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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 2000
REGISTRATION NO. 333-88065
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CALLNOW.COM, INC.
(Exact name of Registrant as specified in its charter)
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<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)
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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:
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
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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. [ ]
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED BE REGISTERED PER SHARE OFFERING PRICE (1) REGISTRATION FEE
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<S> <C> <C> <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) .................................. 4,600,000(2) $8.00 $36,800,000 $9,715
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Common Stock, $0.001 par value, underlying the
Units .......................................... 4,600,000 (3) (3) (3)
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Redeemable Warrants .............................. 4,600,000 (3) (3) (3)
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Common Stock, $0.001 par value, underlying the
Redeemable Warrants ............................ 4,600,000(4)(5) $12.00(6) $55,200,000 $14,573
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Representatives' Warrants(7) ..................... 400,000 $.0001 $40 (8)
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Common Stock, $0.001 par value, underlying the
Representatives' Warrants ...................... 400,000(9) $9.60(10) $3,840,000 $1,014
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Redeemable Warrants underlying the
Representatives' Warrants ...................... 400,000(9) (11) (11) (11)
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Common Stock, $0.001 par value, underlying the
Representatives' Redeemable Warrants ........... 400,000(4)(5) $12.00 $4,800,000 $1,267
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Common Stock, $.001 par value, of existing
stockholders ................................... 164,891 $8.00 $1,319,128 348
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Totals ........................................... $101,959,168 $26,917(12)
====================================================================================================================================
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(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.
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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--FEBRUARY 24, 2000
PROSPECTUS
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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 22, 2000 was $3.25.
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 National 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.
PER UNIT TOTAL
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Public offering price ........................ $ $
Underwriting discount & commissions .......... $ $
Proceeds, before expenses, to us ............. $ $
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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
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[Picture of CallNOW.com home page.]
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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 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 markets we serve, including expanding the choice of languages
available on our Web site. In addition,
3
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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 each customer they
deliver to us, which is offset against the guaranteed payments. However, as of
the
4
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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
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THE OFFERING
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 National
Market System Unit
Symbol (3) ................. CALNU
Proposed Nasdaq National
Market System Common
Stock Symbol (3) ........... CALN
Proposed Nasdaq National
Market System Redeemable
Common Stock Purchase
Warrant Symbol (3) ......... CALNW
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(1) Based on shares outstanding as of the date of this prospectus. Excludes:
6
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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."
(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 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. For discussion of the effects of the
failure to have our units, shares or warrants listed on the Nasdaq National
Market System, see "Risk Factors--Risks Related To This Offering--Failure
To Be Approved For Listing On The Nasdaq National Market System 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
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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.
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YEAR ENDED DECEMBER 31,
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1995 1996 1997 1998 1999
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(UNAUDITED)
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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>
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DECEMBER 31, 1999
-------------------------------
ACTUAL PRO FORMA(1)
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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>
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(1) Adjusted for the sale of the units offered hereby and application of the
estimated net proceeds therefrom.
8
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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
9
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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 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 Egypt* Malaysia* South Africa*
Bahamas* Eritrea Mali South Korea
Bahrain* Fiji Morocco Spain
Belarus Gambia Netherlands Antilles* Syria*
Bolivia* Ghana Nicaragua Tanzania*
Brunei Darussalam Greece Niger Thailand*
Burkina Faso Honduras* Oman* Turkey
Burundi Hungary* Pakistan Uganda
Cambodia India* Panama* United Arab
China* Indonesia* Papua New Guinea Emirates*
Colombia* Kazakhstan Peru* Uruguay*
Cook Islands* Kenya Philippines* Venezuela*
Costa Rica* Republic of Korea Poland Vietnam
Croatia* Kuwait* Portugal* Western Samoa
Cyprus* Kyrgyzstan Qatar* Yemen
Djibouti Latvia* Saudi Arabia* Zambia
Ecuador* Lebanon* Seychelles* Zimbabwe
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* 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
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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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."
20
<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 NATIONAL MARKET SYSTEM 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 National Market System, 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, the selling stockholders 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 National
Market System 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 National Market System, we are required to have
net tangible assets of at least $18,000,000, at least 1.1 million shares owned
by stockholders other than our affiliates having a market value of at least
$18,000,000, a minimum bid price of $5.00 per share, a minimum of 400
stockholders and three market makers. To maintain eligibility for trading on
Nasdaq, we will be required to maintain net tangible assets in excess of
$4,000,000, at least 750,000 shares owned by stockholders other than our
affiliates having a market value of at least $5,000,000, a minimum bid price of
$1.00 per share, a minimum of 400 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.
23
<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.
24
<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 representing interest, irrespective of the date the loan is
repaid).
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
representing interest, irrespective of the date the loan is repaid);
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 representing interest, irrespective of the
date the loan is repaid); 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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<PAGE>
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)
HIGH LOW
---- ---
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
BID PRICES
HIGH LOW
---- ---
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 22, 2000) ........... $3.375 $2.00
- ----------
(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 22, 2000, the last reported bid price of our common stock in
the National Quotations Bureau LLC's Pink Sheets was $3.25. As of February 22,
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."
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<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>
<CAPTION>
<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
============ ========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ---------- ------------ ------------ ------------
(UNAUDITED)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
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
36
<PAGE>
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, 57 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 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:
NAME AGE POSITION
---- --- --------
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
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
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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."
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth certain information, as of February 22,
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.
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<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.
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<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 National Market System 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:
UNDERWRITERS NUMBER OF UNITS
- ------------ ---------------
Dirks & Company, Inc. .................
Nolan Securities Corporation ..........
Total ................................. 4,000,000
=========
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-20
</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)
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998 1999
-------- -------- ------
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%
=== === ===
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:
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
------ ---------- ----------
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
=== ========= =========
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:
YEAR ENDING
DECEMBER 31,
- ------------
2000 ......... $19,069
=======
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:
YEAR ENDING
DECEMBER 31,
- ------------
2000 ........ $ 925,433
2001 ........ 629,270
2002 ........ 384,097
2003 ........ 77,500
----------
$2,016,300
==========
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.
Net loss:
As reported ............. $3,118,048
Pro forma ............... $3,168,460
Loss per share:
As reported ............. $ (0.60)
Pro forma ............... $ (0.61)
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:
YEAR ENDING OFFICE EQUIPMENT
DECEMBER 31, LEASES LEASES
- ------------ -------- ---------
2000 .............. $ 56,250 $ 42,503
2001 .............. 56,250 38,983
2002 .............. 18,750 21,575
-------- --------
$131,250 $103,061
======== ========
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 of the registration
statement. 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 to purchase 50,000 shares of the Company's common
stock at an exercise price of $2.75 per share. Such options are exercisable at
any time within seven years and vest 50% upon signing of the agreement and 50%
six months thereafter.
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 to purchase 100,000 shares of the Company's common stock at
an exercise price of $2.75 per share. Such options are exercisable at any time
within seven years and vest 50% upon signing of the agreement and 50% six months
thereafter. In addition, the parties entered into a registration rights
agreement, which grants the Swiss corporation "piggyback" and "demand"
registration rights after exercise of the options.
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
PAGE
----
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
-----------------------------------
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.
[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--FEBRUARY 24, 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 22, 2000 was $3.25.
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 National 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>
<CAPTION>
<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 National Market System
Unit Symbol (3) .................................... CALNU
Proposed Nasdaq National Market System
Common Stock Symbol (3) ............................ CALN
Proposed Nasdaq National Market System
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 National 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.
The Company 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 22, 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
PAGE
----
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
-----------------------------------
[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:
S.E.C. Registration Fee (1) ................................ $ 28,064.00
N.A.S.D. Filing Fee (1) .................................... 11,129.83
Nasdaq National Market System 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 ..................................................... $
- ----------
(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:
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
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
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(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>
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<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>
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* 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. 3 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 24th DAY OF FEBRUARY, 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. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
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SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Christian Bardenheuer Chairman of the Board of Directors, February 24, 2000
--------------------------- Chief Executive Officer and Director
Christian Bardenheuer (Principal Executive Officer)
/s/ Christopher R. Seelbach Chief Operating Officer, Acting Chief February 24, 2000
--------------------------- Financial Officer and Director
Christopher R. Seelbach (Principal Financial and Accounting
Officer)
* President and Director February 24, 2000
---------------------------
Warner R. Johnson, Jr.
* Director February 24, 2000
---------------------------
Edward Cabot
* Director February 24, 2000
---------------------------
Todd A. Goergen
* Director February 24, 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
February 23, 2000
II-7
<PAGE>
OH&S DRAFT
2/22/00
4,000,000 UNITS, EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE WARRANT
CALLNOW.COM, INC.
UNDERWRITING AGREEMENT
New York, New York
___________, 2000
DIRKS & COMPANY, INC.
NOLAN SECURITIES CORPORATION
As Representatives of the
Several Underwriters listed
on Schedule A hereto
520 Madison Avenue, 10th Floor
New York, New York 10022
Ladies and Gentlemen:
CallNOW.com, Inc., a Delaware corporation (the "Company") confirms its
agreement with Dirks & Company, Inc. ("Dirks"), Nolan Securities Corporation
("Nolan") and each of the several underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in Section 12) for whom Dirks
and Nolan are acting as representatives (in such capacity, Dirks and Nolan
shall be collectively hereinafter referred to as "you" or the
"Representatives"), with respect to the sale by the Company, and the purchase
by the Underwriters, acting severally and not jointly, of the respective number
of units (the "Units") set forth in Schedule A hereto. Each Unit consists of
one (1) share of the Company's common stock, $.001 par value (the "Common
Stock") and one (1) redeemable warrant (the "Redeemable Warrants"). The shares
of Common Stock issuable upon exercise of the Redeemable Warrants are
hereinafter referred to as the "Warrant Shares."
Each Redeemable Warrant is exercisable for one share of Common Stock. The
Common Stock and Redeemable Warrants comprising the Units will be separately
tradeable twelve (12) months after the effective date (the "Effective Date") of
the Registration Statement (as defined herein), or such earlier date as the
Company and the Representatives may agree. The Redeemable Warrants are
exercisable commencing twelve (12) months after the Effective Date. The initial
exercise price of the Redeemable Warrants is $___ per share [150% of the
initial public offering
<PAGE>
price of the Firm Units per share of common stock], subject to adjustment. The
Redeemable Warrants may be redeemed by the Company, in whole, and not in part,
at a redemption price of ten cents ($.10) per Redeemable Warrant at any time
commencing eighteen (18) months after the Effective Date on 30 days' prior
written notice provided that the average closing sales price of the Common
Stock equals or exceeds 200% of the initial public offering price of the Units
(subject to adjustment) for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on the fifth day prior to the date
of the notice of redemption, all in accordance with the terms and conditions of
the Warrant Agreement (defined herein).
Upon the Representatives' request, as provided in Section 2(b) of this
Agreement, the Company shall also issue and sell to the Underwriters up to an
additional 600,000 Units for the purpose of covering over-allotments, if any.
Such 600,000 Units are hereinafter collectively referred to as the "Option
Units." The Company also proposes to issue and sell to the Representatives or
their designees warrants (the "Representatives' Warrants"), pursuant to the
representatives' warrant agreement (the "Representatives' Warrant Agreement"),
for the purchase of an additional 400,000 Units. The common stock purchase
warrants issuable upon exercise of the Representatives' Warrants are
hereinafter sometimes referred to herein as the "Representatives' Underlying
Warrants." The shares of Common Stock issuable upon exercise of the
Representatives' Warrants and the shares of Common Stock issuable upon exercise
of the Representatives' Underlying Warrants are hereinafter collectively
referred to as the "Representatives' Shares." The Representatives' Underlying
Warrants and the Representative's Shares are sometimes referred to herein as
the "Representatives' Securities."
