateral. At
December 31, 2000 and 1999, the liability to the investment bank has a balance
of $2,491,982. Ameritel is in default under the terms of the agreement, but the
investment bank has made no demand of the Company. While the Company believes it
has a reasonable basis for a claim against the investment bank, there can be no
assurance the Company would be successful in defending or settling this
liability should the investment bank make such demand.
The Company is involved in various other legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, the Company believes these proceedings
should not ultimately result in any liability that would have a material effect
on the financial position, liquidity or results of operations of the Company.
See Note C for commitment to issue up to an additional 2,000,000 shares of
stock.
F-18
NOTE H - INCOME TAXES
The Company has incurred net operating losses ("NOL's") since inception. As of
December 31, 2000 and 1999, the Company had net operating loss carryforwards
totaling $94,604,418 and $92,384,725, respectively, which expire at various
times beginning in 2006. Due to the recurring operating losses, a valuation
allowance has been provided against the entire amount of its net deferred tax
assets. A portion of the net operating loss carryforwards is subject to
substantial limitation due to the change of control in 1995. The effective
income tax rate of 0.0% for the years ended December 31, 2000 and 1999 differs
from the U.S. statutory rate due to the valuation allowance.
Components of deferred tax assets are as follows at December 31, 2000 and 1999:
2000 1999
-------------- --------------
Deferred tax assets
Net operating loss carryforwards $ 36,668,484 $36,030,043
Allowance for doubtful accounts 4,112,097 3,529,432
-------------- --------------
40,780,581 39,559,475
Valuation allowance (40,780,581) (39,559,475)
-------------- --------------
Deferred tax assets
$ - $ -
============== ==============
NOTE I - SUBSEQUENT EVENTS
As of April 2001, a motion is pending to dismiss the Ameritel bankruptcy
primarily based upon Ameritel's apparent inability to confirm a Chapter 11 plan
of reorganization.
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders USCI, Inc.:
We have audited the accompanying balance sheet of Ameritel Communications, Inc.
(a debtor-in-possession and a wholly-owned subsidiary of USCI, Inc.,) as of
December 31, 2000 and the related statements of operations, stockholder's
deficit, and cash flows for the year then ended. 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 audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ameritel Communications, Inc.
as of December 31, 2000 and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company filed a voluntary petition for reorganization
under Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court on
October 29, 1999. The Chapter 11 filing was a result of the substantial losses
sustained by the Company and the Company's inability to raise capital required
to support its existing business. The Company has also violated certain
restrictive covenants under certain letters of credit due to its reduced
subscriber base, reduced revenue levels and net loss. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Although the Company is currently operating as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court, the continuation of the business as a
going concern is contingent upon, among other things, the approval and
confirmation by the creditors and Bankruptcy Court of the aforementioned plan of
reorganization, the success of future operations, and/or the amount and
classification of liabilities. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
TAUBER & BALSER, P.C.
Atlanta, Georgia
March 30, 2001
F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
We have audited the accompanying balance sheet of Ameritel Communications, Inc.
(a debtor-in-possession and a wholly-owned subsidiary of USCI, Inc. as of
December 31, 1999 and the related statements of operations, stockholders'
deficit, and cash flows for the year ended December 31, 1999. 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 audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ameritel Communications, Inc.
as of December 31, 1999 and the results of its operations and its cash flows for
the year ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company filed a voluntary petition for reorganization
under Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court on
October 29, 1999. The Chapter 11 filing was a result of the substantial losses
sustained by the Company and the Company's inability to raise capital required
to support its existing business. The Company has also violated certain
restrictive covenants under certain letters of credit due to its reduced
subscriber base, reduced revenue levels and net loss. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Although the Company is currently operating as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court, the continuation of the business as a
going concern is contingent upon, among other things, the approval and
confirmation by the creditors and Bankruptcy Court of the aforementioned plan of
reorganization, the success of future operations, and the ability to recover the
carrying amount of assets and/or the amount and classification of liabilities.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 14, 2000
F-21
AMERITEL COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARY OF USCI, INC.)
