<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 2000
REGISTRATION NO. 333-88065
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 4 TO FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
CALLNOW.COM, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 87-0360333
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
50 BROAD STREET
NEW YORK, NEW YORK 10004-2307
(212) 686-2000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
CHRISTIAN BARDENHEUER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
50 BROAD STREET
NEW YORK, NEW YORK 10004-2307
(212) 686-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
<TABLE>
<S> <C>
NEIL P. PARENT, ESQ. LAWRENCE B. FISHER, ESQ.
STAIRS DILLENBECK & FINLEY ORRICK, HERRINGTON & SUTCLIFFE LLP
330 MADISON AVENUE, SUITE 2900 666 FIFTH AVENUE
NEW YORK, NEW YORK 10017-1005 NEW YORK, NEW YORK 10103
(212) 697-2700 (212) 506-5000
</TABLE>
------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
TITLE OF EACH CLASS
OF SECURITIES TO BE AMOUNT TO
REGISTERED BE REGISTERED
- -----------------------------------------------------------------------------------------------
<S> <C>
Units (each consisting of one share of Common Stock, $0.001 par value, and
one Redeemable Warrant exercisable into one share of Common Stock) ...... 4,600,000(2)
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Units...................... 4,600,000
- -----------------------------------------------------------------------------------------------
Redeemable Warrants ...................................................... 4,600,000
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Redeemable Warrants ....... 4,600,000(4)(5)
- -----------------------------------------------------------------------------------------------
Representatives' Warrants(7) ............................................. 400,000
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Representatives' Warrants.. 400,000(9)
- -----------------------------------------------------------------------------------------------
Redeemable Warrants underlying the Representatives' Warrants ............. 400,000(9)
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Representatives' Redeemable
Warrants ................................................................ 400,000(4)(5)
- -----------------------------------------------------------------------------------------------
Common Stock, $.001 par value, of existing stockholders .................. 164,891
- -----------------------------------------------------------------------------------------------
Totals ...................................................................
- -----------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE OFFERING PRICE AGGREGATE
REGISTERED PER SHARE OFFERING PRICE (1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Units (each consisting of one share of Common Stock, $0.001 par value, and
one Redeemable Warrant exercisable into one share of Common Stock) ...... $8.00 $36,800,000
- -------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Units...................... (3) (3)
- -------------------------------------------------------------------------------------------------------------------
Redeemable Warrants ...................................................... (3) (3)
- -------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Redeemable Warrants ....... $12.00 (6) $55,200,000
- -------------------------------------------------------------------------------------------------------------------
Representatives' Warrants(7) ............................................. $.0001 $40
- -------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Representatives' Warrants.. $9.60 (10) $3,840,000
- -------------------------------------------------------------------------------------------------------------------
Redeemable Warrants underlying the Representatives' Warrants ............. (11) (11)
- -------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Representatives' Redeemable
Warrants ................................................................ $12.00 $4,800,000
- -------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, of existing stockholders .................. $8.00 $1,319,128
- -------------------------------------------------------------------------------------------------------------------
Totals ................................................................... $101,959,168
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF EACH CLASS
OF SECURITIES TO BE AMOUNT OF
REGISTERED REGISTRATION FEE
- -----------------------------------------------------------------------------------------------
<S> <C>
Units (each consisting of one share of Common Stock, $0.001 par value, and
one Redeemable Warrant exercisable into one share of Common Stock) ...... $9,715
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Units...................... (3)
- -----------------------------------------------------------------------------------------------
Redeemable Warrants ...................................................... (3)
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Redeemable Warrants ....... $14,573
- -----------------------------------------------------------------------------------------------
Representatives' Warrants(7) ............................................. (8)
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Representatives' Warrants.. $1,014
- -----------------------------------------------------------------------------------------------
Redeemable Warrants underlying the Representatives' Warrants ............. (11)
- -----------------------------------------------------------------------------------------------
Common Stock, $0.001 par value, underlying the Representatives' Redeemable
Warrants ................................................................ $1,267
- -----------------------------------------------------------------------------------------------
Common Stock, $.001 par value, of existing stockholders .................. 348
- -----------------------------------------------------------------------------------------------
Totals ................................................................... $26,917(12)
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(2) Includes 600,000 Units which the Underwriters have the option to purchase
to cover over-allotments, if any.
(3) Pursuant to Rule 457(i), no additional registration fee is required for
these Shares of Common Stock or Redeemable Warrants being registered as
part of the Units being offered to the public and sold to the
Underwriter, since no additional consideration is to be paid for them.
(4) Reserved for issuance upon exercise of the Redeemable Warrants.
(5) Pursuant to Rule 416, this Registration Statement also covers such
additional shares of Common Stock as may be issued as a result of the
anti-dilution provisions of the Warrants.
(6) Exercise price of the Redeemable Warrants.
(7) In connection with the Registrant's sale of the Units, the Registrant is
granting warrants to purchase 400,000 Units to the Representatives of the
several Underwriters.
(8) No fee due pursuant to Rule 457(g).
(9) Reserved for issuance upon exercise of the Representatives' Warrants.
(10) Exercise price of Representatives' Warrants.
(11) Exercise price of the Representatives' Warrants is set forth above for
the Common Stock issuable upon exercise of the Representatives' Warrants.
(12) $28,064 was previously paid.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
THIS REGISTRATION STATEMENT CONTAINS TWO PROSPECTUSES: ONE RELATING TO
THIS OFFERING OF 4,000,000 UNITS OF CALLNOW.COM, PLUS 600,000 UNITS TO COVER
OVER-ALLOTMENTS, IF ANY, AND ONE RELATING TO THE OFFERING OF 164,891 SHARES OF
COMMON STOCK BY SOME OF THE STOCKHOLDERS OF CALLNOW.COM. FOLLOWING THE
PROSPECTUS ARE CERTAIN SUBSTITUTE PAGES OF THE SELLING STOCKHOLDER PROSPECTUS,
INCLUDING ALTERNATE FRONT OUTSIDE AND BACK OUTSIDE COVER PAGES, AN ALTERNATE
"THE OFFERING" SECTION OF THE "SUMMARY" AND SECTIONS TITLED "SELLING
STOCKHOLDERS AND PLAN OF DISTRIBUTION" AND "LEGAL MATTERS." EACH OF THE
ALTERNATE PAGES FOR THE SELLING STOCKHOLDER PROSPECTUS IS LABELED "ALTERNATE
PAGE FOR SELLING STOCKHOLDER PROSPECTUS." ALL OTHER SECTIONS OF THE PROSPECTUS,
OTHER THAN "USE OF PROCEEDS," "DILUTION," AND "UNDERWRITING" ARE TO BE USED FOR
THE SELLING STOCKHOLDER PROSPECTUS.
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION--MARCH 2, 2000
PROSPECTUS
- --------------------------------------------------------------------------------
4,000,000 UNITS
[CALLNOW.COM, INC. LOGO]
---------------------------------
(Each Unit Consisting of One Share of Common Stock and
One Redeemable Common Stock Purchase Warrant)
---------------------------------
o CallNOW.com is offering 4,000,000 units.
o Selling stockholders are also offering up to 164,891 shares of
common stock through an alternate prospectus that is dated ,
2000 which shares are subject to a 90 day lockup agreement.
o We anticipate that the public offering price will be between
$6.00 and $8.00 per unit.
o Our common stock has been traded in the National Quotation
Bureau, LLC's Pink Sheets. The last reported bid price for our
common stock in the Pink Sheets on February 28, 2000 was $3.00.
o Our trading symbol in the National Quotation Bureau, LLC's Pink
Sheets is CALN. No public market currently exists for the units
or the warrants. We have applied to list the units, common stock
and warrants on the Nasdaq SmallCap Market under the symbols
CALNU, CALN and CALNW, respectively.
THE PURCHASE OF OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. BEFORE
BUYING THE UNITS, CAREFULLY READ THIS PROSPECTUS, ESPECIALLY THE "RISK FACTORS"
BEGINNING ON PAGE 9.
<TABLE>
<CAPTION>
PER UNIT TOTAL
---------- ----------
<S> <C> <C>
Public offering price ........................ $ $
Underwriting discount & commissions .......... $ $
Proceeds, before expenses, to us ............. $ $
</TABLE>
---------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------------------
The underwriters may purchase up to 600,000 additional units from us at the
public offering price less underwriting discount and commissions, to cover
over-allotments.
DIRKS & COMPANY, INC. NOLAN SECURITIES CORPORATION
<PAGE>
[Picture of CallNOW.com home page.]
<PAGE>
PROSPECTUS SUMMARY
This summary sets forth the material highlights of the information
contained elsewhere in this prospectus. It does not contain all the information
that you should consider before investing in us, and you should read the entire
prospectus carefully.
OUR BUSINESS
We offer our customers a variety of telecommunications services through
our e-commerce Web site (www.callnow.com) and any touch tone telephone. Our
services are provided globally and currently consist of international long
distance, national long distance, and a free global online telephone directory,
which currently generates over 1.6 million page impressions (page views) and
over 400,000 user sessions (unique visitors) per month. Our customers currently
consist primarily of individuals and small businesses, 80% of whom are located
outside of the U.S.
Our Web site is a communications portal with a look and feel that is
tailored to local markets, currently with a choice of four languages in
approximately 200 countries. Our Web site is driven by our software that
enables our customers in real time to:
o Survey global telephone rates;
o Sign up online for international and national long distance telephone
service;
o Have their credit cards automatically validated and pre-authorized;
o Activate their accounts;
o Review the details of each of their calls from the date of inception
of their account;
o Review current account information, including cumulative amounts,
through the last call made; and
o Review monthly invoices.
We offer international and national long distance telephone service
through call re-origination or "call-back" service, which we refer to on our
Web site as "ReturnCall." Our customer typically dials a unique U.S. telephone
number to our switch, allows the telephone to ring once, hangs up and then
receives a return call from our switch providing U.S. dial-tone. Alternatively,
a customer connected to the Internet can initiate a ReturnCall through our
switch to any telephone providing them with U.S. dial-tone. We refer to this
service on our Web site as "Internet Trigger." Generally, ReturnCall offers our
customers significant savings on international and national long distance
calls. Approximately 67 countries have stated that call re-origination services
are prohibited in their country. For a more detailed discussion and potential
impact on our business, see "Risk Factors--Risks Related to the
Telecommunications Business--35 Countries Have Notified The Federal
Communications Commission That ReturnCall Services Violate Their Local Laws,
And 67, Countries From Which We Derived Approximately 21% Of Our Revenues In
1999 Have Stated That Call Re-origination Is Prohibited In Their Country."
We launched our telecommunications services using the Internet in
September 1998. In the fourth quarter of 1999, we billed an aggregate of
approximately 4,000 customers for using our service. For the fiscal year ended
December 31, 1999, we had revenues of $1.0 million and a loss of $3.1 million.
Through a contract with Equinox International LLC, a U.S.
telecommunications wholesale provider, we will offer an online calling card and
fax services over the Internet, commencing in the second quarter of 2000. With
the proceeds of this offering, we plan to add direct dial service in Europe,
Japan and Australia and to continue to tailor our Web site to the approximately
200 local
3
<PAGE>
markets we serve, including expanding the choice of languages available on our
Web site. In addition, we intend to add paging, a global online directory for
renting cellular phones, and other services designed to make our Web site a
single source solution for all of our customers' telecommunications needs.
OUR MARKET OPPORTUNITY
We are benefiting from four converging trends:
o Explosive growth in access to and use of the Internet worldwide,
particularly outside the U.S.;
o Deregulation of the telecommunications industry in overseas markets;
o Growing consumer awareness in these markets of low-cost alternatives to
the high-cost of their national telephone company services; and
o Increasing transmission capacity of carriers globally.
We believe that the convergence of these trends has created a significant
opportunity for us to offer our one-stop shop for telecommunications services
in an e-commerce platform.
OUR STRATEGY
Our goal is to establish ourselves as a leading Web portal providing
access to international and national telecommunications services. Our strategy
is to drive traffic to our CallNOW.com Web site and to develop the CallNOW.com
brand through traditional marketing and advertising and through Internet
related promotion and advertising. We are developing a network of affiliates to
promote and drive traffic to our site. Our affiliates are compensated monthly
with a percentage of revenue derived from customers that have signed up for our
services from their sites. Our affiliate network currently includes:
o Major global search engines, which are accessed in many languages;
o Country and language specific search engines aimed at country nationals
and others who use non-English language sites;
o Web sites of telecommunications resellers who are looking for
interactive enhancements to their static sites; and
o Web-based e-commerce retailers and other Web sites, including those
that want to add an interactive service for telecommunications.
We have contracted with Be Free, Inc., a provider of services that enables its
customers to generate, place and manage hyperlink promotions for their products
and services, to manage the administration of our affiliate programs.
We are targeting those countries with substantial amounts of international
and national long distance traffic and that also account for the deepest
non-U.S. Internet penetration. For example, in June 1999, we entered into
contracts with Lycos-Bertelsmann GmbH, a Pan European joint venture between
Lycos Inc. and Bertelsmann GmbH, and with Lycos Japan, a joint venture between
Lycos Inc., Sumitomo Corporation and Internet Initiative Japan. In both Europe
and Japan, these Lycos joint ventures will periodically place banners,
promotional buttons, text links and other hyperlinks from their home pages to
our Web site. Additionally, they will place promotional items on their search
results pages. In return, we are obligated to make minimum guaranteed payments
in the aggregate amount of $460,000 to these Lycos joint ventures in the next
18 months. In addition, we are obligated to pay these Lycos joint ventures a
commission, based on recurring monthly revenue derived from
4
<PAGE>
each customer they deliver to us, which is offset against the guaranteed
payments. However, as of the date of this prospectus, the links which would
direct users of Lycos Japan to our Web site are still being developed. Thus,
the implementation of our contract with Lycos Japan has not yet occurred, and
no assurance can be made when, if ever, such contract will be implemented.
These contracts are non-exclusive.
Telecommunications services are typically recurring monthly purchases.
Accordingly, we expect our subscribers and others to visit our Web site
frequently to review their call detail reports and monthly invoices and to use
our free global online telephone directory and the other telecommunications
services we will offer. This will provide us with the opportunity to cross sell
other products and services and sell targeted advertising that will reach our
subscribers while they navigate our Web site.
We currently provide our customers international and national long
distance telecommunications services through our own switch. We have contracted
with Exodus Communications, Inc., a leader in complex Internet hosting and
services, to provide facilities, bandwidth, and managed services for our switch
and servers in their secure facility on a 24 hour, 7 day a week basis. We
expect to be operational at Exodus commencing in the second quarter of 2000.
This will allow us to focus our resources on the execution of our strategy to
become a leading Internet portal for the telecommunications market.
Our principal executive offices are located at 50 Broad Street, New York,
New York 10004, and our telephone number is (212) 686-2000. We maintain a Web
site at www.callnow.com. Information on our Web site is not intended to be a
part of this prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Units offered by us .................................. 4,000,000 units, each unit consisting of one
share of common stock and one redeemable
common stock purchase warrant. The warrant
is exercisable at a price equal to 150% of the
public offering price of the units per share for
a period of forty-eight months commencing
twelve months from the effective date of the
registration statement of which this
prospectus forms a part. We may redeem the
warrants starting eighteen months after such
effective date at $0.10 per warrant, if the
average closing sale price for our common
stock equals or exceeds 200% of the public
offering price of the units for any twenty
trading days within a period of thirty
consecutive trading days ending on the fifth
trading day prior to the date of the notice of
redemption. You may trade the common
stock and warrants separately starting twelve
months after such effective date, unless we
agree with the representatives of the
underwriters that trading may begin sooner.
See "Description of Securities."
Total shares outstanding after this offering ......... 10,314,666 Shares (1)
Redeemable common stock purchase
warrants outstanding after this offering ............ 4,000,000 Warrants (2)
Use of proceeds ...................................... For working capital, including advertising and
promotion, repayment of convertible
debentures, repayment of accrued liabilities
owed to senior management, retroactive
salary increases and upgrading our computer
hardware and software. You should read
"Use of Proceeds" for an expanded
discussion of our intentions with respect to
the proceeds of this offering.
Proposed Nasdaq SmallCap Market Unit
Symbol (3) .......................................... CALNU
Proposed Nasdaq SmallCap Market Common
Stock Symbol (3) .................................... CALN
Proposed Nasdaq SmallCap Market
Redeemable Common Stock Purchase
Warrant Symbol (3) .................................. CALNW
</TABLE>
- ----------
(1) Based on shares outstanding as of the date of this prospectus. Excludes:
o 282,825 shares of common stock issuable upon exercise of options at
exercise prices ranging from $.01 to $2.75 per share, which options
include an anti-dilution provision which will result in the additional
issuance of options to purchase 200,000 shares of common stock at the
offering price;
6
<PAGE>
o 2,200,000 shares of common stock reserved for future issuance under a
stock option plan, of which options to purchase 1,162,400 shares of
common stock at exercise prices of $2.75 per share have been granted;
o 400,000 shares of common stock issuable upon exercise of the
representatives' warrants at an exercise price of 120% of the public
offering price of the units per share;
o 400,000 shares of common stock issuable upon exercise of 400,000
redeemable common stock purchase warrants issuable upon exercise of the
representatives' warrants at an assumed exercise price of 150% of the
public offering price of the units per share;
o a maximum of 181,232 shares of common stock issuable upon conversion of
$1,276,300 in principal amount of convertible debentures outstanding as
of the date of this prospectus at an effective conversion price of $7.06;
and
o 4,000,000 shares of common stock issuable upon exercise of the
warrants.
For a description of the convertible debentures, see "Description of
Securities--Convertible Debentures." For information regarding options
granted prior to this offering, see "Management--Employment and Consulting
Agreements," "Related Party Transactions" and "Notes to Consolidated
Financial Statements."
(2) Excludes 400,000 redeemable common stock purchase warrants issuable upon
exercise of the representatives' warrants.
(3) We filed an application for our units, shares and warrants to be included
for quotation on the Nasdaq SmallCap Market under the symbols "CALNU",
"CALN" and "CALNW", respectively. However, we cannot assure you that we
will be successful in our efforts to list our units, shares and warrants
on the Nasdaq SmallCap Market and may only trade on the OTC Bulletin
Board or in the National Quotation Bureau, LLC's Pink Sheets. For
discussion of the effects of the failure to have our units, shares or
warrants listed on the Nasdaq SmallCap Market, see "Risk Factors--Risks
Related To This Offering--Failure To Be Approved For Listing On The
Nasdaq SmallCap Market Or The Absence Of An Active Trading Market For The
Common Stock And Warrants Could Make It Difficult For Investors To Resell
Their Shares And Warrants At Or Above The Public Offering Price" and
"--Failure To Satisfy Listing Standards For Nasdaq Could Subject Us To
The "Penny Stock" Rules And Severely Limit The Liquidity Of Our Common
Stock And Warrants."
-------------------------
7
<PAGE>
SUMMARY FINANCIAL DATA
The following tables present summary financial data derived from our
financial statements included elsewhere in this prospectus. The statement of
operations data for the year ended December 31, 1995 has not been audited by
independent auditors, but in the opinion of our management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
have been included. For additional information, you should refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ............... $ 453,273 $1,674,955 $5,010,027 $2,295,202 $ 1,004,636
Loss from operations ......... (253,087) (929,640) (858,771) (550,942) (2,499,257)
Interest expense ............. -- (1,154) (58,568) (90,436) (618,791)
Net loss ..................... (253,087) (930,794) (917,339) (641,378) (3,118,048)
Net loss per share ........... (0.08) (0.24) (0.24) (0.17) (0.60)
Common shares ................ 3,055,525 3,875,000 3,875,000 3,875,000 5,157,964
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------
ACTUAL PRO FORMA(1)
--------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash ................................... $ 80,542 $11,363,942
Current assets ......................... 109,598 11,392,998
Current liabilities .................... 2,007,120 181,387
Working capital (deficit) .............. (1,897,522) 11,211,611
Long-term assets ....................... 2,082,507 11,897,511
Total assets ........................... 2,192,105 23,290,509
Long-term liabilities .................. 1,090,867 240,000
Stockholders' equity (deficit) ......... (905,882) 22,869,122
</TABLE>
- ----------
(1) Adjusted for the sale of the units offered hereby and application of the
estimated net proceeds therefrom.
8
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the following risk factors, in addition to the other information in
this prospectus, before purchasing our units. Each of these risk factors could
adversely affect our business, operating results and financial condition and
the price of our units.
RISKS RELATED TO ESTABLISHMENT OF OUR BUSINESS
OUR REVENUES HAVE FALLEN, WE HAVE NEVER BEEN PROFITABLE AND WE EXPECT OUR
LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE
In the process of implementing our Internet strategy in September 1998, we
substantially abandoned our wholesale business which generated approximately
$2.5 million in revenue in the preceding fiscal year. As a result, our revenues
have fallen from approximately $2.3 million in 1998 to approximately $1.0
million in 1999. While we believe that the Internet strategy we have
implemented and plan to finance with the proceeds of this offering will result
in a growth in revenues, we have not yet experienced any significant increase.
We have recorded a substantial net loss for each fiscal period since our
inception and expect to continue to incur substantial net losses for the
foreseeable future. We incurred net losses of approximately $3.1 million in
1999 and approximately $0.6 million in 1998. Furthermore, if the implementation
of our Internet strategy is successful and we achieve the growth we anticipate
in our business, we expect our cost of sales and operating expenses to increase
significantly, especially in the areas of sales, marketing and brand promotion.
We will, therefore, need to generate significant revenues to achieve
profitability. For additional information on our revenues and losses, see
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE HAVE INCURRED OPERATING LOSSES AND ARE OPERATING WITH A WORKING CAPITAL
DEFICIENCY AND THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN
We have incurred substantial losses to date and we are operating with a
working capital deficiency. Our independent accountants' report on our
financial statements for the years ended December 31, 1999 and 1998 contains an
explanatory paragraph indicating that there is substantial doubt about our
ability to continue as a going concern. We anticipate that operating losses
will continue for the foreseeable future. With the proceeds of this offering,
we believe that we will be able to meet our obligations for at least the next
12 months. However, after such time, we cannot assure you that we will be able
to continue as a going concern. If we are not able to continue as a going
concern, you may lose all, or a significant portion of, your investment in us.
For a further discussion of our financial condition, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
"Notes to Consolidated Financial Statements."
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING
We must continue to enhance and expand our services and our Internet
infrastructure in order to respond to competitive pressures and to meet our
customers' increasing demands for service quality, availability and competitive
pricing. We believe that, based upon our present business plan, our existing
cash resources, the cash resources provided by the proceeds of this offering,
and the expected cash flow from operating activities will be sufficient to meet
our currently anticipated working capital and capital expenditure requirements
for at least the next 12 months. If our growth exceeds current expectations or
we expedite or expand our growth plan, or if our cash flow from operations is
insufficient to meet our working capital and capital expenditure requirements,
we will need to raise additional capital from equity or debt sources. We cannot
assure you that we will be able to raise such capital on favorable terms or at
all. If we are able to obtain such capital, as and when necessary, the terms of
such financing may contain restrictive covenants that might affect our common
stock, such as limitations or prohibitions on payment of dividends or, in the
case of a debt financing, reduced
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earnings due to interest expenses. Any further issuance of equity securities
would likely have a dilutive effect on the holders of our units, common stock
and warrants.
WE MAY NOT BE ABLE TO SUSTAIN OR SUCCESSFULLY MANAGE OUR GROWTH, AND THERE ARE
CONTINUED RISKS ASSOCIATED WITH OUR ABILITY TO MANAGE OUR GROWTH
Our expansion into new businesses has placed, and may continue to place, a
strain on our management, administrative, operational, financial and technical
resources and increased demands on our systems and controls. A failure to
effectively provide customer and technical support services will adversely
affect our ability to maintain our existing customer base and attract new
customers. Expected increases in our telecommunications customer base and
Internet subscriber base will produce increased demands on our sales, marketing
and administrative resources, our engineering and technical resources, and our
customer and technical support resources, as well as on our switching and
routing capabilities and network infrastructure. As of January 31, 2000, we had
18 employees. We will need to hire additional sales and marketing, technical,
administrative and management personnel. In addition, we will need to hire or
retrain managerial and support personnel for the new services we intend to
offer. Although we have hired additional personnel and upgraded certain of our
systems, we cannot assure you that our administrative, operating and financial
control systems, infrastructure, personnel and facilities will be adequate to
support our future operations or maintain and effectively adapt to future
growth.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, EVALUATING OUR BUSINESS AND
DECISIONS RELATING TO US ARE DIFFICULT
We have a very limited operating history in offering our services through
the Internet upon which an investor may evaluate us with respect to our current
business and our prospects. Our business model is evolving and an investor must
consider the substantial and sometimes unforeseeable expenses frequently
encountered by early stage companies, companies that are in the midst of
significant business changes and companies that are in new and rapidly evolving
markets, such as the retail marketing of telephone services and online
commerce. Similarly, our management has only a limited operating history in
this rapidly evolving industry on which to base important business decisions.
This lack of information will make these management decisions very difficult
and the outcome of the decisions uncertain. For a discussion of our operating
history, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Our History."
WE MAY NOT BE ABLE TO GROW OUR CUSTOMER BASE AND GENERATE SALES IF WE ARE
UNABLE TO POSITION THE CALLNOW.COM BRAND
We believe that we must position the CallNOW.com name as a leading brand
and maintain our reputation as a provider of low-cost telephone services to
under-served markets. Promoting and positioning the brand will depend largely
on the success of our marketing efforts and our ability to provide access to
high quality products and customer service. We cannot assure you that we will
be successful in this regard. Building the CallNOW.com brand will require
substantial marketing expenditures. Our sales and marketing expenses were
approximately $0.4 million in 1998 and $0.7 million in 1999. We cannot assure
you that our brand promotion activities will result in increased revenues or
that any such revenues will offset our marketing expenditures. For a further
discussion on our historical marketing expenditures, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations." For
a discussion on our future brand promotion activities, see "Business--Business
Strategy" and "--Sales and Marketing."
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WE MAY NOT BE ABLE TO GROW OUR CUSTOMER BASE AND GENERATE SALES IF WE ARE
UNABLE TO BROADEN OUR SERVICES
Through the date of this prospectus, our consumer service offerings have
consisted almost solely of ReturnCall services. With the proceeds of this
offering, we plan to offer a limited number of other services to individual
consumers and small businesses. For a further discussion of future services we
intend to offer, see "Business--Future and Planned Services." In order to grow
our customer base and generate sales, we must broaden our offerings to include
other telephone services and related services. We cannot assure you that we
will be able to do so. We provide actual telephone service through our own
switch using our proprietary software. In the future, we may also provide
services by others under the CallNOW.com brand or through our affiliate
network. Accordingly, we will need to establish relationships with increasing
numbers of third parties to provide our customers access to those services
through our Web site. Our experience in providing ReturnCall services may not
be effective in purchasing and marketing other telephone services. We cannot
assure you that we will be able to establish the third-party relationships
necessary to broaden our service offerings as we plan. Moreover, the commercial
availability of some of the services that we hope to offer is dependent on
technological advances. We cannot assure you when or even that such advances
will occur, that we will be able to develop profitably a sufficient selection
of telephone services or other services or that any of our services will
achieve market acceptance.
THE E-COMMERCE INDUSTRY IS RAPIDLY CHANGING AND OUR FAILURE TO ADAPT TO NEW
TECHNOLOGIES COULD ADVERSELY AFFECT OUR ABILITY TO ATTRACT CUSTOMERS AND MAKE
SALES THROUGH OUR WEB SITE
The e-commerce industry is characterized by:
o rapid technological changes;
o frequent emergence of new industry standards and practices; and
o continual changes in user and customer requirements and preferences.
Failure to adapt to the evolving technologies, industry standards and user
requirements and preferences on an ongoing basis could have a material adverse
effect on our ability to attract customers to, and make sales through, our Web
site. We cannot assure you that we will be successful in this regard.
OUR FAILURE TO DEVELOP AND MAINTAIN RELATIONSHIPS WITH MASTER AFFILIATES AND
OTHER STRATEGIC WEB SITES COULD ADVERSELY AFFECT OUR ABILITY TO ATTRACT
CUSTOMERS
We believe that in order to attract significant traffic and thereby grow
our customer base we will need to establish and maintain relationships with
master affiliates, Internet portals (which are Web sites that offer a broad
array of resources and services on the Internet to attract traffic to their
sites, such as e-mail, discussion forums, search engines and online shopping
malls) and other high-traffic Web sites that will carry links to our Web site.
We will also need to establish and maintain relationships with content
providers that will provide their Web sites with content that appeals to
consumers who also have an interest in our services. Competition exists for
these types of relationships and we likely will have to pay significant fees to
establish and maintain these relationships. We cannot assure you that we will
be able to enter into or maintain appropriate relationships on terms favorable
to us, or that, even if we do, we will attract significant traffic to grow our
customer base or generate sales.
FAILURE TO IMPLEMENT ONGOING IMPROVEMENTS TO OUR WEB SITE WILL IMPAIR OUR
ABILITY TO ATTRACT CUSTOMERS
Our ability to attract consumers and sell them our services over the
Internet will depend on our ability to design and maintain a state-of-the-art
Web site. We cannot assure you that our Web site will be successful in
attracting customers. Our Web site could contain errors that are discovered in
the future. We may be required to modify our Web site to correct these errors.
We cannot assure you that we will be able to do so or that we will be able to
implement the ongoing improvements that we believe are required for the
continued success of a Web site. Moreover, we cannot estimate the related costs
with any certainty.
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RISKS RELATED TO THE TELECOMMUNICATIONS BUSINESS
CHANGES IN THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY COULD RESULT IN A
MATERIAL DECLINE IN THE ATTRACTIVENESS OF OUR SERVICES OR OUR ABILITY TO OFFER
THEM
We have generated, and plan to continue to generate, a substantial
majority of our revenues by providing international telecommunications services
to our customers on an individual consumer basis. The international nature of
our operations will involve risks, such as changes in U.S. and foreign
government regulations and telecommunications standards, dependence on foreign
firms, tariffs, taxes and other trade barriers, the potential for
nationalization and economic downturns and political instability in foreign
countries. In addition, our business could be adversely affected by a reversal
in the current trend toward deregulation of telecommunications carriers. We
will be increasingly subject to these risks to the extent that we proceed with
the planned expansion of our international operations.
THE INTERNATIONAL MARKETS IN WHICH WE OPERATE ARE UNCERTAIN AND COULD ADVERSELY
AFFECT OUR ABILITY TO OFFER AND SELL OUR SERVICES
Many of the overseas markets in which we currently market
telecommunications services are undergoing dramatic changes as a result of
privatization and deregulation. For example, the European Union has mandated
competitive markets for the European telecommunications industry and the
various European countries are at different stages of opening their
telecommunications markets. As a result of privatization and deregulation, a
new competitive environment is emerging in which major European telephone
companies, media companies and utilities are entering the telecommunications
market and forming new alliances which are radically changing the landscape for
domestic and international telephone services. Open markets for
telecommunications services are expected to evolve in other parts of the world
as well. While we are focused on exploiting the imbalances that may be brought
about by the often fragmented nature of deregulation, we are entering new and
often unknown markets and, therefore, are unable to predict how such
deregulating markets will evolve. We cannot assure you that changes in the
marketplace and new strategic alliances among companies with greater resources
and experience than ours will not adversely affect our ability to continue to
offer and sell ReturnCall services and other services we intend to offer or our
efforts to increase our overseas telecommunications customer base.
A DETERIORATION IN OUR RELATIONSHIPS WITH CARRIERS AND OTHER THIRD PARTY
TELECOMMUNICATIONS COMPANIES COULD RESULT IN OUR INABILITY TO PROVIDE TELEPHONE
SERVICES
We depend on other carriers and third party telecommunications companies,
including foreign government-owned telephone authorities, for many of our key
functions and services, including local switching of long distance telephone
traffic and national and international network connectivity of telephone
traffic to and from our switch.
We do not have our own network, but resell lines on other carriers'
networks. We generally do not have long-term contracts with carriers and
pricing and access to their lines and networks can change suddenly and
frequently. We may be unable to extend or replace our existing contracts with
our carriers on terms comparable to our existing agreements. These carriers are
not restricted from competing against us. We are currently dependent primarily
upon Facilicom International LLC, which is our primary provider of leased
network capacity and data communications facilities. Under our contracts, our
suppliers provide telephone capacity, usually denominated in numbers of minutes
priced on an initial 30 seconds and then subsequent intervals of 6 seconds. The
reseller or the carrier may not be able to, or for competitive reasons may
refuse to, provide a sufficient amount of minutes of capacity. In such an
event, we may be required to route the traffic to another carrier providing
service at a less advantageous rate or with lesser quality and our profit
margins or network service quality may be reduced. A reduction of our service
quality could result in a loss of customers.