The Firm Units, the Option Units, the Representatives' Warrants, the
Representatives' Underlying Warrants, the Representatives' Shares, the
Redeemable Warrants and the Warrant Shares are hereinafter collectively
referred to as the "Securities" and are more fully described in the
Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and covenants and agrees with, the Underwriters as of the date
hereof, and as of the Closing Date (hereinafter defined) and each Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and amendments thereto,
on Form S-1 (Registration No. 333-88065), including any related preliminary
prospectus or prospectuses (each a "Preliminary Prospectus"), for the
registration of the Securities, under the Securities Act of 1933, as amended
(the "Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
rules and regulations of the Commission under the Act. The Company will not
file any other amendment to such registration statement which the
Representatives shall have objected to in writing after having been furnished
with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time it
becomes effective (including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or incorporated
therein (including, but not limited to, those documents or that information
incorporated by reference therein) and all information deemed to be a part
thereof as of such time
2
<PAGE>
pursuant to paragraph (b) of Rule 430A of the rules and regulations under the
Act), is hereinafter called the "Registration Statement," and the form of
prospectus in the form first filed with the Commission pursuant to Rule 424(b)
of the rules and regulations under the Act is hereinafter called the
"Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Preliminary Prospectus, the
Registration Statement or the Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are
pending or threatened. Each of the Preliminary Prospectus, the Registration
Statement and the Prospectus, at the time of filing thereof, conformed with the
requirements of the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, the Registration Statement nor the Prospectus, at the
time of filing thereof, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that this representation and
warranty does not apply to statements made in reliance upon and in conformity
with written information furnished to the Company with respect to the
Underwriters by or on behalf of the Underwriters furnished in writing to the
Company expressly for use in such Preliminary Prospectus, the Registration
Statement or the Prospectus. The Company has filed all reports, forms or other
documents required to be filed under the Act and the Exchange Act and the
respective Rules and Regulations thereunder, and all such reports, forms or
other documents, when so filed or as subsequently amended, complied in all
material respects with the Act and the Exchange Act and the respective Rules
and Regulations thereunder.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date and each Option Closing Date, if any,
and during such longer period as the Prospectus may be required to be delivered
in connection with sales by the Underwriters or a dealer, the Registration
Statement and the Prospectus will contain all statements which are required to
be stated therein in accordance with the Act and the Rules and Regulations, and
will conform to the requirements of the Act and the Rules and Regulations; and,
at and through such dates, neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters expressly for use in
the Registration Statement or the Prospectus or any amendment thereof or
supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or leasing
of any properties or the character of its operations require such qualification
or licensing. The Company does not own, directly or indirectly, an interest in
any
3
<PAGE>
corporation, partnership, trust, joint venture or other business entity. The
Company has all requisite power and authority (corporate and other), and has
obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and has
been doing business in compliance in with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and with all federal,
state, local and foreign laws, rules and regulations to which it is subject;
and the Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order, license,
certificate, franchise or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
prospects, stockholders' equity, value, operations, properties, business or
results of operations of the Company. The disclosure in the Registration
Statement concerning the effects of federal, state, local and foreign laws,
rules and regulations on the Company's business as currently conducted and as
contemplated are correct in all respects and do not omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and the Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by
any instrument, agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities, except for this
Agreement, the Representatives' Warrant Agreement and the Warrant Agreement (as
defined in Section 1(gg) hereof of this Agreement) and as described in the
Prospectus. The Securities and all other securities issued or issuable by the
Company on or prior to the Closing Date and each Option Closing Date, if any,
conform or, when issued and paid for, will conform, in all respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holder of
any security of the Company or any similar contractual right granted by the
Company. The Securities to be sold by the Company hereunder and pursuant to the
Representatives' Warrant Agreement and the Warrant Agreement are not and will
not be subject to any preemptive or other similar rights of any stockholder,
have been duly authorized and, when issued, paid for and delivered in
accordance with the terms hereof and thereof, will be validly issued, fully
paid and non-assessable and conform to the descriptions thereof contained in
the Prospectus; the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and validly
taken; and the certificates representing the Securities, when delivered by the
Company, will be in due and proper form. Upon the issuance and delivery
pursuant to the terms hereof and the Representatives' Warrant Agreement and the
Warrant Agreement of the Securities to be sold by the Company hereunder and
thereunder to the Underwriters, the Underwriters will acquire good and
marketable title to such Securities, free and clear of any lien, charge, claim,
4
<PAGE>
encumbrance, pledge, security interest, defect or other restriction or equity
of any kind whatsoever asserted against the Company or any affiliate (within
the meaning of the Rules and Regulations) of the Company.
(f) The financial statements of the Company and the notes thereto included
in the Registration Statement, each Preliminary Prospectus and the Prospectus
fairly present the financial position, income, changes in cash flow, changes in
stockholders' equity and the results of operations of the Company at the
respective dates and for the respective periods to which they apply. Such
financial statements have been examined by Horton & Company, L.L.C., who are
independent certified public accountants within the meaning of the Act and the
Rules and Regulations, as indicated in their reports filed herewith. Such
financial statements have been prepared in conformity with generally accepted
accounting principles and the Rules and Regulations, consistently applied
throughout the periods involved. There has been no change or development
involving a material adverse prospective change in the condition, financial or
otherwise, or in the earnings, position, prospects, stockholders' equity,
value, operations, properties, business or results of operations of the
Company, whether or not arising in the ordinary course of business, since the
date of the financial statements included in the Registration Statement and the
Prospectus; and the outstanding debt, the property, both tangible and
intangible, and the business of the Company conform in all respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus. The financial information (including, without limitation, any pro
forma financial information) set forth in the Prospectus under the headings
"Prospectus Summary," "Capitalization," "Selected Financial Data" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" fairly presents, on the basis stated in the Prospectus, the
information set forth therein and such financial information has been derived
from or compiled on a basis consistent with that of the audited financial
statements included in the Prospectus; and in the case of pro forma
information, if any, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein.
(g) The Company (i) has paid all federal, state, local and foreign taxes
for which it is liable, including, but not limited to, withholding taxes and
amounts payable under Chapters 21 through 24 of the Internal Revenue Code of
1986, as amended (the "Code"), and has furnished all information returns it is
required to furnish pursuant to the Code, (ii) has established adequate
reserves for such taxes which are not due and payable, and (iii) does not have
any tax deficiency or claims outstanding, proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or on
behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Securities from
the Company, (iii) the consummation by the Company of any of its obligations
under this Agreement or the Representatives' Warrant Agreement, or (iv) resales
of the Securities in connection with the distribution contemplated hereby.
(i) The Company maintains insurance policies, including, but not limited
to, general liability, property, personal and product liability insurance, and
surety bonds which insure the Company and its employees against such losses and
risks generally insured against by
5
<PAGE>
comparable businesses. The Company (i) has not failed to give notice or present
any insurance claim with respect to any matter, including but not limited to
the Company's business, property or employees, under any insurance policy or
surety bond in a due and timely manner, (ii) does not have any disputes or
claims against any underwriter of such insurance policies or surety bonds, nor
has the Company failed to pay any premiums due and payable thereunder, or (iii)
has not failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those pertaining to environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give rise to
the same), or involving the properties or business of, the Company which (i)
questions the validity of the capital stock of the Company, this Agreement, the
Representatives' Warrant Agreement or the Warrant Agreement or of any action
taken or to be taken by the Company pursuant to or in connection with this
Agreement, the Representatives' Warrant Agreement or the Warrant Agreement,
(ii) is required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration Statement
are accurately summarized in all respects), or (iii) might materially and
adversely affect the condition, financial or otherwise, earnings, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company.
(k) The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, to enter into this Agreement, the
Representatives' Warrant Agreement and the Warrant Agreement and to consummate
the transactions provided for in such agreements; and each of this Agreement,
the Representatives' Warrant Agreement and the Warrant Agreement have been duly
and properly authorized, executed and delivered by the Company. Each of this
Agreement, the Representatives' Warrant Agreement and the Warrant Agreement
constitutes a legal, valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms. None of the Company's issue
and sale of the Securities, execution or delivery of this Agreement, the
Representatives' Warrant Agreement or the Warrant Agreement, its performance
hereunder and thereunder, its consummation of the transactions contemplated
herein and therein, or the conduct of its business as described in the
Registration Statement and the Prospectus and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or
will constitute a default under, or result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (i) the
articles of incorporation or by-laws of the Company, (ii) any license,
contract, indenture, mortgage, lease, deed of trust, voting trust agreement,
stockholders' agreement, note, loan or credit agreement or other agreement or
instrument evidencing an obligation for borrowed money, or any other agreement
or instrument to which the Company is a party or by which it is or may be bound
or to which its properties or assets (tangible or intangible) are or may be
subject, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign,
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having jurisdiction over the Company or any of its activities or properties.
(l) No consent, approval, authorization or order of, and no filing with,
any arbitrator, court, regulatory body, administrative agency, government
agency or other body, domestic or foreign, is required for the issuance of the
Securities pursuant to the Prospectus and the Registration Statement, this
Agreement, the Representatives' Warrant Agreement and the Warrant Agreement,
the performance of this Agreement, the Representatives' Warrant Agreement and
the Warrant Agreement and the transactions contemplated hereby and thereby,
including without limitation, any waiver of any preemptive right, first refusal
or other rights that any entity or person may have for the issue and/or sale of
any of the Securities, except such as have been obtained under the Act, state
securities laws and the rules of the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the Underwriters' purchase and
distribution of the Securities.
(m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which any of its assets, properties or business may be subject have
been duly and validly authorized, executed and delivered by the Company, and
constitute legal, valid and binding agreements of the Company, enforceable
against the Company in accordance with their respective terms. The descriptions
in the Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by Form S-1; and there are no agreements, contracts or other documents
which are required by the Act to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described or
filed as required; and the exhibits which have been filed are complete and
correct copies of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, (ii) entered into any transaction other than in
the ordinary course of business, or (iii) declared or paid any dividend or made
any other distribution on or in respect of any class of its capital stock; and,
subsequent to such dates, and except as may otherwise be disclosed in the
Prospectus, there has not been any change in the capital stock, debt (long or
short term) or liabilities of the Company or any material adverse change in the
condition, financial or otherwise, earnings, prospects, stockholders' equity,
value, operations, properties, business or results of operations of the
Company.
(o) No default exists in the due performance and observance of any term,
covenant or condition of any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
partnership agreement, stockholders' agreement, note, loan or credit agreement
or any other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the Company is a party or
by which the Company is or may be bound or to which the property or assets
(tangible or intangible) of the Company is or may be subject.
(p) The Company has generally enjoyed a satisfactory employer-employee
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relationship and the Company is in compliance with all federal, state, local
and foreign laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company by the United States Department of
Labor or any other governmental agency responsible for the enforcement of any
federal, state, local or foreign laws, rules and regulations relating to
employment. There is no unfair labor practice charge or complaint against the
Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company, or any predecessor entity, and none has ever
occurred. No representation question exists respecting the employees of the
Company, and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company. No labor dispute with the employees of the Company
exists or is imminent.
(q) The Company does not maintain, sponsor or contribute to any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan" or a "multiemployer plan," as such terms are defined in Sections
3(2), 3(l) and 3(37), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not
maintain or contribute, now or at any time previously, to a defined benefit
plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code which could subject the
Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply
with Code Section 401(a), stating that such ERISA Plan and the attendant trust
are qualified thereunder. The Company has never completely or partially
withdrawn from a "multiemployer plan."
(r) Neither the Company nor any of its employees, directors, stockholders
or affiliates (within the meaning of the Rules and Regulations), has taken or
will take, directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under the
Exchange Act or otherwise, the stabilization or manipulation of the price of
any security of the Company, whether to facilitate the sale or resale of the
Securities or otherwise.
(s) None of the trademarks, trade names, service marks, service names,
copyrights, patents and patent applications, and none of the licenses and
rights to the foregoing, presently owned or held by the Company are in dispute
or are in conflict with the right of any other person or entity. The Company
(i) owns or has the right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all trademarks, trade names, service marks,
service names, copyrights, patents and patent applications, and licenses and
rights with respect to the foregoing, used in the conduct of its business as
now conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii) is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner or licensee of, or other
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claimant to, any trademark, trade name, service mark, service name, copyright,
patent, patent application, know how, technology or other intangible asset.
There is no action, suit, proceeding, inquiry, arbitration, investigation,
litigation or governmental or other proceeding, domestic or foreign, pending or
threatened (or circumstances that may give rise to the same) against the
Company which challenges the exclusive rights of the Company with respect to
any trademarks, trade names, service marks, service names, copyrights, patents,
patent applications or licenses or rights to the foregoing used in the conduct
of its business, or which challenge the right of the Company to use any
technology presently used or contemplated to be used in the conduct of its
business.
(t) The Company owns and has the unrestricted right to use all trade
secrets, know-how (including all unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), inventions, technology,
designs, processes, works of authorship, computer programs and technical data
and information that are material to the development, manufacture, operation
and sale of all products and services sold or proposed to be sold by the
Company, free and clear of and without violating any right, lien, or claim of
others, including, without limitation, former employers of its employees.
(u) The Company has good and marketable title to, or valid and enforceable
leasehold estates in, all items of real and personal property stated in the
Prospectus to be owned or leased by it, free and clear of all liens, charges,
claims, encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever, other than liens for taxes not
yet due and payable.
(v) Horton & Company, L.L.C., whose reports are filed with the Commission
as a part of the Registration Statement, are independent certified public
accountants as required by the Act and the Rules and Regulations.