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents - $50,500 restricted in
2000 and 1999 $ 285,999 $ 304,161
Accounts receivable - trade, net of allowances of
$2,054,115 and $2,855,535 175,218 2,006,003
Prepaid expenses and other
49,622 29,989
----------- -----------
Total current assets 510,840 2,340,153
COMPUTER EQUIPMENT, net of accumulated
depreciation of $10,951 and $4,296 9,011 15,664
OTHER ASSETS 26,591 18,134
----------- ------------
TOTAL ASSETS $ 546,441 2,373,951
=========== ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities not subject to compromise:
Current liabilities
Accrued expenses $ 211,580 $ 138,561
Accounts payable 467,148 467,148
----------- ------------
Total current liabilities 678,728 605,709
Liabilities subject to compromise 52,272,032 54,216,585
----------- ------------
Total liabilities 52,950,760 54,822,294
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT
Common stock, no par value, 2,000 shares authorized and
Issued 100 100
Additional paid-in capital 77,800 -
Accumulated deficit (52,482,219) (52,448,443)
------------ ------------
Total stockholder's deficit (52,404,319) (52,448,343)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 546,441 $2,373,951
============ ============
The accompanying notes are an integral part of these
financial statements.
F-22
AMERITEL COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARY OF USCI, INC.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
-------------- -------------
REVENUES $ 4,678,385 $ 15,360,812
COST OF SALES 2,052,716 7,847,964
------------- --------------
GROSS MARGIN 2,625,669 7,512,848
------------- ---------------
SELLING, GENERAL AND ADMINISTRATIVE 4,156,521 13,765,016
SUBSCRIBER ACQUISITION AND PROMOTIONAL
COSTS 522,153 1,617,913
REORGANIZATION ITEM - 395,164
------------- ---------------
4,678,674 15,778,093
------------- ---------------
OPERATING LOSS (2,053,005) (8,265,245)
------------- ---------------
OTHER INCOME (EXPENSE)
Interest income 2,718 10,163
Interest expense (contractual amount $2,508,102 in 2000)
a reorganization item) - (2,151,802)
Gain on settlement of liabilities 2,086,510 -
------------- ---------------
2,089,228 (2,141,639)
------------- ---------------
NET INCOME (LOSS) $ 36,223 $ (10,406,884)
============= ================
The accompanying notes are an integral part of these
financial statements.
F-23
AMERITEL COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARY OF USCI, INC.)
STATEMENTS OF STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Additional Accumulated
---------------------
Shares Amount Paid-in Deficit Total
Capital
--------- ---------- ---------- ------------ ------------
BALANCE, December 31, 1998 2,000 $ 100 $ - $ (42,041,559) $(42,041,459)
Net loss - - - (10,406,884) (10,406,884)
--------- ---------- ---------- ------------- -------------
BALANCE, December 31, 1999 2,000 100 - (52,448,443) (52,448,343)
Contribution of stock from USCI, Inc. - - 77,800 - 77,800
Comprehensive loss:
Net income - - - 36,223 36,223
Unrealized loss on equity securities
of USCI, Inc. - - - (69,999) (69,999)
------------- -------------
(33,776) (33,776)
------------- -------------
BALANCE, December 31, 2000 2,000 $ 100 $ 77,800 $(52,482,219) $(52,404,319)
========= ========== ========== ============= =============
The accompanying notes are an integral part of these
financial statements.
F-24
AMERITEL COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARY OF USCI, INC.)
STATEMENT OF CASH FLOWS
2000 1999
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 36,223 $ (10,406,884)
-------------- --------------
Adjustments:
Gain on settlement of liabilities (2,086,510) -
Depreciation and amortization 6,654 2,455
Reorganization item - 395,164
Changes in:
Accounts receivable - trade 1,830,785 6,208,479
Prepaid expenses and other (20,290) 37,172
Commissions payable - (2,375)
Accounts payable and accrued expenses 73,019 (10,594,685)
Promotional deposits and other liabilities - (80,492)
-------------- ---------------
Total adjustments (196,342) (4,034,282)
-------------- ---------------
Net cash used in operating activities (160,119) (14,441,166)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - (12,595)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and draws from notes payable, long-term
debt and Credit Facility - 20,059,719
Repayment of notes payable and Credit Facility - (5,705,733)
Receipts from (payments to) parent company 141,957 (366,577)
-------------- ---------------
Net cash provided by financing activities 141,957 13,987,409
-------------- ---------------
NET DECREASE IN CASH
(18,162) (466,352)
CASH AND CASH EQUIVALENTS, beginning of year
304,161 770,513
-------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 285,999 $ 304,161
============== ===============
SUPPLEMENTAL INFORMATION
Interest paid $ - $ 2,151,802
============== ===============
NONCASH INVESTING AND FINANCING ACTIVITIES
Contribution of stock from USCI, Inc. $ 77,800 $ -
============== ===============
The accompanying notes are an integral part of these
financial statements.