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We route approximately 10% of our international telephone calls using the
networks of third parties that operate or that may plan to operate in countries
in which local laws or regulations limit their ability to provide basic
international service in competition with state-owned or state-sanctioned
monopoly carriers. We have no control over the manner in which these companies
operate in these countries. Future regulatory, judicial, legislative or
political considerations may not permit these companies to offer their services
to residents of these countries. In addition, foreign telecommunications
regulators or third parties may raise issues regarding the compliance of these
companies with local laws or regulations. These regulatory, judicial,
legislative or political decisions could limit the ability of these companies
to route calls to or from our network. If these companies become unable to
provide the services which they presently provide to us or may provide in the
future due to their inability to obtain or retain the required governmental
approvals or for any other reason related to regulatory compliance, we may need
to obtain similar services from other carriers for higher prices or we may not
be able to provide our services at all.
35 COUNTRIES HAVE NOTIFIED THE FEDERAL COMMUNICATIONS COMMISSION THAT
RETURNCALL SERVICES VIOLATE THEIR LOCAL LAWS, AND 67 COUNTRIES FROM WHICH WE
DERIVED APPROXIMATELY 21% OF OUR REVENUES IN 1999 HAVE STATED THAT CALL
RE-ORIGINATION IS PROHIBITED IN THEIR COUNTRY
We are authorized by the Federal Communications Commission to offer a
ReturnCall service throughout the world, subject to certain conditions. In some
countries the use of ReturnCall service is restricted or prohibited. In the
U.S., the FCC has determined that ReturnCall service using uncompleted call
signaling does not violate U.S. or international law, but has held that U.S.
companies providing such services must comply with the laws of the countries in
which they operate as a condition of such companies' Section 214 Switched Voice
Authorization. By using uncompleted call signaling the customer dials a number
to connect to our switch in the U.S., waits a predetermined number of rings,
and hangs up without the switch answering. Our switch then returns the call
and, upon completion, gives the customer a U.S. dial tone.
The FCC reserves the right to condition, modify or revoke any Section 214
Authorizations and impose fines for violations of the Communications Act or the
FCC's regulations, rules or policies promulgated thereunder, or for violations
of the clear and explicit telecommunications laws of other countries that are
unable to enforce their laws against U.S. carriers. FCC policy provides that
foreign governments that satisfy certain conditions may request FCC assistance
in enforcing their laws against U.S. carriers. To date, 67 countries from which
we derived approximately 21% of our revenues in 1999, have stated that call
re-origination services are prohibited in their country and are listed in the
following table:
Algeria
Bahamas*
Bahrain*
Belarus
Bolivia*
Brunei Darussalam
Burkina Faso
Burundi
Cambodia
China*
Colombia*
Cook Islands*
Costa Rica*
Croatia*
Cyprus*
Djibouti
Ecuador*
Egypt*
Eritrea
Fiji
Gambia
Ghana
Greece
Honduras*
Hungary*
India*
Indonesia*
Kazakhstan
Kenya
Republic of Korea
Kuwait*
Kyrgyzstan
Latvia*
Lebanon*
Malaysia*
Mali
Morocco
Netherlands Antilles*
Nicaragua
Niger
Oman*
Pakistan
Panama*
Papua New Guinea
Peru*
Philippines*
Poland
Portugal*
Qatar*
Saudi Arabia*
Seychelles*
South Africa*
South Korea
Spain
Syria*
Tanzania*
Thailand*
Turkey
Uganda
United Arab Emirates*
Uruguay*
Venezuela*
Vietnam
Western Samoa
Yemen
Zambia
Zimbabwe
- ----------
* Has formally submitted information to the FCC stating that certain
ReturnCall services violate its laws.
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Except for the Philippines and Saudi Arabia, the FCC has stated that it has not
determined whether these submissions by foreign governments to the FCC are
sufficient evidence of illegality for purposes of the FCC taking enforcement
action against U.S. carriers. To date, the FCC has only ordered carriers to
cease providing ReturnCall services to the Philippines and Saudi Arabia.
Future FCC enforcement action could include an order to cease providing
call re-origination services to any country ultimately found to have provided
sufficient information to the FCC, the imposition of one or more restrictions
on us, monetary fines or, ultimately, the revocation of our Section 214
Switched Voice Authorization. The telecommunications industry in general and
our business in particular, depends on the regulation of telecommunications
services by the FCC and foreign regulators. We cannot give any assurances that
our ReturnCall services, as presently configured, will continue to be regulated
throughout the world in the same manner as they are today. The actions of
various foreign regulators and the FCC, with respect to call re-origination
services, could materially adversely effect our business, financial condition
and results of operations.
WE MAY NOT BE ABLE TO OBTAIN TELECOMMUNICATIONS AUTHORIZATIONS ABROAD WHICH
COULD PROHIBIT US FROM SERVING CERTAIN MARKETS, SUCH AS AUSTRALIA AND JAPAN
As we expand our service offerings in foreign markets, we or the carriers
we use may need to obtain telecommunications authorizations abroad, including
regulatory authority in Australia or a Special Type II Telecommunications
License in Japan. Our failure (or the failure of our carriers) to obtain
telecommunications authority in these and other jurisdictions could materially
adversely affect our business, financial condition, operating results and
future prospects.
FAILURE TO QUALIFY TO DO BUSINESS IN FOREIGN COUNTRIES OR TO COMPLY WITH
FOREIGN LAWS COULD SUBJECT US TO TAXES AND PENALTIES OR MAY AFFECT OUR ABILITY
TO ENFORCE CONTRACTS
As we expand into additional foreign countries, such countries may assert
that we are required to qualify to do business in the particular foreign
country, that we are otherwise subject to regulation, or that we are prohibited
from conducting our business in that country. Our failure to qualify as a
foreign corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could materially adversely affect our
business, financial condition, operating results and future prospects,
including by subjecting us to taxes and penalties or may affect our ability to
enforce contracts in such jurisdictions.
WE DEPEND ON OUR INDEPENDENT AFFILIATES AND THE FAILURE OF OUR AFFILIATES TO
EFFECTIVELY MARKET OUR SERVICES COULD RESULT IN FEWER SALES OF OUR
TELECOMMUNICATIONS SERVICES
We are dependent upon our network of independent affiliates, particularly
for the sales of our international long distance telecommunications services in
key foreign markets. The risks inherent in our dependence upon our affiliates
include:
o our inability to require each affiliate to devote sufficient efforts to
selling our services because each affiliate is an independent contractor
as opposed to an employee;
o we may not be able to attract affiliates that can effectively market
our services;
o our arrangements with the affiliates are non-exclusive and they may
also offer the services of our competitors; and
o we are not able to monitor affiliates' compliance with regulatory or
other legal requirements in their respective countries.
The failure of our affiliates to effectively market our services could
materially adversely affect our business, financial condition or results of
operations.
THE DEVELOPMENT OF INTERNET TELEPHONY MAY MAKE OUR CURRENT SERVICES LESS
ATTRACTIVE AND THEREFORE REDUCE OUR SALES
Many companies are now offering Internet telephony, a service that allows
for phone-to-phone, computer-to-computer, and computer-to-phone calling over
the Internet, enabling users to benefit from
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substantially reduced long distance rates. Internet telephony could prove to be
a viable alternative to, and to be extremely competitive with, our services. If
the Internet telephony market develops or develops more rapidly than we expect,
then our future revenues may decrease unless we are able to offer such services
from third parties. We cannot assure you that we will be able to do so.
RAPID TECHNOLOGICAL CHANGE AND FREQUENT NEW PRODUCT INTRODUCTIONS IN OUR
MARKETS COULD RENDER OUR SERVICES OBSOLETE
The markets for our services experience rapid technological change,
frequent new product introductions and evolving industry standards. In addition
to competing services developing through technological change, such as Internet
telephony, operation of our Web site and our Internet sales platform can be
affected by rapid technological change. For example, during the past several
years, operators of Web sites have been forced to use more sophisticated
equipment with greater bandwidth and reliability. Rapid technological change
and new product introduction could render one or more of our products or
services obsolete or place us at a competitive disadvantage. Accordingly, we
believe that our success depends upon our ability to anticipate changes in
consumer preferences, develop and market services that use new technologies and
enhance and expand our existing services to keep pace with competing services.
We might not be able to do so.
Fundamental changes in the technologies for telecommunications, Internet
access and content, and Internet telephony services expose us to substantial
risks. If there are advancements in the delivery of telephony services, we will
need to develop new technology, modify our existing technology to accommodate
these developments, or acquire the service capability from others. Our pursuit
of these advances may require substantial time and expense. We cannot provide
any assurance that we will succeed in adapting our businesses to alternate
access devices or other technological developments.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO
COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED COMPANIES WITH
GREATER RESOURCES
The markets in which we operate are extremely competitive and can be
significantly influenced by the marketing and pricing decisions of the larger
industry participants. There are no substantial barriers to entry in either the
Internet, e-commerce or any of the telecommunications markets in which we
compete. We expect competition in these markets to intensify in the future.
Competition for customers in the telecommunication markets in which we
compete is primarily on the basis of price and, to a lesser extent, on the
basis of the type and quality of service offered. Increased competition could
force us to reduce our prices and profit margins.
Telephone authorities, newly-privatized former government-owned telephone
authorities and other home country competitors are positioned to pressure us
directly in their home countries by influencing regulatory authorities to
outlaw the provision of ReturnCall services or by blocking access to our
ReturnCall services or other services we intend to offer. We cannot assure you
that such behavior will not cause a material adverse effect on our business,
financial condition or results of operations. With the increasing privatization
and deregulation of international telecommunications in foreign countries,
telephone authorities may increasingly become free to compete more effectively
with us at competitive rates. Deregulation in foreign countries also could
result in competition from other service providers with large, established
customer bases and close ties to governmental authorities in their home
countries, and in decreased prices for direct-dial international calls such
that customers are no longer willing to use our international ReturnCall
services. The ability of a deregulated telephone authority or other home
country service provider to compete on the basis of greater size and resources,
pricing flexibility and long-standing relationships with customers in its own
country could have a material adverse effect on our business, financial
condition or results of operations.
In addition, the FCC recently adopted rules granting greater flexibility
for U.S. carriers when they negotiate agreements with foreign telephone
authorities for terminating international calls.
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Agreements negotiated under the new rules may reduce the costs and price of
international direct-dial services and reduce or eliminate the disparity
between inbound and outbound rates upon which the profitability of our
ReturnCall services depends.
OUR CURRENT FAVORABLE RATES AND TARIFFS ARE DEPENDENT ON OUR ABILITY TO
MAINTAIN SUFFICIENT DOMESTIC AND INTERNATIONAL TRAFFIC
Our current favorable rates and tarriffs from our service providers are
dependent on our ability to maintain sufficient domestic and international
traffic. In the event that we are unable to maintain the volume of domestic and
international long-distance traffic necessary to obtain favorable rates and
tariffs, we could face significant pricing pressure and be forced to increase
our rates or discontinue service in some of our markets.
FLUCTUATIONS OF CURRENCY EXCHANGE RATES COULD DIMINISH OR ELIMINATE OUR PRICING
ADVANTAGE OVER OTHER SERVICE PROVIDERS
Significant pricing pressure would result if currency exchange rates
fluctuate such that local services, denominated in local currency, are less
expensive compared to our services which are denominated in U.S. dollars. We
are aware that our ability to market our long-distance resale services depends
upon the existence of spreads between the rates offered by us and those offered
by the international carriers with whom we compete as well as those from whom
we obtain service. A decrease in such spreads or price competition in our
markets could have a material adverse effect on our business, financial
condition or results of operations.
RISKS RELATED TO THE INTERNET AND E-COMMERCE ASPECTS OF OUR BUSINESS
OUR GROWTH IS DEPENDENT UPON THE CONTINUED ACCEPTANCE AND GROWTH OF E-COMMERCE
AND IF SUCH GROWTH DOES NOT CONTINUE, OUR SALES MAY SUFFER
Our ability to generate sales of our services through our Web site depends
on continued growth in the use of the Internet and in the acceptance and volume
of e-commerce transactions. We cannot assure you that the number of Internet
users will continue to grow or that e-commerce will become more widespread or
that our sales will grow at a comparable rate. If the development of the
Internet as a commercial medium does not continue on its current course, or if
alternate systems supplant all or part of the currently anticipated
functionality of the Internet and we are not able to react in a cost-effective
and timely manner, then such changes could have a material adverse effect on
our business, financial condition or results of operations. Although we intend
to support emerging standards in the market for e-commerce, we cannot assure
you that industry standards will emerge or if they become established, that we
will be able to conform to these new standards in a timely fashion and maintain
a competitive position in the market. As is typical in the case of a new and
rapidly evolving industry, demand and market acceptance for recently introduced
services are subject to a high level of uncertainty. The Internet may not prove
to be a viable commercial marketplace for a number of reasons, including:
o lack of acceptable security technologies;
o lack of access and ease of use;
o congestion of traffic;
o inconsistent quality of service and lack of availability of
cost-effective, high-speed service;
o potentially inadequate development of the necessary infrastructure;
o governmental regulation; and
o uncertainty regarding intellectual property ownership.
The markets for Internet connectivity, telephony and content services and
related software products are relatively new and current and future competitors
are likely to introduce competing Internet connectivity and/or online services
and products. Therefore, it is difficult to predict either the
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rates at which the markets will grow (if at all) or at which new or increased
competition will result in market saturation, or the direction of development
of the Internet and online services. If demand for Internet services and
e-commerce fails to grow, grows more slowly than anticipated, or becomes
saturated with competitors, our business, financial condition or results of
operations could be materially adversely affected.
WE MAY LOSE CUSTOMERS AND REVENUE OPPORTUNITIES IF WE ARE NOT ABLE TO MAINTAIN
AN EFFECTIVE WEB ADDRESS
We currently hold the domain name "CallNOW.com" as well as other related
names. We may not be able to prevent third parties from acquiring Web addresses
that are similar to ours. If that should occur, we could lose customers and
revenue opportunities to those third parties.
Domain names generally are regulated by Internet regulatory bodies and
their designees. The regulation of domain names in the U.S. and in foreign
countries is subject to change. As a result, we may not acquire or maintain the
"CallNOW.com" domain name in all of the countries in which we may conduct
business in the future. Furthermore, the relationship between regulations
governing such addresses and laws protecting trademarks is not clear. The loss
of our domain name could have a material adverse effect on our business.
FAILURE OR INADEQUATE PERFORMANCE OF OUR TECHNOLOGY SYSTEMS MAY INTERRUPT OUR
OPERATIONS AND RESULT IN THE LOSS OF CUSTOMERS AND REVENUE OPPORTUNITIES
Our ability to grow our customer base and generate sales of our services
over the Internet will depend on the efficient and uninterrupted operation of
our Web-related technology systems that are required to accommodate a high
volume of traffic. We cannot assure you that our Web site infrastructure will
be able to accommodate the volume of traffic that could develop or that upgrade
requirements will not have an adverse impact on our business. Although we
intend to implement security measures, our systems will be vulnerable to
physical damage or interruption from human error, natural disasters,
telecommunication failures, break-ins, sabotage, attempts by unauthorized
computer users, commonly referred to as "hackers", computer viruses,
intentional acts of vandalism and similar events. We have redundant systems but
have not yet adopted a formal disaster recovery plan. Therefore, any system
failure, including network, software or hardware failure, that causes an
interruption in our service or a decrease in responsiveness of our Web site
could cause us to lose customers and revenue opportunities and could harm our
reputation and brand.
SECURITY CONCERNS COULD HINDER E-COMMERCE AND MAY REQUIRE SIGNIFICANT
EXPENDITURES WHICH COULD SIGNIFICANTLY INCREASE OUR LOSSES
Security and authentication concerns with respect to transmission over the
Internet of confidential information, such as credit card numbers, and attempts
by hackers to penetrate online security systems are significant barriers to
e-commerce over the Internet. We cannot assure you that consumers will not
limit their use of the Internet to purchase services or products because of
security concerns. We rely on encryption and authentication technology licensed
from third parties to provide the security and authentication necessary to
effect secure transmission of confidential information, such as customer credit
card numbers. We cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise or breach of the security measures that we use to
protect customer transaction data. In addition, we may be required to make
significant expenditures to protect against the threat of security breaches or
to alleviate problems caused by such breaches.
FAILURE OF INTERNET SERVICE PROVIDERS TO PROVIDE OUR CUSTOMERS WITH ACCESS TO
OUR WEB SITE COULD RESULT IN A SIGNIFICANT LOSS OF REVENUE
We depend on Internet service providers to provide our customers with
dial-up service and Internet access to our Web site. Many of these Internet
service providers operate outside the U.S.
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over older telephone lines and switches. If a significant number of the
networks operated by these companies suffer capacity or operational problems or
failure, fail to serve new accounts, or are unable to expand to satisfy our
customer demand, customers will be unable to access our Web site and our
business could be materially adversely affected.
INFORMATION DISPLAYED ON OUR WEB SITE MAY SUBJECT US TO LITIGATION
We may be subject to claims for defamation, libel, copyright or trademark
infringement or for other causes of action relating to information published on
our Web site. We could also be subject to claims based upon the content that is
accessible from our Web site through links to other Web sites. We do not have
insurance to protect against such claims. Defending against any such claims
could be costly and divert the attention of management from the operation of
our business.
LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO E-COMMERCE AND MAY DECREASE
USE OF THE INTERNET
Our operations are not currently subject to direct regulation by any
governmental agency in the U.S. other than the FCC, beyond the regulations
applicable to businesses generally.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental agencies may lead to laws or
regulations concerning various aspects of the Internet, including:
o on-line content;
o user privacy;
o taxation;
o access charges; and
o jurisdiction.
The adoption of new laws, or the unfavorable application of existing laws, may
decrease the use of the Internet, which would decrease the demand for our
services, increase our cost of doing business or otherwise have an adverse
effect on our business and growth strategy. In addition, the applicability to
the Internet of existing laws is uncertain, including the following:
Online Content and User Privacy. Although there are very few laws and
regulations directly applicable to the protection of consumers in an online
environment, it is possible that legislation will be enacted in this area and
could cover such topics as permissible online content and user privacy,
including the collection, use, retention and transmission of personal
information provided by an online user. Furthermore, the growth and demand for
e-commerce could result in more stringent consumer protection laws that impose
additional compliance burdens on Internet companies. Such consumer protection
laws could result in substantial compliance costs and interfere with the
conduct and growth of our business.
Taxation. The tax treatment of the Internet and e-commerce is currently
unsettled. A number of proposals have been made that could impose taxes on the
sale of goods and services and certain other Internet activities. Recently, the
Internet Tax Information Act was signed into law placing a three-year
moratorium on new state and local taxes on e-commerce. This moratorium is
expected to end on October 21, 2001. We cannot assure you that future laws
imposing taxes or other regulations would not substantially impair the growth
of our business and our financial condition.
Access Charges. The FCC recently characterized dial-up Internet traffic
bound for Internet service providers as jurisdictionally mixed but largely
interstate in nature. However, the FCC has made it clear that its position does
not affect its long-standing rule that Internet and other information services
are exempt from interstate access charges, that it does not change the manner
in which consumers obtain and pay for access to the Internet nor does it
transform the nature of traffic routed through Internet service providers.
Certain local telephone carriers claim that the increasing popularity of the
Internet has burdened the existing telecommunications infrastructure and that
many areas with high Internet use are experiencing interruptions in telephone
service. These carriers have
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<PAGE>
petitioned the FCC to impose access fees on Internet service providers, but not
consumers. If these access fees are imposed on the Internet service providers,
the cost of communicating on the Internet could increase, which could decrease
demand for our services and increase our cost of doing business.
Jurisdiction. Because our e-commerce services will be available over the
Internet in multiple states, and, as a result, we expect to sell to numerous
consumers resident in such states, such jurisdictions may claim in the future
that we are required to qualify to do business as a foreign corporation or
obtain other qualifications there. Our failure in the future to qualify as a
foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties for the failure to so qualify and limit our
ability to conduct litigation there. We are currently qualified to do business
as a foreign corporation in New York.
OTHER RISKS RELATED TO OUR BUSINESS GENERALLY
THE LOSS OF OUR SENIOR MANAGEMENT WOULD CAUSE US TO EXPERIENCE SIGNIFICANT
DIFFICULTIES IN DEVELOPING OUR BUSINESS
Our success is dependent to a significant extent on the efforts of members
of senior management, including Christian Bardenheuer, our Chairman and Chief
Executive Officer, Warner Johnson, Jr., our President, and Christopher R.
Seelbach, our Chief Operating Officer and Acting Chief Financial Officer. Our
ability to retain well-qualified senior management and other key personnel is
crucial to our operations. The loss of any member of our senior management could
have a material adverse effect upon us. We maintain key-man life insurance on
Messrs. Bardenheuer and Johnson in the amount of $250,000 each. We currently do
have employment agreements with Messrs. Bardenheuer, Johnson and Seelbach. For a
description of the terms of those employment agreements, see
"Management--Employment and Consulting Agreements."
IF ANY OF OUR CUSTOMERS ACCOUNTS FOR A HIGH PERCENTAGE OF OUR REVENUE, THE LOSS
OF THAT CUSTOMER COULD HARM OUR BUSINESS
For the year ended December 31, 1999, no customer accounted for more than
approximately 14% of our revenue. Historically, New Media Corporation and Phone
Systems Network S.A. accounted for aproximately 25% and approximately 17%,
respectively, of our revenue in 1998. All of this revenue was derived from
wholesale services. As we focus on our new Internet strategy, we expect to do
significantly less business with Phone Systems. We have done no business with
New Media Corporation since April 1999. However, if the concentration of
business of any one customer reoccurs, the loss of that customer could
adversely affect our business.
OUR U.S. PATENT APPLICATION HAS BEEN REJECTED UPON THE FIRST EXAMINATION AND
FAILURE TO OBTAIN A PATENT MAY ALLOW COMPETITORS TO TAKE ADVANTAGE OF OUR
RESEARCH AND DEVELOPMENT EFFORTS TO DEVELOP COMPETING SERVICES
We intend to rely on a combination of patent and copyright law, trade
secret protection, confidentiality and license agreements with our employees,
strategic partners and others to protect our rights to our business process and
software. We have filed a U.S. patent application and an international (PCT)
patent application on our business process and software. In November 1999, the
U.S. Patent and Trademark Office initially rejected our U.S. patent
application. We have contested the rejection by amending the claims of our
application and presenting detailed arguments regarding the patentability of
our business process and software. The procedures established by the U.S.
Patent Laws and the Code of Federal Regulations require that our application be
reconsidered in the light of the amendments and arguments. If we ultimately
fail to obtain a U.S. Patent for our business process and software, our
business may be adversely affected by being unable to stop competitors in the
U.S. from using business processes similar to ours and from developing software
similar to ours. Also, a failure to obtain a U.S. patent may have some
precedential effect in respect of our patent rights in other countries. We may
decide for cost or other reasons not to seek patents in all countries in which
we offer our services. Even if we are successful in obtaining patents in the
U.S. and other countries
19
<PAGE>
where we conduct significant business, there is no assurance that our patents
will be valid and enforceable or that our patents will be of sufficiently broad
scope to provide a basis for preventing third parties from using competing
business processes and/or software similar to ours and thus diverting business
from us and causing loss of revenue. Our rights of copyright in our software
are secured under the Berne Convention (a treaty) without formalities in most
commercially important markets for our services, but those rights may not
protect us from development by others of similar software based on reverse
engineering. In addition, pursuing persons who might misappropriate our
intellectual property could be costly and divert the attention of management
from the operation of our business. See "Business--Our Intellectual Property"
for a more detailed description of our intellectual property.
FAILURE TO HAVE ADEQUATE PROTECTION FOR OUR TRADE NAME AND SERVICE MARK MAY
RESULT IN LOSS OF REVENUES
We have not yet applied for registration of our service mark in any of the
countries where we offer our services. Although we believe that our trade name
CALLNOW.COM will be adequately protected in nearly all commercially important
countries without registration pursuant to an express provision of the Paris
Convention (a treaty), the remedies available to us for misappropriation and
use by others of the same or similar name or mark may be diminished by failure
to register our service mark. Uses by others of the same or a similar trade
name or service mark for similar businesses and/or services may attract
customers away from us and result in loss of revenues. Moreover, pursuing
persons who might violate our rights in our trade name and service mark could
be costly and distract management from attending to the operation of our
business.
CLAIMS OF OUR INFRINGEMENT ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS COULD
BE COSTLY AND DISRUPTIVE TO OUR BUSINESS OPERATIONS
Other parties may assert claims against us that we have violated a patent
or infringed a copyright, trademark or other proprietary right belonging to
them directly or through the use of software or technology that we license from
others. Defending against any such claim could be costly and divert the
attention of management from the operation of our business. In addition, the
inability to obtain or maintain the use of licenses or other technology could
adversely affect our business operations.
WE COULD STILL FACE PROBLEMS RELATED TO THE YEAR 2000 ISSUE WHICH COULD BE
DISRUPTIVE TO OUR BUSINESS OPERATIONS
To date, our customers have not reported any problems with our services
nor have we experienced any problems with our suppliers and service providers
as a result of the commencement of the year 2000. We have not experienced any
impairment in our internal operations with the year 2000 issue. Nervertheless,
computer experts have warned that there may still be residual consequences
stemming from the change in centuries and, if these consequences become
widespread, they could result in a decrease in sales of our services, increased
operating expenses and other business interruptions. We have not developed any
specific contingency plan for year 2000 issues.
RISKS RELATED TO THIS OFFERING
OUR EXISTING STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL AND COULD MAKE
DECISIONS THAT ADVERSELY AFFECT NEW INVESTORS
We expect that our founders will continue to exercise significant control
over our direction and management following the closing of this offering. In
addition, our directors and executive officers and their affiliates will, in
the aggregate, own approximately 23% of the outstanding shares upon the closing
of this offering. As a result of their share ownership, these stockholders will
have a significant influence on all matters requiring stockholder approval,
including the election of directors. This concentration of ownership could
delay or prevent another person from acquiring control or causing a change in
control of us, which may affect your ability to resell your shares at a
favorable price. For a list of our significant stockholders and their holdings,
see "Principal Stockholders."
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<PAGE>
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN THE USE OF PROCEEDS OF THIS
OFFERING AND IT MAY NOT EFFECTIVELY UTILIZE THOSE FUNDS
Our management will have broad discretion in how we use the net proceeds
of this offering. Investors will be relying on the judgment of our management
regarding the application of the net proceeds of this offering. For more
information, see "Use of Proceeds."
POTENTIAL ADVERSE EFFECT OF REPRESENTATIVES' WARRANTS
At the closing of this offering, we will sell to the representatives of
the underwriters for nominal consideration warrants to purchase 400,000 units.
These warrants will be exercisable for a period of forty-eight months
commencing upon twelve months from the effective date of the registration
statement of which this prospectus forms a part at an exercise price equal to
120% of the public offering price per unit in this offering. For the term of
these warrants, the holders will have, at nominal cost, the opportunity to
profit from a rise in the market price of our units, common stock or warrants
without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as these warrants remain
unexercised, our ability to obtain additional capital might be adversely
affected. Moreover, the holders of these warrants may be expected to exercise
them at a time when we would, in all likelihood, be able to obtain any needed
capital through a new offering of our securities on terms more favorable than
those provided by the warrants.
CONVERSION OF OUR CONVERTIBLE DEBENTURES WILL RESULT IN SUBSTANTIAL DILUTION
The Company has $1,276,300 in principal amount of convertible debentures
outstanding as of the date of this prospectus. While we expect to repay the
debentures from the proceeds of this offering, we are unable to prevent the
holders of the debentures from converting prior to repayment. One debenture is
convertible at a conversion price equal to 90% of the average of the closing
bid prices of our common stock for the five trading days preceding the
conversion date, but in no event can the conversion price be less than $7.06
per share. The other debenture is convertible at a conversion price equal to
80% of the average of the closing bid prices of our common stock for the five
trading days preceding the conversion date, but in no event can the conversion
price be less than $7.06 per share. In the event any portion of either of the
debentures is converted at a price lower than the offering price, investors in
this offering will experience further dilution.
INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND MAY EXPERIENCE
FURTHER DILUTION
The offering price of the units in this offering, assuming you allocate
the entire cost of a unit to the common stock, will be substantially higher
than the net tangible book value per share of the common stock immediately
after this offering. Therefore, assuming a public offering price of $7.00 per
unit, and assuming that all of the purchase price of such units is allocated to
the common stock contained within the units, if you purchase units in this
offering, you will incur immediate and substantial dilution in net tangible
book value of $4.78 per share of common stock contained in the units from the
price you paid. The exercise prices of all of our outstanding options are below
the anticipated public offering price. To the extent these options are
exercised or debentures converted, you will experience further dilution. See
"Dilution" and "Management" for information regarding outstanding stock options
and additional stock options which may be granted.
FAILURE TO BE APPROVED FOR LISTING ON THE NASDAQ SMALLCAP MARKET OR THE ABSENCE
OF AN ACTIVE TRADING MARKET FOR THE UNITS, COMMON STOCK AND WARRANTS COULD MAKE
IT DIFFICULT FOR INVESTORS TO RESELL THEIR UNITS, SHARES AND WARRANTS AT OR
ABOVE THE PUBLIC OFFERING PRICE
Before the offering, there was a limited trading market for our common
stock. Although we have applied to have our units, common stock and warrants
approved for quotation on the Nasdaq SmallCap Market, we do not know whether
our application for quotation will be approved. If our application is not
approved, we will trade only on the OTC Bulletin Board or in the National
Quotation Bureau, LLC's Pink Sheets. If our application is approved, we do not
know whether a
21
<PAGE>
liquid trading market for our units, common stock or warrants will develop.
Investors may not be able to resell their units, shares or warrants at or above
the public offering price. The public offering price for our units will be
determined through negotiations among us and the representatives of the
underwriters. The public offering price may be higher than the market price of
the units after the offering.
FAILURE TO SATISFY LISTING STANDARDS FOR NASDAQ COULD SUBJECT US TO THE "PENNY
STOCK" RULES AND SEVERELY LIMIT THE LIQUIDITY OF OUR UNITS, COMMON STOCK AND
WARRANTS
The trading of our units, common stock and warrants on Nasdaq SmallCap
Market will be conditioned upon us meeting net tangible asset, market value and
stock price tests set forth by Nasdaq. For initial listing of our units and
common stock on Nasdaq SmallCap Market, we are required to have net tangible
assets of at least $4,000,000, at least 1.0 million shares owned by
stockholders other than our affiliates having a market value of at least
$5,000,000, a minimum bid price of $4.00 per share, a minimum of 300
stockholders and three market makers. To maintain eligibility for trading on
Nasdaq, we will be required to maintain net tangible assets in excess of
$2,000,000, at least 500,000 shares owned by stockholders other than our
affiliates having a market value of at least $1,000,000, a minimum bid price of
$1.00 per share, a minimum of 300 stockholders and at least two market makers.
Upon the receipt of the proceeds from this offering, we believe that we will
meet the net tangible assets, market value and minimum bid tests set forth by
Nasdaq. If we fail any of the tests, our units, common stock and warrants will
not be eligible for trading on Nasdaq. Also, if after the offering we fail any
of the tests required to maintain our listing, our units, common stock and
warrants may be delisted from trading on Nasdaq. The effects of not being
eligible for trading or delisting include the limited release of the market
prices of our units, common stock and warrants and limited news coverage of us.
Ineligibility or delisting may also restrict investors' interest in our units,
common stock and warrants and materially adversely affect the trading market
and prices for our units, common stock and warrants and our ability to issue
additional securities or to secure additional financing. In addition, low price
stocks are subject to the additional risks of federal and state regulatory
requirements and the potential loss of effective trading markets. In
particular, if our units, common stock and warrants were not eligible or
delisted from trading on Nasdaq and the trading price of our common stock was
less than $5.00 per share, our common stock could be subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended, which, among other
things, requires that broker/dealers satisfy special sales practice
requirements, including making individualized written suitability
determinations and receiving purchasers' written consent, prior to any
transaction. If our common stock is deemed to be a penny stock under the
Securities Enforcement and Penny Stock Reform Act of 1990, this would require
additional disclosure in connection with trades in our common stock, including
the delivery of a disclosure schedule explaining the nature and risks of the
penny stock market. Such requirements could severely limit the liquidity of our
common stock and the ability of purchasers in this offering to sell their
securities in the secondary market.