(w) All officers and directors and holders of "restricted" securities of
the Company have executed an agreement (collectively, the "Lock-Up Agreements")
pursuant to which he, she or it has agreed (i) for a period extending 180 days
following the effective date of the Registration Statement, not to, directly or
indirectly, offer, offer to sell, sell, grant an option for the purchase or
sale of, transfer, assign, pledge, hypothecate or otherwise encumber (whether
pursuant to Rule 144 of the Rules and Regulations or otherwise) any securities
issued or issuable by the Company, whether or not owned by or registered in the
name of such persons, or dispose of any interest therein, without the prior
written consent of the Representatives and the Company, and (ii) for a period
extending twelve (12) months following the Effective Date, that all sales of
such securities issued by the Company shall be made through the Representatives
in accordance with their customary brokerage policies. The Company will cause
its transfer agent to mark an appropriate legend on the face of stock
certificates representing all of such securities and place "stop transfer"
orders on the Company's stock ledgers.
(x) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities
hereunder or any other arrangements, agreements, understandings, payments or
issuances that may affect the Underwriters' compensation, as determined by the
NASD.
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(y) The Units, the Common Stock, and the Redeemable Warrants have been
approved for quotation on The Nasdaq National Market.
(z) Neither the Company nor any of its directors, officers, stockholders,
employees, agents or any other person acting on behalf of the Company has,
directly or indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the ordinary course
of business) to any customer, supplier, employee or agent of a customer or
supplier, or any official or employee of any governmental agency (domestic or
foreign) or instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or any other
person who was, is or may be in a position to help or hinder the business of
the Company (or assist the Company in connection with any actual or proposed
transaction) which (i) might subject the Company or any other such person to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign), (ii) if not given in the past, might have had
a material and adverse effect on the condition, financial or otherwise, or the
earnings, business affairs, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company, or (iii) if not
continued in the future, might materially and adversely affect the condition,
financial or otherwise, or the earnings, business affairs, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company. The Company's internal accounting controls are
sufficient to cause the Company to comply with the Foreign Corrupt Practices
Act of 1977, as amended.
(aa) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
Relating to Disclosure of Doing Business with Cuba, and the Company further
agrees that if it or any affiliate commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.
(bb) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, and no affiliate or associate (as these
terms are defined in the Rules and Regulations) of any of the foregoing persons
or entities, has or has had, either directly or indirectly, (i) an interest in
any person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which the Company may be bound. Except as set forth in the
Prospectus under "Certain Transactions," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company and
any officer, director or any person listed in the "Principal Stockholders"
section of the Prospectus or any affiliate or associate of any of the foregoing
persons or entities.
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(cc) The minute books of the Company have been made available to the
Underwriters, contain a complete summary of all meetings and actions of the
directors and stockholders of the Company since the time of its incorporation,
and reflect all transactions referred to in such minutes accurately in all
respects.
(dd) Except and to the extent described in the Prospectus, no holder of
any securities of the Company or of any options, warrants or other convertible
or exchangeable securities of the Company has the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement. No person or entity holds any anti-dilution
rights with respect to any securities of the Company.
(ee) Any certificate signed by any officer of the Company and delivered to
the Representatives or to Underwriters' Counsel (as defined in Section 5(d)
herein), shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(ff) The Company has as of the effective date of the Registration
Statement (i) entered into employment agreements with Christian Bardenheuer,
Warner R. Johnson, Jr. and Christopher R. Seelbach, in the forms filed as
Exhibits to the Registration Statement on terms and conditions reasonably
satisfactory to the Representatives and (ii) purchased "key-man" life insurance
on Mr. Bardenheuer and Mr. Johnson, of which the Company is the sole
beneficiary, on terms and conditions reasonably satisfactory to the
Representatives.
(gg) The Company has entered into a warrant agreement, substantially in
the form filed as Exhibit __ to the Registration Statement (the "Warrant
Agreement"), with Atlas Stock Transfer Corporation, in form and substance
satisfactory to the Representatives, with respect to the Redeemable Warrants
and providing for the payment of warrant solicitation fees contemplated
therein. The Warrant Agreement has been duly and validly authorized by the
Company and, assuming due execution by the parties thereto other than the
Company, constitutes a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting the enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as obligations to
indemnify or contribute to losses may be limited by applicable law).
(hh) The Company has filed a Form 8-A with the Commission providing for
the registration under the Exchange Act of the Securities and such Form 8-A has
been declared effective by the Commission.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter
agrees to purchase from the Company, at a price equal to $_____ per Unit [90%
of the public offering price], that number of Firm Units as set forth
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in Schedule A opposite the name of such Underwriter, subject to adjustment as
the Representatives in their sole discretion shall make to eliminate any sales
or purchases of fractional shares, plus any additional number of Firm Units
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section [12] hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters to purchase all or any part of the Option Units at a price equal
to $______ per Unit [90% of the public offering price]. The option granted
hereby will expire forty-five (45) days after (i) the date the Registration
Statement becomes effective, if the Company has elected not to rely on Rule
430A under the Rules and Regulations, or (ii) the date of this Agreement if the
Company has elected to rely upon Rule 430A under the Rules and Regulations, and
may be exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Firm Units upon notice by the Representatives to the
Company setting forth the number of Option Units as to which the Underwriters
are then exercising the option and the time and date of payment and delivery
for any such Option Units. Any such time and date of delivery (an "Option
Closing Date") shall be determined by the Representatives, but shall not be
later than seven (7) full business days after the exercise of said option, nor
in any event prior to the Closing Date, unless otherwise agreed upon by the
Representatives and the Company. Nothing herein contained shall obligate the
Underwriters to exercise the option granted hereby. No Option Units shall be
delivered unless the Firm Units shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates for,
the Firm Units shall be made at the offices of Dirks at 520 Madison Avenue,
10th Floor, New York, New York 10022, or at such other place as shall be agreed
upon by the Representatives and the Company. Such delivery and payment shall be
made at 10:00 a.m. (New York City time) on _________, 2000 or at such other
time and date as shall be agreed upon by the Representatives and the Company
but not less than three (3) nor more than seven (7) full business days after
the effective date of the Registration Statement (such time and date of payment
and delivery being herein called the "Closing Date"). In addition, in the event
that any or all of the Option Units are purchased by the Underwriters, payment
of the purchase price for, and delivery of certificates for, such Option Units
shall be made at the above mentioned office of the Dirks or at such other place
as shall be agreed upon by the Representatives and the Company on each Option
Closing Date as specified in the notice from the Representatives to the
Company. Delivery of the certificates for the Firm Units and the Option Units,
if any, shall be made to the Underwriters against payment by the Underwriters
of the purchase price for the Firm Units and the Option Units, if any, to the
order of the Company by New York Clearing House funds. Certificates for the
Firm Units and the Option Units, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two (2) business days prior to the Closing Date or the
relevant Option Closing Date, as the case may be. The certificates for the Firm
Units and the Option Units, if any, shall be made available to the
Representatives at such offices or such other place as the Representatives may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to the Closing Date or the relevant Option Closing
Date, as the case may be.
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(d) On the Closing Date, the Company shall issue and sell to the
Representatives or their designees the Representatives' Warrants for an
aggregate purchase price of $.0001 per warrant, which Representatives' Warrants
shall entitle the holders thereof to purchase an aggregate of an additional
400,000 Units. The Representatives' Warrants shall be exercisable for a period
of forty-eight (48) months commencing twelve (12) months from the Effective
Date at a price equaling one hundred and twenty percent (120%) of the initial
public offering price of the Units. The Representatives' Underlying Warrants
are identical to the Redeemable Warrants, except they are not redeemable. The
Representatives' Warrant Agreement and the form of the certificates for the
Representatives' Warrant shall be substantially in the form filed as Exhibit
_____ to the Registration Statement. Payment for the Representatives' Warrants
shall be made on the Closing Date.
3. Public Offering of the Units. As soon after the Registration Statement
becomes effective as the Representatives deem advisable, the Underwriters shall
make a public offering of the Firm Units and such of the Option Units as the
Representatives may determine (other than to residents of or in any
jurisdiction in which qualification of the Units is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Representatives may from time to time increase or decrease the public
offering price after distribution of the Units has been completed to such
extent as the Representatives, in their sole discretion, deem advisable. The
Underwriters may enter into one or more agreements as the Underwriters, in
their sole discretion, deem advisable with one or more broker-dealers who shall
act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective
date of the Registration Statement, file any amendment to the Registration
Statement or supplement to the Prospectus or file any document under the Act or
the Exchange Act before termination of the offering of the Securities to the
public by the Underwriters of which the Representatives shall not previously
have been advised and furnished with a copy, or to which the Representatives
shall have objected or which is not in compliance with the Act, the Exchange
Act and the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Representatives and confirm the same in writing, (i)
when the Registration Statement, as amended, becomes effective, when any
post-effective amendment to the Registration Statement becomes effective and,
if the provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding the outcome of which may result in the
suspension of the effectiveness of the Registration Statement or any order
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution of any
proceedings for that purpose, (iii) of the issuance by the Commission or by any
state securities commission of
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any proceedings for the suspension of the qualification of any of the
Securities for offering or sale in any jurisdiction or of the initiation, or
the threatening, of any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission, and (v) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to the
Prospectus or for additional information. If the Commission or any state
securities regulatory authority shall enter a stop order or suspend such
qualification at any time, the Company will make every effort to obtain
promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representatives) with the Commission, or transmit the
Prospectus by a means reasonably calculated to result in filing the same with
the Commission, pursuant to Rule 424(b)(1) of the Rules and Regulations (or, if
applicable and if consented to by the Representatives, pursuant to Rule
424(b)(4) of the Rules and Regulations) within the time period specified in
Rule 424(b)(1) (or, if applicable and if consented to by the Underwriters, Rule
424(b)(4)).
(d) The Company will give the Representatives notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Representatives in connection with the offering of any of the Securities which
differs from the corresponding prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), and will furnish the Representatives with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement to which the Representatives or Orrick, Herrington & Sutcliffe LLP,
its counsel ("Underwriters' Counsel"), shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representatives, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representatives may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution contemplated hereby, and shall make such
applications, file such documents and furnish such information as may be
required for such purpose; provided, however, the Company shall not be required
to qualify as a foreign corporation or file a general or limited consent to
service of process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Representatives
agree that such action is not at the time necessary or advisable, use all
reasonable efforts to file and make such statements or reports at such times as
are or may reasonably be required by the laws of such jurisdiction to continue
such qualification.
(f) During the time when a prospectus is required to be delivered under
the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act, the Exchange Act and the Rules and
Regulations so far as necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and the
Prospectus, or any amendments or supplements thereto. If, at any time when a
prospectus relating to the Securities is required to be delivered under the
Act, any event shall have occurred as
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a result of which, in the opinion of counsel for the Company or Underwriters'
Counsel, the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, or if it is necessary at
any time to amend or supplement the Prospectus to comply with the Act, the
Company will notify the Representatives promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel and the Company will furnish to the Representatives
copies of such amendment or supplement as soon as available and in such
quantities as the Representatives may request.
(g) As soon as practicable, but in any event not later than forty five
(45) days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (ninety (90) days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Representatives, an
earnings statement which will be in the detail required by, and will otherwise
comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless required by
the Act, covering a period of at least twelve (12) consecutive months after the
effective date of the Registration Statement.
(h) During a period of seven (7) years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly report of earnings and will deliver to the Representatives:
i) concurrently with furnishing such quarterly reports to the
Commission statements of income of the Company for such quarter in the
form furnished to the Company's stockholders and certified by the
Company's principal financial and accounting officer;
ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity and cash flows of the Company for such fiscal year,
accompanied by a copy of the report thereon of the Company's independent
certified public accountants;
iii) as soon as they are available, copies of all reports (financial
or other) mailed to stockholders;
iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD
or any securities exchange;
v) every press release and every material news item or article of
interest
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to the financial community in respect of the Company or its affairs which
was released or prepared by or on behalf of the Company; and
vi) any additional information of a public nature concerning the
Company (and any future subsidiaries) or its business which the
Representatives may request.
During such seven-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(i) The Company will maintain a transfer and warrant agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for the Units, the Common
Stock and the Redeemable Warrants.
(j) The Company will furnish to the Representatives, without charge and at
such place as the Representatives may designate, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or post-effective
amendments thereto (one of which will be signed and will include all financial
statements and exhibits), the Prospectus, and all amendments and supplements
thereto, including any prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such
quantities as the Representatives may reasonably request.
(k) On or before the effective date of the Registration Statement, the
Company shall provide the Representatives with originally-executed copies of
duly executed, legally binding and enforceable Lock-Up Agreements which are in
form and substance satisfactory to the Underwriters. On or before the Closing
Date, the Company shall deliver instructions to its transfer agent authorizing
such transfer agent to place appropriate legends on the certificates
representing the securities of the Company subject to the Lock-Up Agreements
and to place appropriate stop transfer orders on the Company's ledgers.