F-25
AMERITEL COMMUNICATIONS, INC.
(DEBTOR-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARY OF USCI, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - CHAPTER 11 REORGANIZATION PROCEEDINGS
Ameritel Communications, Inc. (the "Company"), is a wholly owned subsidiary of
USCI, Inc. (the "Parent Company"). The Company is a reseller of cellular
services to subscribers via reselling agreements with carriers. Effective
October 1998, the Company ceased the active acquisition of new subscribers.
On October 29, 1999, the Company filed a voluntary petition for reorganization
under Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court for
the Southern District of New York (Case No. 99-11081) (the "Bankruptcy Court").
Under Chapter 11, certain claims against the Company in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are stayed
while the Company continues business operations as a Debtor-in-possession. These
claims are reflected in the balance sheet as "liabilities subject to
compromise." Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of executory contracts,
including leases and from the determination by the Bankruptcy Court for relief
from the stay. Secured claims are secured by liens on substantially all of the
Company's assets.
The Company has not yet filed a plan of reorganization. Such a plan may result
in additional reorganization charges, as well as impairment of certain assets
included in these financial statements.
Entering reorganization, although a significant event, does not ordinarily
affect or change the application of accounting principles followed by a company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern in accordance with the AICPA Statement
of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code." As such, asset and liability carrying amounts do not
purport to represent realizable or settlement values as contemplated by the
Bankruptcy Code. Specifically, the financial statements do not present the
amounts that will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Chapter 11 reorganization case or the effect of any
changes which may be made in connection with the Company's capitalization or
operations resulting from a plan of reorganization.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues from subscriber sales are recorded for charges to customers for monthly
access, cellular and paging airtime, roaming, and long distance, as such
services are rendered.
F-26
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Included in cash and cash
equivalents at December 31, 2000 and 1999 was $50,500 of certificates of
deposit.
Computer Equipment
Computer equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the computer equipment,
which is 3 to 5 years.
Subscriber Acquisition and Promotional Costs
Subscriber acquisition costs and promotional costs include costs incurred to
acquire subscribers, including commissions, discounts given to consumers for
reduced airtime and other promotions, and advertising.
Reorganization Item
In accordance with SOP 90-7, and the reorganization of the Company under Chapter
11 of the U.S Bankruptcy Code, the Company wrote off certain deferred financing
costs. The related expense of $395,164 is reflected in the statement of
operations for the year ended December 31, 1999 as Reorganization Item.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value of financial instruments that are assets is estimated to approximate
their carrying value at December 31, 2000. It is not practicable to estimate the
fair value of the Company's liabilities at that date because the Company is
subject to the provisions of the bankruptcy code and because of the Company's
inability to fund its liabilities.
F-27
NOTE C - LIABILITIES SUBJECT TO COMPROMISE
At December 31, 2000 and 1999 "liabilities subject to compromise" was comprised
of the following:
2000 1999
-------------- --------------
Item
------------------------------------------------
Secured Liabilities $12,811,419 $12,524,772
Due to parent and affiliates 18,854,608 21,856,306
Unsecured priority claims 1,337,225 1,337,225
Unsecured nonpriority claims 19,268,780 18,498,282
------------- -------------
Total Liabilities Subject to Compromise $52,272,032 $54,216,585
============= =============
Secured Liabilities
The Company had a revolving credit and term loan facility in place with a
commercial lender ("lender"). Funding under the term loan ceased when the
Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Court.
The Company was able to borrow additional money under the revolving credit
facility subsequent to the filing based upon cash collateral and extensions
allowed by the U.S. Bankruptcy Court. Term loans bear interest at 10.25% and
revolving credit borrowings bear interest at 9.25%. Substantially all of the
assets of the Company are pledged as collateral for these borrowings. In
addition, the Parent had guaranteed the total indebtedness.