OUR UNIT PRICE, STOCK PRICE AND WARRANT PRICE ARE LIKELY TO BE VOLATILE AND
THEY MAY DECLINE WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR OUR STOCKHOLDERS
The trading price of our units, common stock and warrants is likely to be
volatile. The stock market has experienced significant price and volume
fluctuations, and the market prices of technology company stocks, particularly
those of Internet-related companies, have been highly volatile. Since the
completion of the Axicom-American Ostrich transaction, our stock has been
quoted at a high bid price of $7.00 per share and a low bid price of $0.03 per
share. Our stock price experienced a significant decline when, recently, our
stock became ineligible for quotation on the OTC Bulletin Board and became
quoted in the National Quotation Bureau, LLC's Pink Sheets. For a discussion of
the reasons for this change, see "Business--Our History." As a result, you may
not be able to resell your units, shares or warrants at a price equal to or
greater than the price of this offering. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against the issuing company,
resulting in substantial costs and a diversion of management's attention from
the operation of its business.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE BY OUR EXISTING STOCKHOLDERS MAY ADVERSELY
AFFECT OUR UNIT PRICE, STOCK PRICE AND WARRANT PRICE
The market price of our units, stock or warrants could drop due to the
sales of a large number of shares of our stock or the perception that such
sales could occur. These factors could also make it more difficult to raise
funds through future offerings of stock. After this offering, 10,314,666 shares
of common stock will be outstanding. Of these shares, 5,758,595 shares,
including the 4,000,000 shares sold in this offering, will be freely tradable
without restrictions under the Securities Act of 1933, as amended, except for
any shares purchased by our "affiliates," as defined in Rule 144 under the
Securities Act. Of the 5,758,595 freely tradable shares, 164,891 shares of
outstanding common stock are being registered in the registration statement of
which this prospectus is a part, but are subject to an agreement between the
holders thereof and the representatives restricting the sale thereof within 90
days from the date of this prospectus without the prior written consent of the
representatives. The remaining 4,556,071 shares of common stock are "restricted
securities," as that term is defined in Rule 144 under the Securities Act, and
in the future may only be sold pursuant to a registration statement under the
Securities Act, in compliance with the exemption provisions of Rule 144 or
pursuant to another exemption under the Securities Act. We have agreed with the
representatives of the underwriters to use our best efforts to have all of our
officers and directors and holders of all restricted shares of our common
stock, holders of all outstanding options and holders of all other convertible
securities enter into lock-up agreements pursuant to which they agree not to
offer or sell any shares of common stock for a period of 180 days after the
effective date of the registration statement of which this prospectus forms a
part without the prior written consent of the representatives of the
underwriters. Upon expiration of this lock-up period, the shares owned by these
persons prior to completion of this offering may be sold into the public market
without registration under the Securities Act, provided such sales are in
compliance with the volume limitations and other applicable restrictions of
Rule 144 under the Securities Act. After the date of this prospectus, we intend
to file one or more registration statements under the Securities Act to
register all shares of common stock issuable upon the exercise of outstanding
stock options or options reserved for issuance under our stock option plan.
Those registration statements are expected to become effective immediately upon
filing, and subject to the vesting requirements and exercise of the related
options and the grant of stock awards (as well as the terms of the lock-up
agreements), shares covered by those registration statements will be eligible
for sale in the public markets, except for any shares held by our affiliates.
During the last twelve months, we sold 691,853 shares of common stock at $2.75
per share. In addition, holders of our convertible debentures have the right to
demand registration of the shares of common stock issuable to them upon
conversion at any time from the date of this prospectus to June 1, 2000. Also,
we have agreed to register 494,672 shares on behalf of existing stockholders
within 90 days of the consummation of this offering, but such shares are
subject to a lock-up agreement for a period of 180 days after the effective
date of the registration statement of which this prospectus forms a part. See
"Shares Eligible for Future Sale" for more information.
YOU CANNOT SELL THE SHARES UNDERLYING THE WARRANTS IF WE DO NOT HAVE AN
EFFECTIVE REGISTRATION STATEMENT
You cannot exercise the warrants and sell the underlying shares unless we
keep a prospectus effective and the shares underlying the warrants are
qualified or exempt in the states in which exercising warrant holders reside.
We have registered these shares and have qualified them in the states where we
plan to sell the units unless the state does not require qualification. We have
also filed an undertaking with the SEC to maintain a current prospectus
relating to these shares until the expiration of the warrants. However, we
cannot assure that we will be able to satisfy this undertaking. The warrants
may be deprived of any value if we fail to do so. The common stock and warrants
are detachable and separately transferable twelve months after the effective
date of the registration statement of which this prospectus forms a part unless
we agree with the representatives of the underwriters that trading may begin
sooner. Purchasers may buy warrants in the aftermarket or may move to
jurisdictions in which the shares underlying the warrants are not so registered
or qualified during the period that the warrants are exercisable. In that
event, we would be unable to issue shares to those persons desiring to exercise
their warrants, and warrant holders would have no choice but to offer to sell
the warrants in a jurisdiction where a sale is permitted or allow them to
expire unexercised.
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<PAGE>
YOU COULD LOSE YOUR RIGHT TO EXERCISE YOUR WARRANTS IF WE EXERCISE OUR RIGHT TO
REDEEM THE WARRANTS
Under some circumstances, we may redeem all of the warrants at nominal
cost. If you are a warrant holder and we call for redemption, to the extent we
redeem your warrants, you will lose your right to purchase shares pursuant to
your warrants. Furthermore, the threat of redemption could force you to:
o exercise your warrants at a time when it may be disadvantageous for you
to do so;
o sell your warrants at the then current market price when you might
otherwise wish to hold them; or
o accept the redemption price which will be substantially less than the
market value of your warrants at the time of redemption.
See "Description of Securities--Warrants" for the conditions under which we may
redeem the warrants. We will not call the warrants for redemption if a current
prospectus is not available for the exercise of the warrants.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements based largely on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. The words "believe," "may,"
"will," "estimate," "continue," "anticipate," "intend," "expect" and similar
expressions identify these forward-looking statements. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions,
including those described above under the caption "Risk Factors." In light of
these risks and uncertainties, the forward-looking events and circumstances
discussed in this prospectus may not occur and actual results could differ
materially from those anticipated in the forward-looking statements. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law.
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<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of our units and warrants sold in
this offering are estimated to be $24,360,000, assuming an offering price of
$7.00 per unit ($28,014,000 if the underwriters' over-allotment option is
exercised in full). We plan to use the net proceeds as follows:
o approximately $9.0 million for advertising and promotion, including $3.7
million for portal contracts which will provide advertising of our services
on a variety of Web sites for an extended period;
o approximately $1.0 million to upgrade our computer hardware and software;
o approximately $1.3 million to repay convertible debentures;
o approximately $1.0 million for trade payables;
o approximately $1.0 million for the hiring of additional personnel;
o $200,000 will be paid to Smart Software, a company controlled by our Chief
Technical Officer, for the completion of documentation of the software we
acquired from Smart Software in July 1999;
o $192,500 will be paid to Gorada Service Company, Inc. in repayment of a
loan to us (note provides for principal of $175,000 to be repaid plus
$17,500, irrespective of the date the loan is repaid; assuming the loan is
repaid on April 1, 2000, the effective interest rate on an annualized basis
would be approximately 70%).
o approximately $65,000 will be paid to each of Messrs. Bardenheuer and
Johnson as a one-time salary payment upon consummation of this offering;
o $55,000 will be paid to Mr. Seelbach in payment of a finder's fee in
connection with a prior transaction and accrued unpaid consulting fees and
salary;
o approximately $38,300 will be paid to each of Messrs. Bardenheuer and
Johnson for accrued and unpaid salary;
o $110,000 will be paid to Mr. Bardenheuer in repayment of a loan to us,
(note provides for principal of $100,000 to be repaid plus $10,000,
irrespective of the date the loan is repaid; assuming the loan is repaid on
April 1, 2000, the effective interest rate on an annualized basis would be
approximately 46%);
o $55,000 will be paid to a shareholder that is affiliated with one of our
directors in repayment of a loan to us (note provides for principal of
$50,000 to be repaid plus $5,000, irrespective of the date the loan is
repaid; assuming the loan is repaid on April 1, 2000, the effective
interest rate on an annualized basis would be approximately 57%); and
o the remaining approximately $10.3 million for working capital.
Pending such uses, the net proceeds will be invested in short-term, interest
bearing securities. See "Risk Factors--Risks Related To This Offering--Our
Management Will Have Broad Discretion In The Use Of Proceeds And It May Not
Effectively Utilize Those Funds," "Management--Employment and Consulting
Agreements," "Management--Executive Compensation" and "Related Party
Transactions" for more information concerning our use of the proceeds of this
offering.
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PRICE RANGE OF OUR COMMON STOCK
Although our common stock is traded in the National Quotation Bureau,
LLC's Pink Sheets under the symbol "CALN", such trading has been limited and
sporadic. The following tables show the high and low ask prices per share of
our common stock and the high and low bid prices per share of our common stock,
as reported in the National Quotation Bureau, LLC's Pink Sheets (and prior to
August 2, 1999, on the OTC Bulletin Board) for the periods indicated:
ASK PRICES(1)
<TABLE>
<CAPTION>
HIGH LOW
------------ -----------
<S> <C> <C>
Fiscal Year 1998
First Quarter .................. $ 0.375 $ 0.375
Second Quarter ................. 0.50 0.375
Third Quarter .................. 0.50 0.50
Fourth Quarter ................. 0.50 0.50
Fiscal Year 1999
First Quarter .................. $ 0.50 $ 0.50
</TABLE>
BID PRICES
<TABLE>
<CAPTION>
HIGH LOW
------------ -----------
<S> <C> <C>
Fiscal Year 1999(2)
Second Quarter .................................... $ 7.00 $ 0.03
Third Quarter ..................................... 2.75 1.15
Fourth Quarter .................................... 3.00 1.75
Fiscal Year 2000 .....................................
First Quarter (through February 28, 2000) ......... $ 3.375 $ 2.00
</TABLE>
- ----------
(1) The ask price does not reflect a price that a buyer is willing to pay for
a share of our common stock.
(2) Prior to April 6, 1999, the high and low ask prices per share reflect
only the operations of American Ostrich Corporation before the
acquisition of Axicom. Also, in April 1999, American Ostrich Corporation
effected a reverse stock split of 32,000 to 1 and the prices commencing
in the Second Quarter of 1999 reflect such split.
On February 28, 2000, the last reported bid price of our common stock in
the National Quotations Bureau LLC's Pink Sheets was $3.00. As of February 28,
2000, there were approximately 220 stockholders of record of our common stock.
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<PAGE>
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock, and
we do not anticipate declaring or paying any cash dividends on our common stock
in the foreseeable future. We intend to retain any future earnings for use in
the operation of our business.
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
other short-term debt obligations and our capitalization (1) as of December 31,
1999, and (2) pro forma, adjusted to reflect the sale of the units hereby and
the application of the estimated net proceeds as described in "Use of
Proceeds." This table should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------
ACTUAL PRO FORMA
-------------- ---------------
<S> <C> <C>
Total current debt obligations (1) .................................... $ 19,069 $ 19,069
============ ============
Other long-term liabilities (1) ....................................... $ 1,090,867 $ 240,000
------------ ------------
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized; 6,314,666
shares issued and outstanding; 10,314,666 shares issued and
outstanding, pro forma (2) ......................................... 6,315 10,315
Additional paid-in capital ........................................... 4,974,759 28,745,763
Retained earnings (accumulated deficit) .............................. (5,886,956) (5,886,956)
------------ ------------
Total stockholders' equity (deficit) ............................... (905,882) 22,869,122
------------ ------------
Total capitalization ............................................... $ 184,985 $ 23,109,122
============ ============
</TABLE>
- ----------
(1) See Notes 4 and 5 of Notes to Financial Statements for a description of
our debt obligations.
(2) Based on shares outstanding as of the date of this prospectus. Excludes:
o 282,825 shares of common stock issuable upon exercise of options at
exercise prices ranging from $.01 to $2.75 per share, which options
include an anti-dilution provision which will result in the additional
issuance of options to purchase 200,000 shares of common stock at the
offering price;
o 2,200,000 shares of common stock reserved for future issuance under a
stock option plan, of which options to purchase 1,162,400 shares of
common stock at exercise prices of $2.75 per share have been granted;
o 400,000 shares of common stock issuable upon exercise of the
representatives' warrants at an exercise price of 120% of the public
offering price of the units per share;
o 400,000 shares of common stock issuable upon exercise of 400,000
redeemable common stock purchase warrants issuable upon exercise of the
representatives' warrants at an assumed exercise price of 150% of the
public offering price of the units per share;
o a maximum of 181,232 shares of common stock issuable upon conversion of
$1,276,300 in principal amount of convertible debentures outstanding as
of the date of this prospectus at an effective conversion price of $7.06;
and
o 4,000,000 shares of common stock issuable upon exercise of the warrants.
For a description of the convertible debentures, see "Description of
Securities--Convertible Debentures." For information regarding options
granted prior to this offering, see "Management--Employment and Consulting
Agreements," "Related Party Transactions" and "Notes to Consolidated
Financial Statements."
27
<PAGE>
DILUTION
Our net tangible book value (deficit) at December 31, 1999 was
$(1,533,639), or $(.24) per share. "Net tangible book value per share"
represents our total tangible assets less our total liabilities, divided by the
number of shares of common stock outstanding. After giving effect to the sale
of the units and warrants offered hereby at an assumed offering price of $7.00
per unit, and application of net proceeds therefrom, and assuming that all of
the offering price of such units is allocated to the common stock contained
within the units, our pro forma net tangible book value at December 31, 1999
would have been approximately $22,869,122, or $2.22 per share. This represents
an immediate increase in net tangible book value per share of $2.46 to existing
stockholders and an immediate dilution of $4.69 per share to the investors
purchasing our units at the assumed public offering price. The following table
illustrates this dilution in net tangible book value to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per unit .............................. $ 7.00
Net tangible book value (deficit) per share before offering ......... $ (0.24)
Increase per share attributable to new investors .................... 2.46
-------
Pro forma net tangible book value per share after offering .......... 2.22
-------
Dilution to new investors ........................................... $ 4.78
=======
</TABLE>
The following table sets forth the number of shares of common stock
purchased from us, the effective cash contribution made and the average price
per share paid by existing stockholders and by purchasers of the common stock
contained within the units offered hereby (assuming a public offering price of
$7.00 per unit and assuming that all of the offering price of such units is
allocated to the common stock contained within the units ):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders ......... 6,314,666 61.2% $ 3,845,863 12.1% $ 0.61
New Investors ................. 4,000,000 38.8% 28,000,000 87.9% $ 7.00
--------- ----- ----------- -----
Total ........................ 10,314,666 100.0% $31,845,863 100.0%
========== ===== =========== =====
</TABLE>
The foregoing excludes:
o 282,825 shares of common stock issuable upon exercise of options at exercise
prices ranging from $.01 to $2.75 per share, which options include an
anti-dilution provision which will result in the additional issuance of
options to purchase 200,000 shares of common stock at the offering price;
o 2,200,000 shares of common stock reserved for future issuance under a stock
option plan, of which options to purchase 1,162,400 shares of common stock
at exercise prices of $2.75 per share have been granted;
o 400,000 shares of common stock issuable upon exercise of the
representatives' warrants at an exercise price of 120% of the public
offering price of the units per share; and
o 400,000 shares of common stock issuable upon exercise of 400,000 redeemable
common stock purchase warrants issuable upon exercise of the
representatives' warrants at an assumed exercise price of 150% of the
public offering price of the units per share;
o a maximum of 181,232 shares of common stock issuable upon conversion of
$1,276,300 in principal amount of convertible debentures outstanding as of
the date of this prospectus at an effective conversion price of $7.06; and
o 4,000,000 shares of common stock issuable upon exercise of the warrants.
For a description of the convertible debentures, see "Description of
Securities--Convertible Debentures." For information regarding options granted
prior to this offering, see "Management--Employment and Consulting Agreements,"
"Related Party Transactions" and "Notes to Consolidated Financial Statements."
28
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of and for the four-year period
ended December 31, 1999 is derived from our audited financial statements. The
selected financial data for the year ended December 31, 1995 is derived from
our unaudited financial statements. In the opinion of our management, our
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of our
consolidated financial condition and result of operations as of and for the
periods presented. For additional information, you should refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes contained elsewhere
in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- ------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .............................. $ 453,273 $1,674,955 $ 5,010,027 $ 2,295,202 $ 1,004,636
Cost of sales .......................... 395,121 1,276,934 4,293,524 1,681,978 662,160
------------ ---------- ------------ ------------ ------------
Gross profit ........................... 58,152 398,021 716,503 613,224 342,476
------------ ---------- ------------ ------------ ------------
Operating expenses:
Administrative ....................... 230,097 654,009 570,500 518,546 1,104,074
Sales and marketing .................. 77,688 475,432 807,989 438,430 739,695
Technical ............................ -- 178,652 143,134 101,330 294,863
Stock-based compensation ............. -- -- -- -- 480,610
Depreciation and
amortization ........................ 3,454 19,568 53,651 105,860 222,491
------------ ---------- ------------ ------------ ------------
Total operating expenses ............. 311,239 1,327,661 1,575,274 1,164,166 2,841,733
------------ ---------- ------------ ------------ ------------
Loss from operations ................... (253,087) (929,640) (858,771) (550,942) (2,499,257)
Interest expense ....................... -- (1,154) (58,568) (90,436) (618,791)
------------ ---------- ------------ ------------ ------------
Net loss ............................... $ (253,087) $ (930,794) $ (917,339) $ (641,378) $ (3,118,048)
============ ========== ============ ============ ============
Net loss per share ..................... $ (0.08) $ (0.24) $ (0.24) $ (0.17) $ (0.60)
============ ========== ============ ============ ============
Common shares ........................... 3,055,525 3,875,000 3,875,000 3,875,000 5,157,964
============ ========== ============ ============ ============
DECEMBER 31,
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ---------- ------------ ------------ ------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash ................................... $ 47,849 $ 71,260 $ 107,832 $ 7,565 80,542
Current assets ......................... 259,591 358,843 375,106 130,265 109,598
Current liabilities .................... 200,281 806,912 1,825,485 1,250,301 2,007,120
Working capital (deficit) .............. 59,310 (448,069) (1,450,379) (1,120,036) (1,897,522)
Long-term assets ....................... 40,296 294,714 311,539 549,088 2,082,507
Total assets ........................... 299,887 653,557 686,645 679,353 2,192,105
Long-term liabilities .................. -- 227,433 147,756 1,357,026 1,090,867
Stockholders' equity (deficit) ......... 99,606 (380,788) (1,286,596) (1,927,974) (905,882)
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except as otherwise noted or unless the context otherwise requires:
o all information in this prospectus assumes no exercise of the
underwriters' over-allotment option; and
o all references to "we" or "us" refer to CallNOW.com, Inc. and its
wholly-owned subsidiary, AXICOM Communications Group, Inc.
The following discussion should be read in conjunction with the financial
statements and the notes to those statements included elsewhere in this
prospectus. The following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Forward-looking statements include,
but are not limited to, statements concerning anticipated trends in revenue and
net income, projections concerning operations, and available cash flow. Our
actual results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and
elsewhere in this prospectus, particularly in "Risk Factors."
OVERVIEW
We began operations in 1995 as AXICOM Communications Group, Inc., an
international telephone service company. In mid-1997, we recognized the
opportunity of offering multiple telephone services using the Internet and
changed our strategy. We decreased the number of retail customers that we
acquired and billed through independent agents and reduced our wholesale
business which had accounted for approximately half our revenues, but which was
not profitable. We implemented our new Internet strategy in September 1998. In
April 1999, all of the common stock of Axicom was acquired by the American
Ostrich Corporation, a non-reporting company that was publicly traded on the
OTC Bulletin Board under the symbol "AOC". As a result of this transaction,
Axicom stockholders became the majority stockholders of American Ostrich
Corporation, and American Ostrich Corporation reincorporated in Delaware and
changed its name to CallNOW.com, Inc.
As of the date of this prospectus, CallNOW.com is a Web-based provider of
telecommunications services in approximately 200 countries. We believe that our
technology provides us the ability to deliver competitively priced dial tone to
Web-based customers in virtually all the countries of the world in a
cost-effective manner. In addition, we have a free global online telephone
directory, which currently generates over 1.6 million page impressions and over
400,000 user sessions per month.
Revenue is generated primarily from international and national ReturnCall
services and is based on the minutes of customer use billed by us on completed
calls. Our ReturnCall revenue represents the majority of our revenue. Our
ReturnCall customer base of individuals and small businesses is diversified
geographically with about 59% of our customers located in Europe, 16% in North
America, 13% in Latin America and 12% in the rest of the world.
In 1999, approximately 75% of our revenue was collected through automatic
charges to pre-approved customer credit cards. This is increasing as more of
our customers sign up through our Web site. All Web-based customers are credit
card customers.
We have recruited approximately 1,500 affiliates. Our affiliate program
includes many telecommunication related Web sites, international and national
search engines and general e-commerce sites. Under the terms of their
agreements, affiliates are responsible for marketing our services on their Web
sites and are compensated on a commission basis. We also have agents, though we
expect that the use of agents will be phased out over a period of time in favor
of affiliates.
Cost of revenue consists primarily of costs paid to carriers for the
origination and transmission of voice and data telecommunications services.
Currently, our telecommunications revenue is derived
30
<PAGE>
from services that are accessed through the facilities of long distance
carriers. Accordingly, the vast majority of our cost of telecommunications
services is variable, based on the number of minutes of use, with transmission
costs being our most significant expense.
Sales and marketing expense represents commissions paid for sales by
affiliates and agents. In addition, we include in sales and marketing expense
the costs of bad debts, recruiting affiliates, advertising, and promotion of
the CallNOW.com brand.
Administrative expense primarily represents the cost of customer service,
executive and employee compensation, overall administrative costs, professional
fees, and other operating and corporate overhead.
Technical costs include the costs associated with the operation and
maintenance of our switch, and costs related to the technical development of
our Web site and our global telephone directory Web site.
Depreciation expense includes depreciation of switching and network
equipment, software, computers, furniture, and fixtures. We provide for
depreciation using the straight line method of depreciation over the estimated
useful lives of the assets, which range from three to ten years.
Interest and debt discount expense includes interest expense on
indebtedness and non-cash financing expenses.
RESULTS OF OPERATIONS
The following tables present operating expenses as a percentage of
revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 % 1999 %
------------- -------- --------------- ---------
<S> <C> <C> <C> <C>
Net sales .............................. $2,295,202 100% $ 1,004,636 100%
Cost of sales .......................... 1,681,978 73% 662,160 66%
---------- --- ------------ ---
Gross profit ........................... 613,224 27% 342,476 34%
Operating expenses:
Administrative ........................ 518,546 23% 1,104,074 110%
Sales and marketing ................... 438,430 19% 739,695 74%
Technical ............................. 101,330 4% 294,863 29%
Stock-based finders' fees ............. -- -- 480,610 48%
Depreciation and amortization ......... 105,860 5% 222,491 22%
---------- --- ------------ ---
Total operating expenses ............ 1,164,166 51% 2,841,733 283%
---------- --- ------------ ---
Loss from operations ................... (550,942) -24% (2,499,257) -249%
Interest expense ....................... (90,436) -4% (618,791) -62%
---------- ---- ------------ ----
Net loss ............................... $ (641,378) -28% $ (3,118,048) -311%
========== === ============ ====
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 % 1998 %
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Net sales ........................... $5,010,027 100% $2,295,202 100%
Cost of sales ....................... 4,293,524 86% 1,681,978 73%
---------- --- ---------- ---
Gross profit ........................ 716,503 14% 613,224 27%
Operating expenses:
Administrative ..................... 570,500 11% 518,546 23%
Sales and marketing ................ 807,989 16% 438,430 19%
Technical .......................... 143,134 3% 101,330 4%
Stock-based finders' fees .......... -- -- -- --
Depreciation and
amortization ..................... 53,651 1% 105,860 5%
---------- --- ---------- ---
Total operating expenses ......... 1,575,274 31% 1,164,166 51%
---------- --- ---------- ---
Loss from operations ................ (858,771) -17% (550,942) -24%
Interest expense .................... (58,568) -1% (90,436) -4%
---------- ---- ---------- ----
Net loss ............................ $ (917,339) -18% $ (641,378) -28%
========== === ========== ===
</TABLE>
Fiscal Year ended December 31, 1999 Compared to Fiscal Year ended December
31, 1998
Revenue decreased $1,290,566, from $2,295,202 for the fiscal year ended
December 31, 1998 to $1,004,636 for the fiscal year ended December 31, 1999.
The decrease in revenue resulted from a shift in focus to selling our services
through the Internet and a corresponding de-emphasis of direct wholesale sales
and agent based retail sales. We ceased marketing of wholesale contracts and
phased out retail customers who did not pay directly by credit cards. Our
revenue from agent based retail customers declined from approximately
$1,268,000 in 1998 to approximately $324,000 in 1999 and our revenue from
wholesale sales declined from approximately $988,000 in 1998 to approximately
$164,000 in 1999. Our Internet based business increased from approximately
$38,000 in 1998 to approximately $516,000 in 1999. As a result, retail revenue
decreased as a percentage of total revenue from 55% in 1998 to 32% in 1999,
wholesale revenue decreased as a percentage of total revenue from 43% in 1998
to 16% in 1999, and Internet revenue increased as a percentage of total revenue
from 2% in 1998 to 51% in 1999.
Cost of revenue decreased $1,019,818, from $1,681,978 for the fiscal year
ended December 31, 1998 to $662,160 for fiscal year ended December 31, 1999
primarily as a result of lower revenue. As a percentage of revenue, these costs
decreased from approximately 73% in 1998 to approximately 66% in 1999. The
decrease in cost as a percentage of revenue in 1999 is primarily a result of a
one time settlement with a carrier for approximately $97,000. This decrease was
partially offset by approximately $40,000 in start up costs associated with the
Internet business. If both one time charges had not occurred, costs of revenue
as a percentage of revenue would have been approximately 72%.
Administrative expenses increased $585,528, from $518,546 for the fiscal
year ended December 31, 1998 to $1,104,074 for the fiscal year ended December
31, 1999. The increase in expenses in 1999 was due primarily to an increase in
use of outside consulting and professional services of approximately $300,000,
a reserve for litigation expense of $100,000, an increase in business insurance
of approximately $65,000, an increase in personnel costs of approximately
$55,000, and an increase in occupancy costs of approximately $50,000. As a
result of these increased administrative expenses, their proportion as a
percentage of total revenue increased from 23% in 1998 to 110% in 1999.
Sales and marketing expense increased $301,265, from $438,430 for the
fiscal year ended December 31, 1998 to $739,695 for the fiscal year ended
December 31, 1999. The increase was attributable to an increase in payroll
expenses of approximately $250,000, a decrease in commissions of approximately
$60,000, an increase in promotional costs attributable to our agreement with
Lycos- Bertelsmann of approximately $60,000 and an increase of approximately
$53,000 in bad debt. As a result of the increases in sales and marketing
expense and a decrease in revenues, sales and marketing expense as a percentage
of total revenue rose from 19% in 1998 to 74% in 1999.
32
<PAGE>
Technical expenses increased $193,533, from $101,330 for the fiscal year
ended December 31, 1998 to $294,863 for the fiscal year ended December 31,
1999. The increase was attributable to an increase in salary expense of
approximately $145,000, and an increase in cost of approximately $40,000 to
maintain the Telephone Directory Web site which was acquired in 1999. These
increases, plus the decrease in revenues, increased technical expenses as a
percentage of total revenue from 4% in 1998 to 29% in 1999.
We issued warrants to purchase 485,465 shares of our common stock in 1999
as finders' fees in connection with the business combination with American
Ostrich Corporation. We took a charge of $480,610 representing the difference
between the fair market value of our stock at the time of the transaction ($1
per share) and the $.01 exercise price of the warrants.
Depreciation and amortization expense increased $116,631, from $105,860
for the fiscal year ended December 31, 1998 to $222,491 for the fiscal year
ended December 31, 1999. These costs increased primarily as a result of higher
amortization costs for our proprietary software.
Interest expense increased approximately $528,355, from $90,436 for the
fiscal year ended December 31, 1998 to $618,791 for the fiscal year ended
December 31, 1999. This increase is the result of the accounting treatment of
debentures issued with beneficial conversion features which enabled the holders
to convert at a discount to market price of our common stock. The convertible
debentures issued in March 1999 resulted in an additional interest charge of
$128,000. The convertible debentures issued in June 1999 resulted in an
additional interest charge of $392,750. We had a reduction in interest cost
related to long term debt and trade debt of approximately $27,000.
Our total net loss was $641,378 for the fiscal year ended December 31,
1998 compared to a net loss of $3,118,048 for the fiscal year ended December
31, 1999. We had a loss per share of $0.17 for the fiscal year ended December
31, 1998 compared to loss per share of $.60 for the fiscal year ended December
31, 1999.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December
31, 1997
Revenue decreased $2,714,825, from $5,010,027 for the fiscal year ended
December 31, 1997 to $2,295,202 for the fiscal year ended December 31, 1998.
This decrease in net revenue resulted from a shift in focus to our Internet
strategy and a corresponding de-emphasis of wholesale and some retail business.
In order to reposition ourselves as an e-commerce company, we ceased marketing
of wholesale contracts and phased out retail customers who did not pay by
credit cards; consequently, our revenue from retail also declined. As a result
of this change, retail revenue ($1,268,460) increased as a percentage of total
revenue from 41% in 1997 to 55% in 1998 while wholesale traffic revenue
($988,433) decreased from 59% in 1997 to 43% in 1998. Approximately 2% of our
revenue in 1998 was generated from our Internet traffic ($38,309).
Our cost of revenue decreased $2,611,546, from $4,293,524 for the fiscal
year ended December 31, 1997 to $1,681,978 for the fiscal year ended December
31, 1998. As a percentage of revenue, these costs decreased from approximately
86% for 1997 to approximately 73% for 1998. The decrease in costs as a
percentage of revenue is attributable to the change in revenue mix from lower
margin wholesale sales to higher margin retail sales.
Administrative expense declined $51,954, from $570,500 for the fiscal year
ended December 31, 1997 to $518,546 for the fiscal year ended December 31,
1998. The decrease was primarily due to the successful settlement of a dispute
with a trade vendor resulting in a $40,016 reversal of a current payable from
our balance sheet. Other costs remained relatively constant. The increase in
administrative expense as a percent of total revenue from 11% in 1997 to 23% in
1998 was due to the decrease in revenue from 1997 to 1998.
Sales and marketing expense decreased $369,559, from $807,989 for the
fiscal year ended December 31, 1997 to $438,430 for the fiscal year ended
December 31, 1998. This decrease was attributable to a reduction of commission
expenses, from $300,327 in 1997 to $148,961 in 1998, as a
33
<PAGE>
consequence of our lower revenue, and a significant reduction in bad debt
expense from $197,109 in 1997 to $23,723 in 1998. As a result, and despite the
significant decline in revenue from 1997, the increase in sales and marketing
expense as a percent of total revenue increased to only 19% in 1998 from
approximately 16% in 1997.
Our technical expenses decreased $41,804, from $143,134 for the fiscal
year ended December 31, 1997 to $101,330 for the fiscal year ended December 31,
1998. The lower costs in 1998 were primarily due to a reduction in personnel
because of the decline in revenues in 1998.
Depreciation and amortization expense increased $52,209, from $53,651 for
the fiscal year ended December 31, 1997 to $105,860 for the fiscal year ended
December 31, 1998. The increase is the result of significant investment during
1998, principally to acquire our Internet software.
Interest expense increased $31,868, from $58,568 for the fiscal year ended
December 31, 1997 to $90,436 for the fiscal year ended December 31, 1998. The
increase was the result of financing costs arising from increasing balances
payable to trade creditors.
Our net loss was $917,339 for the fiscal year ended December 31, 1997
compared to a net loss of $641,378 for the fiscal year ended December 31, 1998.
The reduction in loss was a result of a decline in low margin wholesale
business, higher gross profit margins because of a higher mix of retail
business, a decrease in sales commissions, a decrease in bad debt expenses and
the favorable outcome of a disputed vendor billing.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources have been used to fund operating losses, debt
service and capital expenditures associated with development of our customer
base and the establishment and upgrade of our network infrastructure. We have
historically satisfied our capital requirements principally through extended
trade agreements with carriers and other suppliers. At December 31, 1999, we
had a working capital deficit of $1,897,522. We anticipate that the funds from
this offering will be sufficient to eliminate our working capital deficit and
satisfy our working capital needs at least for the next 12 months.
During the twelve-month period ended December 31, 1999, we effected a
number of revisions to our capital structure. Such revisions included raising a
total of $979,000 in capital through the issuance of convertible debentures and
the subsequent conversion of all of those debentures into 972,247 shares of our
common stock. We also negotiated agreements with trade creditors that converted
approximately $1,279,300 of trade debt into 5% convertible debentures with
three-year maturities. In addition, during July 1999, we completed a private
placement of 545,454 shares of our common stock, raising an aggregate of
$1,500,000 and providing additional liquidity. In September 1999, we issued an
aggregate of 146,399 shares of our common stock in private placements for a
total of approximately $402,600. We also have an outstanding loan in the
original aggregate principal amount of $100,000 of which approximately $7,600
is outstanding as of January 31, 2000. This loan bears interest at a rate of
12% and matures in March 2000. Also, we have a $100,000 loan from our Chief
Executive Officer which is repayable in the amount of $110,000 upon the
consummation of this offering with the proceeds of this offering. In addition,
ROPART Investments LLC, a stockholder that is affiliated with one of our
directors, loaned us $50,000 in January 2000. The loan is repayable in the
amount of $55,000 upon the consummation of this offering with the proceeds of
this offering. Gorada Service Company, Inc. loaned us $175,000 in February 2000
and such loan is repayable in the amount of $192,500 upon the consummation of
the offering with the proceeds of this offering. The Gorada loan is secured by
the pledge of 100,000 shares of our common stock held by each of our Chief
Executive Officer and President. See "Use of Proceeds."