(l) The Company agrees that, for a period of twelve (12) months commencing
on the effective date of the Registration Statement, and except as contemplated
by this Agreement, it and its present and future subsidiaries will not, without
the prior written consent of the Representatives issue, sell, contract or offer
to sell, grant an option for the purchase or sale of, assign, transfer, pledge,
distribute or otherwise dispose of, directly or indirectly, any securities or
any option, right or warrant with respect to any securities for cash at less
than the greater of the initial public offering price of the Units or the fair
market value of such Units, except pursuant to stock options or
Representatives' Warrants issued on the date hereof.
(m) Neither the Company nor any of its officers, directors, stockholders
or affiliates (within the meaning of the Rules and Regulations) will take,
directly or indirectly, any action designed to stabilize or manipulate the
price of any securities of the Company, or which might in the future reasonably
be expected to cause or result in the stabilization or manipulation of the
price of any such securities.
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(n) The Company shall apply the net proceeds from the sale of the
Securities offered to the public in the manner, and subject to the conditions,
set forth under "Use of Proceeds" in the Prospectus. No portion of the net
proceeds will be used, directly or indirectly, to acquire any securities issued
by the Company.
(o) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, any Form SR
required by Rule 463 under the Act) from time to time under the Act, the
Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents will comply as to form and substance with the applicable requirements
under the Act, the Exchange Act and the Rules and Regulations.
(p) The Company shall furnish to the Representatives as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date hereof, the Closing Date or the relevant Option Closing
Date, as the case may be) which have been read by the Company's independent
public accountants, as stated in their letters to be furnished pursuant to
Section 7(k) hereof.
(q) The Company shall cause the Units, the Common Stock and the Redeemable
Warrants to be quoted on the Nasdaq National Market and, for a period of seven
(7) years from the date hereof, use its best efforts to maintain the Nasdaq
National Market quotation of the Units, the Common Stock and the Redeemable
Warrants to the extent outstanding.
(r) For a period of five (5) years from the Closing Date, the Company
shall at the request of the Representatives, furnish or cause to be furnished
to the Representatives and at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Units, the Common Stock and the
Redeemable Warrants, and (ii) a list of holders of all of the Company's
securities.
(s) For a period of five (5) years from the Closing Date, the Company
shall, at the Company's sole expense, (i) promptly provide the Underwriters
upon any and all requests of the Underwriters, with a "blue sky trading survey"
for secondary sales of the Company's securities, prepared by counsel to the
Company, and (ii) take all necessary and appropriate actions to further qualify
the Company's securities in all jurisdictions of the United States in order to
permit secondary sales of such securities pursuant to the "blue sky" laws of
those jurisdictions, provided that such jurisdictions do not require the
Company to qualify as a foreign corporation.
(t) As soon as practicable, but in no event more than thirty (30) days
after the effective date of the Registration Statement, the Company agrees to
take all necessary and appropriate actions to be included in the Standard and
Poor's Corporation Descriptions and Moody's OTC Manual and to continue such
inclusion for a period of not less than seven (7) years.
(u) Until the completion of the distribution of the Units to the public
and during any period during which a prospectus is required to be delivered,
the Company shall not, without the prior written consent of the Underwriters,
issue, directly or indirectly, any press release or other
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communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases
issued in the ordinary course of the Company's business consistent with past
practices with respect to the Company's operations.
(v) For a period of five (5) years after the effective date of the
Registration Statement, the Company shall cause one (1) individual selected by
Dirks, subject to the good faith approval of the Company, to be elected to the
Board of Directors of the Company (the "Board"), if requested by Dirks. In the
event Dirks shall not have designated such individual at the time of any
meeting of the Board or such person has not been elected or is unavailable to
serve, the Company shall notify Dirks of each meeting of the Board. An
individual selected by Dirks shall be permitted to attend all meetings of the
Board and to receive all notices and other correspondence and communications
sent by the Company to members of the Board. The Company shall reimburse
Dirks's designee for his or her out-of-pocket expenses reasonably incurred in
connection with his or her attendance of the Board meetings.
(w) Commencing one year from the date hereof, to pay the Underwriters a
warrant solicitation fee equal to five percent (5%) of the exercise price of
the Redeemable Warrants, payable on the date of the exercise thereof on terms
provided in the Warrant Agreement. The Company will not solicit the exercise of
the Redeemable Warrants through any solicitation agent other than the
Underwriters. The Underwriters will not be entitled to any warrant solicitation
fee unless the Underwriters provides bona fide services in connection with any
warrant solicitation and the investor designates, in writing, that the
Underwriters is entitled to such fee.
(x) For a period equal to the lesser of (i) seven (7) years from the date
hereof, and (ii) the sale to the public of the Representatives' Securities, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Forms SB-2 or S-1 (or other appropriate form) for the
registration under the Act of the Underwriters' Securities.
(y) For a period of twenty four (24) months after the effective date of
the Registration Statement, the Company shall not restate, amend or alter any
term of any written employment, consulting or similar agreement entered into
between the Company and any officer, director or key employee as of the
effective date of the Registration Statement in a manner which is more
favorable to such officer, director or key employee, without the prior written
consent of the Representatives.
(z) The Company will use its best efforts to maintain the effectiveness of
the Registration Statement for a period of five years after the date hereof.
(aa) For a period of three (3) years following the Effective Date, the
Company, any subsidiaries and any affiliates thereof grant a right of first
refusal to Dirks for any sale of securities to be made by the Company, any
affiliates and any subsidiaries.
(bb) For a period of twelve (12) months following the Effective Date, the
Company, any subsidiaries and any affiliates thereof shall not sell or offer
for sale any of their securities for cash at less than the greater of the
initial public offering price of the Units or the then market value of such
Units commencing on the Effective Date and for a period of twelve (12)
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months following the Effective Date, except pursuant to options of the Company
existing on the Effective Date, without the written consent of the
Representatives, as adjusted for consolidations and stock splits.
5. Payment of Expenses.
(a) The Company hereby agrees to pay (such payment to be made, at the
discretion of the Underwriters, on the Closing Date and any Option Closing Date
(to the extent not paid on the Closing Date or a previous Option Closing Date))
all expenses and fees (other than fees of Underwriters' Counsel) incident to
the performance of the obligations of the Company under this Agreement, the
Representatives' Warrant Agreement and the Warrant Agreement, including,
without limitation, (i) the fees and expenses of accountants and counsel for
the Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage, overnight
delivery or courier charges with respect thereto) of the Registration Statement
and the Prospectus and any amendments and supplements thereto and the printing,
mailing (including the payment of postage, overnight delivery or courier
charges with respect thereto) and delivery of this Agreement, the
Representatives' Warrant Agreement, the Warrant Agreement, and agreements with
selected dealers, and related documents, including the cost of all copies
thereof and of each Preliminary Prospectus and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in such quantities as the Underwriters
may reasonably request, (iii) the printing, engraving, issuance and delivery of
the Securities, including transfer taxes, if any, (iv) the qualification of the
Securities under state or foreign securities or "blue sky" laws and
determination of the status of such securities under legal investment laws,
including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and disbursements and fees of counsel in connection therewith,
(v) advertising costs and expenses, including, but not limited to costs and
expenses in connection with "road shows," information meetings and
presentations, bound volumes and prospectus memorabilia and "tombstone"
advertisement expenses, (vi) costs and expenses in connection with due
diligence investigations, including, but not limited to, the fees of any
independent counsel or consultants, (vii) fees and expenses of a transfer and
warrant agent and registrar for the Securities, (viii) applications for
assignments of a rating of the Securities by qualified rating agencies, (ix)
the fees payable to the Commission and the NASD, and (x) the fees and expenses
incurred in connection with the quotation of the Securities on the Nasdaq
National Market and/or any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance with
the provisions of Section 6, Section 10(a) or Section 12 hereof, the Company
shall reimburse and indemnify the Underwriters for all of their actual
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel, less any amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses payable
pursuant to Section 4(a) hereof, it will pay to the Underwriters on the Closing
Date by certified or bank cashier's check, or, at the election of the
Underwriters, by deduction from the proceeds of the offering of the Firm Units,
a non-accountable expense allowance equal to three percent (3%) of the
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<PAGE>
gross proceeds received by the Company from the sale of the Firm Units, fifty
thousand dollars ($50,000) of which has been paid to date by the Company. In
the event the Underwriters elect to exercise the over-allotment option
described in Section 2(b) hereof, the Company further agrees to pay to the
Underwriters on each Option Closing Date, by certified or bank cashier's check,
or, at the Underwriters' election, by deduction from the proceeds of the Option
Units purchased on such Option Closing Date, a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of such Option Units.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had
been made on and as of the Closing Date and each Option Closing Date, as the
case may be; the accuracy on and as of the Closing Date and each Option Closing
Date, if any, of the statements of officers of the Company made pursuant to the
provisions hereof; the performance by the Company on and as of the Closing Date
and each Option Closing Date, if any, of its covenants and obligations
hereunder; and to the following further conditions:
(a) The Registration Statement shall have become effective not later than
12:00 p.m., New York time, on the date of this Agreement or such later date and
time as shall be consented to in writing by the Representatives, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission
for additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Units and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Representatives of such timely
filing, or a post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with the requirements
of Rule 430A of the Rules and Regulations.
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representatives' opinion, is material, or omits to state
a fact which, in the Representatives' opinion, is material and is required to
be stated therein or is necessary to make the statements therein, in light of
the circumstances in which they were made not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Representatives' opinion, is material, or omits to state a fact
which, in the Representatives' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(c) On or prior to the Closing Date, the Representatives shall have
received from Underwriters' Counsel such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and such other
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<PAGE>
related matters as the Representatives may request and Underwriters' Counsel
shall have received such papers and information as they may request in order to
enable them to pass upon such matters.
(d) The Underwriters shall have received the favorable opinion of Stairs
Dillenbeck Finley & Merle, counsel to the Company, dated the Closing Date,
addressed to the Underwriters, in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
i) the Company (A) has been duly organized and is a validly existing
corporation in good standing under the laws of its jurisdiction of
incorporation, (B) is duly qualified and licensed and in good standing as
a foreign corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, and (C) has all requisite power and authority
(corporate and other) and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and
has been doing business in compliance in with all such authorizations,
approvals, orders, licenses, certificates and permits obtained by it from
governmental or regulatory officials and agencies and all federal, state,
local and foreign laws, rules and regulations to which it is subject; and
the Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order,
license, certificate, franchise or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially and adversely affect the condition, financial or
otherwise, or the earnings, prospects, stockholders' equity, value,
operations, properties, business or results of operations of the Company.
The disclosure in the Registration Statement concerning the effects of
federal, state, local and foreign laws, rules and regulations on the
Company's business as currently conducted and as contemplated is correct
in all respects and does not omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading;
ii) the Company does not own, directly or indirectly, an interest in
any corporation, partnership, joint venture, trust or other business
entity;
iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "Capitalization" and "Description of Securities"
and except as set forth in the Prospectus, the Company is not a party to
or bound by any instrument, agreement or other arrangement providing for
it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Representatives' Warrant
Agreement and the Warrant Agreement and as described in the Prospectus.