On April 28, 2000, Tranche B, Inc., the Parent and the lender entered a Purchase
and Assignment Agreement which assigned all rights, title and interest in and to
the claims of the lender against the Company, the Parent and guarantors to
Tranche B, Inc. Tranche B is owned and controlled by shareholders who hold a
controlling interest in the Parent. Concurrent with this agreement, Tranche B
released the Parent from all obligations related to the revolving credit and
term loan facility.
Secured Liabilities consists of the following:
December 31,
-------------------------------------
2000 1999
---------- -----------
Term Loan $ 11,637,517 $ 11,424,107
Revolving Credit 1,173,902 1,100,665
------------ -------------
Total $ 12,811,419 $ 12,524,772
============ =============
Unsecured Priority Claims
Unsecured priority claims consists of taxes and certain other debts owed to
governmental units. A significant portion of these claims represent amounts owed
to various government authorities for taxes.
F-28
NOTE C - LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
Unsecured NonPriority Claims
Unsecured nonpriority claims consist of accounts payable, notes payable,
liabilities under letters of credit, and other accrued expenses incurred in the
normal course of business. The note payable is a $12,376,995 note payable to the
Company's largest vendor, entered into in April 1999. Under the terms of the
original agreement, the Company was to repay the balance in equal monthly
payments through April 2003. Interest is payable monthly at 6%. Pursuant to the
agreement, the Company is required to make current payments for its monthly
airtime usage and to secure a standby letter of credit totaling $1,000,000. As
of December 31, 2000 and 1999, the Company had made only one payment to the
vendor under the terms of the agreement.
Contract Termination and Litigation
The Company had an agreement with RadioShack, a division of Tandy, to be the
exclusive provider of analog cellular communications services to RadioShack's
retail locations in the greater New York metropolitan area. Ameritel was party
to the contract which was guaranteed by the Parent. In October 1998, the
contract was terminated by RadiShack who initiated legal action in December 1998
seeking more than $11,000,000. During 2000, the parties agreed to a mutual
release of all claims against each other (the Company had filed a counterclaim)
which was approved by the Bankruptcy Court. As a condition to the mutual
release, the Parent issued 500,000 shares of the Parent's common stock to the
Company and may be required to issue additional stock, not to exceed 250,000
shares, depending upon the market price of the stock eighteen months after the
release. As a result of the settlement, the Company recorded a gain of
$2,086,510, which represented the net liability to RadioShack at the time of the
settlement.
In 1997, the Company and the Parent entered an agreement with an investment
banking firm which provided that the investment bank would establish standby
letters of credit for up to $3,750,000 to satisfy requirements of clients and
vendors. Under the terms of the agreement, the Parent was required to pledge
545,045 shares of common stock of the Parent. Some of the Parent's officers,
directors and other stockholders agreed to deposit the required shares in return
for options to purchase 54,505 shares of common stock at $6.00 per share.
The Company is involved in various other legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, the Company believes these proceedings
should not ultimately result in any liability that would have a material effect
on the financial position, liquidity or results of operations of the Company.
NOTE D - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leased certain office space and telecommunications and office
equipment under noncancellable operating leases that expired at various times in
2000. At December 31, 2000, there were no future minimum lease payments under
noncancellable operating leases.
The expenses for operating leases were $90,140 and $156,600 for the years ended
December 31, 2000 and 1999, respectively.
F-29
NOTE E - INCOME TAXES
The Company's results are included in the federal and state income tax returns
of the Parent. For purposes of these financial statements, the income tax
provision has been determined on a basis as if the Company were a separate
taxpayer. Due to the history of losses incurred by the Company, the net deferred
tax asset resulting from net operating loss carryforwards is not considered
probable of realization and therefore is offset in all periods presented by a
valuation allowance.
NOTE F - SUBSEQUENT EVENTS
On January 26, 2001, the Company sold 2,507 cellular service subscribers in
Puerto Rico plus the related accounts receivable to Celulares Telefonica for the
forgiveness of approximately $1,100,000 owed to Celulares by the Company. The
receivables transferred aggregated $115,000, which resulted in a gain on the
transaction of about $1,000,0000.
As of April 2001, a motion is pending to dismiss the bankruptcy primarily based
upon the Company's apparent inability to confirm a Chapter 11 plan of
reorganization.
F-31