To promote our Internet strategy, we currently anticipate aggregate
expenditures of approximately $9.0 million for advertising and promotion,
including $3.7 million for portal contracts which will provide advertising of
our services on a variety of Web sites for an extended period. We believe that
cash on hand, together with cash flow from our operating activities and cash
available from this offering, will be sufficient to fund our existing
operations at least for the next 12 months. We
34
<PAGE>
believe that our business will require substantially less capital beyond the
next 12 months. However, if our growth exceeds current expectations or we
expedite or expand our growth plan, or if our cash flow from operations is
insufficient to meet our working capital and capital expenditure requirements,
we will need to raise additional capital from equity or debt sources. There can
be no assurance that we will be able to raise additional capital on acceptable
terms or at all. If we are unable to obtain such additional capital, we may
have to curtail our expansion of operations, growth and other strategic
initiatives, which could adversely affect our business, financial condition or
results of operations and our ability to compete. For a description of the
risks related to financing our growth, see "Risk Factors--Risks Related To
Establishment Of Our Business--We Cannot Predict Our Future Capital Needs And
We May Not Be Able To Secure Additional Financing."
EFFECTS OF INFLATION
We do not believe that inflation has had a significant effect on our
operations to date.
SEASONALITY
Our business exhibits a degree of seasonality. Historically, our revenue
(as well as sales in the telecommunications industry in general) has decreased
slightly in July, August and December, which we attribute to vacations and
holidays in our European and Latin American markets and in the U.S.
ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on when costs incurred for internal-use software should be
capitalized. SOP 98-1 is effective for financial statements with fiscal years
beginning after December 15, 1998, although earlier application is encouraged.
We elected to adopt the guidance in this pronouncement effective for the year
December 31, 1998. In accordance with the guidance provided by SOP 98-1, we
capitalized internal and external costs to develop or obtain internal use
software during the application development stage. The costs of upgrades and
enhancements to internal-use software is also capitalized when it is probable
that such expenditures will result in additional functionality. Costs incurred
during the preliminary project stage are expensed as incurred, as are training
and maintenance costs.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements with fiscal years beginning after December 15, 1998,
although earlier application is encouraged. The adoption of SOP 98-5 is not
expected to have a material adverse effect on us.
35
<PAGE>
BUSINESS
OUR HISTORY
We were incorporated in August 1994, and began operations in 1995 as
AXICOM Communications Group, Inc. In April 1999, all of the common stock of
Axicom was acquired by the American Ostrich Corporation, a non-reporting
company that was publicly traded on the OTC Bulletin Board under the symbol
"AOC". As a result of this transaction, Axicom stockholders became the majority
stockholders of American Ostrich Corporation, and American Ostrich Corporation
reincorporated in Delaware and changed its name to CallNOW.com, Inc.
In mid-1997, we recognized the opportunity of offering multiple telephone
services using the Internet and changed our strategy. We decreased the number
of customers that we acquire and bill through independent agents and abandoned
our "wholesale" business which had accounted for approximately half our
revenues, but which was not profitable. We implemented our new Internet
strategy in September 1998.
We were required to file current financial information with the Securities
and Exchange Commission by August 1, 1999 in order to allow our common stock to
continue to be quoted on the OTC Bulletin Board. We did not make the required
filings by such date. As a result, market makers are not permitted to quote us
on the OTC Bulletin Board until our financial information has been filed and
the SEC has completed its review. Starting August 2, 1999, quotations in the
shares of our common stock can only be made in the National Quotation Bureau,
LLC's Pink Sheets until we are able to complete our required filing. We filed
an application for our units, shares and warrants to be included for quotation
on the Nasdaq National Market System under the symbols "CALNU", "CALN" and
"CALNW", respectively. However, we cannot assure you that we will be successful
in our efforts to list our units, shares and warrants on the Nasdaq National
Market System and may only trade on the Nasdaq SmallCap Market System, the OTC
Bulletin Board or in the National Quotation Bureau, LLC's Pink Sheets.
OUR BUSINESS
We offer our customers a variety of telecommunications services through
our e-commerce Web site (www.callnow.com) and any touch tone telephone. Our
services are provided globally and currently consist of international long
distance, national long distance, and a free global online telephone directory,
which currently generates over 1.6 million page impressions (page views) and
over 400,000 user sessions (unique visitors) per month. Our customers currently
consist primarily of individuals and small businesses, 80% of whom are located
outside of the U.S.
Our Web site is a communications portal with a look and feel that is
tailored to local markets, currently with a choice of four languages in
approximately 200 countries. Our Web site is driven by our software that
enables our customers in real time to:
o Survey global telephone rates;
o Sign up online for international and national long distance telephone
service;
o Have their credit cards automatically validated and pre-authorized;
o Activate their accounts;
o Review the details of each of their calls from the date of inception
of their account;
o Review current account information, including cumulative amounts,
through the last call made; and
o Review monthly invoices.
We offer international and national long distance telephone service
through call re-origination or "call-back" service, which we refer to on our
Web site as "ReturnCall." Our customer typically dials a
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unique U.S. telephone number to our switch, allows the telephone to ring once,
hangs up and then receives a return call from our switch providing U.S.
dial-tone. Alternatively, a customer connected to the Internet can initiate a
ReturnCall through our switch to any telephone providing them with U.S.
dial-tone. We refer to this service on our Web site as "Internet Trigger."
Generally, ReturnCall offers our customers significant savings on international
and national long distance calls. Approximately 67 countries have stated that
call re-origination services are prohibited in their country, 35 of which have
formally submitted information to the FCC stating that certain ReturnCall
services violate their laws. Except for the Philippines and Saudi Arabia, the
FCC has stated that it has not determined whether these submissions by foreign
governments to the FCC are sufficient evidence of illegality for purposes of
the FCC taking enforcement action against U.S. carriers. To date, the FCC has
only ordered carriers to cease providing ReturnCall services to the Philippines
and Saudi Arabia. For a more detailed discussion and potential impact on our
business, see "Risk Factors--Risks Related To The Telecommunications
Business--35 Countries Have Notified The Federal Communications Commission That
ReturnCall Services Violate Their Local Laws, And 67 Countries Have Stated That
Call Re-origination Is Prohibited In Their Country."
THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
Historically, telephone service within individual countries has been
monopolized by large, typically government-owned telephone authorities. As a
result, international callers have had little choice but to use the services
provided, and pay the prices charged, by national telephone authorities.
Deregulation on a regional basis, together with decreases in the cost of
providing services and the introduction of more sophisticated enhanced
services, has made it possible for new entrants to compete with the telephone
authorities in providing alternative telecommunications services. The resulting
decrease in non-regulated rates has produced a resale market for long distance
telecommunications services permitting companies to obtain favorable
volume-based rates from third-party providers and to resell services at
competitive rates to other providers and users. These and other factors have
contributed to an increase in telecommunications usage and the growth of
enhanced telecommunications services in these markets. The combination of a
continually expanding global telecommunications market, demand for lower prices
and improved quality, and ongoing deregulation has created competitive
opportunities for new telecommunications companies in many countries.
The international long distance industry, which involves the transmission
of voice and data from the domestic telephone network of one country to
another, is undergoing a period of fundamental change that has resulted, and is
expected to continue to result, in significant growth in usage of international
telecommunications services. According to TeleGeography, an independent
research and publishing company, in 1997, the international long distance
industry accounted for $66 billion in revenues and 82 billion minutes of use.
That is an increase from $27 billion in revenues and 22 billion minutes of use
in 1988. TeleGeography has estimated that, by the year 2001 this market will
have expanded to $80 billion in revenues and 159 billion minutes of use.
TeleGeography's estimate is based on a faster traffic growth rate than
experienced in the last five years, assuming a faster network growth rate and
faster rates of price cutting, plus a significant component of new demand
created by international traffic generated from mobile phones.
We believe that growth of traffic originated in markets outside the United
States will continue to be higher than growth in traffic originated within the
United States due to recent deregulation in many foreign markets and increasing
access to competitive telecommunications facilities in emerging markets.
The competition spurred by privatization and deregulation has resulted in
a wider choice of products and services and lower prices. In recent years,
prices for long distance services have decreased substantially and are expected
to continue to decrease in most of the markets in which we currently compete.
We believe that the lower price environment and resulting revenue losses from
increased competition have been more than offset by cost decreases and the
increase in telecommunications usage. For example, based on the FCC data for
the period 1989 through 1996, per
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minute settlement payments by U.S.-based carriers to foreign telephone
authorities fell 38.6%, from $0.70 per minute to $0.43 per minute. Over this
same period, however, per minute international billed revenue fell only 27.5%,
from $1.02 in 1989 to $0.74 in 1996. We believe that, as settlement rates and
costs for leased capacity continue to decline, international long distance will
continue to provide high revenue and gross profit per minute. For a discussion
of the risk related to competition in our industry, see "Risk Factors--Risks
Related To The Telecommunications Business--The Markets In Which We Operate Are
Highly Competitive And We May Be Unable To Compete Successfully Against New
Entrants And Established Companies With Greater Resources."
We believe that the international telecommunications market will continue
to experience strong growth for the foreseeable future as a result of the
following developments and trends:
Global economic development and increased access to telecommunications
services. The dramatic increase in the number of telephone lines around
the world, stimulated by economic growth and development, government
initiatives and technological advancements, is expected to lead to
increased demand for international telecommunications services in those
markets.
Liberalization of telecommunications markets. The continuing
liberalization and privatization of telecommunications markets has
provided, and continues to provide, opportunities for new carriers who
desire to penetrate those markets, thereby increasing competition and
resulting in a further decrease in prices for international long
distance services in many of the markets in which we currently compete.
Reduced rates stimulating higher traffic volumes. The reduction of
outbound international long distance rates resulting from increased
competition and technological advancements has made, and continues to
make, international calling available to a much larger customer base
thereby stimulating increased traffic volumes.
Increased capacity and quality. The increased availability of additional
higher-quality digital fiber optic cable has enabled international long
distance carriers to provide more services at a higher quality while
reducing costs.
Bandwidth needs. The demand for bandwidth-intensive data transmission
services, including Internet-based demand, has increased rapidly and is
expected to continue to increase in the future.
Internet telephony. Technology trends over the past decade have removed
the distinction between voice and data segments. In order to satisfy the
high demand for low-cost communication, software and hardware developers
began to develop technologies capable of allowing the Internet to be
utilized for voice communications. This is called Internet telephony. We
are evaluating Internet telephony for our customer base and intend to
integrate it into our services as appropriate.
Popularity and acceptance of technology. The proliferation of
communications devices, including cellular telephones and facsimile
machines, as well as the increased level of Internet usage, has led to a
general increase in the use of telecommunications services and
stimulated demand for faster transmission of data. The following chart
from IDC, as printed in TeleGeography 1998, shows the expected number of
Internet users in four geographical regions through the year 2002:
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Regional Internet Growth
Internet Users (millions)
[GRAPHIC OMITTED]
1997 2002
------ -----
Japan........................................ 4.9 22.1
Asia-Pacific................................. 3.8 36.8
Western Europe...............................16.8 82.0
United States................................38.7 135.8
BUSINESS STRATEGY
Our goal is to establish ourselves as a leading Web portal providing
access to international and national telecommunications services. We plan to:
Establish www.CallNOW.com as a Leading Telecommunications "Portal" on the
Internet. We believe that there is currently no global e-commerce brand for
telecommunications. A large portion of the proceeds of this offering will be
used to establish ourselves as a leading portal for telecommunications -- a
one-stop shop on the Web where Internet users can sign up for international
long distance, national long distance, calling cards, cellular rentals and
other services. We believe that our traditional business, ReturnCall, makes us
ideally suited to quickly service multiple markets because ReturnCall utilizes
touch tone telephone technology which is available in the markets we serve. We
plan to introduce country specific services in the approximately 200 countries
that we serve to reinforce our image as a local-based company. We will spend a
portion of the proceeds of this offering on country-specific branding of the
site. We are targeting countries with a large amount of international and
national long distance traffic and which also account for the deepest non-U.S.
Internet penetration.
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Focus on International Opportunities. We anticipate that approximately 80%
of our customers will continue to reside outside the U.S. In addition, we
expect that the majority of our new Web-based customers will be individuals and
small-sized companies with monthly international long distance bills between
$50 and $5,000. Because of the relatively small account size, these individuals
and corporations are generally not the primary targets of national carriers or
large resellers.
Leverage Multiple Distribution Channels. In order to reach the broadest
potential group of customers rapidly, we are executing a broadly based
affiliate program. This program will create local brand recognition through the
promotion by the affiliates targeted to their local subscribers and expand the
reach of our marketing efforts while offering other global e-commerce
organizations the opportunity of selling our telecommunications services in
local markets. We expect that this program will be particularly important in
geographic territories and market segments where populations of potential
customers are too diffuse to support traditional forms of advertising.
Create a "Sticky" Web Site for Cross Selling Products/Services and
Generating Incremental Advertising Revenues. Due to the nature of the services
available through our Web site, we believe customers will have reason to visit
our Web site frequently. This will provide us with the opportunity of cross
selling other products and services and enable us to sell targeted advertising
which will reach customers while they navigate our site. We expect advertising
to be approximately 10% of our revenue.
Expand Our Technology to New Applications. In order to expand our services
and the number of customers we serve, we are extending our technology to new
applications. For example, our Internet Trigger currently allows customers the
ability to originate a traditional telephone call from our Web site. Customers
are prompted to input their telephone number, the number they wish to call,
click on "submit," and our technology completes the call. In other application
examples, our 2speak.com technology will enable Internet users to talk to
e-commerce merchants as well as to each other. These applications allow
customers who want to speak to customer service agents to be automatically
connected via a 2speak.com call and allow two people in a chat session who want
to speak to each other on a traditional telephone to be connected through a
2speak.com call. We anticipate that the completion of these two new
applications will cost approximately $100,000 and that these applications will
be in commercial use in the third quarter of 2000.
Develop Additional Services. We plan to expand the services we offer our
customers through our Web site to provide additional telecommunications
services. For example, in the next six to 18 months, we plan to offer direct
dial service in Europe, Japan and Australia for national and international long
distance through one or a number of networks. We intend to include Internet fax
within 90 days and paging within one year. As Internet telephony improves and
achieves greater acceptance, we may offer it through our site. We are also
developing Internet telephone services aimed at international corporate
customers.
Additionally, in the next three months, we plan to expand the global
online telephone directory services we currently offer to include more
countries and features, including language options. In the next six months, we
will provide customers who locate a number on the directory with the ability to
find out the cost to place a call to the number and, if desired, to place the
call immediately.
Utilize Strategic Acquisitions to Augment Portal Strategy. We intend to
use strategic acquisitions to augment our internally developed services in
order to achieve our goal of becoming a leading telecommunications "portal" on
the Internet. For example, in May 1999, we acquired the assets of Telephone
Directories on the Web (www.teldir.com), an online assembly of international,
national, regional, and local telephone directories.
OUR TELECOMMUNICATIONS SERVICES
International Long Distance. We are a reseller of traditional and enhanced
telephone services routed through our own switch and licensed by the FCC. We
target a market consisting of customers who are primarily located outside the
United States. Our target market consists of individuals and smaller businesses
who historically have been considered by the international long distance
carriers
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and the large resellers to be too small a segment to cater to cost-effectively,
or whose access to low-cost services is restricted by monopolistic national
telephone companies. We are able to benefit from the relatively low cost of
international telephone service in the United States and further from a
differential in rates created by the present over-capacity of high speed voice
and data lines and networks around the world. Long distance carriers who own
the networks have long sold hundreds of millions of telephone "minutes"
annually to resellers. We purchase large blocks of the minutes, directly or
indirectly, from the carriers at prices discounted from U.S. rates and we are
able to pass along a significant portion of those discounts to our customers.
National Long Distance. In our markets, particularly Western Europe, our
customers are able to use ReturnCall to make calls within their country.
Following the experience in the U.S., many countries around the world are
starting to deregulate their long distance markets. We have identified these
countries and their key telecommunications providers. We are approaching these
providers to negotiate reseller agreements that will enable us to provide
direct dial service for national long distance locally through our Web site.
Free Global Online Telephone Directory. Last year we acquired the assets
of Telephone Directories on the Web, an online assembly of international,
national, regional and local telephone directories, and provide it as a free
service on our Web site. Currently, we are generating over 1.6 million page
impressions and 400,000 user sessions per month. We believe that Telephone
Directories on the Web will draw many potential subscribers to our Web site.
Currently, Telephone Directories on the Web is ranked first under
www.directhit.com's search results for telephone directories on the Internet
and is in the top three of the search results on www.google.com's listing of
telephone directories as well. As a future service, we intend to offer
potential customers the opportunity to complete a call to any number they have
located. If potential customers attempt calls, we will then follow up with an
e-mail message encouraging them to sign up for our services.
OUR SOURCES OF REVENUE
Traditional Phone Calls. We expect that ReturnCall or direct dial service
for international and national long distance services will continue to provide
us with a substantial proportion of our revenues. Because we transmit customer
traffic through our proprietary software, we know the wholesale cost that we
pay and can control the retail prices we charge, subject to the competitive
pressures of the marketplace. In the international long distance business, we
have experienced a growth in retail gross margins which can be attributed to
wholesale prices declining faster than retail rates in markets where we provide
services. We provide our services over the Internet only to customers with
major international credit cards. Charges are pre-authorized based upon each
customers requested monthly limit which significantly reduces our exposure to
fraud.
Other Telecommunications Services. We intend to offer other
telecommunications services on our Web site, including calling cards, paging,
Internet fax and an online directory for renting cellular phones. We intend to
negotiate wholesale, reseller or override agreements with various companies
offering these services. In addition, we plan on adding services to our global
online telephone directory, including the ability to dial any telephone number
accessed through the directory immediately.
Advertising. We expect to generate revenue through a variety of different
advertising and promotional opportunities. We intend to offer prospective
advertisers the opportunity to place customized ads on our Web site through
branding entire sections on our Web site, rotating and permanent placement of
buttons, logos and Web site links, integrated gateway ads and multimedia banner
ads. The data generated from customers' invoices and other sources will enable
us to sell targeted advertising space at a higher cost per thousand hits
because of the detailed information we have about our customers. We will also
sell traditional Web-based advertising through banners and advertising displays
on our Web site to companies seeking to reach customers meeting the profile of
our subscribers.
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KEY FEATURES OF OUR SERVICE
Prior to implementing our Internet strategy, we sold our services largely
through local agents. These agents were primarily individuals and small
businesses which signed up customers for our services, and in many cases,
maintained accounts and collected bills. This system had many inefficiencies
and risks, including lack of a universal brand identity, high agent
commissions, lagging cash flows and the risks of collecting from the agents.
By selling our services through the Internet, we bill our customers
directly against credit cards, thus avoiding lagging cash flow and collection
risks. We are able to establish universal brand identity and are able to
operate at a much lower cost while reaching a significantly wider universe of
potential customers. Traffic is driven to our Web site by our affiliates and we
typically pay them a commission based on referrals -after we have been paid by
our customer.
Most importantly, however, the Internet platform and our proprietary
software enable us to offer an array of fully-automated, real-time features
that include:
Ability to Survey Country Specific Rates. When potential customers enter
our Web site, a pull-down screen is presented which prompts them to input the
country from which they are calling. Our rate calculator then determines the
per minute rate for a call to any country selected.
Immediate Account Sign Up, Credit Card Validation and Account
Information. Upon entering our site, a customer may submit a completed
application for our service with credit card information to our corporate
database server. The server creates an account for the customer after identity,
password, payment method and credit limit are checked and validated during the
registration process. The customer is then assigned an access number which
identifies the customer and which can be used immediately to initiate calls.
Our communications switch routes all details of the call to our platform. All
this information is stored in our corporate database.
Immediate Call Information. A customer can review a report of a call
immediately upon termination of the call. This report includes the detail of
the date and time, country and number called, length and cost of the call. Our
communications switch tracks all details of the call and provides the
information to the billing platform. All this information is stored in real
time in our corporate database. Customers can also review details of each of
their calls from the date of inception of their account. To the best of our
knowledge, customers' ability to access interim account information is not
widely available outside the U.S.
Monthly Invoicing. At the end of each billing period, an invoice and the
related call detail information is automatically generated and e-mailed to
customers after their credit cards have been charged and, based upon the credit
limit, pre-approved for the next billing period. We believe that our Web-based
software enables customers to administer their telecommunications needs with an
ease and functionality that is innovative and user-friendly, particularly
compared to alternatives in overseas markets.
Automated Credit Card Billing and Pre-approval. Our software also
automatically validates and bills customers' credit cards every four weeks. The
bill is itemized and upon billing, the account is automatically pre-approved
for the next billing cycle.
While we are aware of several companies that offer customers the ability
to sign up for services online, their customers must still typically submit a
completed application form online or fax the printed form, and then wait to be
contacted by an operator to set up the account (which could take a few days).
More importantly, we are not aware of any other telecommunications company
currently providing the combination of services we provide in real-time on the
Internet on a global basis.
We believe our automated method of signing up, provisioning, activating
and providing account information with a cost effective customer acquisition
and administration system in real time on a 24 hour, 7 day per week basis can
be adapted to other online or e-commerce businesses. Accordingly, we believe
that with adaptation of the application specific codes, our proprietary
software has the potential to be used by and licensed to companies in other
industries.
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FUTURE AND PLANNED SERVICES
We plan to introduce several new services in the future. These services
include:
Direct Dial Service. In the next six to 18 months, we intend to offer
direct dial service from Australia, Austria, Denmark, Finland, France, Germany,
Italy, Japan, Netherlands, Norway, Spain, Sweden, Switzerland and the United
Kingdom. Users of direct dial service do not hang up and wait for a return
telephone call. Instead, they dial a PIC code or local number (similar to
10-10-321 in the U.S.) prior to completing the call. Subscribers will sign up
for this service on our Web site in the same manner as our ReturnCall service.
We intend to expand the countries from which a caller can use direct dial
service as markets in other countries further deregulate and this service
becomes available in those countries.
Calling Cards. We have contracted with Interconnect, a U.S.-based calling
and debit card reseller for AT&T, to provide discounted AT&T calling card
services to our customers. We will sell co-branded AT&T/CallNOW.com calling
cards with access from approximately 165 countries. These services will be
provisioned in the same manner as our international and national long distance
service.
Fax Service Over The Internet. Through a contract with Equinox
International, LLC, a U.S. telecommunications wholesale provider, customers
will be able to send and receive faxes delivered through the Internet. We
expect to begin offering this service in the second quarter of 2000.
Telephone Directory Button. We offer a free global online telephone
directory. Once customers find their desired telephone number in our directory,
a pop-up form will appear asking them if they want to be connected to this
telephone number. By entering their own telephone number in the pop-up form,
the connection will occur automatically without having to dial the telephone
number.
CallNOW.com Members' Services Customized Web Page. We plan to provide each
customer with a customized Web page which, in addition to call monitoring and
billing information, will contain the following services:
International and National Long Distance Account. Each customer will be
assigned an account number for our national and international long distance
service.
Virtual Calling Card. Through a contract with Equinox International, LLC,
a U.S. telecommunications wholesale provider, customers will be given a
pre-selected CallNOW.com online calling card displaying their name on their
personalized site. By clicking on various icons next to the card, customers
will be able to see a list of toll free access numbers, request a hard copy of
the card, or review their calling card charges. We expect to begin offering
this service in the second quarter of 2000.
Virtual Phone Book. Customers will be able to store their frequently
called numbers under this service. Customers will be able to click on a
CallNOW.com button to initiate a call to one of their frequently called
numbers.
Virtual Conference Calls. Customers will be able to select from their
virtual phone book or enter numbers manually on a field that will automatically
set up conference calls at a time specified by them. At the designated time,
all parties will be called and customers will be able to verify that
connections have been made to the desired telephone numbers by looking at their
computer screens.
Free e-mail Account. A free e-mail account will be set up for every
customer with an address, such as [email protected].
Customer Account Information. Access to a customer's invoice and call
detail report will be provided under this service.
Other Services. We believe that we have the ability to use our existing
technology to enhance international customer service offered by potential
sponsors and our affiliates. We are exploring opportunities to provide such a
service.
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SALES AND MARKETING
CallNOW.com Branding Strategy
To support our affiliate network and to promote CallNOW.com as a leading
portal for telecommunications, we plan to initiate an advertising campaign in
countries with a large amount of international and national long distance
traffic and which also account for the deepest non-U.S. Internet penetration.
This campaign will seek to establish CallNOW.com as the site to go to for a
single source solution for telecommunications needs. We plan to utilize
multiple advertising media, such as print, television, radio and Web-based
advertising in order to build our brand, increase traffic and raise our profile
among potential advertisers. Our advertising will be country specific.
Our advertising program will highlight the advantages of our services in
their targeted markets as well as emphasize CallNOW.com as the online resource
for finding telephone numbers. In markets in which telecommunications have just
recently been deregulated, we will educate customers about new services
available to them. In addition, this branding will assist local and regional
affiliates who promote our services.
Affiliate Strategy
We believe that establishing affiliate relationships with other parties in
the Internet and telecommunications industries is an effective means of
generating sales of our services on a global basis. We currently have over
1,500 affiliates. We believe that these affiliates are key to creating brand
recognition in many disparate markets that we would have difficulty accessing
purely by traditional advertising alone. The sponsorship of our service by
affiliates gives a local-based flavor to our services which is important in
establishing ourselves in many markets around the world. We have recently
retained two consultants, Regrafco, S.A. and EuroSwiss Syndicators, Ltd., to
assist us in identifying affiliates in Latin America and Europe, respectively,
as part of our business development activities. We have various types of
affiliates, such as:
Premier search engines and portals--Last year we entered into agreements
with each of the European and Japanese joint ventures of Lycos to be a premier
telecom partner in those geographical areas. They will periodically place
banners, promotional buttons, text links and other hyperlinks from their home
pages and Web guides to our Web site resulting in having our name and services
prominently displayed and offered in some of the most high-traffic sites on the
Internet. Additionally, a similar presence will periodically be provided on
search results pages. Also, during any keyword search relating to our industry
or services, our name and services should appear in prominent positions. These
agreements expire in the first half of 2001, unless terminated earlier by
mutual consent or after one year upon 90 days' prior written notice or upon
other conditions. We are obligated to make minimum guaranteed payments in an
aggregate amount of $460,000 to these Lycos joint ventures in the next 18
months. In addition, we are obligated to pay these Lycos joint ventures a
commission, based on recurring monthly revenue derived from each customer they
deliver to us, which is offset against the guaranteed payments. However, as of
the date of this prospectus, the links which would direct users of Lycos Japan
to our Web site are still being developed. Thus, the implementation of our
contract with Lycos Japan has not yet occurred, and no assurance can be made
when, if ever, such contract will be implemented. These transactions are not
exclusive for either party and we are actively seeking similar agreements with
other prominent search engines.
On August 26, 1999, we entered into a two year agreement with Orientation
Global Network, Inc, which operates Orientation.com, a growing network of
regional Internet portals. Orientation will receive a commission on recurring
revenue for customers that Orientation provides to us.
National and local search engines--In most countries outside the U.S.,
e-commerce is still in a development stage and local sites are looking for ways
to generate revenue and traffic. Currently, we have agreements with a few
overseas search engines who are promoting our services on their home pages.
Master affiliates--Master affiliates are Internet businesses which provide
a number of telecommunications (and other) services to a large number of retail
sub-affiliates. In August 1999, we
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signed agreements with a telecommunications association representing 10,000
Web-based affiliates and with another group that has over 20,000 telecom
related Web sites. In November 1999, we contracted with Be Free, Inc., a
provider of services that enables its customers to generate, place and manage
hyperlink promotions for their products and services, to manage the
administration of our affiliate programs. We are constantly in discussions with
other parties who may want to become Master affiliates who we believe offer us
the possibility of greatly expanding our number of customers. However, no
assurance can be given that any of our discussions will actually result in
signed agreements.
Telecom related sites--Some traditional resellers of telecom services have
developed static Web sites to promote their business. These resellers are eager
to turn their Web sites into interactive sites allowing customers to sign up 24
hours per day, anywhere in the world. We are focused on this opportunity
because the existing customer base for these sites is looking specifically for
telecom services.
E-commerce sites--We have been contacted by travel sites, hotel search
engines and e-commerce retailers that wish to market our services as an added
feature for their customers. We intend to pursue these opportunities with the
proceeds from this offering.
For the majority of our affiliates, we provide a standard, co-branded site
that is designed to yield an immediate sign up for our international and
national long distance services by their customers. These sites include:
o a rate calculator, with a currency converter;
o an online sign up application;
o a service description;
o a link to customer service; and
o four language capability.
Affiliates are attracted by the recurring revenue stream and the ability
to provide more services to their customers who visit their sites and will then
want to return to their sites. Our affiliate agreements are structured on a
revenue sharing basis. We offer our affiliates a percentage of sales revenues
generated by the affiliates' customers. Affiliates generally introduce and
market our services to their customers via strategic placement of a permanent
click-through CallNOW.com icon on their Web sites. In addition to revenue from
sales, we gain a valuable list of customers with e-mail and regular addresses,
telephone numbers and other demographic information about them.
OUR INTELLECTUAL PROPERTY
Our Internet strategy, based upon our Web platform and our enhanced
services, is enabled and driven by software, the principal components of which
are proprietary to us. The proprietary software was custom designed to our
specifications. We filed a U.S. patent application for our proprietary software
on August 28, 1998, and an international patent application under the Patent
Cooperation Treaty on August 27, 1999. In November 1999, the U.S. Patent and
Trademark office initially rejected our application on the ground that the
invention set forth in the claims is obvious from the prior art and, therefore,
not patentable. We have contested the rejection by amending the claims of our
application and presenting detailed arguments regarding the patentability of
our business process and software. The procedures established by the U.S.
Patent Laws and the Code of Federal Regulations require that our application be
reconsidered in the light of the amendments and arguments. Our international
patent application, which designates all treaty jurisdictions (about 100
countries), gives us the right to file Patent Cooperation Treaty national stage
applications at any time prior to February 28, 2001, in all treaty
jurisdictions in which we elect to seek patents for our proprietary software.
We are continuously developing refinements and new features to our
software. Our proprietary software enables us to offer to our customers the
combination of services and features that we
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currently provide. We believe the technology resident in our software and
switches should allow us to differentiate our service offerings and provide us
with a competitive advantage in the marketplace. However, we cannot assure you
that others will not be able to develop software solutions or methods to
deliver services and combinations of services similar to ours without
infringing on our intellectual property rights. For a description of the risks
related to our intellectual property, see "Risk Factors--Other Risks Related To
Our Business Generally--Failure To Protect Our Intellectual Property Could
Adversely Affect Our Brand And Our Business."
COMPETITION
Most of our competition in the international telecommunications market is
from traditional communications common carriers and telephone authorities
(first tier), other carriers and resellers (second and third tier), all of whom
are using the conventional Public Switched Telephone Network. Additionally, in
the last ten years, alternative carriers have emerged who operate globally
using ReturnCall technology and, more recently, voice over Internet protocol
("IP") technology. Other potential competitors include cable television
companies, wireless telephone companies, large end users who have private
networks and electric and other utilities with rights of way such as railways
and microwave carriers.
The first tier carriers are companies such as AT&T, MCI-Worldcom, British
Telecom and other PTTs, international and local. Without exception, these
companies are very large, have vast financial resources, and service most of
the current end users today. These companies have multi-billion dollar
investments in, and control most of, the existing infrastructure.
Some of the alternative carriers and resellers who have emerged include
RSL, Viatel, Espirit Telecom, Ursus and IDT. These companies serve retail
markets in direct competition with us. For example, Ursus has recently
announced an Internet approach to selling and administering some of their
services in a manner that may be similar to ours. We are also aware of other
resellers (for example, Talk.com, formerly TelSav) that have a similar approach
to ours in the U.S. domestic market. We expect to see other competitors emerge.
These carriers serve the small to mid-sized business markets using various
technologies, including their own fiber networks and resale of others'
capacity, through direct dial service in deregulating markets, by ReturnCall
and, more recently, by IP telephony.
Competition for customers in the telecommunications industry is primarily
based on price and, to a lesser extent, on services and on the type and quality
of services offered. In most markets in which we compete, and in particular,
those markets that have been deregulated, prices to the end-user customer have
been decreasing and are expected to continue to decrease. Thus, we have
experienced declining revenue per billable minute in all of our markets, in
part as a result of increased worldwide competition within the
telecommunications industry. We have no control over the prices set by our
competitors, and some of our competitors may be able to use their financial
resources to cause severe price competition in the countries in which we
operate. Any such price competition would have a material adverse effect on our
business, financial condition and results of operations.
Our services are currently marketed to individuals and small businesses
and thus, we generally do not compete with large-carrier alliances who
generally target larger corporate customers. In addition, many smaller carriers
have emerged, most of which specialize in offering national and international
telephone services utilizing dial up access methods. Although many of these
represent potential resale providers for us, others may choose to go directly
to end-users and compete with us.