The Securities and all other securities issued or issuable by the Company
conform, or when issued and paid for, will conform, in all respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus. All issued and
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outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the holders thereof
have no rights of rescission with respect thereto and are not subject to
personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any
holders of any security of the Company or any similar contractual right
granted by the Company. The Securities to be sold by the Company hereunder
and under the Representatives' Warrant Agreement and the Warrant Agreement
are not and will not be subject to any preemptive or other similar rights
of any stockholder, have been duly authorized and, when issued, paid for
and delivered in accordance with the terms hereof and thereof, will be
validly issued, fully paid and non-assessable and conform to the
descriptions thereof contained in the Prospectus; the holders thereof will
not be subject to any liability solely as such holders; all corporate
action required to be taken for the authorization, issue and sale of the
Securities has been duly and validly taken; and the certificates
representing the Securities are in due and proper form. The Redeemable
Warrants and Representatives' Warrants constitute valid and binding
obligations of the Company to issue and sell, upon exercise thereof and
payment therefor, the number and type of securities of the Company called
for thereby. Upon the issuance and delivery pursuant to this Agreement,
the Representatives' Warrant Agreement and the Warrant Agreement of the
Securities to be sold by the Company hereunder and thereunder, the
Underwriters will acquire good and marketable title to such Securities,
free and clear of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever. No
transfer tax is payable by or on behalf of the Underwriters in connection
with (A) the issuance by the Company of the Securities, (B) the purchase
by the Underwriters of the Securities from the Company, (D) the
consummation by the Company of any of its obligations under this
Agreement, the Representatives' Warrant Agreement or the Warrant
Agreement, or (E) resales of the Securities in connection with the
distribution contemplated hereby;
iv) the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A, and no stop order suspending the use of
the Preliminary Prospectus, the Registration Statement or the Prospectus
or any part of any thereof or suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending, threatened or, to the counsel's
knowledge, contemplated under the Act;
v) each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto (other than
the financial statements and schedules and other financial and statistical
data included therein, as to which no opinion need be rendered) comply as
to form in all material respects with the requirements of the Act and the
Rules and Regulations;
vi) (A) there are no agreements, contracts or other documents
required by the Act to be described in the Registration Statement (or
required to be filed
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under the Exchange Act if upon such filing they would be incorporated, in
whole or in part, by reference therein) and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement and the Prospectus and filed as exhibits thereto,
and the exhibits which have been filed are correct copies of the documents
of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or amendment
thereto of agreements, contracts and other documents to which the Company
is a party or by which it is bound are accurate and fairly represent the
information required to be shown by Form S-1; (C) there is no action,
suit, proceeding, inquiry, arbitration, investigation, litigation or
governmental proceeding (including, without limitation, those pertaining
to environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same) or
involving the properties or business of, the Company which (I) is required
to be disclosed in the Registration Statement which is not so disclosed
(and such proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), or (II) questions the validity of
the capital stock of the Company or of this Agreement, the
Representatives' Warrant Agreement or the Warrant Agreement or of any
action taken or to be taken by the Company pursuant to or in connection
with any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is not
described as required; and (E) there is no action, suit or proceeding
pending or threatened against or affecting the Company before any court,
arbitrator or governmental body, agency or official (or any basis thereof
known to such counsel) in which there is a reasonable possibility of a
decision which may result in a material adverse change in the condition,
financial or otherwise, or the earnings, prospects, stockholders' equity,
value, operation, properties, business or results of operations of the
Company, which could adversely affect the present or prospective ability
of the Company to perform its obligations under this Agreement, the
Representatives' Warrant Agreement or the Warrant Agreement or which in
any manner draws into question the validity or enforceability of this
Agreement, the Representatives' Warrant Agreement or the Warrant
Agreement;
vii) the Company has full legal right, power and authority to enter
into each of this Agreement, the Representatives' Warrant Agreement and
the Warrant Agreement and to consummate the transactions provided for
herein and therein; and each of this Agreement, the Representatives'
Warrant Agreement and the Warrant Agreement has been duly authorized,
executed and delivered by the Company. Each of this Agreement, the
Representatives' Warrant Agreement and the Warrant Agreement, assuming due
authorization, execution and delivery by each other party thereto,
constitutes a legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating
to or affecting the enforcement of creditors' rights and the application
of equitable principles in any action, legal or equitable, and except as
obligations to indemnify or contribute to losses may be limited by
applicable law). None of the Company's execution or
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delivery of this Agreement, the Representatives' Warrant Agreement and the
Warrant Agreement, its performance hereunder and thereunder, its
consummation of the transactions contemplated herein and therein, or the
conduct of its business as described in the Registration Statement and the
Prospectus and any amendments or supplements thereto, conflicts with or
will conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (A) the
certificate of incorporation or bylaws of the Company, (B) any license,
contract, indenture, mortgage, lease, deed of trust, voting trust
agreement, stockholders' agreement, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company is a party or by
which it is or may be bound or to which its properties or assets (tangible
or intangible) are or may be subject, (C) any statute applicable to the
Company or (D) any judgment, decree, order, rule or regulation applicable
to the Company of any arbitrator, court, regulatory body or administrative
agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or any
of their activities or properties;
viii) no consent, approval, authorization or order of, and no filing
with, any arbitrator, court, regulatory body, administrative agency,
government agency or other body, domestic or foreign (other than such as
may be required under "blue sky" laws and the rules of the NASD, as to
which no opinion need be rendered), is required in connection with the
issuance of the Securities pursuant to the Prospectus, the Registration
Statement, this Agreement, the Representatives' Warrant Agreement and the
Warrant Agreement, or the performance of this Agreement, the
Representatives' Warrant Agreement and the Warrant Agreement and the
transactions contemplated hereby and thereby;
ix) the properties and business of the Company conform to the
description thereof contained in the Registration Statement and the
Prospectus; and the Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
stated in the Prospectus to be owned or leased by it, in each case free
and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and liens for
taxes not yet due and payable;
x) the Company is not in breach of, or in default under, any term or
provision of any license, contract, indenture, mortgage, installment sale
agreement, lease, deed of trust, voting trust agreement, stockholders'
agreement, partnership agreement, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument
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to which the Company is a party or by which it is or may be bound or to
which its property or assets (tangible or intangible) are or may be
subject; and the Company is not in violation of any term or provision of
(A) its certificate of incorporation or by-laws, (B) any authorization,
approval, order, license, certificate, franchise or permit of any
governmental or regulatory official or body, or (C) any judgement, decree,
order, statute, rule or regulation to which it is subject;
xi) the Units, the Common Stock and the Redeemable Warrants have been
accepted for quotation on the Nasdaq National Market;
xi) the statements in the Prospectus under "Prospectus Summary,"
"Risk Factors," "Business," "Management," "Principal Stockholders,"
"Related Party Transactions," "Shares Eligible For Future Sale," and
"Description of Securities" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in all
material respects;
xii) the persons listed under the caption "Principal Stockholders" in
the Prospectus are the respective "beneficial owners" (as such phrase is
defined in Rule 13d-3 under the Exchange Act) of the securities set forth
opposite their respective names thereunder as and to the extent set forth
therein;
xiv) the Company owns or possess, free and clear of all liens or
encumbrances and right thereto or therein by third parties, the requisite
licenses or other rights to use all trademarks, service marks, copyrights,
service names, tradenames, patents, patent applications and licenses
necessary to conduct its business (including without limitation any such
licenses or rights described in the Prospectus as being owned or possessed
by the Company) and there is no claim or action by any person pertaining
to, or proceeding, pending or threatened, which challenges the exclusive
rights of the Company with respect to any trademarks, service marks,
copyrights, service names, trade names, patents, patent applications and
licenses used in the conduct of the Company's business (including, without
limitation, any such licenses or rights described in the Prospectus as
being owned or possessed by the Company);
xv) neither the Company nor any of their respective directors,
officers, stockholders, employees, agents or any other person acting on
behalf of the Company has, directly or indirectly, given or agreed to give
any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, or any official or employee
of any governmental agency or instrumentality of any government (domestic
or foreign) or any political party or candidate for office (domestic or
foreign) or other person who was, is or may be in a position to help or
hinder the business of the Company (or assist it in connection with any
actual or proposed transaction) which (A) might subject the Company or any
such person to any damage or penalty in any civil, criminal or
governmental litigation or
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proceeding (domestic or foreign), (B) if not given in the past, might have
had material and adverse effect on the condition, financial or otherwise,
or the earnings, prospects, stockholders' equity, value, operations,
properties, business or results of operations of the Company taken as a
whole, or (C) if not continued in the future, might materially and
adversely affect the condition, financial or otherwise, or the earnings,
prospects, stockholders' equity, value, operations, properties, business
or results of operations of the Company taken as a whole;
xvi) there are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangement or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Representatives' compensation, as determined by the NASD;
xvii) the minute books of the Company contain a complete summary of
all meetings and actions of the directors and stockholders of the Company
since the time of its incorporation and reflect all transactions referred
to in such minutes accurately in all material respects;
xviii) no person, corporation, trust, partnership, association or
other entity has the right to include and/or register any securities of
the Company in the Registration Statement, require the Company to file any
registration statement or, if filed, to include any security in such
registration statement;
xix) assuming due authorization, execution and delivery by the
parties thereto, the Lock-Up Agreements are legal, valid and binding
obligations of the parties thereto, enforceable against such parties and
any subsequent holder of the securities subject thereto in accordance with
their terms;
xx) except as described in the Prospectus, the Company does not (A)
maintain, sponsor or contribute to an ERISA Plans, (B) maintain or
contribute, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA, and (C) has never completely or
partially withdrawn from a "multiemployer plan"; and
xxi) none of the Company or an of its affiliates shall be subject to
the requirements of or shall be deemed an "Investment Company," pursuant
to and as defined under, respectively, the Investment Company Act.
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company and representatives of
the independent public accountants for the Company, at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus and related matters and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of
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the statements contained in the Preliminary Prospectus, the Registration
Statement or the Prospectus, on the basis of the foregoing, no facts have come
to the attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective, or the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, as of the date of the
Preliminary Prospectus and the Prospectus, and as of the date of such opinion,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading
(it being understood that such counsel need express no opinion with respect to
the financial statements and schedules and other financial and statistical data
included in the Preliminary Prospectus, the Registration Statement or the
Prospectus, or any supplements or amendments thereto).
In rendering such opinion, such counsel may rely (a) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; and (b) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of the Company and
certificates or other written statements of officers of departments of
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel, if requested. Such
opinion shall not state that it is to be governed or qualified by, or that it
is otherwise subject to, any treatise, written policy or other document
relating to legal opinions, including without limitation, the Legal Opinion
Accord of the ABA Section of Business Law (1991) or any comparable state
accord. The opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such counsel and
that the Underwriters and they are justified in relying thereon. Such opinion
shall also state that Underwriters' Counsel is entitled to rely thereon.
(e) The Underwriters shall have received the favorable opinion of Swidler
Berlin Shereff Friedman LLP, regulatory counsel to the Company, dated the
Closing Date, addressed to the Underwriters, in form and substance satisfactory
to Underwriters' Counsel. In addition, at each Option Closing Date, if any, the
Underwriters shall have received the favorable opinions of Stairs Dillenbeck
Finley & Merle, counsel to the Company, and Swidler Berlin Shereff Friedman
LLP, regulatory counsel to the Company, dated the relevant Option Closing Date,
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel confirming, as of the Option Closing Date, the statements
made by Stairs Dillenbeck Finley & Merle and Swidler Berlin Shereff Friedman
LLP, in their respective opinions delivered at the Closing Date.
(f) On or prior to each of the Closing Date and each Option Closing Date,
if any, Underwriters' Counsel shall have been furnished with such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in Section 6(c)
hereof, or in order to evidence the accuracy, completeness or satisfaction of
any of the representations, warranties or conditions of the Company herein
contained.
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(g) Prior to the Closing Date and each Option Closing Date, if any, (i)
there shall have been no material adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, or the
earnings, stockholders' equity, value, operations, properties, prospects,
business or results of operations of the Company, whether or not in the
ordinary course of business, from the latest dates as of which such matters are
set forth in the Registration Statement and the Prospectus; (ii) there shall
have been no transaction, not in the ordinary course of business, entered into
by the Company from the latest date as of which the financial condition of the
Company is set forth in the Registration Statement and the Prospectus; (iii)
the Company shall not be in default under any provision of any instrument
relating to any outstanding indebtedness; (iv) the Company shall not have
issued any securities (other than the Securities) or declared or paid any
dividend or made any distribution in respect of its capital stock of any class
and there shall not have been any change in the capital stock, debt (long or
short term) or liabilities or obligations of the Company (contingent or
otherwise) from the latest dates as of which such matters are set forth in the
Registration Statement and the Prospectus; (v) no material amount of the assets
of the Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and the Prospectus; (vi) no action, suit, proceeding,
inquiry, arbitration, investigation, litigation or governmental or other
proceeding, domestic or foreign, shall be pending or threatened (or
circumstances giving rise to same) against the Company or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially and adversely affect the condition,
financial or otherwise, or the earnings, stockholders' equity, value,
operations, properties, business or results of operations of the Company,
except as set forth in the Registration Statement and Prospectus; and (vii) no
stop order shall have been issued under the Act with respect to the
Registration Statement and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any, the
Representatives shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or the relevant Option Closing
Date, as the case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date
or the Option Closing Date, as the case may be, and the Company has
complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or satisfied at or
prior to such Closing Date or Option Closing Date, as the case may be;
ii) No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best of each of
such person's knowledge, are contemplated or threatened under the Act;
iii) The Registration Statement and the Prospectus and, if any, each
<PAGE>
amendment and each supplement thereto contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus or any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading and neither the Preliminary Prospectus nor any supplement
thereto included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were
made, not misleading; and
iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (A) the Company
has not incurred any material liabilities or obligations, direct or
contingent; (B) the Company has not paid or declared any dividends or
other distributions on its capital stock; (C) the Company has not entered
into any transactions not in the ordinary course of business; (D) there
has not been any change in the capital stock or long-term debt or any
increase in the short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the Company;
(E) the Company has not sustained any material loss or damage to its
property or assets, whether or not insured; (F) there is no litigation
which is pending or threatened (or circumstances giving rise to same)
against the Company or any affiliate (within the meaning of the Rules and
Regulations) of the foregoing which is required to be set forth in an
amended or supplemented Prospectus which has not been set forth; and (G)
there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this Section
6(h) are to such documents as amended and supplemented at the date of such
certificate.