We should not be confused with a new class of service provider using the
Internet rather than traditional switched-circuit voice networks to provide
call completion, sometimes known as Internet telephony. Internet telephony
services are marketed as a low-cost way to make phone calls over the Internet
using personal computers and/or traditional telephones. We view Internet
telephony as a new technology for voice calls and intend to offer it as an
option in the future based on the price/quality considerations of our
customers. Whether or not we offer Internet telephony, some Internet telephony
providers will compete with future features we may offer such as allowing the
user to speak with sales
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or customer service representatives of online retailers and other Web-based
businesses while visiting their Web sites, including pop-up video phone
capability at the computer.
GOVERNMENTAL REGULATION
We are subject to regulation as a telecommunications service provider in
some jurisdictions. In some countries where we operate or plan to operate,
local laws or regulations limit or require prior government approval for the
provision of international telecommunications service in competition with
authorized carriers. For example, we provide our services by purchasing minutes
from other carriers for resale to our customers. As a result, we may be
affected by increased regulatory requirements in foreign jurisdictions. Also,
local laws and regulations differ significantly among the jurisdictions in
which we operate or plan to operate, and, within such jurisdictions, the
interpretation and enforcement of such laws and regulations can be
unpredictable. There can be no assurance that future regulatory, judicial,
legislative or political changes will permit us to offer to residents of such
countries all or any of our services or will not have a material adverse effect
on us, that regulators or third parties will not raise material issues
regarding our compliance with applicable laws or regulations, or that
governmental decisions will not have a material adverse effect on our business.
If we are unable to provide the services which we presently provide or
intend to provide or to use our existing or contemplated transmission methods
due to our inability to obtain or retain the requisite governmental approvals
for such services or transmission methods, or for any other reason related to
regulatory compliance or lack thereof, such developments could have a material
adverse effect on our business, financial condition and results of operations.
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. The FCC is considering a number of international
service issues in the context of several policy rulemaking proceedings in
response to specific petitions and applications filed by other international
carriers. We are unable to predict how the FCC will resolve the pending
international policy issues or how such resolution will effect our
international business. In addition, the World Trade Organization Basic Telecom
Agreement (the "WTO Agreement"), which reflects efforts to eliminate
government-owned telecommunications monopolies throughout Asia, Europe and
Latin America may affect us. Although we believe that these deregulation
efforts will create opportunities for new entrants in the telecommunications
service industry, there can be no assurance that they will be implemented in a
manner that would benefit us.
The regulatory framework in certain jurisdictions in which we provide
services is described below:
United States
Pursuant to the Communications Act of 1934, as amended (the
"Communications Act"), the FCC is empowered to regulate the telecommunications
industry in the U.S. Under current FCC policy, telecommunications carriers
reselling the services of other carriers, and not owning domestic
telecommunications transmission facilities of their own, are considered
non-dominant and, as a result, are subject to streamlined regulation. The
degree of regulation varies between domestic interstate telecommunications
services (services which originate and terminate within the U.S.) and
international telecommunications services (services which originate in the U.S.
and terminate in a foreign country or vice versa).
Non-dominant providers of domestic interstate telecommunications services
do not require prior authorization from the FCC to provide service, they only
need to have a tariff on file with the FCC setting forth the terms, conditions
and rates of their interstate telecommunications services. Conversely,
non-dominant providers of international services must obtain authorization to
provide service from the FCC pursuant to Section 214 of the Communications Act.
Carriers providing international service also must file a tariff with the FCC,
setting forth the terms, conditions and rates under which they provide
international services. The FCC has determined that it no longer will require
non-dominant providers of domestic services to file tariffs. That decision has
been stayed, pending appeal by the U.S. Court of Appeals for the District of
Columbia Circuit.
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We provide both domestic interstate and international services to and from
the U.S. and therefore must possess authority under Section 214 of the
Communications Act and must file tariffs for domestic interstate and
international services with the FCC. We have held a 214 Authorization to
provide international switched resale services since March 1996. We also have
tariffs on file with the FCC setting forth the terms and conditions under which
we provide domestic interstate and international services.
We must also conduct our international business in compliance with the
FCC's International Settlements Policy, the rules that establish the
permissible boundaries for U.S.-based carriers and their foreign correspondents
to settle the cost of terminating each others' traffic over their respective
networks.
In addition to these authorization and tariff requirements, the FCC
imposes a number of additional requirements on all telecommunications carriers,
such as prior approval of transfers of control, including pro forma transfers
of control (without public notice), corporate reorganizations, and assignments
of regulatory authorizations. Such requirements may delay, prevent or deter a
change in our control or our acquisition of another company.
The FCC also imposes certain restrictions on U.S.-licensed
telecommunications companies that are affiliated with foreign
telecommunications carriers, especially if the foreign telecommunications
carrier obtains a greater than 25% interest in a licensed carrier. If we become
controlled by or under common control with a foreign telecommunications
carrier, or we obtain a greater than 25% interest in or control over a foreign
telecommunications carrier, the FCC could restrict our ability to provide
service on certain international routes.
The regulatory requirements in force today impose a relatively minimal
burden on us. There can be no assurance, however, that the current regulatory
environment and the present level of FCC regulation will continue, or that we
will continue to be considered non-dominant. Any changes in the current
regulatory framework may adversely affect our business, financial condition or
results of operations.
International Regulation
Under the WTO Agreement concluded on February 15, 1997, 69 countries
comprising 95% of the global market for basic telecommunications services
agreed to permit competition from foreign carriers. In addition, 59 of these
countries have subscribed to specific pro-competitive regulatory principles.
The WTO Agreement became effective on February 5, 1998, and has been
implemented, to varying degrees, by the signatory countries. We believe that
the WTO Agreement will increase opportunities for us and our competitors.
However, we cannot assure you that the WTO Agreement will result in beneficial
regulatory liberalization in all signatory countries.
On November 26, 1997, the FCC adopted the Foreign Participation Order to
implement the U.S. obligations under the WTO Agreement. In this order, the FCC
adopted an open entry standard for carriers from World Trade Organization
member countries, generally facilitating market entry for such applicants by
eliminating certain existing tests. These tests remain in effect, however, for
carriers from non-World Trade Organization member countries. Requests for
reconsideration of the Foreign Participation Order are pending at the FCC.
Increasing regulatory liberalization in many countries' telecommunications
markets now permits more flexibility in the way we can route calls. Some
countries, however, continue to restrict carriers from providing ReturnCall
services.
European Union
In Europe, the regulation of the telecommunications industry is governed
at a supra-national level by the European Union (EU) formed by: Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal, Spain, Sweden and the United Kingdom. The EU was
established by the Treaty of Rome and subsequent conventions and is
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authorized by such treaties to issue EU directives. EU member states are
required to implement these directives through national legislation. If an EU
member state fails to adopt such directives, the European Commission may take
action, including referral to the European Court of Justice, to enforce the
directives.
In March 1996, the EU adopted the Full Competition Directive which
requires EU member states to allow the creation of alternative
telecommunications infrastructures by July 1, 1996, and affirms the obligations
of EU member states to abolish the PTTs' monopolies in voice telephony by 1998.
The Full Competition Directive also allows certain EU countries to delay the
abolition of their voice telephony monopoly. The only country that still has a
temporary exemption is Greece and that exemption expires on December 31, 2000.
Each EU member state in which we plan to begin offering direct dial
service has a different regulatory regime and such differences have continued
beyond January 1998. Most EU member states require companies to obtain a
license in order to provide voice telephony services or construct and operate
telecommunications networks. However, the EU generally does not permit its
member states to require individual licenses for other types of services. As a
result, we may be delayed in obtaining or may not be able to obtain licenses in
certain countries that would allow us to compete effectively. Failure to obtain
regulatory authority in any European country may adversely affect our business,
financial condition or results of operations.
Australia
Two federal regulatory authorities have control over the operation of the
Australian telecommunications industry. The Australian Communications Authority
is the authority regulating matters such as the licensing of carriers and
technical matters, and the Australian Competition and Consumer Commission has
the role of promoting competition and consumer protection.
Under the Australian regulatory framework, we will not be required to
maintain a carriage license in order to supply carriage services to the public
using network facilities owned by another carrier. Instead, we must comply with
legislated "service provider" rules contained in the Australian
Telecommunications Act of 1997 covering matters such as operator services,
regulation of access, directory assistance, provision of information to allow
maintenance of an integrated public number database, and itemized billing. In
addition, other federal legislation, various regulations pursuant to delegated
authority, ministerial declarations, codes, directions and court decisions
affecting telecommunications carriers may also apply to us.
There can be no assurances that we can obtain regulatory authority in
Australia. Failure to obtain regulatory authority in the future may adversely
affect our business, financial condition or results of operations.
Japan
Japan's regulatory authority is the Ministry of Post and
Telecommunications which enforces the Telecommunications Business Law. Under
this law, we may be required to obtain a Special Type II license allowing us to
provide additional services in Japan. There can be no assurance that we will
obtain a Special Type II license. Our failure to obtain a Special Type II
license could have an adverse effect on our ability to expand our operations in
Japan and could adversely affect our business, financial condition or results
of operations.
Latin America
During recent years, several Latin American countries have taken steps to
liberalize their telecommunications markets. Chile, El Salvador, Guatemala,
Mexico and Peru are among the most liberalized. Several other countries,
including Argentina and Venezuela, have partially or totally privatized their
dominant local carriers and partially opened their markets to competition.
Some important developments in the Latin American telecommunications
markets include: (i) Argentina has recently issued new licensing regulations
for telecommunications providers, and is
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currently licensing new competitive voice carriers that may begin providing
services in November 2000; (ii) Brazil established an independent regulator,
and partially opened its telecommunications market to competition; (iii) the
Mexican local and long distance markets have been opened to competition and
Telmex, the dominant local carrier, has been required to interconnect with the
networks of competing carriers; and (iv) other countries such as Chile,
Guatemala, El Salvador and Peru have fully liberalized their market for all
telecommunications services.
The degree of regulation and liberalization in the region varies
significantly among countries. There can be no assurance that we will obtain
regulatory authority in any of these countries. Failure to obtain regulatory
authority in any country may adversely affect our business, financial condition
or results of operations.
RETURNCALL
We offer service by means of call re-origination, which we refer to as
ReturnCall, pursuant to an FCC Section 214 Switched Voice Authorization. The
FCC has determined that call re-origination service using uncompleted call
signaling does not violate U.S. or international law, but has held that U.S.
companies providing such services must comply with the laws of the countries in
which they operate as a condition of such companies' Section 214 Switched Voice
Authorizations. The FCC reserves the right to condition, modify or revoke any
Section 214 Authorizations and impose fines for violations of the
Communications Act or the FCC's regulations, rules or policies promulgated
thereunder, or for violations of the clear and explicit telecommunications laws
of other countries that are unable to enforce their laws against U.S. carriers.
FCC policy provides that foreign governments that satisfy certain conditions
may request FCC assistance in enforcing their laws against U.S. carriers.
Thirty-five countries have formally submitted information to the FCC
stating that certain call re-origination services violate their laws. In
November 1996, 67 countries reported to the International Telecommunications
Union that call re-origination services are prohibited in their country. Except
for the Philippines and Saudi Arabia, the FCC has stated that it has not
determined whether these submissions by foreign governments to the FCC or the
ITU are sufficient evidence of illegality for purposes of the FCC taking
enforcement action against U.S. carriers.
To date, the FCC has only ordered carriers to cease providing call
re-origination services to the Philippines and Saudi Arabia. Future FCC
enforcement action could include an order to cease providing call
re-origination services to any other country ultimately found to have provided
sufficient information to the FCC, the imposition of one or more restrictions
on us, monetary fines or, ultimately, the revocation of our Section 214
Switched Voice Authorization, and could have a material adverse effect on our
business, financial condition and results of operations. See "Risk
Factors--Risks Related To The Telcommunications Business--35 Countries Have
Notified The Federal Communications Commission That ReturnCall Services Violate
Their Local Laws, And 67 Countries From Which We Derived Approximately 21% Of
Our Revenues In 1999 Have Stated That Call Re-origination Is Prohibited In
Their Country."
INTERNET TELEPHONY
United States
While we currently do not offer Internet telephony, we may offer it to our
customers in the future. We believe that under U.S. law the Internet-related
services that we provide and those that we may provide including IP telephony
constitute information services, rather than telecommunications services. As
such, our Internet-related services are not currently regulated by the FCC or
state agencies responsible for regulating telecommunications carriers (although
some parts of our future operations may be subject to state or federal
regulation such as universal service, confidentiality of communications,
copyright, and excise taxes). However, several efforts have been made to enact
federal legislation that would either regulate or exempt from regulation
services provided over the Internet. Therefore, we cannot assure you that
Internet-related services will not be regulated in the future. Increased
regulation of the Internet may slow its growth by negatively impacting the cost
of doing business over the Internet.
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We also cannot assure you that Internet telephony will continue to be
lightly regulated by the FCC and state regulatory agencies. The FCC has
determined that, at present, information service providers, including Internet
telephony providers, are not telecommunications carriers; however, we cannot be
certain that this position will continue. On April 10, 1998, the FCC issued a
report to Congress discussing its implementation of certain universal service
provisions contained in the 1996 amendments to the Communications Act. In its
report, the FCC stated that it would examine whether phone-to-phone Internet
telephony should be considered an information service or a telecommunications
service. The FCC noted that certain forms of phone-to-phone Internet telephony
appeared to lack the characteristics of an information service and to have the
same functionality as non-Internet protocol telecommunications services. In
addition, the FCC is currently considering whether to impose surcharges and/or
other common carrier regulations upon certain providers of Internet telephony.
If the FCC or Congress determines that Internet telephony is subject to
regulation as a telecommunications service, it could adversely affect our
business, financial condition or results of operations.
International
The regulatory treatment of Internet telephony in other countries varies
widely and is subject to constant change. Some countries treat Internet
telephony as does the U.S. and currently impose little or no regulation.
Conversely, countries that prohibit or limit competition for traditional voice
telephony services generally do not permit Internet telephony or strictly limit
the terms under which it may be provided. Other countries regulate Internet
telephony like traditional voice telephony services or determine on a
case-by-case basis whether to regulate Internet telephony as a voice service or
as another telecommunications service. Finally, in many countries, legislation
or the regulatory authorities have not addressed Internet telephony. The
varying and constantly changing regulation of Internet telephony in the
countries where we plan to begin providing services may adversely affect our
business, financial condition or results of operations.
The EU, for example, distinguishes between voice telephony, which may be
regulated by the member states, and other telecommunications services, which
are fully liberalized. As concerns Internet telephony, the European Commission
concluded in a Communication to the member states that, at present, Internet
telephony should not be considered voice telephony and thus should not be
regulated as such by the member states. However, the Commission noted that
providers of Internet telephony whose services satisfied the EU's definition of
voice telephony could be considered providers of voice telephony and could be
regulated by the member states. Moreover, Commission Communications are not
binding on the member states.
OTHER REGULATION AFFECTING THE INTERNET
United States
Congress has recently adopted legislation that regulates certain aspects
of the Internet, including content, user privacy, and taxation. In addition,
Congress and other federal agencies are considering other proposals that would
further regulate use of the Internet. For example, Congress is currently
considering legislation on a wide range of issues including Internet spamming,
database privacy, gambling, pornography and child protection, Internet fraud,
privacy, and digital signatures. Similarly, various states have adopted or are
considering Internet-related legislation. Increased regulation of the Internet
may slow its growth, which may negatively impact the cost of doing business
over the Internet and adversely affect our business, financial condition or
results of operations.
International
The EU has also enacted legislation affecting the Internet. In particular,
the EU imposes restrictions on the collection and use of personal data and
grants. EU citizens have broad rights to access and limit the use of their
personal data. U.S. companies that collect or transmit information over the
Internet from individuals in EU member states are subject to EU legislation,
which imposes
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restrictions that are more stringent than existing Internet privacy standards
in the U.S. The potential effect on us of the EU legislation or similar
legislation elsewhere is uncertain. A prohibition on the export of personal
data could adversely affect our business, financial condition or results of
operations.
EMPLOYEES
As of January 31, 2000, we had 18 employees. In addition, we use
independent contractors and consultants when needed. We currently lack the
personnel that will be necessary for our expected growth. We intend to use a
significant portion of the proceeds of the offering to add additional
personnel, including management, sales personnel, technical personnel and
business development personnel. See "Use of Proceeds." In order to attract
qualified personnel, we may be required to offer incentives such as stock
options, stock awards or other additional non-cash compensation or may be
required to allocate a greater portion of the proceeds of the offering for this
purpose than is currently anticipated. None of our employees is represented by
a labor union, and we consider our employee relations to be satisfactory.
PROPERTIES
We lease an aggregate of approximately 4,000 square feet of office space
in New York, New York pursuant to two leases, both of which were entered into
in 1999, for our executive and administrative offices, at a total annual rental
of approximately $89,000. Both leases expire on April 30, 2002.
LEGAL PROCEEDINGS
Viatel, Inc. commenced an arbitration with the American Arbitration
Association, New York Regional Office, alleging that it was owed $194,672.40 by
us for "telecommunications services" provided by Viatel. We asserted
counterclaims against Viatel alleging that Viatel engaged in unjust and
unreasonable charges and/or practices in violation of the Communications Act.
We requested that we be awarded our actual damages, in an amount to be
determined at arbitration, as well as an award of costs and reasonable
attorneys' fees. We accrued the full amount of the claim. The matter was
arbitrated and an award was made in favor of us and Viatel. Viatel's claims and
award exceeded ours. The net result is that Viatel can seek a judgment (by
filing a Petition in the New York County Supreme Court) against us for
approximately $98,000 plus interest at 9% from November 19, 1999. Although
Viatel previously tried to obtain such an award, because of procedural errors,
its motion was voluntarily withdrawn without prejudice to file a subsequent
Petition. Viatel has so far not filed a new Petition.
Reid Bernstein, an independent financial advisor, has alleged that he was
offered an opportunity by us to assist in the location of a potential candidate
for merger or acquisition, or a related financing. Mr. Bernstein claims to be
owed a five percent interest in us and a consulting fee of $60,000. Our
position is that no agreement was ever executed and delivered between the
parties, and, in any event, Mr. Bernstein did not perform. No arbitration
demand or summons and complaint has been served, either by or upon us. The
parties are currently discussing a resolution of the matter. We believe that we
have meritorious defenses to any claim which may be brought by Mr. Bernstein,
and if any such claim is brought, we will defend it vigorously.
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MANAGEMENT
OUR EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- ----- ---------------------------------------
<S> <C> <C>
Christian Bardenheuer ............ 40 Chairman of the Board of Directors and
Chief Executive Officer
Warner R. Johnson, Jr. ........... 37 President and Director
Christopher R. Seelbach .......... 60 Chief Operating Officer, Acting Chief
Financial Officer and Director
Martin Casanova .................. 45 Chief Technical Officer
Edward Cabot ..................... 34 Director
Todd A. Goergen .................. 27 Director
Robert S. Tolmach, Jr. ........... 44 Director
</TABLE>
Christian Bardenheuer has served as our Chairman of the Board of Directors
and Chief Executive Officer since April 1999 and as Managing Director of our
subsidiary, Axicom, since its inception in August 1994. Prior to his
co-founding Axicom, from early 1993 to August 1994, Mr. Bardenheuer served as
President of Intertel Communications S.A., a Paris based telephone services
company and was responsible for forming strategic alliances with international
carriers and its marketing strategy. In addition, from 1992 to 1993, he was an
independent consultant to senior management at Viatel Inc., an international
telecommunications company, consulting on opportunities in Latin America. From
1990 to 1992, he worked as Vice President International at FM International, an
international management consulting firm. Prior to that, he worked with Reseal
International Limited Partnership, a high-tech packaging company, as Vice
President in the International Business Development Department. Mr. Bardenheuer
studied architecture at Universidad Piloto de Colombia from 1978 to 1981, and
continued his studies at the Universidad de los Andes for a General Managing
Program until 1982. He became a U.S. resident in 1982.
Warner R. Johnson, Jr. has served as our President and as a Director since
April 1999 and as Managing Director of Axicom, which he co-founded with
Christian Bardenheuer, since August 1994. Mr. Johnson was Director of Finance
of Viatel, Inc. from October 1992 through August 1994. From 1984 to 1990, he
held various capital markets and investment banking positions at PaineWebber,
Inc. in New York. Mr. Johnson received an A.B. in History/American Civilization
from Brown University in 1984 and an M.B.A. from Columbia University in 1987.
Christopher R. Seelbach has served as our Chief Operating Officer and
Acting Chief Financial Officer since June 1999 and as a Director since August
1999. Mr. Seelbach began consulting for Axicom in May 1998. From 1994 to 1998,
Mr. Seelbach was an independent consultant and served as President and Chief
Executive Officer of Belcom, Inc., a COMSAT telecommunications investment, and
as Acting President of Skysat Communications Network Corporation, a
telecommunications business development company. From 1992 to 1994, he was
Chief Operating Officer of Viatel, Inc. Prior to that, he was an executive with
a number of technology-based companies and venture capital firms. Mr. Seelbach
also was a consultant at McKinsey & Co. from 1967 to 1970. Mr Seelbach received
a B.S. in engineering from the U.S. Naval Academy in 1961 and an M.B.A. from
Columbia University in 1967.
Martin Casanova has served as our Chief Technical Officer since February
1996. From July 1993 to January 1996, Mr. Casanova was the Technical Director
for development of communications software of Sitel, Inc. From October 1992 to
June 1993, he was an assistant in software development at Brainstorm Monitoring
Corporation. From 1980 to 1992, Mr. Casanova was on the teaching staff of the
National University of Mar Del Plata in Buenos Aires, Argentina. He completed
his studies in electrical engineering at the National University of Mar Del
Plata in 1979.
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Edward Cabot was appointed as a Director in September 1999. Mr. Cabot has
served as the principal of Cabot Design, an interior design firm, which he
founded in 1995. From 1991 to 1995, he was a principal at Lesser Frich Cabot,
an architectural and design firm. Mr. Cabot received a B.A. in 1987 and a
Masters of Architecture in 1991, both from Columbia University.
Todd A. Goergen was appointed as a Director in September 1999. Mr. Goergen
has served as the Director of Acquisitions and Corporate Development at Blyth
Industries, Inc., a NYSE company, since 1999. Mr. Goergen also serves as a
Manager for ROPART Investments LLC, a family investment partnership. He sits on
the board of directors of several private companies, including Surfree.com, an
Internet service provider. From 1994 to 1999, he was an Associate and an
Analyst in the Mergers and Acquisitions Group of Donaldson, Lufkin & Jenrette.
Mr. Goergen received a B.A. with a double major in Economics and Political
Science from Wake Forest University in 1994.
Robert S. Tolmach, Jr. was appointed as a Director in September 1999.
Since 1998, Mr. Tolmach has served as a Managing Director of Environmental
Property Group, LLC, a fund that invests in remediating environmentally
sensitive properties. In 1998, he founded Verrazzano Partners LLC, which is
developing a Staten Island Ferry as a New York City Expo in Japan. From 1987 to
1991, Mr. Tolmach served as senior real estate manager for James D. Wolfensohn,
Incorporated. From 1986 to 1987, he was an associate at Carodan Corporation, a
real estate development and consulting firm, and from 1982 to 1986, he was a
principal at Arquitectonica International Corporation, an architectural firm,
and headed the firm's Texas office. From 1984 to 1986, he owned and developed
real estate in Houston and from 1980 to 1982, he was an architectural designer
in Houston. He received a B.A. with a double major in architecture and fine
arts from Rice University in 1978, and a B. Arch. from Rice University in 1980.
Pursuant to a letter agreement entered into in connection with its
investment in us, ROPART Investments LLC has the right to appoint one member of
our Board of Directors. However, such appointment is limited to one of either
Robert B. Goergen, Todd A. Goergen or Robert B. Goergen, Jr. On September 14,
1999, Todd A. Goergen was appointed to our Board of Directors as the initial
nominee of ROPART Investments LLC.
BOARD COMMITTEES
Executive Committee
Between meetings of our full board of directors, the Executive Committee
may exercise all of the power and authority of the board in the oversight of
the management of our business and affairs, subject to limitations imposed
under Delaware law. The members of the Executive Committee are Messrs.
Bardenheuer, Johnson and Seelbach, and Mr. Bardenheuer serves as Chairman of
the Executive Committee.
Audit Committee
The Audit Committee will review our internal accounting procedures and
controls and consult with and review the services provided by our independent
accountants. The members of the Audit Committee are Messrs. Cabot and Goergen.
Compensation Committee
The Compensation Committee will review and determine the stock option
grants for all employees, consultants, directors and other individuals and
review and determine the salaries of the Chief Executive Officer and the other
executive officers. In addition, the members of the Compensation Committee will
also review the terms of any transactions with any of our officers, directors,
or 10% stockholders to insure that the terms of any such transaction are fair
and reasonable. The members of the Compensation Committee are Messrs. Cabot,
Goergen and Tolmach, Jr.
DIRECTOR COMPENSATION
As compensation for their services, we expect to make annual grants of
options to purchase shares of our common stock to our independent directors. In
connection with the appointment of
54
<PAGE>
Messrs. Cabot, Goergen and Tolmach, Jr. as directors, we awarded each of them
an initial grant of options to purchase 10,000 shares of our common stock
pursuant to our stock option plan at an exercise price of $2.75 per share
vesting ratably over three years. We will also reimburse directors for
out-of-pocket expenses incurred in connection with attending board of directors
and committee meetings.
EMPLOYMENT AND CONSULTING AGREEMENTS
In February 2000, we entered into employment agreements with Messrs.
Bardenheuer and Johnson. Pursuant to the terms of those agreements, Mr.
Bardenheuer continues to be our Chairman and Chief Executive Officer and Mr.
Johnson continues to be our President. Each of the employment agreements is for
a two-year period and may be extended by mutual agreement. Each of the
employment agreements provides Mr. Bardenheuer and Mr. Johnson with an annual
salary of 120,000; provided however, that such salary increases to $180,000,
effective upon consummation of this offering and retroactive to January 1,
2000. In addition, each of Mr. Bardenheuer and Mr. Johnson may receive a bonus
of up to 20% of his salary.
In November 1998, we entered into a consulting agreement with Christopher
R. Seelbach, now our Chief Operating Officer and Acting Chief Financial
Officer. Pursuant to the terms of the agreement, Mr. Seelbach was to have been
paid consulting fees of $5,000 per month from August 1998 through February
1999, and $10,000 per month from March 1999 until revenues reach $1.0 million
per month at which time his compensation will be increased to $15,000 per
month. As of the date of this prospectus, we owe Mr. Seelbach approximately
$15,000 representing consulting fees, which we intend to pay from the net
proceeds of this offering. For a discussion of payments owed to Mr. Seelbach,
see "Use of Proceeds" and "Related Party Transactions."
In addition, pursuant to the terms of the agreement, in 1998 and 1999, Mr.
Seelbach has been granted options to purchase 282,825 shares of our common
stock at exercise prices ranging from $.01 to $2.75 per share, representing
approximately 4.3% of our outstanding common stock prior to the offering
(assuming the exercise of such options).
During November 1999, we entered into an employment agreement with Mr.
Seelbach that replaced the November 1998 consulting agreement. Pursuant to the
terms of his employment agreement, Mr. Seelbach continues to be our Chief
Operating Officer and Acting Chief Financial Officer. The employment agreement
is for a one-year period and is automatically renewable for one additional year
unless we provide written notice to the contrary to Mr. Seelbach at least 60
days prior to the expiration of the agreement. The employment agreement
provides for monthly compensation of $10,000. Mr. Seelbach's compensation
increases to $14,000 per month upon the successful completion of this offering
for so long as he is both our Chief Operating Officer and the Acting Chief
Financial Officer. His compensation will be $12,000 for any period that he is
only our Chief Operating Officer. If our revenue increases to $1,000,000 per
month, his base salary will increase to $15,000 per month. Mr. Seelbach is also
entitled to participate in any bonus plan instituted by us. In addition, the
employment agreement requires us to grant non-qualified stock options in
connection with each equity financing that we consummate until the earlier of
(1) immediately following the successful completion of this offering or (2)
October 31, 2000. He will be granted options to purchase 5% of the number of
shares issued pursuant to such financing at an exercise price equal to the
purchase price paid by the investor or the public offering price if applicable.
The options will have an exercise term of five years. Thus, as part of this
offering, Mr. Seelbach will be granted options to purchase 200,000 shares at
the public offering price. In February 2000, Mr. Seelbach's employment
agreement was amended to extend the term of the agreement until February 7,
2002.
In July 1999, we entered into an employment agreement with Martin
Casanova. This agreement terminates in July 2001 and is automatically renewed
from year to year unless terminated by mutual agreement or by either party upon
60 days' notice. As our Chief Technical Officer, Mr. Casanova's duties include
operating, maintaining, and upgrading the hardware and software necessary for
the telecommunications services we provide and developing additional services,
such as calling cards and IVR services. He receives an annual base salary of
$120,000. In addition, subject to the discretion of
55
<PAGE>
our Board, Mr. Casanova may be awarded an annual bonus of up to 20% of his
annual base salary. He has been granted options to purchase 45,000 shares of
our common stock pursuant to our stock option plan. For a description of a
transaction entered into between a company controlled by Mr. Casanova and us,
see "Related Party Transactions."
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid to or earned by our Chief Executive Officer and other
executive officers whose salaries exceed $100,000 (collectively, the "Named
Officers"). For 2000, Messrs. Bardenheuer and Johnson will each receive an
annual salary of $180,000, effective upon the consummation of this offering and
retroactive to January 1, 2000, and a bonus of up to 20% of their annual
salary. In addition, each will receive a one-time payment of $65,000 upon the
consummation of this offering from the proceeds of this offering. See
"--Employment and Consulting Agreements."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
----------------------------------------------------- COMPENSATION:
OTHER SHARES
NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION
- -------------------------- ------ ----------------- ------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Christian Bardenheuer 1999 $115,000(1) -- -- 300,000 --
Chairman of the Board 1998 $ 98,000(2) -- -- -- --
of Directors and Chief 1997 $ 90,000(3) -- -- -- --
Executive Officer
Warner Johnson, Jr. 1999 $115,000(1) -- -- 300,000 --
President 1998 $ 98,000(2) -- -- -- --
1997 $ 90,000(3) -- -- -- --
Christopher Seelbach 1999 $ 60,000(4) -- -- 185,950 $50,000(5)
Chief Operating 1998 -- -- -- 96,875 $60,000(6)
Officer/Acting Chief 1997 -- -- -- --
Financial Officer
Martin Casanova 1999 $102,500 -- -- 45,000 --
Chief Technical Officer 1998 $ 60,325 -- -- -- --
1997 $ 75,035 -- -- -- --
</TABLE>
- ----------
(1) $7,500 of such salary was deferred and will be paid out of the net
proceeds from this offering.
(2) $15,500 of such salary was deferred and will be paid out of the net
proceeds from this offering.
(3) Approximately $15,300 of such salary was deferred and will be paid out of
the net proceeds from this offering.
(4) $5,000 of such salary was deferred and will be paid out of the net
proceeds from this offering.
(5) Compensation earned by Mr. Seelbach when he was a consultant to us.
$15,000 of such compensation was deferred and will be paid out of the net
proceeds of this offering.
(6) Compensation earned by Mr. Seelbach when he was a consultant to us.
$35,000 of such compensation, consisting of a finder's fee, has been
deferred and will be paid out of the net proceeds of this offering.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted in
the last fiscal year to the Named Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OR OPTION TERM
GRANTED IN FISCAL BASE PRICE EXPIRATION ------------------------------------
NAME (#) YEAR ($/SH) DATE 0% ($) 5% ($) 10% ($)
- --------------------------- ------------ ----------- ------------ ---------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Christian Bardenheuer ..... 300,000 25.3% $ 2.75 September 2009 -- $518,838 $1,314,838
Warner Johnson, Jr. ....... 300,000 25.3% $ 2.75 September 2009 -- $518,838 $1,314,838
Christopher Seelbach ...... 96,875 8.2% $ 1.00 March 2004 $22,281 $ 28,437 $ 35,884
31,429 2.7% $ 0.80 March 2004 $10,372 $ 13,237 $ 16,704
870 0.1% $ 0.01 April 2004 $ 861 $ 1,099 $ 1,387
17,183 1.5% $ 1.39 June 2004 $23,369 $ 29,825 $ 37,636
5,000 0.4% $ 0.01 June 2004 $13,700 $ 17,485 $ 22,064
27,273 2.3% $ 2.75 July 2004 -- $ 20,721 $ 45,789
7,320 0.6% $ 2.75 September 2004 -- $ 5,562 $ 12,290
Martin Casanova ........... 45,000 3.8% $ 2.75 September 2009 -- $ 77,826 $ 197,226
</TABLE>
Our Board of Directors has adopted a stock option plan, which has been
approved by our stockholders, pursuant to which we have reserved 2,200,000
shares of common stock for issuance upon exercise of options which may be
granted under the plan. See "--1999 Stock Option Plan."
As part of this offering, Mr. Seelbach will be granted options to purchase
200,000 shares at the public offering price. For a further discussion of these
options, see "--Employment and Consulting Agreements."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ACQUIRED ON VALUE ----------------------------- ----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- -------------- ------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Christian Bardenheuer ......... -- -- -- 300,000 -- --
Warner Johnson, Jr. ........... -- -- -- 300,000 -- --
Christopher Seelbach .......... -- -- 193,750 89,075 $193,750 $59,878
Martin Casanova ............... -- -- -- 45,000 -- --
</TABLE>
- ----------
(1) Based on the difference between the option exercise price and the bid
price of $2.00 on December 31, 1999.
1999 STOCK OPTION PLAN
In September 1999, our Board of Directors adopted the 1999 Stock Option
Plan. The 1999 Plan was subsequently approved by our stockholders.
The 1999 Plan provides for the grant of options to purchase up to, but not
in excess of, 2,200,000 shares of common stock to our officers, directors,
agents, consultants and independent contractors. Options may be either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or non-qualified options. Incentive stock
options may be granted only to our employees or employees of our subsidiary,
while non-qualified options may be granted to such persons and to non-employee
directors and consultants.
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<PAGE>
The 1999 Plan is administered by our Board of Directors or by our
Compensation Committee (the "Administrator"), which determines, among other
things, those individuals who receive options, the time period during which the
options may be exercised, the number of shares of common stock issuable upon
the exercise of each option and the option exercise price. The exercise price
per share of common stock subject to an incentive stock option may not be less
than the fair market value per share of common stock on the date the option is
granted (110% in the case of an incentive stock option granted to a person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option to such person, 10% or more of the total combined voting power of all
classes of stock of us (a "10% Shareholder")). The exercise price per share of
the common stock subject to a non-qualified option may be established by the
Administrator. The aggregate fair market value, determined as of the date the
option is granted, of common stock for which any person may be granted
incentive stock options which first become exercisable in any calendar year
cannot exceed $100,000.
No stock option may be transferred by an optionee other than by will or
the laws of descent and distribution, and, during the lifetime of an optionee,
the option will be exercisable only by the optionee. In the event of
termination of employment other than by death, retirement or permanent and
total disability, the optionee will have no more than three months after such
termination during which the optionee shall be entitled to exercise all or any
part of such employee's option, unless otherwise determined by the
Administrator. Upon termination of employment of an optionee by reason of
death, retirement or permanent or total disability, such optionee's options
remain exercisable for one year thereafter to the extent such options were
exercisable on the date of such termination.
Options under the 1999 Plan must be issued within ten years from the
effective date of the Plan. Incentive stock options granted under the 1999 Plan
cannot be exercised more than ten years from the date of grant (five years in
the case of an incentive stock option granted to a 10% Shareholder). All
options granted under the 1999 Plan will provide for the payment of the
exercise price in cash or check or by delivery to us of shares of common stock
having a fair market value equal to the exercise price of the options being
exercised, or by a combination of such methods, or by such other methods
approved by the Administrator pursuant to the 1999 Plan. Therefore, an optionee
may be able to tender shares of common stock to purchase additional shares of
common stock and may theoretically exercise all of such optionee's stock
options with no investment.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under the 1999
Plan. To date, options to purchase 1,162,400 shares of our common stock at
exercise prices of $2.75 per share, have been granted under the 1999 Plan.
58
<PAGE>
RELATED PARTY TRANSACTIONS
REORGANIZATION TRANSACTION
On March 19, 1999, Axicom issued a convertible debenture in the principal
amount of $500,000 to GEM France, S.A. (the "March Debenture"). The March
Debenture was convertible by its terms into 628,585 shares of our common stock.
GEM France subsequently assigned $50,000 principal amount of the March
Debenture to Turbo International Inc.
On April 6, 1999, in a series of related transactions, GEM France and
Turbo converted the March Debenture into 628,585 shares of our common stock as
part of the Axicom-American Ostrich transaction. Of this amount, 565,727
shares, or approximately 11.25% of the 5,025,042 shares outstanding after the
transaction, were issued to GEM France. In connection with the Axicom-American
Ostrich transaction, Axicom's shareholders received 3,875,000 shares, or 88% of
the issued and outstanding common stock of American Ostrich Corporation, on a
fully-diluted basis. Also, GEM Global Fund received 251,433 shares, or
approximately 5% of our fully-diluted common stock, as a fee for arranging for
and structuring this transaction. Immediately after this transacation, American
Ostrich Corporation reincorporated in Delaware and changed its name to
CallNOW.Com, Inc.
In June 1999, we issued to GEM Investments Ltd. a convertible debenture in
the principal amount of $479,000 (the "June Debenture"). The June Debenture was
issued in tandem with warrants entitling the holder to purchase 100,000 shares
of our common stock at an exercise price of $0.01 per share (the "GEM
Warrants"). In September 1999, GEM Investments Ltd. converted the June
Debenture into 343,662 shares of our common stock and exercised the GEM
Warrants for 100,000 shares of our common stock.
All of the shares of common stock issued or issuable to GEM France, Turbo,
GEM Investments Ltd. and certain other shareholders of American Ostrich
Corporation are exempt from registration under the Securities Act and are
freely tradable pursuant to Rule 504 of Regulation D promulgated under the
Securities Act.
As of the date of this prospectus, GEM France no longer owns any shares of
our common stock and GEM Investments Ltd. owns approximately 7% of our
outstanding common stock.
SEELBACH FINDER'S FEE
In November 1998, we entered into a finders fee agreement with Christopher
R. Seelbach, now our Chief Operating Officer and Acting Chief Financial
Officer. Pursuant to the finders fee agreement, Mr. Seelbach was to be paid
$35,000 in connection with the $500,000 extension of credit by one of our
suppliers. As of the date of this Prospectus, we still owe Mr. Seelbach this
$35,000 fee, which we intend to pay from the net proceeds of this offering. For
further information, see "Use of Proceeds" and "Management--Employment and
Consulting Agreements."
CASANOVA SALE OF TECHNOLOGY AGREEMENT
On July 28, 1999, we entered into an agreement with Smart Software, a
corporation controlled by Mr. Martin Casanova, now our Chief Technical Officer,
who designed our telephone switching software. The agreement provides that,
over a period of two years, Mr. Casanova will complete the documentation of the
software we acquired from Smart Software. Smart Software will receive an
aggregate of $400,000 in eight quarterly installments, $200,000 of which will
be paid in the next 12 months with the proceeds of this offering. In addition,
we purchased the Software for an aggregate of 30,000 shares of our common
stock. For further information, see "Management--Employment and Consulting
Agreements."
SALARY OWED TO SENIOR MANAGEMENT
As of December 31, 1999, we owed Messrs. Bardenheuer and Johnson an
aggregate of approximately $77,000 for accrued and unpaid salary relating to
1997, 1998 and 1999. In addition, we
59
<PAGE>
owed Mr. Seelbach an aggregate of approximately $55,000 for accrued and unpaid
compensation relating to 1998 and 1999. We intend to pay the foregoing amounts
out of the net proceeds of this offering. For further information, see "Use of
Proceeds."
LOANS FROM OFFICERS AND DIRECTORS
Mr. Johnson, our President, loaned us $100,000 in 1996. The loan bore
interest at 12% per year. In addition, we were responsible for any interest and
penalties incurred by Mr. Johnson arising from unpaid tax liabilities resulting
from a gain on marketable securities sold by him to fund the loan. During 1999,
this liability, including interest on the loan and any interest and penalties
arising from Mr. Johnson's income tax deficiency, were paid in full. Such
penalties and interest on the tax deficiency totaled approximately $13,000.
Such charges were included as interest expense in our financial statements.
Mr. Bardenheuer, our Chief Executive Officer, loaned us $100,000 in
January 2000. The loan is payable in the amount of $110,000 upon the
consummation of this offering with the proceeds of this offering.
ROPART Investments LLC, a stockholder that is affiliated with one of our
directors, loaned us $50,000 in January 2000. The loan is payable in the amount
of $55,000 upon the consummation of this offering with the proceeds of this
offering.
In connection with a $175,000 loan to us from Gorada Service Company, Inc.
in February 2000, each of Messrs. Johnson and Bardenheuer pledged 100,000
shares of our common stock as security for the loan.
OPTIONS GRANTED TO OUR FOUNDERS
In September 1999, Messrs. Bardenheuer and Johnson were each granted
options to purchase 300,000 shares of common stock at an exercise price of
$2.75 per share, pursuant to our stock option plan. For further discussion of
options we have granted, see "Management--Options Grants In Last Fiscal Year."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth certain information, as of February 28,
2000 and as adjusted to reflect the sale of 4,000,000 shares of common stock as
part of the 4,000,000 units by us in this offering, regarding beneficial
ownership of our common stock by (1) each director and executive officer, (2)
all persons known by us to beneficially own more than 5% of our common stock,
and (3) all directors and executive officers as a group. The principal
stockholders table gives effect to the shares of common stock that could be
issued upon the exercise of outstanding options and warrants which are or will
become exercisable within 60 days of the date of this prospectus. Unless
otherwise indicated in the footnotes to the principal stockholders table, the
following individuals have sole voting and sole investment control with respect
to the shares they beneficially own, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
PRINCIPAL STOCKHOLDERS
--------------------------------------------------------
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF OWNED PRIOR TO OWNED AFTER THE
BENEFICIAL OWNER OFFERING OFFERING
- ------------------------------------------- --------------------------- --------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Christian Bardenheuer (1), (2) ............ 969,539 15.35% 969,539 9.40%
Warner Johnson, Jr. (1), (2), (3) ......... 1,036,477 16.41% 1,036,477 10.05%
Christopher Seelbach (1), (4) ............. 193,750 2.98% 193,750 1.84%
Martin Casanova (1), (5) .................. 30,000 * 30,000 *
Todd A. Goergen (6)
c/o ROPART Investments LLC
100 Field Point Rd
Greenwich, CT 06830 ...................... 90,909 1.43% 90,909 *
Edward Cabot
c/o McAlpine Associates
394 Broadway, 5th Floor
New York, NY 10013 ....................... 125,510 1.99% 125,510 1.22%
Robert S. Tolmach, Jr.
c/o Verrazzano
Development Partners
330 East 38th Street
Apt. 54-O
New York, NY 10016 ....................... 9,090 * 9,090 *
GEM Global Yield Fund Limited
c/o Loughtan 8 Co. 38 Hertford
Street
London WIY 7TG ........................... 443,662 7.03% 443,662 4.30%
Upper Brook Ltd.
c/o Citco Bank and Trust Company
(Bahamas) Limited
P.O. Box CB-13136
Nassau Bahamas ........................... 507,272 8.03% 507,272 4.92%
Executive Officers and Directors as a
group (7 persons) (7) .................... 2,455,275 37.72% 2,455,275 23.36%
</TABLE>
61
<PAGE>
- ----------
* less than 1%
(1) Except as otherwise indicated, the address for the referenced
stockholders is c/o CallNOW.com, Inc., 50 Broad Street, New York, New
York 10004.
(2) Includes 100,000 shares that have been pledged as collateral to Gorada
Service Company, Inc. for the loan made by Gorada Service Company, Inc.
to us.
(3) Includes 33,469 shares of common stock held by Mr. Johnson's parents and
33,469 shares of common stock held by Mr. Johnson's brother. Mr. Johnson
disclaims beneficial ownership of such shares.
(4) Includes 193,750 shares of common stock which are issuable pursuant to
options exercisable within 60 days.
(5) Restricted shares which become vested in four semi-annual installments
commencing January 28, 2000.
(6) ROPART Investments LLC is the beneficial owner of 90,909 shares of common
stock and Mr. Goergen is a Manager of ROPART Investments LLC. Mr. Goergen
disclaims beneficial ownership of the shares of common stock held by
ROPART Investments LLC.
(7) See footnotes 2 through 6 above.
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<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of our capital stock and selected
provisions of our certificate of incorporation and bylaws is qualified in its
entirety by reference to our certificate of incorporation and bylaws.
COMMON STOCK
We are authorized to issue up to 50,000,000 shares of common stock, par
value $.001 per share, of which 6,314,366 shares are outstanding as of the date
of this prospectus. Holders of common stock are entitled to one vote for each
share held of record on each matter submitted to a vote of stockholders. There
is no cumulative voting for election of directors. Subject to the prior rights
of any series of preferred stock which may from time to time be outstanding, if
any, holders of common stock are entitled to receive ratably dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore and, upon our liquidation, dissolution or winding up, are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of accrued dividends and liquidation preferences on the preferred stock, if
any. Holders of common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. Our outstanding shares of
common stock are, and the shares offered by us in this offering will be, when
issued and paid for, fully paid and nonassessable.
WARRANTS
The warrants will be issued in registered form under, governed by, and
subject to the terms of a warrant agreement between Atlas Stock Transfer
Corporation, as warrant agent, and us. We have authorized the issuance of
5,000,000 redeemable common stock purchase warrants, which includes 600,000
warrants comprising part of the units issuable pursuant to the underwriters'
over-allotment option and 400,000 warrants included in the units issuable upon
exercise of the representatives' warrants. We have also reserved an equivalent
number of shares of common stock for issuance upon exercise of these warrants.
Each warrant entitles the registered holder to purchase one share of our
common stock. The exercise period commences twelve months from the effective
date of the registration statement of which this prospectus forms a part and
terminates 48 months thereafter. The warrant exercise price is equal to 150% of
the public offering price of the units per share. The warrant exercise price
and the number of shares issuable upon exercise of the warrants are subject to
adjustment as described below.
Commencing eighteen months from the effective date of the registration
statement of which this prospectus forms a part, we may redeem your warrants at
$0.10 per warrant when the average closing sale price for our common stock
equals or exceeds 200% of the public offering price of the units for any twenty
trading days within a period of thirty consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption. You will have
the right to exercise your warrants until the close of business on the date
fixed for redemption. If we redeem any of the warrants, then we must redeem all
of the warrants remaining unexercised at the end of the redemption period.
The warrants contain provisions that protect against dilution by
adjustment of the exercise price and the number of shares issuable upon
exercise in some events. These events include, but are not limited to:
o stock dividends;
o stock splits;
o reclassifications;
o mergers; or
o a sale of substantially all of our assets.
We do not intend to issue fractional shares of common stock, but will
round any fractional share up to the nearest whole share. Holders of warrants
will not possess any rights as a shareholder. The shares of common stock, when
issued upon the exercise of the warrants in accordance with their terms, will
be validly issued, fully paid and non-assessable.
63
<PAGE>
The warrants will be exchangeable and transferable on our books at the
principal office of the warrant agent. Holders may exercise their warrants by
surrendering warrant certificates on or prior to the close of business on ,
2005, unless earlier redeemed as noted above, at the offices of the warrant
agent. A holder must complete and execute the form of "Election to Purchase" on
the reverse side of the warrant certificate and make payment of the full
exercise price for the number of warrants being exercised. The exercise price
must be paid by cash, or by bank check, certified check or money order payable
to the order of the warrant agent. After warrants are exercised they will
become completely void and of no value. If a market develops for the warrants,
the holder may sell the warrants instead of exercising them. There can be no
assurance, however, that a market for the warrants will develop or, if
developed, will be sustained. No amendment adversely affecting warrant holders'
rights may be made without the approval of the holders of a majority of the
then outstanding warrants.
CONVERTIBLE DEBENTURES
In August 1999, we issued two 5% convertible debentures in the aggregate
principal amount of $1,276,300 that mature in August 2002. For the first six
months after issuance, we are only obligated to make interest payments.
Thereafter, we are obligated to repay the principal in thirty equal
installments, plus interest. However, the consummation of this offering will
accelerate our repayments to four equal monthly installments, provided the
debenture holder has so requested. The debentures are convertible at any time,
in whole or in part, at the option of the each debenture holder, into our
common stock. One debenture is convertible at an 80% discount to the average of
the closing bid prices of our common stock for the five trading days preceding
the conversion while the other is convertible at a 90% discount to such average
price. For both debentures, the conversion price cannot be less than $7.06. The
shares of common stock into which the debentures are convertible are subject to
transfer restrictions under the Securities Act of 1933, as amended, and under
the terms of the debenture. We have agreed that upon the earlier of nine months
from the date of issuance of each debenture or the filing of any registration
statement, at the holders' request, we will register all of the shares issuable
upon conversion of these debentures. The holders have waived their rights to
have such shares registered in connection with this offering.
REGISTRATION RIGHTS
We have agreed to register 494,672 shares on behalf of existing
stockholders within 90 days of the consummation of this offering, but such
shares are subject to a lock-up agreement of 180 days following the effective
date of the registration statement of which this prospectus forms a part. In
addition, after the closing of this offering, the holders of 90,909 outstanding
shares of common stock hold registration rights that allow them to "piggyback"
the registration of their shares under the Securities Act on future
registrations of our securities and holders of a maximum of 181,232 shares of
our common stock in the event of the conversion of our outstanding convertible
debentures have registration rights that allow them to "demand" the
registration of their shares under the Securities Act. Also, a holder of
options to purchase a maximum of 100,000 shares of our common stock holds
registration rights that allow the holder to (1) "demand" the registration of
its shares, once exercised, under the Securities Act and (2) "piggyback" the
registration of its shares, once exercised, under the Securities Act on future
registration of our securities. Accordingly, whenever we propose to register
any shares of our common stock under the Securities Act (other than
registrations on Forms S-4 or S-8), these stockholders have the right to
include their shares of common stock in that registration. However, the number
of shares that those stockholders may include in any registration will be
reduced if the underwriters for that offering advise us that the aggregate
number of shares should be reduced. We are generally obligated to bear all
expenses, other than underwriting discount and sales commissions, of the
registration of all shares of common stock of those stockholders. The
registration rights require those stockholders to indemnify us in some
circumstances. Registration of any of the shares of common stock held by
holders of registration rights generally would result in those shares becoming
freely tradable without restriction under the Securities Act immediately
following their distribution in the manner described in the applicable
registration statement.
64
<PAGE>
The holders of the representatives' warrants will have certain demand and
"piggyback" registration rights with respect to the shares of common stock
contained within the units issuable upon exercise of such representatives'
warrants, the warrants contained within the units exercisable upon exercise of
such representatives' warrants, and with respect to the shares of common stock
issuable upon exercise of the warrants contained within the units issuable upon
exercise of such representatives' warrants. The representatives' warrants
contain anti-dilution provisions providing for automatic adjustments of the
exercise price and the number of units issuable on exercise of the
representatives' warrants upon the occurrence of certain events, including
stock dividends, stock splits, mergers, acquisitions and recapitalizations. If
the representatives should exercise registration rights to effect the
distribution of the securities underlying the representatives' warrants, they
will be unable to make an active market in our securities prior to and during
such distribution. If they cease making a market in our securities, the market
and market prices for our securities may be materially adversely affected, and
holders thereof may be unable to sell or otherwise dispose of their securities.
For a detailed description of the representatives' warrants, see
"Underwriting."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that a
director of a corporation will not be personally liable for monetary damages
resulting from a breach of that individual's fiduciary duties as a director
except for liability for a breach of director's duty of loyalty, any act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of the law, unlawful payments of dividends or unlawful stock
repurchases or redemptions, or for any transaction from which the director
derived an improper personal benefit. This limitation of liability does not
apply to liabilities arising under federal securities laws and does not affect
the availability of equitable remedies such as injunctive relief or rescission.
Section 145 of the Delaware General Corporation Law permits
indemnification by a corporation of certain officers, directors, employees and
agents. Our bylaws contain provisions which require us to indemnify our
officers and directors against liabilities in their capacities as such to the
maximum extent permitted by law. We believe that the provisions of our
certificate of incorporation and bylaws described above are necessary to
attract and retain qualified persons as directors and officers.
We have also obtained a policy of insurance under which our directors and
officers will be insured, subject to the limits of the policy, against certain
losses arising from claims made against such directors and officers by reason
of any acts or omissions covered under such policy in their respective
capacities as directors or officers, including liabilities under the Securities
Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that,
in the opinion of the Commission, such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
DELAWARE ANTI-TAKEOVER LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 prohibits a Delaware corporation from engaging in
any "business combination" with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder, unless (1) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (2) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (for the purposes of determining the number of shares outstanding,
those shares owned (x) by persons who are directors and also officers and (y)
by employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender
65
<PAGE>
or exchange offer, are excluded from the calculation); or (3) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes (1) any
merger or consolidation involving the corporation and the interested
stockholder; (2) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder; (3)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (4) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or (5) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation. Section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
MARKET INFORMATION
From May 11, 1999 to July 30, 1999, our common stock was traded on the OTC
Bulletin Board. Since August 2, 1999, our common stock has traded in the Nasdaq
Quotation Bureau LLC's Pink Sheets. We filed an application to include our
units, common stock and warrants on the Nasdaq SmallCap Market under the
symbols "CALNU", "CALN", and "CALNW", respectively.
TRANSFER AGENT
Atlas Stock Transfer Corporation, 5899 South State Street, Murray, Utah
84107, is the Transfer Agent for our common stock.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the offering, we will have outstanding 10,314,666
shares of common stock, of which 5,758,595 shares, including the 4,000,000
shares offered hereby, will be freely tradable without restriction or further
registration under the Securities Act. Of the 5,758,595 freely tradable shares,
164,891 shares of outstanding common stock are being registered in the
registration statement of which this prospectus is a part, but are subject to
an agreement between the holders thereof and the representatives restricting
the sale thereof within 90 days from the date of this prospectus without the
prior written consent of the representatives. The remaining 4,556,071 shares of
common stock are "restricted securities," as that term is defined in Rule 144
under the Securities Act, and in the future may only be sold pursuant to a
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. Commencing in April 2000, substantially all of these restricted
securities will be eligible for sale in the public market pursuant to Rule 144
subject to the lock-up agreement described below. Also, we have agreed to
register 494,672 shares on behalf of existing stockholders within 90 days of
the consummation of this offering, but such shares are subject to a lock-up
agreement of 180 days following the effective date of the registration
statement of which this prospectus forms a part.
In general, under Rule 144, as currently in effect, a person, including a
person who may be deemed our "affiliate" as that term is defined under the
Securities Act, who has beneficially owned shares for at least one year would
be entitled to sell within any three-month period a number of shares that do
not exceed the greater of (1) 1% of the then outstanding shares of our common
stock, or (2) the average weekly trading volume of our common stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are further
subject to certain restrictions relating to the manner of sale, notice and the
availability of current public information about us. After two years have
elapsed from the date of the issuance of restricted securities by us or their
acquisition from an affiliate, such shares may be sold without limitation by
persons who have not been our affiliates for at least three months.
We have agreed with the representatives of the underwriters to use our
best efforts to have all of our officers and directors, all holders of
restricted shares of our common stock, all holders of our options and all
holders of other convertible securities of ours agree not to sell for a period
of 180 days after the effective date of the registration statement of which
this prospectus forms a part without the prior written consent of the
representatives of the underwriters, and to agree to make any sale of our
securities owned by them through the representatives of the underwriters for a
period of twelve months following the effective date of such registration
statement. In addition, we have agreed not to sell or offer for sale any of our
securities for cash at less than the greater of the public offering price of
the units or the then market price of the units for a period of twelve months
following the effective date of such registration statement, except for
pursuant to the exercise of options existing on the date hereof, as adjusted
for stock splits and consolidations, without the prior written consent of the
representatives of the underwriters.
No prediction can be made as to the effect, if any, that sales of
securities, or whether pursuant to Rule 144 or otherwise, the availability of
such securities for sale, will have on the market prices prevailing from time
to time for our common stock. However, even the possibility that a substantial
number of our securities may, in the near future, be sold in the public market
may adversely affect prevailing market prices for the common stock and could
impair our ability to raise capital through the sale of our equity securities.
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement between ourselves and the underwriters named below, we have agreed to
sell an aggregate of 4,000,000 units to the underwriters named below, for whom
Dirks & Company, Inc. and Nolan Securities Corporation are acting as the
representatives, and the underwriters have severally agreed to purchase the
number of units set forth opposite their respective names in the table below at
the offering price, less the underwriting discount set forth on the cover page
of this prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
- -------------------------------------------- ----------------
<S> <C>
Dirks & Company, Inc. .................
Nolan Securities Corporation ..........
Total ................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligation of the
underwriters to purchase the units is subject to certain conditions. The
underwriters are committed to purchase all of the units, other than those units
covered by the over-allotment option described below, if any are purchased.
The underwriters propose to offer the units to the public initially at the
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $ per unit.
The underwriters may allow, and such dealers may reallow, discounts not in
excess of $ per unit; and the underwriters may allow, and such dealers may
reallow, a concession of not more than $ per unit to certain other dealers.
After this offering, the public offering price, the concession to selected
dealers and the reallowance to other dealers may be changed by the
representatives of the underwriters.
We have also granted to the underwriters, exercisable for 45 days from the
date of this prospectus, an option to purchase up to 600,000 additional units
at the public offering price less the underwriting discount. To the extent such
option is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase additional units proportionate to such underwriters'
initial commitment as indicated in the preceding table. The underwriters may
exercise such right of purchase only for the purpose of covering
over-allotments, if any, made in connection with the sale of the units.
We have also granted to the representatives of the underwriters, and their
respective designees, for nominal consideration, the representatives' warrants
to purchase up to an aggregate of 400,000 units. The representatives' warrants
will be exercisable for a period of forty-eight months, commencing twelve
months after the effective date of the registration statement of which this
prospectus forms a part, at an initial exercise price equal to 120% of the
public offering price of the units per share. The representatives' warrants are
not redeemable by us under any circumstances. The representatives' warrants
will contain anti-dilution provisions for appropriate adjustment of the
exercise price and number of units which may be purchased upon the occurrence
of certain events, including the issuance of stock dividends, stock splits,
subdivisions or combinations of outstanding stock and reclassifications. The
representatives' warrants grant to the holders thereof certain demand and
piggyback registration rights for securities issuable upon exercise thereof.
We have agreed to pay the representatives a non-accountable expense
allowance equal to 3% of the gross proceeds received by us from the sale of the
units offered hereby less a $50,000 advance on such expense allowance
previously paid by us to a predecessor of the underwriters. We have also agreed
to pay certain expenses in connection with this offering, including expenses in
connection with qualifying the units offered hereby for sale under the laws of
such states as the Underwriters may designate and the placement of tombstone
advertisements.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect thereof.
68
<PAGE>
We have agreed to grant to Dirks & Company, Inc., one of the
representatives of the underwriters, a right of first refusal for a period of
three years after the effective date of the registration statement of which
this prospectus forms a part for any sale of our securities by us. We have also
agreed to grant Dirks the right to designate for election one person to our
board of directors for a period of five years after such effective date. In the
event Dirks elects not to exercise such right, then it may designate one person
to attend our board of directors meetings. Such person shall be entitled to
attend all such meetings and to receive all notices and other correspondence
and communications sent by us to members of our board of directors. We have
agreed to reimburse designees of Dirks for their out-of-pocket expenses
incurred in connection with their attendance of our board of directors
meetings.
We have agreed with the representatives of the underwriters to use our
best efforts to have all of our officers and directors, all holders of
restricted shares of our common stock, all holders of our options and all
holders of other convertible securities of ours agree not to sell for a period
of 180 days after the effective date of the registration statement of which
this prospectus forms a part without the prior written consent of the
representatives of the underwriters, and to agree to make any sale of our
securities owned by them through the representatives of the underwriters for a
period of twelve months following the effective date of such registration
statement. In addition, we have agreed not to sell or offer for sale any of our
securities for cash at less than the greater of the public offering price of
the units or the then market price of the units for a period of twelve months
following the effective date of such registration statement, except for
pursuant to the exercise of options existing on the date hereof, as adjusted
for stock splits and consolidations, without the prior written consent of the
representatives of the underwriters.
Although our common stock is traded in the National Quotation Bureau,
LLC's Pink Sheets, such trading has been limited and sporadic. For more
information on the high and low ask prices per share of our common stock, see
"Price Range of Common Stock." The offering price of the units will be
determined by negotiation between us, the selling stockholders and the
representatives of the underwriters. Factors to be considered in such
negotiation, in addition to the prices prevailing in the National Quotation
Bureau, LLC's Pink Sheets, include the history of and prospects for the
industry in which we compete, an assessment of our management, our prospects,
our capital structure and the general condition of the securities markets at
the time of this offering. The public offering price of the units does not
necessarily bear any relationship to our assets, net worth, earnings, book
value, or other criteria of value applicable to us and should not be considered
an indication of the actual value of the units or underlying common stock and
warrants. Such price is subject to change as a result of market conditions and
other factors, and the units may not be able to be resold at the offering
price.
During and after this offering, the underwriters may purchase and sell
common stock and warrants in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the offering. The underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the units sold in the offering
for their account may be reclaimed by the syndicate if such units are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
units which may be higher than the price that might otherwise prevail in the
open market. Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the units. In addition, neither we nor
any of the underwriters makes any representation that the underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued at any time.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon by Stairs
Dillenbeck & Finley, New York, New York and Swidler Berlin Shereff Friedman,
LLP has acted as regulatory counsel to us in connection with certain matters.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Orrick, Herrington & Sutcliffe LLP, New York, New York.
69
<PAGE>
EXPERTS
Our financial statements and schedules as of December 31, 1999 and 1998
and for each of the three years in the period ended December 31, 1999, included
in this prospectus and elsewhere in the registration statement, have been
audited by Horton & Company, L.L.C., independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
On March 30, 1999, we dismissed Ernst & Young LLP as our independent
public accountants and auditors, a capacity in which that firm had served for
approximately one and one-half years, and selected Horton & Company, LLC to
replace Ernst & Young in this role. The decision to dismiss our accountants and
auditors was approved by our full Board of Directors.
During the fiscal year ended December 31, 1996 and the subsequent period
through March 30, 1999, the date on which Ernst & Young was dismissed as our
independent public accountants and auditors, there were no disagreements
between us and Ernst & Young on any matter relating to accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which if not resolved to Ernst & Young's satisfaction would have caused it to
make reference to the subject matter of disagreement in connection with its
report. In addition, Ernst & Young's report on the Company's financial
statements for the fiscal year ended December 31, 1996 contained no adverse
opinions or disclaimers of opinion, nor were such reports qualified as to audit
scope or accounting principles.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act, with respect to the common
stock offered hereby. This prospectus does not contain all of the information
set forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to us and our common stock, reference is hereby made
to the Registration Statement which may be examined without charge at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, NW, Washington, DC 20549. Copies thereof may be obtained from the
Commission upon payment of the prescribed fees. Statements contained in this
prospectus as to the contents of any contract, agreement, or other document
referred to herein are not necessarily complete, and in each instance, if such
contract, agreement or other document is filed as an exhibit to the
Registration Statement, each such statement is qualified in all respects by
reference to such exhibit.