(i) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall have
received a letter, dated such date, addressed to the Underwriters and in form
and substance satisfactory in all respects (including the non-material nature
of the changes or decreases, if any, referred to in clause (iii) below) to the
Underwriters and Underwriters' Counsel, from Horton & Company, L.L.C:
i) confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the Rules
and Regulations;
ii) stating that it is their opinion that the financial statements
and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting
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requirements of the Act and the Rules and Regulations and that the
Underwriters may rely upon the opinion of Horton & Company, L.L.C. with
respect to such financial statements and supporting schedules included in
the Registration Statement;
iii) stating that, on the basis of a limited review which included a
reading of the latest unaudited interim financial statements of the
Company, a reading of the latest available minutes of the stockholders and
board of directors and the various committees of the board of directors of
the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the pro forma financial
information contained in the Registration Statement and Prospectus does
not company as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or is not
fairly presented in conformity with generally accepted accounting
principles applied on basis consistent with that that of the audited
financial statements of the Company, (B) the unaudited financial
statements and supporting schedules of the Company included in the
Registration Statement do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis consistent with that of
the audited financial statements of the Company included in the
Registration Statement, or (C) at a specified date nor more than five (5)
days prior to the effective date of the Registration Statement, there has
been any change in the capital stock or long-term debt of the Company, or
any decrease in the stockholders' equity or net current assets or net
assets of the Company as compared with amounts shown in the ______, 1999
balance sheet included in the Registration Statement, other than as set
forth in or contemplated by the Registration Statement, or, if there was
any change or decrease, setting forth the amount of such change or
decrease, and (C) during the period from ______, 1999 to a specified date
not more than five (5) days prior to the effective date of the
Registration Statement, there was any decrease in net revenues, net
earnings or net earnings per share of Common Stock, in each case as
compared with the corresponding period beginning _______, 1998, other than
as set forth in or contemplated by the Registration Statement, or, if
there was any such decrease, setting forth the amount of such decrease;
iv) setting forth, at a date not later than five (5) days prior to
the effective date of the Registration Statement, the amount of
liabilities of the Company (including a break-down of commercial paper and
notes payable to banks);
v) stating that they have compared specific dollar amounts, numbers
of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the
Prospectus, in each case to the extent that such amounts, numbers,
percentages, statements and information
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<PAGE>
may be derived from the general accounting records, including work sheets,
of the Company and excluding any questions requiring an interpretation by
legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do
not constitute an audit in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement; and
vi) statements as to such other matters incident to the transaction
contemplated hereby as the Underwriters may request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Horton & Company, L.L.C. a letter, dated
as of the Closing Date or the relevant Option Closing Date, as the case may be,
to the effect that (i) it reaffirms the statements made in the letter furnished
pursuant to Section 6(j), (ii) if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that Horton & Company,
L.L.C. has carried out procedures as specified in clause (v) of Section 6(j)
hereof with respect to certain amounts, percentages and financial information
as specified by the Underwriters and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(l) On each of Closing Date and Option Closing Date, if any, there shall
have been duly tendered to the Representatives the appropriate number of
Securities.
(m) No order suspending the sale of the Securities in any jurisdiction
designated by the Underwriters pursuant to Section 4(e) hereof shall have been
issued on either the Closing Date or the Option Closing Date, if any, and no
proceedings for that purpose shall have been instituted or shall be
contemplated.
(n) On or before the effective date of the Registration Statement, the
Company shall have executed and delivered to the Representatives the
Representatives' Warrant Agreement, substantially in the form filed as Exhibit
____ to the Registration Statement. On or before the Closing Date, the Company
shall have executed and delivered to the Representatives, the Representatives'
Warrants in such denominations and to such designees as shall have been
provided to the Company.
(o) On or before Closing Date, the Securities shall have been duly
approved for quotation on the Nasdaq National Market, subject to official
notice of issuance.
(p) On or before Closing Date, there shall have been delivered to the
Underwriters all of the Lock-Up Agreements, in form and substance satisfactory
to Underwriters' Counsel.
(q) On or before the effective date of the Registration Statement, the
Company and American Stock Transfer & Trust Company shall have executed and
delivered to the Underwriters the Warrant Agreement, substantially in the form
filed as Exhibit ____ to the Registration Statement.
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(r) At least two (2) full business days prior to the date hereof, the
Closing Date and each Option Closing Date, if any, the Company shall have
delivered to the Underwriters the unaudited interim financial statements
required to be so delivered pursuant to Section 4(p) of this Agreement.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or at any Option Closing Date, as the
case may be, is not so fulfilled, the Underwriters may terminate this Agreement
or, if the Underwriters so elect, they may waive any such conditions which have
not been fulfilled or extend the time for their fulfillment.
7. Indemnification
(a) The Company agrees to indemnify and hold harmless each Underwriter
(for purposes of this Section 7, "Underwriter" shall include the officers,
directors, partners, employees, agents and counsel of the Underwriters,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries and suits in respect thereof),
whatsoever (including but not limited to any and all costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
such action, proceeding, investigation, inquiry or suit, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is
included securities of the Company issued or issuable upon exercise of the
Securities; or (iii) in any application or other document or written
communication (in this Section 7, collectively referred to as "applications")
executed by the Company or based upon written information furnished by the
Company in any jurisdiction in order to qualify the Securities under the
securities laws thereof or filed with the Commission, any state securities
commission or agency, the NASD, Nasdaq or any securities exchange; (B) the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading (in the case
of the Prospectus, in light of the circumstances in which they were made); or
(C) any breach of any representation, warranty, covenant or agreement of the
Company contained herein or in any certificate by or on behalf of the Company
or any of its officers delivered pursuant hereto, unless, in the case of clause
(A) or (B) above, such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to
any Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or any Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be. The indemnity agreement in this Section 7(a) shall be in addition to any
liability which the Company may have at common law or otherwise.
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(b) Each of the Underwriters agree severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors and officers who
has signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, to the same extent as the foregoing
indemnity from the Company to each Underwriter but only with respect to
statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof
or supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or the Prospectus directly relating to
the transactions effected by the Underwriter in connection with the offering
contemplated hereby. The Company acknowledges that the statements with respect
to the public offering of the Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriter expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus. The indemnity agreement in this Section 7(b) shall be in addition
to any liability which the Underwriter may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against one or more indemnifying parties
under this Section 7, notify each party against whom indemnification is to be
sought in writing of the commencement thereof (but the failure to so notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 (except to the extent that it has been prejudiced in any
material respect by such failure) or from any liability which it may have
otherwise). In case any such action, investigation, inquiry, suit or proceeding
is brought against any indemnified party, and it notifies an indemnifying party
or parties of the commencement thereof, the indemnifying party or parties will
be entitled to participate therein, and to the extent it or they may elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party. Notwithstanding
the foregoing, an indemnified party shall have the right to employ its own
counsel in any such case but the fees and expenses of such counsel shall be at
the expense of such indemnified party unless (i) the employment of such counsel
shall have been authorized in writing by the indemnifying parties in connection
with the defense of such action, investigation, inquiry, suit or proceeding at
the expense of the indemnifying party, (ii) the indemnifying parties shall not
have employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party shall have
reasonably concluded that there may be defenses available to it which are
different from or additional to those available to one or all of the
indemnifying parties (in which event the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event
shall the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action,
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investigation, inquiry, suit or proceeding or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances. An indemnifying party will not, without the prior written
consent of the indemnified parties, settle, compromise or consent to the entry
of any judgment with respect to any pending or threatened claim, action, suit
or proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action, investigation, inquiry, suit or proceeding),
unless such settlement, compromise or consent (i) includes an unconditional
release of each indemnified party from all liability arising out of such claim,
action, investigation, suit or proceeding and (ii) does not include a statement
as to or an admission of fault, culpability or a failure to act by or on behalf
of any indemnified party. Anything in this Section 7 to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement
of any claim or action effected without its written consent.
(d) In order to provide for just and equitable contribution in any case in
which (i) an indemnified party makes a claim for indemnification pursuant to
this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigation, inquiry, suit or proceeding in respect thereof) (A) in
such proportion as is appropriate to reflect the relative benefits received by
each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand, from the offering of the Securities or (B) if
the allocation provided by clause (A) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (A) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, in connection with the statements or omissions that resulted in
such losses, claims, damages, expenses or liabilities, as well as any other
relevant equitable considerations. In any case where the Company is a
contributing party and the Underwriters are the indemnified party, the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Securities (before deducting expenses) bear to the
total underwriting discounts received by the Underwriters hereunder, in each
case as set forth in the table on the cover page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or by the Underwriters, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions,
investigation, inquiry, suit or proceeding in respect thereof) referred to in
the first (1st) sentence of this Section 7(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), the Underwriters shall not
be required to contribute any amount in excess of the underwriting discount
applicable to the Securities purchased by the Underwriter hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of
the Act) shall be entitled to
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contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7(d), each person, if any, who
controls the Company or the Underwriters within the meaning of the Act, each
officer of the Company who has signed the Registration Statement and director
of the Company shall have the same rights to contribution as the the Company or
the Underwriters, as the case may be, subject in each case to this Section
7(d). Any party entitled to contribution will, promptly after receipt of notice
of commencement of any action, investigation, inquiry, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this Section 7(d), notify such party or
parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this Section 7(d), or to the extent that such party or
parties were not adversely affected by such omission. Notwithstanding anything
in this Section 7 to the contrary, no party will be liable for contribution
with respect to the settlement of any action, investigation, inquiry, suit or
proceeding effected without its written consent. The contribution agreement set
forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company contained in this Agreement, or contained in certificates of officers
of the Company submitted pursuant hereto, shall be deemed to be
representations, warranties, covenants and agreements at the Closing Date and
each Option Closing Date, if any, and such representations, warranties,
covenants and agreements of the Company, and the respective indemnity and
contribution agreements contained in Section 7 hereof, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any Underwriter, the Company, any controlling person of any
Underwriter or the Company, and shall survive the termination of this Agreement
or the issuance and delivery of the Securities to the Underwriters.
9. Effective Date. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the next full business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representatives, in their discretion, shall release the Securities for sale to
the public; provided, however, that the provisions of Sections 5, 7 and 9 of
this Agreement shall at all times be effective. For purposes of this Section 9,
the Securities to be purchased hereunder shall be deemed to have been so
released upon the earlier of dispatch by the Representatives of telegrams to
securities dealers releasing such shares for offering or the release by the
Representatives for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
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10. Termination.
(a) Subject to Section 10(b) hereof, the Representatives shall have the
right to terminate this Agreement: (i) if any domestic or international event
or act or occurrence has materially adversely disrupted, or in the
Representatives' opinion will in the immediate future materially adversely
disrupt, the financial markets; or (ii) if any material adverse change in the
financial markets shall have occurred; or (iii) if trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the NASD, the Boston
Stock Exchange, Chicago Board of Trade, the Chicago Board of Options Exchange,
the Chicago Mercantile Exchange, the Commission or any governmental authority
having jurisdiction over such matters; or (iv) if trading of any of the
securities of the Company shall have been suspended, or if any of the
securities of the Company shall have been delisted, on any exchange or in any
over-the-counter market; or (v) if the United States shall have become involved
in a war or major hostilities, or if there shall have been an escalation in an
existing war or major hostilities, or a national emergency shall have been
declared in the United States; or (vi) if a banking moratorium shall have been
declared by any state or federal authority; or (vii) if a moratorium in foreign
exchange trading shall have been declared; or (viii) if the Company shall have
sustained a material or substantial loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether
or not such loss shall have been insured, will, in the Representatives'
opinion, make it inadvisable to proceed with the delivery of the Securities; or
(ix) if there shall have been such a material adverse change in the conditions
or prospects of the Company, or if there shall have occurred any outbreak or
escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the general market, political or economic
conditions, in the United States or elsewhere, as in the Representatives'
judgment would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities.
(b) If this Agreement is terminated by the Representatives in accordance
with the provisions of Section 6 or Section 10(a) hereof, the Company shall
promptly reimburse and indemnify the Underwriters for all their actual
out-of-pocket expenses, including the reasonable fees and disbursements of
Underwriters' Counsel, less amounts previously paid pursuant to Section 5(c)
hereof. Notwithstanding any contrary provision contained in this Agreement, if
this Agreement shall not be carried out within the time specified herein, or
any extension thereof granted to the Representatives, by reason of any failure
on the part of the Company to perform any undertaking or satisfy any condition
of this Agreement by it to be performed or satisfied (including, without
limitation, pursuant to Section 6 or Section 12) then, the Company shall
promptly reimburse and indemnify the Underwriters for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriters (less amounts previously paid pursuant to Section 5(c) above). In
addition, the Company shall remain liable for all reasonable "blue sky" counsel
fees and expenses and "blue sky" filing fees. In addition, the Company shall
remain liable for all "blue sky" counsel fees and expenses and "blue sky"
filing fees. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6 and 10(a) hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 4 and Section 6 shall not be in any way be affected by such election or
termination or failure to carry out the terms of this
36
<PAGE>
Agreement or any part hereof.