Upon completion of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, NW, Washington, DC 20549, and at the Commission's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048;
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Electronic
filings made via EDGAR are publicly available through the Commission's Web site
at http://www.sec.gov. Copies of such material can be obtained at prescribed
rates by writing to the Public Reference Section of the Commission, Room 1024,
450 Fifth Street, NW Washington, DC 20549.
70
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditors' Report .......................................... F-2
Consolidated balance sheets as of December 31, 1998 and 1999 .......... F-3
Consolidated statements of operations for the years ended
December 31, 1997, 1998 and 1999 ..................................... F-4
Consolidated statements of stockholders' deficit for the years ended
December 31, 1997, 1998 and 1999 ..................................... F-5
Consolidated statements of cash flows for the years ended
December 31, 1997, 1998 and 1999 ..................................... F-6
Notes to consolidated financial statements ............................ F-7 -- F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
CallNOW.com, Inc. and subsidiary
New York, New York
We have audited the accompanying consolidated balance sheets of CallNOW.com,
Inc. and subsidiary as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CallNOW.com, Inc. and subsidiary at December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
CallNOW.com, Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses, has a working
capital deficiency, and has a net capital deficiency. These conditions 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 1. The
financial statements do not include any adjustment to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
HORTON & COMPANY, LLC
Wayne, New Jersey
February 2, 2000, except for the last two paragraphs
of Note 10, as to which the date is February 16, 2000
F-2
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................... $ 7,565 $ 80,542
Accounts receivable, net of allowances of $6,000 in 1998,
and $5,000 in 1999 ........................................... 122,700 29,056
------------ ------------
Total current assets .......................................... 130,265 109,598
Property and equipment, net of accumulated depreciation ......... 512,303 1,085,744
Other assets .................................................... 36,785 996,763
------------ ------------
Total assets .................................................. $ 679,353 $ 2,192,105
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt .............................. $ 128,688 $ 19,069
Accounts payable and accrued expenses .......................... 1,034,382 1,988,051
Loan payable--officer ........................................... 87,231 --
------------ ------------
Total current liabilities ..................................... 1,250,301 2,007,120
Long-term debt, net of current portion ......................... 19,069 --
Other long-term liabilities .................................... 1,337,957 1,090,867
------------ ------------
Total liabilities ............................................. 2,607,327 3,097,987
------------ ------------
Stockholders' deficit:
Common stock, $.001 per value
50,000,000 shares authorized
3,875,000 shares issued and outstanding in 1998
6,314,666 shares issued and outstanding in 1999 .............. 3,875 6,315
Additional paid-in capital ..................................... 837,059 4,974,759
Accumulated deficit ............................................ (2,768,908) (5,886,956)
------------ ------------
Total stockholders' deficit ................................... (1,927,974) (905,882)
------------ ------------
Total liabilities and stockholders' deficit ................... $ 679,353 $ 2,192,105
============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- ---------------
<S> <C> <C> <C>
Net sales .......................................... $5,010,027 $2,295,202 $ 1,004,636
Cost of sales ...................................... 4,293,524 1,681,978 662,160
---------- ---------- ------------
Gross profit ....................................... 716,503 613,224 342,476
---------- ---------- ------------
Operating expenses:
Administrative .................................... 570,500 518,546 1,104,074
Sales and marketing ............................... 807,989 438,430 739,695
Technical ......................................... 143,134 101,330 294,863
Stock-based finders' fees ......................... -- -- 480,610
Depreciation and amortization ..................... 53,651 105,860 222,491
---------- ---------- ------------
Total operating expenses ......................... 1,575,274 1,164,166 2,841,733
---------- ---------- ------------
Loss from operations ............................... (858,771) (550,942) (2,499,257)
Interest expense ................................... (58,568) (90,436) (618,791)
---------- ---------- ------------
Net loss ........................................... $ (917,339) $ (641,378) $ (3,118,048)
========== ========== ============
Net loss per share ................................. $ (0.24) $ (0.17) $ (0.60)
========== ========== ============
Weighted average common shares outstanding ......... 3,875,000 3,875,000 5,157,964
========== ========== ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- -------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997, as
restated for reverse acquisition
accounting .......................... 3,857,377 $3,857 $ 825,546 $ (1,210,191) $ (380,788)
Shares issued during 1997 ............ 17,623 18 11,513 -- 11,531
Net loss ............................. -- -- -- (917,339) (917,339)
--------- ------ ---------- ------------ ------------
Balance, December 31, 1997 ........... 3,875,000 3,875 837,059 (2,127,530) (1,286,596)
Net loss ............................. -- -- -- (641,378) (641,378)
--------- ------ ---------- ------------ ------------
Balance, December 31, 1998 ........... 3,875,000 3,875 837,059 (2,768,908) (1,927,974)
Shares issued during 1999 ............ 2,439,666 2,440 4,137,700 -- 4,140,140
Net loss ............................. -- -- -- (3,118,048) (3,118,048)
--------- ------ ---------- ------------ ------------
Balance at December 31, 1999 ......... 6,314,666 $6,315 $4,974,759 $ (5,886,956) $ (905,882)
========= ====== ========== ============ ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
-------------- -------------- ----------------
<S> <C> <C> <C>
Net loss ................................................ $ (917,339) $ (641,378) $ (3,118,048)
---------- ---------- ------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 53,651 105,860 222,491
Bad debts ............................................ 197,109 59,458 77,224
Stock-based compensation ............................. 11,531 -- 53,194
Stock-based finders' fees ............................ -- -- 480,610
Interest charges arising from discounts on
convertible debentures .............................. -- -- 552,543
Changes in operating assets and liabilities: .........
Accounts receivable ................................. (176,800) 85,116 16,420
Other assets ........................................ 36,538 (3,081) 13,579
Prepaid advertising ................................. -- -- (342,800)
Accounts payable .................................... 906,593 (549,794) 978,669
Other long-term liabilities ......................... (56,762) 1,137,957 (597,090)
Total adjustments ................................... 971,860 835,516 1,454,840
Net cash provided by (used in) operating
activities ....................................... 54,521 194,138 (1,663,208)
---------- ---------- ------------
Cash flows from investing activities:
Capital expenditures ................................... (168,556) (140,328) (363,432)
Deferred offering costs ................................ -- -- (584,996)
---------- ---------- ------------
Net cash used in investing activities ............. (168,556) (140,328) (948,428)
---------- ---------- ------------
Cash flows from financing activities:
Proceeds from long-term debt financing ............... 100,000 -- --
Principal payments on loan obligations ............... (38,040) (114,203) (128,688)
Proceeds from officer loans (repayments) ............. 88,647 (39,874) (87,231)
Proceeds from issuance of convertible debt ........... -- -- 979,000
Proceeds from issuance of stock ...................... -- -- 1,921,532
---------- ---------- ------------
Net cash provided by (used in) financing
activities ....................................... 150,607 (154,077) 2,684,613
---------- ---------- ------------
Net increase (decrease) in cash ......................... 36,572 (100,267) 72,977
Cash, beginning of period ............................... 71,260 107,832 7,565
---------- ---------- ------------
Cash, end of period ..................................... $ 107,832 $ 7,565 $ 80,542
========== ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................... $ 32,430 $ 75,193 $ 45,072
========== ========== ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of CallNOW.com, Inc.
(hereinafter "CallNOW" or the "Company") is presented to assist in
understanding the financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
Effective April 6, 1999, pursuant to the terms of a plan of
reorganization, American Ostrich Corporation ("AOC") acquired all of the
outstanding common stock of AXICOM Communications Group, Inc. ("Axicom"), a New
York corporation, in exchange for 3,875,000 unregistered shares of AOC's common
stock. As a result of the transaction, the former shareholders of Axicom
received shares representing an aggregate of 88% of AOC's outstanding common
stock, resulting in a change in control of AOC. As a result of the merger,
Axicom became the wholly-owned subsidiary of AOC. Simultaneously therewith, AOC
amended its articles of incorporation to reflect a change in name to
CallNOW.com, Inc. ("CallNOW"), a Delaware corporation. References to the
"Company" refer to CallNOW together with its predecessor, Axicom.
The acquisition of Axicom by AOC has been accounted for as a reverse
acquisition. Under the accounting rules for a reverse acquisition, Axicom is
considered the acquiring entity and AOC the acquired entity. As a result,
historical financial statements presented for periods prior to the date of the
transaction are those of Axicom. However, the capital structure has been
retroactively restated to reflect the number of shares received by Axicom
shareholders in the acquisition and AOC's par value. Under purchase method
accounting, balances and results of operations of AOC (now CallNOW) have been
included in the Company's financial statements from the date of the
transaction, April 6, 1999.
In the reverse acquisition, the Company recorded assets and liabilities at
their historical cost basis which was deemed to approximate fair market value.
The reverse acquisition transaction is treated as a non-cash transaction,
except to the extent of cash acquired, since all consideration given was in the
form of common stock. Proforma results of operations (assuming the business
combination had been effected in January 1997) are not presented because AOC
was inactive for the periods presented. As a result, proforma results of
operations for the years ended December 31, 1997, 1998 and 1999, would be no
different than the historical statements of operations presented herewith.
BUSINESS ACTIVITY
The Company began operations in 1995 as Axicom Communications Group, Inc.
which provided low-cost, international telephone service globally. The
Company's principal operations were in providing clients in overseas locations
with low-cost communication originated from a U. S. switch. The vast majority
of the Company's traffic is generated from small-to mid-sized businesses and
individuals. In addition, the Company has been involved in wholesale
arrangements with accounts in France and Hong Kong.
F-7
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1997, the Company changed its principal strategy to that of
providing multiple telephone services using the Internet. In 1998, the Company
filed a patent for its proprietary Internet software which provides automated,
instant sign-up for services, real-time monitoring of call detail reports, and
on-line billing. The Company operates from its offices and switching facility
in New York City's financial district.
To market its services, CallNOW has developed an international affiliate
network of Internet search engines, Web-based e-commerce retailers and
telecom-related web sites where customers click for immediate sign up for
global telephone services. Affiliates are compensated on a revenue-sharing
basis derived from the usage of customers that have signed up for service from
their sites. The Company generates business from Europe (approximately 59%),
North America (approximately 16%), Latin America (approximately 13%) and Asia
and the rest of the world (approximately 12%).
GOING CONCERN
The Company's initial capitalization provided the necessary funds to set up
the platform to provide services for clients. The cash flows from results of
operations were intended to be used for development and growth. The Company has
incurred operating losses, has a working capital deficiency and a net capital
deficiency as of December 31, 1997, 1998 and 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern for
the next fiscal year. Management's plans in regard to these matters include
raising additional capital through private placements of convertible debt and
equity and through a planned public offering of the Company's common stock.
REVENUE RECOGNITION
The Company recognizes revenue on sales when services are performed.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on the
straight-line basis using the estimated useful lives of the assets which range
from three to ten years.
INTERNET-ASSISTED RETURNCALL SOFTWARE
During November 1998, the Company acquired the rights, including the
copyright, to certain computer software and related documents. The software
enables customers and the Company to perform a series of tasks in real time.
Such procedures can be accessed from the Company's Internet Web site and
interact with the Company's database and telecommunications switch in order to
provide the following features:
o Automatic sign-up of customers, including
o Credit card authorization
o Customer account creation on the Company's database
o Activation with the telecommunications switch to enable immediate
access to the service
o Customer survey of country specific rates
o Customer review of call detail reports
o Automatic monthly invoicing to customers via e-mail
F-8
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Trigger call back service through the Internet.
The Company has submitted an application for a patent on this software.
INTERNAL-USE COMPUTER SOFTWARE
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which provides
guidance on when costs incurred for internal-use software should be
capitalized. SOP 98-1 is effective for financial statements with fiscal years
beginning after December 15, 1998, although earlier application is encouraged.
The Company elected to adopt the guidance in this pronouncement effective for
the year ended December 31, 1998. In accordance with the guidance provided by
SOP 98-1, the Company has capitalized internal and external costs to develop or
obtain internal use software during the application development stage. The
costs of upgrades and enhancements to internal-use software are also
capitalized when it is probable that such expenditures will result in
additional functionality. Costs incurred during the preliminary project stage
are expensed as incurred, as are training and maintenance costs.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of accounts receivable. The
Company's policies do not require collateral to support accounts receivable.
However, because of the diversity and credit worthiness of individual accounts
which comprise the total balance, management does not believe that the Company
is subject to any significant credit risk.
At December 31, 1999, the Company had accounts receivable from two
customers which represented 38% and 15% of the accounts receivable at that
date. At December 31, 1998, the Company had accounts receivable from one
customer which represented 18% of the accounts receivable balance at that date.
During 1999, one customer represented approximately 14% of the Company's
revenues. During 1998, two customers represented approximately 25% and 17%,
respectively, of the Company's revenues. The same two customers accounted for
approximately 49% and 12%, respectively, of the Company's revenues in 1997.
GEOGRAPHIC INFORMATION
The Company operates primarily in four geographic regions, the United
States, Europe, Latin America and the Far East. The following is a summary of
local operations for countries from where the Company derives significant
revenues.
F-9
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
United States ................................... 3% 4% 6%
Honduras ........................................ 12% 9% 10%
France .......................................... 9% 6% 6%
Germany ......................................... 3% 6% 9%
Austria ......................................... 2% 8% 7%
Other foreign countries (each under 7%) ......... 71% 67% 62%
-- -- --
Total ........................................... 100% 100% 100%
=== === ===
</TABLE>
Revenues are attributed to countries based on location of customer. There
are no long-lived assets outside of the United States.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's receivables and payables are current and on normal terms
and, accordingly, are believed by management to approximate fair value.
Management also believes that long-term debt obligations approximate fair value
when current interest rates for similar debt securities are applied.
SUPPLEMENTARY DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company financed property and equipment purchases as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
------ ------------- ------------
<S> <C> <C> <C>
Property and equipment purchased ......... $-- $ 340,328 $ 795,932
Long-term liability incurred ............. -- (200,000) (350,000)
Stock issued ............................. -- -- (82,500)
--- ---------- ----------
Capital expenditures ..................... $-- $ 140,328 $ 363,432
=== ========== ==========
</TABLE>
During the year ended December 31, 1999, convertible debentures of
$979,000 were converted into 972,247 shares of the Company's common stock.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average number of shares of common stock
outstanding during the period.
F-10
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ --------------
<S> <C> <C>
Telecommunications equipment ........... $ 132,778 $ 200,223
Software ............................... 541,411 1,239,010
Office furniture and equipment ......... 21,057 51,946
---------- ----------
695,246 1,491,179
Less accumulated depreciation .......... (182,943) (405,435)
---------- ----------
Net property and equipment ............. $ 512,303 $1,085,744
========== ==========
</TABLE>
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred offering costs ......... $ -- $584,996
Prepaid advertising ............. -- 342,800
Other ........................... 36,785 68,967
------- --------
$36,785 $996,763
======= ========
</TABLE>
Prepaid advertising costs are amortized as advertising services are
provided. See Note 8.
Costs incurred in connection with the Company's registration statement and
planned public offering of its common stock have been capitalized as deferred
offering costs. If such offering is successful, the costs will be charged
against the proceeds of the offering. If such offering is not successful, such
costs will be expensed.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ---------
<S> <C> <C>
Note to a finance company, payable in monthly
installments of $7,750, including principal and
interest through January 2000 .................... $ 94,033 $ 7,673
Note to a finance company, payable in monthly
installments of $3,875, including interest at 12%,
through March 2000 ............................... 53,724 11,396
-------- -------
147,757 19,069
Less current portion ............................... 128,688 19,069
-------- -------
$ 19,069 $ --
======== =======
</TABLE>
F-11
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
As of December 31, 1999, maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------
<S> <C>
2000 ......... $19,069
=======
</TABLE>
The notes are secured by substantially all of the Company's assets and by
the collateral assignment of life insurance on the lives of Messrs. Bardenheuer
and Johnson (two of the Company's officers and stockholders) in the amount of
$250,000 each. In addition, the loans are subject to a number of affirmative
and negative covenants. The Lender also received warrants to purchase up to
2.9% of the Company's common stock. Such warrants are exercisable for a period
of ten years from the original date of the loans for total consideration of
$999. Such warrants include anti-dilutive provisions. During May 1999, the
above warrants were exercised, resulting in the issuance of 114,109 shares of
the Company's common stock.
5. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------- -------------
<S> <C> <C>
Payable to an individual for purchase of Internet assisted
ReturnCall software (Note 1). The liability is payable in four
semi-annual installments of $43,750 and a fifth payment of $25,000
due 90 days thereafter. The first payment is due based on the
delivery date of user manuals related to the software technology.
As of the date of this report, such manuals had not been delivered.
Therefore, the earliest date for the initial installment would be due
no sooner than July 2001. $ 200,000 $ 140,000
Payable to a trade creditor under a $700,000 credit line. The trade
credits are collateralized by a security interest in substantially all of
the Company's assets. This trade payable was exchanged for a
long-term convertible debenture during August 1999. 629,203 --
Payable to a trade creditor under a $576,300 credit line. This trade
payable was exchanged for a long-term convertible debenture
during August 1999. 576,297 --
5% convertible debentures. Interest only is payable through March
2000. Thereafter, principal is payable in 30 equal monthly
installments plus interest. -- 1,276,300
Payable to a corporation in six quarterly installments of $50,000,
without interest, commencing August 1999. -- 300,000
Payable to a corporation in quarterly installments of $50,000,
without interest, commencing November 1999. -- 300,000
---------- ----------
1,405,500 2,016,300
Less: current portion included in accounts payable 67,543 925,433
---------- ----------
$1,337,957 $1,090,867
========== ==========
</TABLE>
In the event that the Company raises a minimum of $5,000,000 in debt or
equity, the holders of the convertible debentures have the right to have its
debt and accumulated interest paid in four equal
F-12
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
5. OTHER LONG-TERM LIABILITIES (CONTINUED)
monthly installments. The debentures are convertible at any time, in whole or
in part, at the option of the creditor, into common stock of the Company at a
discount to the average closing bid price of the Company's stock for five
trading days preceding the conversion, but not less than $7.06. Such conversion
shares are subject to transfer restrictions under the Securities Act of 1933
and under the terms of the agreement. The Company agreed that upon the earlier
of nine months from the issuance of the convertible debenture, or the filing of
any registration statement, that it will register all of the conversion shares
at each creditor's option.
Because the debentures had a beneficial conversion feature which enables
the holders to convert at a discount to the market price of the Company's
common stock, a deferred charge of $76,969 has been recorded. Such charge is
being amortized as a charge to interest expense over the estimated nine month
period the debentures are expected to be outstanding. For the year ended
December 31, 1999, the Company recorded a charge to interest expense of $34,208
related to such discount, leaving a balance in the deferred charge of $42,761.
At December 31, 1999, estimated maturities of other long-term liabilities
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------
<S> <C>
2000 ......... $ 925,433
2001 ......... 629,270
2002 ......... 384,097
2003 ......... 77,500
----------
$2,016,300
==========
</TABLE>
6. LOAN PAYABLE--OFFICER
Loan payable--officer represents an unsecured demand loan payable to one
of the Company's officers. The loan bears interest at 12%. The loan was repaid
during 1999. Interest and other expenses incurred by the Company in connection
with this loan totaled $26,137, $12,093 and $5,141 for 1997, 1998 and 1999,
respectively.
7. STOCKHOLDERS' DEFICIT
CAPITALIZATION
As discussed in Note 1, on April 6, 1999, the Company issued 3,875,000
shares of its common stock in connection with the reverse acquisition of
Axicom. The total shares of common stock issued and outstanding immediately
subsequent to the business combination was 4,396,457. The capital structure for
all periods presented has been retroactively restated to assume the capital
structure of CallNOW. The number of common shares shown outstanding is based on
the number of common shares received by shareholders of Axicom in connection
with such reverse acquisition (3,875,000 shares).
OPTIONS AND WARRANTS
In addition to the options and warrants issued in conjunction with a
long-term debt obligation (Note 4) and a consulting agreement (Note 8), the
seller of software technology described in Note 1 received 10,000 shares of the
Company's common stock in lieu of a $25,000 payment.
F-13
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
CONVERTIBLE DEBENTURES
During March 1999, the Company sold $500,000 of 2% convertible debentures,
due April 2004. The debentures and any unpaid interest thereon are convertible
into shares of the Company's common stock at the option of the holders. The
conversion price shall be the lesser of an amount which results in the
debentures being converted into 12.5% of the fully diluted common stock or 80%
of the average closing bid price for the Company's common stock for the seven
trading days immediately preceding the conversion. Such shares issued in
conversion shall not exceed 628,585 shares. The debentures contain
anti-dilutive provisions. During May 1999, the debentures were converted in
full into 628,585 shares of the Company's common stock.
Because the debentures had a beneficial conversion feature which enabled
the holders to convert at a discount to the market price of the Company's
common stock, an additional interest charge of $128,585 has been recorded for
the year ended December 31, 1999.
During June 1999, the Company issued $479,000 of convertible debentures
along with warrants entitling the holder to purchase 100,000 shares of the
Company's common stock at an exercise price of $.01 per share. During September
1999, the debentures were converted into 343,662 shares of the Company's common
stock and the warrants to purchase 100,000 shares were exercised. Because the
warrants were exercisable at a price which was $2.74 below the estimated market
price of $2.75 per share, $274,000 of the proceeds received from the debenture
were allocated to the value of the warrants and recorded as additional paid in
capital. This resulted in the convertible debt being issued at a $273,000
discount to the face value. In addition, because the debentures are convertible
at a discount to the market price of the Company's stock, there is an
additional discount of $119,750. These discounts were recorded as a charge to
interest expense during the year ended December 31, 1999.
PRIVATE PLACEMENTS
During July 1999, the Company completed a private placement of 545,454
shares of its common stock at a price of $2.75 per share, raising an aggregate
of $1,500,000 of equity. In September 1999, the Company issued an additional
146,399 shares of its common stock at a price of $2.75 per share, in private
placement transactions which raised a total of $402,597.
OPTIONS GRANTED TO CONSULTANT
Through April 1999, the consultant described in Note 8 was granted options
to purchase 226,049 shares of the Company's common stock. The Company has
accounted for the fair value of the options granted to the consultant in
accordance with SFAS 123. Fair value is estimated based on the Black-Scholes
option-pricing model with the following weighed average assumptions used for
grants: dividend yield of zero; expected volatility of 30%; risk-free interest
rate of 6%; and expected lives of one year. The fair value is recognized as
compensation cost over the vesting period of the options. Compensation costs
arising from such grants totals $31,570 for the year ended December 31, 1999. A
summary of options granted to the consultant, are as follows:
F-14
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
DATE OF DATE OPTIONS EXERCISE
GRANT VESTED GRANTED PRICE
--------------- ---------------- ------------ ---------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1999 ......... November 1998 May 1999 96,875 $ 1.00
March 1999 September 1999 96,875 $ 1.00
March 1999 March 2000 31,429 $ 0.80
April 1999 April 2000 870 $ 0.01
------
Outstanding at December 31, 1999 ....... 226,049
=======
Options exercisable at
December 31, 1999 ..................... 183,750
-------
Weighed average fair value of
options granted during the year
ended December 31, 1999 ............... $ 0.15
---------
</TABLE>
1999 STOCK OPTION PLAN
In September 1999, the Company's Board of Directors adopted the 1999 Stock
Option Plan. The 1999 Plan was subsequently approved by the Company's
stockholders.
The 1999 Plan provides for the grant of options to purchase up to, but not
in excess of, 2,200,000 shares of common stock to the Company's officers,
directors, agents, consultants and independent contractors. Options may be
either "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or non-qualified options. Incentive
stock options may be granted only to our employees and employees of our
subsidiary, while non-qualified options may be granted to such persons and to
non-employee directors and consultants.
The 1999 Plan is administered by the Company's Board of Directors or by
the Compensation Committee of the Board of Directors (the "Administrator"),
which determines, among other things, those individuals who receive options,
the time period during which the options may be exercised, the number of shares
of common stock issuable upon the exercise of each option and the option
exercise price. The exercise price per share of common stock subject to an
incentive stock option may not be less than the fair market value per share of
common stock on the date the option is granted (110% in the case of an
incentive stock option granted to a person who owns, directly or indirectly, at
the time of the granting of an incentive stock option to such person, 10% or
more of the total combined voting power of all classes of the Company's stock
(a "10% Shareholder")). The exercise price per share of the common stock
subject to a non-qualified option may be established by the Administrator. The
aggregate fair market value, determined as of the date the option is granted,
of common stock for which any person may be granted incentive stock options
which first become exercisable in any calendar year cannot exceed $100,000.
No stock option may be transferred by an optionee other than by will or
the laws of descent and distribution, and, during the lifetime of an optionee,
the option will be exercisable only by the optionee. In the event of
termination of employment other than by death, retirement or permanent and
total disability, the optionee will have no more than three months after such
termination during which the optionee shall be entitled to exercise all or any
part of such employee's option, unless otherwise determined by the
Administrator. Upon termination of employment of an optionee by reason of
death, retirement or permanent or total disability, such optionee's options
remain exercisable for one year thereafter to the extent such options were
exercisable on the date of such termination.
F-15
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
Options under the 1999 Plan must be issued within ten years from the
effective date of the Plan. Incentive stock options granted under the 1999 Plan
cannot be exercised more than ten years from the date of grant (five years in
the case of an incentive stock option granted to a 10% Shareholder). All
options granted under the 1999 Plan will provide for the payment of the
exercise price in cash or check or by delivery to the Company of shares of
common stock having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods, or by such other
methods approved by the Administrator pursuant to the 1999 Plan. Therefore, an
optionee may be able to tender shares of common stock to purchase additional
shares of common stock and may theoretically exercise all of such optionee's
stock options with no investment.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1999 Plan. During 1999, options to purchase 998,400 shares of the Company's
common stock at exercise prices of $2.75 per share were granted under the 1999
Plan. Such grants included options to purchase 300,000 shares granted to each
of Messrs. Bardenheuer and Johnson, two of the Company's officers and
stockholders. In addition, the Company granted options to purchase a total of
30,000 shares to its three outside directors at an exercise price of $2.75.
Such options vest ratably over a three-year period.
Also, the Company granted non-plan options to its Chief Operating Officer.
Such options vest one year after the date of the grant and are exercisable for
a five-year period.
The following is a summary of employee stock option transactions during
the year ended December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NON-PLAN PLAN AVERAGE
OPTIONS OPTIONS EXERCISE PRICE
---------- --------- ---------------
<S> <C> <C> <C>
Granted -- June 1999 ..................... 17,183 -- $ 1.40
June 1999 ........................... 5,000 -- $ 0.01
July 1999 ........................... 27,273 -- $ 2.75
September 1999 ...................... 7,320 -- $ 2.75
September 1999 ...................... -- 958,000 $ 2.75
October 1999 ........................ -- 11,400 $ 2.75
December 1999 ....................... -- 29,000 $ 2.75
------ -------
Outstanding at December 31, 1999 ......... 56,776 998,400
====== =======
</TABLE>
STOCK RESERVED FOR ISSUANCE
In addition to the options listed above, the Company has reserved 181,232
shares for issuance under the convertible debentures payable to trade creditors
described above. In addition, the Company's Chief Operating Officer is entitled
to options to purchase 200,000 shares exercisable at the public offering price
upon the successful completion of the Company's proposed public offering.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board of Opinion
No. 25, "Accounting for Stock issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of employee stock options granted equals the market
price of the underlying stock on the date of grant, no compensation expense is
recorded. For options granted at an exercise price that is less than the market
price of the Company's stock, the Company recognizes compensation expense based
on the intrinsic value of the options granted over
F-16
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
the vesting period. Compensation cost arising from such grants totaled $21,624
for the year ended December 31, 1999. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Had compensation cost been
determined based on the fair value of stock options on grant date consistent
with the method prescribed by SFAS 123, the Company's net loss and loss per
share amounts for the year ended December 31, 1999, would have been revised to
the pro forma amounts shown below.
<TABLE>
<S> <C>
Net loss:
As reported ............. $3,118,048
Pro forma ............... $3,168,460
Loss per share:
As reported ............. $ (0.60)
Pro forma ............... $ (0.61)
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of zero; expected volatility of 30%; risk-free interest rate of
6%; and expected lives of one year.
STOCK-BASED FINDERS' FEES
In conjunction with the business combination described in Note 1, AOC
issued 485,465 warrants to purchase its common stock at an exercise price of
$.01 per share for services rendered as finders' fees. Such warrants were
immediately exercised, resulting in the issuance of 485,465 shares of common
stock. The Company recorded a charge for stock-based finders' fees of $480,610
during the year ended December 31, 1999.
8. COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
The Company leases office space and certain office equipment under
non-cancelable operating lease agreements through 2002. Future minimum rental
payments required under such agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OFFICE EQUIPMENT
DECEMBER 31, LEASES LEASES
- --------------------- ---------- ----------
<S> <C> <C>
2000 .............. $ 56,250 $ 42,503
2001 .............. 56,250 38,983
2002 .............. 18,750 21,575
-------- --------
$131,250 $103,061
======== ========
</TABLE>
Total rental expense for all operating leases totaled $71,068, $77,534 and
$76,854 for the years ended December 31, 1997, 1998 and 1999, respectively.
CONSULTING AGREEMENT
During 1998, the Company entered into a consulting agreement. Such
agreement provides for compensation of $5,000 per month commencing August 1998.
Such compensation increased to $10,000 per month effective March 1999.
F-17
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, the Company agreed to grant the consultant options to
purchase 5% of the Company. Effective November 1998, options representing 2.5%
of the Company were granted. These options are exercisable at $1 per share and
vest in May 1999. The options include anti-dilutive provisions so that the
number of options granted will be increased in the event of an equity financing
so that the consultant maintains his 2.5% ownership position. Such additional
options will be granted at the price of the equity financing and will vest six
months after such financing. Additional options for another 2.5% of the Company
will be granted at the next round of financing. Such options will be granted at
the price of the financing and will vest twelve months after the financing. The
consultant will be granted additional options (at the then stock price) upon
subsequent financing over the next two years to prevent dilution of his 5%
ownership. The options will remain in effect as long as the consultant remains
with the Company and are exercisable over five years. In the event the
consultant is terminated, the options will vest immediately.
The Company has accounted for the fair value of the options issued to the
consultant in accordance with SFAS 123. Fair value is estimated based on the
Black-Scholes option-pricing model. Because the exercise price of the options
granted during 1998 was significantly in excess of the fair market value of the
Company's stock at the date of the grant, application of the Black-Scholes
option-pricing model resulted in no fair value being attributed to the options
granted during 1998. Therefore, no compensation was recorded as a result of
such grant. See "Options granted to consultant" under Note 7.
The consultant is also entitled to receive a $35,000 finder's fee for the
extension of the $700,000 vendor credit line described in Note 5.
SOFTWARE SUPPORT
Effective November 1998, the Company entered into an agreement with a
computer consultant to provide ongoing support and maintenance for its
proprietary Internet-assisted ReturnCall software. This agreement is for a
two-year period ending November 2000. The consultant receives a monthly fee of
$5,000 for support and maintenance services.
LEGAL PROCEEDINGS
During February 1999, the Company discussed an agreement for an individual
to provide financial advisory services to the Company. Such services were to be
rendered in connection with the possible business combination with a public
company. Under the terms of the proposed agreement, the advisor was to receive
5% of the fully-diluted shares of the Company, or its successor, upon
consummation of such business combination, as well as a one-year consulting
agreement for $60,000. The individual has alleged that he was offered an
opportunity by the Company to assist in the location of a potential candidate
for merger or acquisition, or a related financing. As a result, the consultant
claims to be owed a five percent interest in the Company and a consulting fee
of $60,000. The Company's position is that no agreement was ever executed and
delivered between the parties, and in any event, the consultant did not
perform. No arbitration demand or summons and complaint has been served, either
by or upon the Company. The parties are currently discussing a resolution of
the matter. Management of the Company believes that it has meritorious defenses
to the potential claim and intends to vigorously defend the Company's position.
While it is not possible to determine the ultimate outcome at this time,
management believes that the resolution of the matter will not have a material
effect on the Company's financial position.
During 1998, a telephone carrier which had provided services to the
Company, commenced an arbitration proceeding alleging that it was owed $194,672
for telecommunication services. The full
F-18
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
amount of the claim had been accrued by the Company. The Company asserted
counterclaims alleging that the carrier had engaged in unjust and unreasonable
charges. In November 1999, the matter was arbitrated. The result of the
arbitration was that the net amount owed to the telephone carrier was reduced
to approximately $98,000. The decrease in the accrual was recorded as a
reduction of cost of sales in 1999.
TELECOMMUNICATION SERVICES
The Company routinely enters into agreements with long distance carriers
to provide telecommunication services to the Company for its customer traffic
at specified rates. Such agreements are typically short-term in duration and
automatically renewable.
ADVERTISING AGREEMENTS
Prepaid advertising costs arise from an agreement entered into in June
1999 with a company that operates as an Internet portal and search engine. The
agreement provides that such company will periodically place banners,
promotional buttons, text links and other hyperlinks from its home pages and
web guides to CallNOWS's Web site. Under the terms of the agreement, such
company guarantees a minimum of 120 million "visits." The agreement specified
that CallNOW is obligated to make payments totaling $400,000, with $100,000
payable upon execution of the agreement and the balance payable over an
eighteen-month period without interest (Note 5). The total cost of the
agreement is being recognized based on the number of "visits" the Company
receives monthly. The advertising program began operation during August 1999.
During the year ended December 31, 1999, the Company received approximately
17.1 million "visits" or 14.3% of the guaranteed total. Therefore, advertising
expense of $57,200, representing 14.3% of the total cost of the agreement, was
recognized.
During May 1999, the Company entered into an agreement with a Japanese
affiliate of the same company that operates as an Internet portal and search
engine described above. Under the terms of the agreement, such company
guarantees a minimum of 48 million "visits." The agreement specifies that
CallNOW is obligated to make payments totaling $160,000 over an eighteen-month
period, without interest, commencing 30 days after the effective date. As of
the date of this report, the links which would direct users to CallNOW's Web
site were still being developed, including translation into Japanese.
Therefore, the agreement is not yet effective.
EMPLOYMENT AGREEMENTS
In July 1999, the Company entered into an employment agreement with an
individual to be the Company's Chief Technical Officer. This agreement
terminates in July 2001 and is automatically renewed from year-to-year unless
terminated by mutual agreement or by either party upon 60 days notice. The
Chief Technical Officer receives an annual base salary of $120,000. In
addition, subject to the discretion of the Company's Board of Directors, he may
be awarded an annual bonus of up to 20% of his annual base salary. He has been
granted options to purchase 45,000 shares of the Company's common stock
pursuant to the Company's option plan.
During November 1999, the Company entered into an employment agreement
with its Chief Operating Officer and Acting Chief Financial Officer to replace
the November 1998 consulting agreement. The employment agreement is for a
one-year period and is automatically renewable for one additional year unless
the Company provides written notice to the contrary at least 60 days prior to
the expiration of the agreement. The agreement provides for monthly
compensation of $10,000. Such compensation increases to $14,000 per month upon
the successful completion of the Company's public offering for so long as the
employee is both the Chief Operating Officer and the Acting Chief
F-19
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Financial Officer. Compensation will be $12,000 for such period that the
employee is only the Chief Operating Officer. When the Company's revenues
increase to $1,000,000 per month, the employee's base salary will increase to
$15,000 per month. The employee is also entitled to participate in any bonus
plan instituted by the Company. In addition, the employee shall receive a grant
of non-qualified stock options in connection with each equity financing that
the Company consummates until the earlier of (1) immediately following the
successful completion of the Company's public offering or (2) October 31, 2000.
The employee will be granted options to purchase 5% of the number of shares
issued pursuant to such financing at an exercise price equal to the purchase
price paid by the investor or the public offering price if applicable. The
options shall have an exercise term of five years. During February 2000, this
term of this agreement was extended through February 2002.
EXECUTIVE COMPENSATION
During February 2000, the Company entered into employment agreements with
its Chairman/Chief Executive Officer and its President. Each of the employment
agreements is for a two-year period and may be extended by mutual agreement.
The agreements provide each of the officers with an annual salary of $120,000;
provided however, that such salaries increase to $180,000, effective upon
consummation of the Company's registration statement and retroactive to January
1, 2000. In addition, each officer may receive a bonus of up to 20% of his
salary. In addition, the officers will receive a payment of $65,000 each upon
completion of the Company's proposed public offering. Such payments will be
recorded as additional compensation in 2000.
SALE OF TECHNOLOGY AGREEMENT
On July 28, 1999, the Company entered into an agreement with a corporation
controlled by the Company's Chief Technical Officer who designed the Company's
telephone switching, account activation and billing software. The agreement
provides that, over a period of two years, this corporation will create
documentation for the software and switching system. Consideration for the
software and the documentation consists of an aggregate of $400,000, payable in
eight quarterly installments and 30,000 shares of the Company's common stock.
ASSET ACQUISITION
During May 1999, the Company acquired the assets of a global, online
telephone directory known as "Telephone Directories on the Web" ("TDW"). TDW
operates as a free web site that enables users to locate international,
national and local telephone numbers. The Company believes that such web site
will draw additional customers to the Company's services. Consideration for the
acquisition consisted of a payment of $20,000 and a promissory note in the
amount of $40,000. The note is payable, without interest, within 60 days of the
close of the contract. The transaction was accounted for as an acquisition of
assets. Any prior revenue-producing activities of TDW ceased upon acquisition
of the assets.
9. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
There were no significant temporary differences
F-20
<PAGE>
CALLNOW.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED)
9. INCOME TAXES (CONTINUED)
leading to deferred tax assets or liabilities as of December 31, 1998 and 1999.
Deferred tax assets arising from net operating loss carryforwards have been
reduced to zero through valuation allowances.
10. SUBSEQUENT EVENTS
During January 2000, the Company borrowed $100,000 from its Chief
Executive Officer. The loan is payable in the amount of $110,000 upon the
completion of the Company's public offering.
During January 2000, the Company borrowed $50,000 from a shareholder that
is affiliated with one of the Company's directors. The loan is payable in the
amount of $55,000 upon the completion of the Company's public offering.
During January 2000, the Company entered into an agreement with a
Colombian corporation to provide business development services in Latin
America. The agreement is for a one-year period ending in January 2001.
Compensation for such services consists of options, issued under the Company's
1999 Stock Option Plan, to purchase 50,000 shares of the Company's common stock
at an exercise price of $2.75 per share. Such options are for a term of seven
years and vest 100% twelve months after the effective date of the Company's
registration statement.
During February 2000, the Company borrowed $175,000 from an unaffiliated
corporation. The loan is payable in the amount of $192,500 on the earlier of
July 1, 2000 or the date on which the Company consummates a public offering or
private placement of either debt or equity securities with net proceeds equal
to or exceeding $2 million. The note is secured by a total of 200,000 shares of
the Company's stock that is owned by two of the Company's officers.
During February 2000, the Company entered into an agreement with a Swiss
corporation to provide business development services in Europe. The agreement is
for a one-year period ending in February 2001. Compensation for such services
consists of options, issued under the Company's 1999 Stock Option Plan, to
purchase 100,000 shares of the Company's common stock at an exercise price of
$2.75 per share. Such options are for a term of seven years and vest 100% twelve
months after the effective date of the Company's registration statement.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE
ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU
MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER
TO SELL OR BUY ANY SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE
INFORMATION IN THIS PROSPECTUS IS CURRENT ONLY AS OF THE DATE OF THIS
PROSPECTUS.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ....................... 3
Risk Factors ............................. 9
Forward-Looking Statements ............... 24
Use of Proceeds .......................... 25
Price Range of Our Common Stock .......... 26
Dividend Policy .......................... 27
Capitalization ........................... 27
Dilution ................................. 28
Selected Financial Data .................. 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 30
Business ................................. 36
Management ............................... 53
Related Party Transactions ............... 59
Principal Stockholders ................... 61
Description of Securities ................ 63
Shares Eligible for Future Sale .......... 67
Underwriting ............................. 68
Legal Matters ............................ 69
Experts .................................. 70
Additional Information ................... 70
Financial Statements ..................... F-1
</TABLE>
-----------------------------------
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
[LOGO]
CALLNOW.COM, INC.
4,000,000 UNITS
(EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON
STOCK PURCHASE WARRANT)
--------------------------------------------
PROSPECTUS
--------------------------------------------
DIRKS & COMPANY, INC.
NOLAN SECURITIES CORPORATION
2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS
SUBJECT TO COMPLETION--MARCH 2, 2000
PROSPECTUS
- --------------------------------------------------------------------------------
164,891 SHARES OF COMMON STOCK
[CALLNOW.COM, INC. LOGO]
---------------------------------
o Selling stockholders may sell the shares using this prospectus.
o Using an alternate prospectus, CallNOW.com is also offering
4,000,000 units plus up to an additional 600,000 units to cover
over-allotments, if any, in an underwritten public offering.
Each unit consists of one share of common stock and one
redeemable common stock purchase warrant.
o We anticipate that the public offering price of the units
discussed above will be between $6.00 and $8.00 per unit.
o Our common stock has been traded in the National Quotation
Bureau, LLC's Pink Sheets. The last reported bid price for our
common stock in the Pink Sheets on February 28, 2000 was $3.00.
o Our trading symbol in the National Quotation Bureau, LLC's Pink
Sheets is CALN. We have applied to list the units, common stock
and warrants on the Nasdaq SmallCap Market under the symbols
CALNU, CALN and CALNW, respectively.
THE PURCHASE OF OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. BEFORE
BUYING THE SHARES, CAREFULLY READ THIS PROSPECTUS, ESPECIALLY THE "RISK
FACTORS" BEGINNING ON PAGE 9.
---------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------------------
<PAGE>
ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS--(CONTINUED)
THE OFFERING
<TABLE>
<S> <C>
Shares offered ....................................... This prospectus relates to the offering of
164,891 shares of common stock which are
being offered by selling stockholders. See
"Description of Securities" and "Selling
Stockholders and Plan of Distribution."
Total shares outstanding after this offering ......... 10,314,666 Shares, assuming that the shares of
common stock registered under the
concurrent underwritten public offering have
been sold by CallNOW.com; excludes
outstanding options, underwriters'
over-allotment option and warrants from
concurrent offering.
Proceeds ............................................. We will not receive any of the proceeds from
the sale of shares by the selling stockholders.
Proposed Nasdaq SmallCap Market Unit
Symbol (3) .......................................... CALNU
Proposed Nasdaq SmallCap Market Common
Stock Symbol (3) .................................... CALN
Proposed Nasdaq SmallCap Market
Redeemable Common Stock Purchase
Warrant Symbol (3) .................................. CALNW
</TABLE>
-------------------------
2
<PAGE>
ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS--(CONTINUED)
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The selling stockholders have advised us that they may from time to time
sell all or a portion of the shares offered hereby in one or more transactions
in the over-the-counter market, on the Nasdaq SmallCap Market, on any exchange
on which the common stock may then be listed, in underwritten offerings,
negotiated transactions or otherwise, or a combination of such methods of sale,
at market prices prevailing at the time of sale or prices related to such
prevailing market prices or at negotiated prices. The selling stockholders may
effect such transactions by selling the shares to or through broker-dealers,
and such broker-dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the selling stockholders and/or
purchasers of the shares for whom they may act as agent (which compensation may
be in excess of customary commissions). In connection with such sales, the
selling stockholders and any broker-dealers or agents participating in such
sales may be deemed to be underwriters as that term is defined under the
Securities Act. Neither we nor the selling stockholders can presently estimate
the amount of commissions or discounts, if any, that will be paid by the
selling stockholders on account of their sales of the shares from time to time.
The shares are subject to an agreement between the holders thereof and the
representatives restricting the sale thereof within 90 days from the date of
this prospectus without the prior written consent of the representatives.
Under the securities laws of certain states, the shares may be sold in
such states only through registered or licensed broker-dealers or pursuant to
available exemptions from such requirements. In addition, in certain states the
shares may not be sold therein unless the shares have been registered or
qualified for sale in such state or an exemption from such requirement is
available and satisfied.
We will pay certain expenses in connection with this offering, estimated
to be approximately $ , but will not pay for any underwriting commissions and
discounts, if any, or counsel fees or expenses of the selling stockholders. We
have agreed to indemnify the selling stockholders, their directors, officers,
agents and representatives, and any underwriters, against certain liabilities,
including certain liabilities under the Securities Act.
The selling stockholders have also agreed to indemnify us, our directors,
officers, agents and representatives against certain liabilities, including
liabilities under the Securities Act. The selling stockholders and other
persons participating in the distribution of the shares offered hereby are
subject to the applicable requirements of Regulation M promulgated under the
Exchange Act in connection with sales of the shares.
The following table sets forth information with respect to the selling
stockholders as of February 28, 2000:
<TABLE>
<CAPTION>
SELLING STOCKHOLDERS
---------------------------------------------
NUMBER OF PERCENTAGE NUMBER OF
NAME AND ADDRESS OF SHARES OWNED BEFORE SHARES
BENEFICIAL OWNER BEFORE OFFERING OFFERING OFFERED
- --------------------------------- ----------------- ------------ ----------
<S> <C> <C> <C>
Upper Brook Ltd.
c/o Citco Bank and Trust Company
(Bahamas) Limited
P.O. Box CB-13136
Nassau Bahamas ................. 507,272 8.03% 126,818
Eden Capital Fund Limited
P.O. Box 309
George Town
Cayman Islands, B.W.I. ......... 38,182 * 9,546
New York Community Investment
Company L.L.C.
120 Broadway, 36th Floor
New York, NY 10271 ............. 114,109 1.81% 28,527
</TABLE>
- ------------
* less than 1%
3
<PAGE>
ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS--(CONTINUED)
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon by Stairs
Dillenbeck & Finley, New York, New York and Swidler Berlin Shereff Friedman,
LLP has acted as regulatory counsel to us in connection with certain matters.
See "Selling Stockholders and Plan of Distribution."
4
<PAGE>
ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS--(CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE
ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU
MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER
TO SELL OR BUY ANY SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE
INFORMATION IN THIS PROSPECTUS IS CURRENT ONLY AS OF THE DATE OF THIS
PROSPECTUS.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ....................... 3
Risk Factors ............................. 9
Forward-Looking Statements ............... 24
Price Range of Our Common Stock .......... 26
Dividend Policy .......................... 27
Capitalization ........................... 27
Selected Financial Data .................. 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 30
Business ................................. 36
Management ............................... 53
Related Party Transactions ............... 59
Principal Stockholders ................... 61
Selling Stockholders and Plan of
Distribution ..........................
Description of Securities ................ 63
Shares Eligible for Future Sale .......... 67
Legal Matters ............................ 69
Experts .................................. 70
Additional Information ................... 70
Financial Statements ..................... F-1
</TABLE>
-----------------------------------
[LOGO]
CALLNOW.COM, INC.
164,891 SHARES OF
COMMON STOCK
--------------------------------------------
PROSPECTUS
--------------------------------------------
2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of this offering are as follows:
<TABLE>
<S> <C>
S.E.C. Registration Fee (1) ................................ $ 28,064.00
N.A.S.D. Filing Fee (1) .................................... 11,129.83
Nasdaq SmallCap Market Qualification Fee ...................
Representative's Non-Accountable Expense Allowance .........
Accounting Fees ............................................
Legal Fees and Expenses ....................................
Blue Sky Qualification Fees and Expenses ...................
Printing and Engraving .....................................
Transfer Agent's Fees and Expenses .........................
Miscellaneous Expenses .....................................
------------
Total ..................................................... $
</TABLE>
- ----------
(1) Assuming a public offering price of $8.00 per unit.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's certificate of incorporation limits the liability of the
Registrant's directors to the maximum extent permitted by Delaware law.
Delaware law provides that a director of a corporation will not be personally
liable for monetary damages for breach of that individual's fiduciary duties as
a director except for liability for (i) a breach of the director duty of
loyalty to the corporation or its stockholders, (ii) any act or omission not in
good faith or that involves intentional misconduct or a knowing violation of
the law, (iii) unlawful payments of dividends or unlawful stock repurchases or
redemption, or (iv) any transaction from which the director derived an improper
personal benefit.
This limitation of liability does not apply to liabilities arising under
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or recission.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers, as well as other employees
and individuals, against attorneys fees and other expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with any threatened, pending or completed actions, suits or
proceedings in which such person was or is a party or is threatened to be made
a party by reason of such person being or having been a director, officer,
employee or agent of the corporation. The Delaware General Corporation Law
provides that Section 145 is not exclusive of other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
The Registrant's certificate of incorporation and bylaws provide that the
Registrant is required to indemnify its directors and officers to the maximum
extent permitted by law. The Registrant's bylaws also require the Registrant to
advance expenses incurred by an officer or director in connection with the
defense of any action or proceeding arising out of that party's status or
service as a director of officer of the Registrant or as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, if serving as such at the
Registrant's request. The Registrant has procured insurance on behalf of any
director or officer for any liability arising out of his or her actions in a
representative capacity.
Reference is also made to the Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement for information concerning the
underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
II-1
<PAGE>
ITEM 15.
Recent Sales of Unregistered Securities
Since September 15, 1996, the Registrant issued and sold the following
securities:
In December 1996, Axicom entered into a loan agreement with New York
Community Investment Company L.L.C. ("NYCIC"). As part of such agreement,
Axicom issued warrants to purchase 74,665 shares of Axicom common stock at an
aggregate exercise price of $999. The issuance of the warrants was exempt from
registration pursuant to Section 4 (2) of the Securities Act of 1933, as
amended (the "Securities Act"). The warrant was exercised in April 1999 and, as
a result of the Axicom-American Ostrich transaction, NYCIC received 114,109
shares of CallNOW.com stock.
From November 1998 to the present, the Registrant granted an aggregate of
282,825 options to Chris Seelbach pursuant to his Consulting/Employment
Agreement. Of these 282,825 options, 5,870 have an exercise price of $0.01 per
share, 31,429 have an exercise price of $0.795 per share, 193,750 have an
exercise price of $1.00 per share, 17,183 have an exercise price of $1.39 per
share and 34,593 have an exercise price of $2.75 per share. The issuance of
these options was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On March 30, 1999, American Ostrich Company issued 12,555,317 shares of
its common stock to Jenson Services, Inc. a Utah corporation and financial
consulting firm in exchange for $37,500. In April 1999, American Ostrich
Company declared a 32,000 to one reverse stock split (17,400 shares
post-split). This issuance was exempt from registration pursuant to Section
4(2) of the Securities Act.
On April 6, 1999, Axicom issued $500,000 principal amount 2% Convertible
Debenture due April 2004 to GEM France, S.A. ("GEM") in exchange for $500,000
in cash. The issuance of this Convertible Debenture was exempt from
registration pursuant to Rule 504 promulgated under the Securities Act. GEM
subsequently assigned $50,000 principal amount of this $500,000 Convertible
Debenture to Turbo International Inc. ("Turbo"). In April 1999, GEM and Turbo
converted these Convertible Debentures into 628,585 shares of the Registrant's
common stock which shares were issued under exemptions from registration
pursuant to Rule 504 promulgated under the Securities Act.
In April 1999, American Ostrich Company, a Delaware corporation whose
stock was publicly traded on the Over The Counter Bulletin Board, acquired all
of the issued and outstanding common stock of Axicom (the "Acquisition"). In
consideration of the Acquisition, Axicom's shareholders received 3,875,000
shares of American Ostrich Company common stock. In addition, GEM Global Fund
received warrants to purchase 251,433 shares of American Ostrich Company common
stock at an exercise price of $.01 per share as a fee for arranging for and
structuring the Acquisition.
On April 6, 1999, American Ostrich Company also issued warrants to
purchase its common stock at an exercise price of $.01 per share to the
following companies for services rendered as finder's fees:
<TABLE>
<S> <C>
Cicero Cinzano Ltd. Warrant to purchase 40,000 shares
Camisado Venturos Ltd. Warrant to purchase 69,852 shares
Out Back Ltd. Warrant to purchase 69,852 shares
New York, New York, Ltd. Warrant to purchase 54,328 shares
</TABLE>
All of the foregoing warrants to purchase in the aggregate 485,465 shares
of common stock of the Registrant were exercised in April 1999 and the shares
were issued pursuant to Rule 504.
In June 1999, the Registrant issued a $479,000 principal amount 2%
Convertible Debenture due June 2004 plus a Warrant to purchase 100,000 shares
of the Registrant's common stock at an exercise price of $.01 per share, to GEM
Investments Ltd. in exchange for $479,000 in cash. In September 1999, GEM
Investments Ltd. converted this Debenture into 343,662 shares of the
Registrant's common stock and exercised the Warrant to purchase 100,000 shares
of the Registrant's common stock. All such shares were issued pursuant to Rule
504 promulgated under the Securities Act.
II-2
<PAGE>
In July 1999, the Registrant sold an aggregate of 545,454 shares of its
common stock to Eden Capital Fund Limited and Upper Brook Ltd. at a price of
$2.75 per share. These shares were issued pursuant to Section 4(2) of the
Securities Act, including Regulation D promulgated thereunder.
In connection with the purchase of technology by the Registrant, the
Registrant paid a combination of cash and stock, including the issuing of
30,000 shares and 10,000 shares of its common stock to Mr. Martin Casanova and
Mr. Guibert Englebienne, in July 1999 and September 1999, respectively.
In September 1999, the Registrant sold 9,090, 36,400, 10,000 and 90,909
shares of its common stock to Robert Tolmach, Jr., David Ford, Peter Williams
and ROPART Investments LLC, respectively, at a price of $2.75 per share. These
shares were issued pursuant to Section 4(2) of the Securities Act, including
Regulation D promulgated thereunder.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
(a) Exhibits:
1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Registrant, dated April 8, 1999.*
3.1a Certificate of Ownership and Merger of American Ostrich Corporation, a Utah
corporation, into CallNOW.com, Inc., a Delaware corporation.*
3.2 Bylaws of Registrant.*
4.1 Form of Specimen Common Stock Certificate of Registrant.*
4.2 5% Convertible Debenture Due August 31, 2002, issued to New Media Corporation, in the
principal amount of $576,300.*
4.3 5% Convertible Debenture Due August 26, 2002, issued to Facilicom International, Inc., in
the principal amount of $700,000.*
4.4 Form of Lock-up Agreement.*
4.5 Form of Representatives' Warrants Agreement, including Representative's Warrant
Certificate.*
4.6 Form of Warrant Agreement, including Warrant Certificate.**
5.1 Opinion of Stairs Dillenbeck & Finley, as to legality of the securities being offered
hereby.**
5.2 Opinion of Swidler Berlin Shereff Friedman, LLP.**
10.1 Sale of Technology Agreement, dated November 30, 1998, by and between AXICOM
Communications Group, Inc. ("Axicom") and Mr. Guibert Englebienne.*
10.2 Consulting/Employment Agreement, dated November 1, 1998, between Axicom and Mr.
Chris Seelbach.*
10.3 Consulting Agreement dated as of November 30, 1998, between Mr. Guibert Englebienne
and Axicom.*
10.4 Asset Purchase Agreement made as of May 19, 1999, between Buttle & Tuttle Ltd and
Registrant.*
10.5 Agreement dated March 2, 1999, between Lloyd Layton Golding and Christian
Bardenheuer; Axicom.*
10.6 Loan Agreement between Axicom and New York Community Investment Company L.L.C.,
dated December 27, 1996.*
10.7 Security Agreement made on December 27, 1996, between Axicom and New York
Community Investment Company L.L.C.*
10.8 Promissory Notice, dated December 27, 1996, made by Axicom to New York Community
Investment Company L.L.C. in the face amount of $200,000.*
10.9 Promissory Note, dated March , 1997, made by Axicom to New York Community
Investment Company L.L.C. in the face amount of $100,000.*
10.10 Lease Agreement, dated as of March 25, 1999, between Fifty Broad Street, Inc. and Fifty
New Street, Inc. and Axicom (Re: Room 520 in the building known as 50 Broad St.).*
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.11 Lease Agreement, dated as of March 25, 1999, between Fifty Broad Street, Inc. and Fifty
New Street, Inc. and Axicom (Re: Room 501 in the building known as 50 Broad St.).*
10.12 Agreement, dated May 12, 1999, between Lycos-Bertelsmann GmbH and Registrant.*
10.13 Agreement, dated May 26, 1999, between Lycos Japan and Registrant.*
10.14 International Carrier Voice Service Agreement, dated October 14, 1997, between Facilicom
International, L.L.C. and Axicom.*
10.15 Long Distance Reseller Service Agreement, dated April 6, 1999, between Interoute, Inc.
and Axiom.*
10.16 Carrier Services Agreement, dated June 21, 1999, between International Forval Telecom,
Inc. and Registrant.*
10.17 1999 Stock Option Plan.*
10.18 Agreement, made and entered into as of September 30, 1999 between Be Free, Inc. and the
Registrant.*
10.19 Employment Agreement, dated as of August 9, 1999, between the Registrant and Ann K.
McShea.*
10.20 Employment Agreement, dated as of July 28, 1999, between the Registrant and Martin
Casanova.*
10.21 Employment Agreement, dated as of June 1, 1999, between the Registrant and Josune
Garcia Yauguas.*
10.22 Sale of Technology Agreement, dated July 28, 1999, between the Registrant and Smart
Software.*
10.23 Stock Purchase Agreement, dated September 16, 1999, between the Registrant and
ROPART Investments LLC.*
10.24 Letter Agreement, dated September 16, 1999, between the Registrant and ROPART
Investments LLC.*
10.25 Stock Purchase Agreement, dated July 30, 1999, by and among the Registrant, Upper
Brook Ltd. and Eden Capital Fund Limited.*
10.26 Employment Agreement, made effective November 9, 1999 by and between Christopher R.
Seelbach and the Registrant.*
10.26a Amendment, dated February 7, 2000, to Employment Agreement between Christopher R.
Seelbach and the Registrant.*
10.27 Master Services Agreement, made effective October 29, 1999 between Exodus
Communications, Inc. and the Registrant.*
10.28 Carrier Service Agreement, entered into as of November 5, 1999, between Equinox
International LLC and the Registrant.*
10.29 Employment Agreement, dated February 7, 2000, between Christian Bardenheuer and the
Registrant.*
10.30 Employment Agreement, dated February 7, 2000, between Warner R. Johnson, Jr. and the
Registrant.*
16 Letters re: Change in Certifying Accountant From Ernst & Young LLP and the Registrant*
21 Subsidiaries.*
23.1 Consent of Horton & Company, L.L.C. (included on page II-7)
23.2 Consent of Stairs Dillenbeck & Finley (included in Exhibit 5.1).
23.3 Independent Auditors' Report on Other Financial Information.
23.4 Consent of Swidler Berlin Shereff Friedman, LLP (included in Exhibit 5.2).
24 Power of Attorney.*
27 Financial Data Schedule for year ended December 31.
</TABLE>
- ----------
* Previously filed
** To be filed by amendment.
(b) Financial Statement Schedules:
99 Schedule II--Valuation and Qualifying Accounts.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
Registrant hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Registrant for expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Registrant hereby further undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424 (b) if, in the
aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(5) That, for purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement for the securities offered in the
registration statement, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering of these securities.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON THE 2nd DAY OF MARCH, 2000.
CallNOW.com, Inc.
By: /s/ Christian Bardenheuer
------------------------------------
Christian Bardenheuer
Chairman of the Board of Directors
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- --------------------------------------- --------------
<S> <C> <C>
/s/ Christian Bardenheuer Chairman of the Board of Directors, March 2, 2000
--------------------------- Chief Executive Officer and Director
Christian Bardenheuer (Principal Executive Officer)
/s/ Christopher R. Seelbach Chief Operating Officer, Acting Chief March 2, 2000
--------------------------- Financial Officer and Director
Christopher R. Seelbach (Principal Financial and Accounting
Officer)
* President and Director March 2, 2000
---------------------------
Warner R. Johnson, Jr.
* Director March 2, 2000
---------------------------
Edward Cabot
* Director March 2, 2000
---------------------------
Todd A. Goergen
* Director March 2, 2000
---------------------------
Robert S. Tolmach, Jr.
By: /s/ Christian Bardenheuer
------------------------
*Attorney-in-fact
</TABLE>
II-6
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
CallNOW.com, Inc. and Subsidiary
New York, New York
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 2, 2000, except
for the last two paragraphs of Note 10, as to which the date is February 16,
2000, relating to the consolidated financial statements of CallNOW.com, Inc.
and Subsidiary, which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" in such Prospectus.
/S/ HORTON & COMPANY, LLC
Wayne, New Jersey
March 2, 2000
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
(a) Exhibits:
1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Registrant, dated April 8, 1999.*
3.1a Certificate of Ownership and Merger of American Ostrich Corporation, a Utah
corporation, into CallNOW.com, Inc., a Delaware corporation.*
3.2 Bylaws of Registrant.*
4.1 Form of Specimen Common Stock Certificate of Registrant.*
4.2 5% Convertible Debenture Due August 31, 2002, issued to New Media Corporation, in the
principal amount of $576,300.*
4.3 5% Convertible Debenture Due August 26, 2002, issued to Facilicom International, Inc., in
the principal amount of $700,000.*
4.4 Form of Lock-up Agreement.*
4.5 Form of Representatives' Warrants Agreement, including Representative's Warrant
Certificate.*
4.6 Form of Warrant Agreement, including Warrant Certificate.**
5.1 Opinion of Stairs Dillenbeck & Finley, as to legality of the securities being offered
hereby.**
5.2 Opinion of Swidler Berlin Shereff Friedman, LLP.**
10.1 Sale of Technology Agreement, dated November 30, 1998, by and between AXICOM
Communications Group, Inc. ("Axicom") and Mr. Guibert Englebienne.*
10.2 Consulting/Employment Agreement, dated November 1, 1998, between Axicom and Mr.
Chris Seelbach.*
10.3 Consulting Agreement dated as of November 30, 1998, between Mr. Guibert Englebienne
and Axicom.*
10.4 Asset Purchase Agreement made as of May 19, 1999, between Buttle & Tuttle Ltd and
Registrant.*
10.5 Agreement dated March 2, 1999, between Lloyd Layton Golding and Christian
Bardenheuer; Axicom.*
10.6 Loan Agreement between Axicom and New York Community Investment Company L.L.C.,
dated December 27, 1996.*
10.7 Security Agreement made on December 27, 1996, between Axicom and New York
Community Investment Company L.L.C.*
10.8 Promissory Notice, dated December 27, 1996, made by Axicom to New York Community
Investment Company L.L.C. in the face amount of $200,000.*
10.9 Promissory Note, dated March , 1997, made by Axicom to New York Community
Investment Company L.L.C. in the face amount of $100,000.*
10.10 Lease Agreement, dated as of March 25, 1999, between Fifty Broad Street, Inc. and Fifty
New Street, Inc. and Axicom (Re: Room 520 in the building known as 50 Broad St.).*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.11 Lease Agreement, dated as of March 25, 1999, between Fifty Broad Street, Inc. and Fifty
New Street, Inc. and Axicom (Re: Room 501 in the building known as 50 Broad St.).*
10.12 Agreement, dated May 12, 1999, between Lycos-Bertelsmann GmbH and Registrant.*
10.13 Agreement, dated May 26, 1999, between Lycos Japan and Registrant.*
10.14 International Carrier Voice Service Agreement, dated October 14, 1997, between Facilicom
International, L.L.C. and Axicom.*
10.15 Long Distance Reseller Service Agreement, dated April 6, 1999, between Interoute, Inc.
and Axiom.*
10.16 Carrier Services Agreement, dated June 21, 1999, between International Forval Telecom,
Inc. and Registrant.*
10.17 1999 Stock Option Plan.*
10.18 Agreement, made and entered into as of September 30, 1999 between Be Free, Inc. and the
Registrant.*
10.19 Employment Agreement, dated as of August 9, 1999, between the Registrant and Ann K.
McShea.*
10.20 Employment Agreement, dated as of July 28, 1999, between the Registrant and Martin
Casanova.*
10.21 Employment Agreement, dated as of June 1, 1999, between the Registrant and Josune
Garcia Yauguas.*
10.22 Sale of Technology Agreement, dated July 28, 1999, between the Registrant and Smart
Software.*
10.23 Stock Purchase Agreement, dated September 16, 1999, between the Registrant and
ROPART Investments LLC.*
10.24 Letter Agreement, dated September 16, 1999, between the Registrant and ROPART
Investments LLC.*
10.25 Stock Purchase Agreement, dated July 30, 1999, by and among the Registrant, Upper
Brook Ltd. and Eden Capital Fund Limited.*
10.26 Employment Agreement, made effective November 9, 1999 by and between Christopher R.
Seelbach and the Registrant.*
10.26a Amendment, dated February 7, 2000, to Employment Agreement between Christopher R.
Seelbach and the Registrant.*
10.27 Master Services Agreement, made effective October 29, 1999 between Exodus
Communications, Inc. and the Registrant.*
10.28 Carrier Service Agreement, entered into as of November 5, 1999, between Equinox
International LLC and the Registrant.*
10.29 Employment Agreement, dated February 7, 2000, between Christian Bardenheuer and the
Registrant.*
10.30 Employment Agreement, dated February 7, 2000, between Warner R. Johnson, Jr. and the
Registrant.*
16 Letters re: Change in Certifying Accountant From Ernst & Young LLP and the Registrant*
21 Subsidiaries.*
23.1 Consent of Horton & Company, L.L.C. (included on page II-7)
23.2 Consent of Stairs Dillenbeck & Finley (included in Exhibit 5.1).
23.3 Independent Auditors' Report on Other Financial Information.
23.4 Consent of Swidler Berlin Shereff Friedman, LLP (included in Exhibit 5.2).
24 Power of Attorney.*
27 Financial Data Schedule for year ended December 31.
</TABLE>
- ----------
* Previously filed
** To be filed by amendment.
(b) Financial Statement Schedules:
99 Schedule II--Valuation and Qualifying Accounts.
<PAGE>
Exhibit 23.3
[HORTON & COMPANY LOGO]
INDEPENDENT AUDITORS' REPORT ON OTHER FINANCIAL INFORMATION
The Shareholders
CallNOW.com, Inc.
The audited financial statements of the Company and our report thereon is
presented in the preceding section of this report. The financial information in
Schedule II-Valuation and Qualifying Accounts in Exhibit 99 is presented for
purposes of additional analysis and is not a required part of the financial
statements of the Company. Such information has been subjected to the auditing
procedures applied in our audit of the financial statements and, in our opinion,
is fairly stated in all material respects in relation to the financial
statements taken as a whole.
HORTON & COMPANY, L.L.C.
Wayne, New Jersey
February 2, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 80,542 7,565
<SECURITIES> 0 0
<RECEIVABLES> 29,056 122,700
<ALLOWANCES> 5,000 6,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 109,598 130,265
<PP&E> 1,491,179 695,247
<DEPRECIATION> 405,435 182,944
<TOTAL-ASSETS> 2,192,105 679,353
<CURRENT-LIABILITIES> 2,007,120 1,250,301
<BONDS> 0 0
0 0
0 0
<COMMON> 6,315 3,875
<OTHER-SE> 912,197 1,931,849
<TOTAL-LIABILITY-AND-EQUITY> 2,192,105 679,353
<SALES> 0 0
<TOTAL-REVENUES> 1,004,636 2,295,202
<CGS> 0 0
<TOTAL-COSTS> 662,160 1,681,978
<OTHER-EXPENSES> 2,841,733 1,164,166
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 618,791 90,436
<INCOME-PRETAX> (3,118,048) (641,378)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,118,048) (641,378)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,118,048) (641,378)
<EPS-BASIC> (0.60) (0.17)
<EPS-DILUTED> (0.60) (0.17)
</TABLE>
<PAGE>
CallNOW.com, INC
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts
(deducted from accounts receivable) $123,000 $197,109 $ -- $313,609 $ 6,500
-------- -------- ------- -------- --------
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts
(deducted from accounts receivable) $ 6,500 $ 23,723 $ -- $ 24,223 $ 6,000
-------- -------- ------- -------- --------
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts
(deducted from accounts receivable) $ 6,000 $ 77,224 $ -- $ 78,224 $ 5,000
-------- -------- ------- -------- --------
</TABLE>