11. Substitution of Underwriters. If one or more of the Underwriters shall
fail otherwise than for a reason sufficient to justify the termination of this
Agreement (under the provisions of Section 6, Section 10 or Section 12 hereof)
to purchase the Securities which it or they are obligated to purchase on such
date under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangement for one
or more of the non-defaulting Underwriters, or any other Underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representatives shall not have completed such arrangements within such
24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the total
number of Firm Units to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to
the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total number
of Firm Units, this Agreement shall terminate without liability on the part of
any non-defaulting Underwriters (or, if such default shall occur with respect
to any Option Units to be purchased on an Option Closing Date, the Underwriters
may at the Representatives' option, by notice from the Representatives to the
Company, terminate the Underwriters' obligation to purchase Option Units from
the Company on such date).
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement. In the event of any such default which does not result in a
termination of this Agreement, the Representatives shall have the right to
postpone the Closing Date for a period not exceeding seven (7) days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing Date
or any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Units to be purchased on an Option Closing Date, the Representatives
may, at their option, by notice from the Representatives to the Company,
terminate the Underwriters' obligation to purchase Option Units from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, Section 7 and Section 10 hereof. No
action taken pursuant to this Section 12 shall relieve the Company from
liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to
have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives at Dirks & Company, Inc., 520 Madison Avenue, 10th Floor, New
York, NY 10038, Attention: Jessy Dirks, with a copy to Orrick, Herrington &
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<PAGE>
Sutcliffe, 666 Fifth Avenue, New York, New York 10103, Attention: Lawrence
Fisher, Esq. Notices to the Company shall be directed to the Company at
CallNOW.com, Inc., 50 Broad Street, New York, New York 10004, Attention:
Christian Bardenheuer, Chairman and Chief Executive Officer, with a copy to
Stairs Dillenbeck Finley & Merle, Attention: Ken Drake.
14. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Units from the Underwriters shall be deemed
to be a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without giving
effect to choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the Representatives'
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter hereof and thereof. This Agreement may not
be amended except in a writing signed by the Representatives and the Company.
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<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
CALLNOW.COM, INC.
By:
-------------------------------
Christian Bardenheuer
Chief Executive Officer
Confirmed and accepted as of the date first above written.
DIRKS & COMPANY, INC.
NOLAN SECURITIES CORPORATION
Acting on their own behalf and
as the Representatives of the several
Underwriters named on Schedule A
hereto
BY: DIRKS & COMPANY, INC.
By:_______________________________________
Name:
Title:
39
<PAGE>
Schedule A
Underwriters
NAME NUMBER OF UNITS
- ----------------------------------- ---------------------------------------
Dirks & Company, Inc.
Nolan Securities Corporation
Total 4,000,0000
40
<PAGE>
CALLNOW.COM, INC.
AND
DIRKS & COMPANY, INC.
AND
NOLAN SECURITIES CORPORATION
REPRESENTATIVES'
WARRANT AGREEMENT
DATED AS OF __________, 2000
<PAGE>
REPRESENTATIVES' WARRANT AGREEMENT dated as of ___________, 2000 between
CALLNOW.COM, INC., a Delaware corporation (the "Company"), and DIRKS & COMPANY,
INC. and NOLAN SECURITIES CORPORATION (collectively, hereinafter referred to
variously as the "Holder" or "Holders" or the "Representatives").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representatives warrants
("Warrants") to purchase up to an aggregate 400,000 shares of common stock,
$0.001 par value ("Common Stock"), of the Company and/or 400,000 non-redeemable
Common Stock purchase warrants of the Company ("Underlying Warrants"), each
Underlying Warrant to purchase one additional share of Common Stock; and
WHEREAS, the Representatives have agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between
the Company and the several Underwriters listed therein to act as the
Representatives in connection with the Company's proposed public offering of up
to 4,000,000 units ("Units"), consisting of an aggregate 4,000,000 shares of
Common Stock and 4,000,000 redeemable Common Stock purchase Warrants (the
"Public Warrants") at a public offering price of $___ per unit (the "Public
Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representatives in consideration for, and as
part of the Representatives' compensation in connection with, the
Representatives acting as the Representatives pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of an aggregate forty dollars ($40.00), the
agreements herein set
<PAGE>
forth and other good and valuable consideration, hereby acknowledged, the
parties hereto agree as follows:
1. Grant.
The Representatives (or their designees) are hereby granted the right to
purchase, at any time from ___________, 2001 [twelve months after the date of
this Agreement], until 5:30 P.M., New York time, on ___________, 2005 [five
years after the date of this Agreement], up to an aggregate of 400,000 shares
of Common Stock and/or 400,000 Underlying Warrants at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $____ per share of
Common Stock [120% of the public offering price per share of Common Stock], and
$___ per Underlying Warrant [120% of the public offering price per Underlying
Warrant], subject to the terms and conditions of this Agreement. One Underlying
Warrant is exercisable to purchase one additional share of Common Stock at an
initial exercise price of $___ [150% of the public offering price] from
________, 2001, until 5:30 p.m. New York time on _________, 2005, at which time
the Underlying Warrants shall expire. Except as set forth herein, the shares of
Common Stock and the Underlying Warrants issuable upon exercise of the Warrants
are in all respects identical to the shares of Common Stock and the Public
Warrants being purchased by the Underwriters for resale to the public pursuant
to the terms and provisions of the Underwriting Agreement, and particularly
except that the Underlying Warrants are non-redeemable, and the Public Warrants
are redeemable. The shares of Common Stock and the Underlying Warrants issuable
upon exercise of the Warrants are sometimes hereinafter referred to
collectively as the "Securities."
2. Warrant Certificates.
The warrant certificates (the "Warrant Certificates") delivered and to be
delivered pursuant to this Agreement shall be in the form set forth in Exhibit
A, attached hereto and made
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<PAGE>
a part hereof, with such appropriate insertions, omissions, substitutions, and
other variations as required or permitted by this Agreement.
3. Exercise of Warrant.
3.1 Method of Exercise.
The Warrants initially are exercisable at an aggregate initial exercise
price (subject to adjustment as provided in Section 8 hereof) per share of
Common Stock and per Underlying Warrant set forth in Section 6 hereof payable
by certified or official bank check in New York Clearing House funds, subject
to adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock and/or the Underlying Warrants purchased at the
Company's principal executive offices in New York (presently located at 50
Broad Street, New York, New York 10004-2307) the registered holder of a Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the shares of Common Stock so purchased and a certificate
or certificates for the Underlying Warrants so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder thereof, in whole or in part (but not as to fractional shares of the
Common Stock and Underlying Warrants underlying the Warrants). In the event the
Company redeems all of the Public Warrants (other than the Underlying Warrants
underlying the Warrants, which are not redeemable), then the Warrants may only
be exercised if such exercise is accompanied by the simultaneous exercise of
the Underlying Warrant(s) underlying the Warrants being so exercised. Warrants
may be exercised to purchase all or part of the shares of Common Stock together
with an equal or unequal number of the Underlying Warrants represented thereby.
In the case of the purchase of less than all the shares of Common Stock and/or
the Underlying Warrants purchasable under any Warrant
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<PAGE>
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the shares of Common Stock and Underlying
Warrants purchasable thereunder.
3.2 Exercise by Surrender of Warrant.
In addition to the method of payment set forth in Section 3.1 and in lieu
of any cash payment required thereunder, the Holder(s) of the Warrants shall
have the right at any time and from time to time to exercise the Warrants in
full or in part by surrendering the Warrant Certificate in the manner specified
in Section 3.1 hereof. The number of shares of Common Stock to be issued
pursuant to this Section 3.2 shall be equal to the difference between (a) the
number of shares of Common Stock in respect of which the Warrants are exercised
and (b) a fraction, the numerator of which shall be the number of shares of
Common Stock in respect of which the Warrants are exercised multiplied by the
Exercise Price and the denominator of which shall be the Market Price (as
defined in Section 3.3 hereof) of the shares of Common Stock. The number of
Underlying Warrants to be issued pursuant to this Section 3.2 shall be equal to
the difference between (a) the number of Underlying Warrants in respect of
which the Warrants are exercised and (b) a fraction, the numerator of which
shall be the number of Underlying Warrants in respect of which the Warrants are
exercised multiplied by the Exercise Price and the denominator of which shall
be the Market Price (as defined in Section 3.3 hereof) of the Underlying
Warrants. Solely for the purposes of this paragraph, Market Price shall be
calculated either (i) on the date on which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 14 hereof
("Notice Date") or (ii) as the average of the Market Prices for each of the
five trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
4
<PAGE>
3.3 Definition of Market Price.
As used herein, the phrase "Market Price" at any date shall be deemed to
be (i) when referring to the Common Stock, the last reported sale price, or, in
case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the Nasdaq SmallCap Market
("Nasdaq SmallCap") or by the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), or, if the Common Stock is not listed or
admitted to trading on any national securities exchange or quoted by Nasdaq,
the average closing bid price as furnished by the National Association of
Securities Dealers, Inc. ("NASD") through Nasdaq or similar organization if
Nasdaq is no longer reporting such information, or if the Common Stock is not
quoted on Nasdaq, as determined in good faith (using customary valuation
methods) by resolution of the members of the Board of Directors of the Company,
based on the best information available to it or (ii) when referring to a
Underlying Warrant, the last reported sales price, or, in the case no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three (3) trading days, in either case as officially
reported by the principal securities exchange on which the Underlying Warrants
are listed or admitted to trading or by Nasdaq, or, if the Underlying Warrants
are not listed or admitted to trading on any national securities exchange or
quoted by Nasdaq, the average closing bid price as furnished by the NASD
through Nasdaq or similar organization if Nasdaq is no longer reporting such
information, or if the Underlying Warrants are not quoted on Nasdaq or are no
longer outstanding, the Market Price of a Underlying Warrant shall equal the
difference between the Market Price of the Common Stock and the Exercise Price
of the Underlying Warrant.
5
<PAGE>
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of certificates for shares of
Common Stock and Underlying Warrants and/or other securities, properties or
rights underlying such Warrants and, upon the exercise of the Underlying
Warrants, the issuance of certificates for shares of Common Stock and/or other
securities, properties or rights underlying such Underlying Warrants shall be
made forthwith (and in any event within five (5) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the
name of, or in such names as may be directed by, the Holder thereof; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificates in a name other than that of the Holder, and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares of
Common Stock and the Underlying Warrants underlying the Warrants and the shares
of Common Stock underlying the Underlying Warrants (and/or other securities,
property or rights issuable upon the exercise of the Warrants or the Underlying
Warrants) shall be executed on behalf of the Company by the manual or facsimile
signature of the then Chairman or Vice Chairman of the Board of Directors or
President or Vice President of the Company. Warrant Certificates shall be dated
the date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer. Certificates representing the shares of Common Stock
and Underlying Warrants, and the shares of Common Stock underlying each
Underlying Warrant (and/or other securities, property or rights
6
<PAGE>
issuable upon exercise of the Warrants) shall be dated as of the Notice Date
(regardless of when executed or delivered) and dividend bearing securities so
issued shall accrue dividends from the Notice Date.
5. Restriction On Transfer of Warrants.
The Holder of a Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Warrants are being acquired as an investment and not with a
view to the distribution thereof; that the Warrants may not be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, for a period of one (1) year from the date hereof, except to officers of
the Representatives.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price.
Except as otherwise provided in Section 8 hereof, the initial exercise
price of each Warrant shall be $____ per share of Common Stock and $___ per
Underlying Warrant. The adjusted exercise price shall be the price which shall
result from time to time from any and all adjustments of the initial exercise
price in accordance with the provisions of Section 8 hereof. Any transfer of a
Warrant shall constitute an automatic transfer and assignment of the
registration rights set forth in Section 7 hereof with
respect to the Securities or other securities, properties or rights underlying
the Warrants.
6.2 Exercise Price.
The term "Exercise Price" herein shall mean the initial exercise price or
the adjusted exercise price, depending upon the context or unless otherwise
specified.
7
<PAGE>
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933.
The Warrants, the shares of Common Stock and Underlying Warrants, or other
securities issuable upon exercise of the Warrants, or other securities issuable
upon exercise of the Underlying Warrants (collectively, the "Warrant
Securities") have been registered under the Securities Act of 1933, as amended
(the "Act") pursuant to the Company's Registration Statement on Form S-1
(Registration No. 333-88065) (the "Registration Statement"). All of the
representations and warranties of the Company contained in the Underwriting
Agreement relating to the Registration Statement, the Preliminary Prospectus
and Prospectus (as such terms are defined in the Underwriting Agreement) and
made as of the dates provided therein, are incorporated by reference herein.
The Company agrees and covenants promptly to file post-effective amendments to
such Registration Statement as may be necessary in order to maintain its
effectiveness and otherwise to take such action as may be necessary to maintain
the effectiveness of the Registration Statement as long as any Warrants are
outstanding. In the event that, for any reason, whatsoever, the Company shall
fail to maintain the effectiveness of the Registration Statement, the
certificates representing the Warrant Securities shall bear the following
legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration statement
under the Act, (ii) to the extent applicable, Rule 144 under the Act (or
any similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
8
<PAGE>
7.2 Piggyback Registration.
If, at any time commencing after the date hereof and expiring seven (7)
years thereafter, the Company proposes to register any of its securities under
the Act (other than pursuant to Form S-4, Form S-8 or a comparable registration
statement) it will give written notice by registered mail, at least thirty (30)
days prior to the filing of each such registration statement, to the
Representatives and to all other Holders of the Warrants and/or the Warrant
Securities of its intention to do so. If the Representatives or other Holders
of the Warrants and/or Warrant Securities notify the Company within twenty (20)
business days after receipt of any such notice of its or their desire to
include any such securities in such proposed registration statement, the
Company shall afford the Representatives and such Holders of the Warrants
and/or Warrant Securities the opportunity to have any such Warrant Securities
registered under such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring five (5)
years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof), exercisable by
written notice to the Company, to have the Company prepare and file with the
9
<PAGE>
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Representatives and Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale of their respective Warrant
Securities for nine (9) consecutive months by such Holders and any other
Holders of the Warrants and/or Warrant Securities who notify the Company within
ten (10) days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant
Securities within the time period specified in Section 7.4(a) hereof pursuant
to the written notice specified in Section 7.3(a) of a Majority of the Holders
of the Warrants and/or Warrant Securities, the Company may, at its option, upon
the written notice of election of a Majority of the Holders of the Warrants
and/or Warrant Securities requesting such registration, repurchase (i) any and
all Warrant Securities of such Holders at the higher of the Market Price per
share of Common Stock and per Underlying Warrant, determined as of (x) the date
of the notice sent pursuant to Section 7.3(a) or (y) the expiration of the
period specified in Section 7.4(a) and (ii) any and all Warrants of such
Holders at such Market Price less the Exercise Price of such Warrant. Such
repurchase shall be in immediately available funds and shall close within two
(2) days after the later of (i) the expiration of the period specified in
Section 7.4(a) or (ii) the delivery of the written notice of election specified
in this Section 7.3(c).
10
<PAGE>
7.4 Covenants of the Company With Respect to Registration.
In connection with any registration under Section 7.2 or 7.3 hereof, the
Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Securities to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any
11
<PAGE>
claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which
the Company has agreed to indemnify each of the Underwriters contained in
Section 8 of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 8 of the Underwriting
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in any registration statement filed
pursuant to Section 7.3 hereof, or permit any other registration statement to
be or remain effective during the effectiveness of a registration statement
filed pursuant to Section 7.3 hereof (other than (i) shelf registrations
effective prior thereto and (ii) registrations on Form S-4 or S-8), without the
prior
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<PAGE>
written consent of the Holders of the Warrants and Warrant Securities
representing a Majority of such securities.
(h) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement) relating to the due incorporation of
the Company, the validity of the shares being issued, the due execution and
delivery of the underwriting agreement and Rule 10b-5, and (ii) if such
registration includes an underwritten public offering, a "cold comfort" letter
dated the effective date of such registration statement and a letter dated the
date of the closing under the underwriting agreement signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, with respect to events subsequent to the date of such
financial statements, as are customarily covered in accountants' letters
delivered to underwriters in underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its
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<PAGE>
counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss
the business of the Company with its officers and independent auditors, all to
such reasonable extent and at such reasonable times and as often as any such
Holder or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested pursuant to Section 7.3(a) to be
included in such underwriting, which may be the Representatives. Such agreement
shall be reasonably satisfactory in form and substance to the Company, each
Holder and such managing underwriter(s), and shall contain such
representations, warranties and covenants by the Company and such other terms
as are customarily contained in agreements of that type used by the managing
underwriter(s). The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Warrant Securities whether pursuant
to Section 7.2 or Section 7.3(a) and may, at their option, require that any or
all of the representations, warranties and covenants of the Company to or for
the benefit of such underwriter(s) shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders and their intended methods of distribution.
(l) For purposes of this Agreement, the term "Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the
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<PAGE>
then outstanding Warrants or Warrant Securities that (i) are not held by the
Company, an affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith and (ii) have not been resold to the
public pursuant to a registration statement filed with the Commission under the
Act.
8. Adjustments to Exercise Price and Number of Securities.
8.1 Subdivision and Combination.
In case the Company shall at any time subdivide or combine the outstanding
shares of Common Stock, the Exercise Price shall forthwith be proportionately
decreased in the case of subdivision or increased in the case of combination.
8.2 Stock Dividends and Distributions.
In case the Company shall pay a dividend in, or make a distribution of,
shares of Common Stock or of the Company's capital stock convertible into
Common Stock, the Exercise Price shall forthwith be proportionately decreased.
An adjustment made pursuant to this Section 8.2 shall be made as of the record
date for the subject stock dividend or distribution.
8.3 Adjustment in Number of Securities.
Upon each adjustment of the Exercise Price pursuant to the provisions of
this Section 8, the number of Warrant Securities issuable upon the exercise at
the adjusted exercise price of each Warrant shall be adjusted to the nearest
full amount by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Securities
issuable upon exercise of the Warrants immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.
15
<PAGE>
8.4 Definition of Common Stock.
For the purpose of this Agreement, the term "Common Stock" shall mean (i)
the class of stock designated as Common Stock in the Certificate of
Incorporation of the Company as may be amended as of the date hereof, or (ii)
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value.
8.5 Merger or Consolidation.
In case of any consolidation of the Company with, or merger of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the holder of each Warrant then outstanding or to be
outstanding shall have the right thereafter (until the expiration of such
Warrant) to receive, upon exercise of such Warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of securities of the Company
for which such Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments which shall be identical to the adjustments
provided in Section 8. The above provision of this subsection shall similarly
apply to successive consolidations or mergers.
8.6 No Adjustment of Exercise Price in Certain Cases.
No adjustment of the Exercise Price shall be made if the amount of said
adjustment shall be less than two (2) cents per Warrant Security, provided,
however, that in such case any adjustment that would otherwise be required then
to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which,
16
<PAGE>
together with any adjustment so carried forward, shall amount to at least two
(2) cents per Warrant Security.
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Warrant Securities in
such denominations as shall be designated by the Holder thereof at the time of
such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates representing
fractions of shares of Common Stock or Underlying Warrants upon the exercise of
the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of shares of Common Stock or Underlying Warrants or other securities,
properties or rights.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrants and the
17
<PAGE>
Underlying Warrants, such number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of the Warrants and payment of
the Exercise Price therefor, all shares of Common Stock, Underlying Warrants
and other securities issuable upon such exercise shall be duly and validly
issued, fully paid, non-assessable and not subject to the preemptive rights of
any stockholder. The Company further covenants and agrees that upon exercise of
the Underlying Warrants underlying the Warrants and payment of the respective
Underlying Warrant exercise price therefor, all shares of Common Stock and
other securities issuable upon such exercises shall be duly and validly issued,
fully paid, non-assessable and not subject to the preemptive rights of any
stockholder. As long as the Warrants shall be outstanding, the Company shall
use its best efforts to cause all shares of Common Stock issuable upon the
exercise of the Warrants and Underlying Warrants and all Underlying Warrants
underlying the Warrants to be listed (subject to official notice of issuance)
on all securities exchanges on which the Common Stock or the Public Warrants
issued to the public in connection herewith may then be listed and/or quoted on
Nasdaq SmallCap or Nasdaq.
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as conferring upon
the Holders the right to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors or any other matter, or as having any rights whatsoever as a
stockholder of the Company. If, however, at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained
18
<PAGE>
earnings or capital surplus (in accordance with applicable law), as indicated
by the accounting treatment of such dividend or distribution on the books of
the Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially
all of its property, assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Underlying Warrants.
The form of the certificate representing Underlying Warrants (and the form
of election to purchase shares of Common Stock upon the exercise of Underlying
Warrants and the form of assignment printed on the reverse thereof) shall be
substantially as set forth in Exhibit "A" to the Warrant Agreement dated as of
the date hereof by and between the Company and Atlas Stock Transfer Corporation
(the "Underlying Warrant Agreement"). Each Underlying
19
<PAGE>
Warrant issuable upon exercise of the Warrants shall evidence the right to
initially purchase a fully paid and non-assessable share of Common Stock at an
initial purchase price of $__ per share [150% of the public offering price per
share of Common Stock] from ____, 2001 [one year after the effective date of
the offering] until 5:30 p.m. New York time on ________, 2005 [five years after
the effective date of the offering] at which time the Underlying Warrants,
unless the exercise period has been extended, shall expire. The exercise price
of the Underlying Warrants and the number of shares of Common Stock issuable
upon the exercise of the Underlying Warrants are subject to adjustment, whether
or not the Warrants have been exercised and the Underlying Warrants have been
issued, in the manner and upon the occurrence of the events set forth in
Section 8 of the Underlying Warrant Agreement, which is hereby incorporated
herein by reference and made a part hereof as if set forth in its entirety
herein. Subject to the provisions of this Agreement and upon issuance of the
Underlying Warrants underlying the Warrants, each registered holder of such
Underlying Warrant shall have the right to purchase from the Company (and the
Company shall issue to such registered holders) up to the number of fully paid
and non-assessable shares of Common Stock (subject to adjustment as provided
herein and in the Underlying Warrant Agreement), free and clear of all
preemptive rights of stockholders, provided that such registered holder
complies with the terms governing exercise of the Underlying Warrants set forth
in the Underlying Warrant Agreement, and pays the applicable exercise price,
determined in accordance with the terms of the Underlying Warrant Agreement.
Upon exercise of the Underlying Warrants, the Company shall forthwith issue to
the registered holder of any such Underlying Warrants in his name or in such
name as may be directed by him, certificates for the number of shares of Common
Stock so purchased. Except as otherwise provided in this Agreement, the
Underlying Warrants underlying the Warrants shall be governed in all respects
by the terms of the Underlying Warrant Agreement. The Underlying Warrants
20
<PAGE>
shall be transferable in the manner provided in the Underlying Warrant
Agreement, and upon any such transfer, a new Underlying Warrant Certificate
shall be issued promptly to the transferee. The Company covenants to, and
agrees with, the Holder(s) that without the prior written consent of the
Holder(s), which will not be unreasonably withheld, the Underlying Warrant
Agreement will not be modified, amended, canceled, altered or superseded, and
that the Company will send to each Holder, irrespective of whether or not the
Warrants have been exercised, any and all notices required by the Underlying
Warrant Agreement to be sent to holders of Underlying Warrants.
14. Notices.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt requested
or by FedEx or other recognized overnight courier:
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof or to
such other address as the Company may designate by notice to the Holders.
15. Supplements and Amendments.
The Company and the Representatives may from time to time supplement or
amend this Agreement without the approval of any Holders of Warrant
Certificates (other than the Representatives) in order to cure any ambiguity,
to correct or supplement any provision contained herein which may be defective
or inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Representatives may deem necessary or desirable and which the Company and the
21
<PAGE>
Representatives deem shall not adversely affect the interests of the Holders of
Warrant Certificates.
16. Successors.
All the covenants and provisions of this Agreement shall be binding upon
and inure to the benefit of the Company, the Holders and their respective
successors and assigns hereunder.
17. Termination.
This Agreement shall terminate at the close of business on _______, 2007.
Notwithstanding the foregoing, the indemnification provisions of Section 7
shall survive such termination until the close of business on _____, 2013.
18. Governing Law; Submission to Jurisdiction.
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for
all purposes shall be construed in accordance with the laws of said State
without giving effect to the rules of said State governing the conflicts of
laws.
The Company, the Representatives and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representatives and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the
Representatives and the Holders (at the option of the party bringing such
action, proceeding or claim) may be served by transmitting a copy thereof, by
registered or certified mail, return receipt requested, postage
22
<PAGE>
prepaid, addressed to it at the address set forth in Section 14 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon
the party so served in any action, proceeding or claim. The Company, the
Representatives and the Holders agree that the prevailing party(ies) in any
such action or proceeding shall be entitled to recover from the other
party(ies) all of its/their reasonable legal costs and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefore.
19. Entire Agreement; Modification.
This Agreement (including the Underwriting Agreement and the Underlying
Warrant Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to
the subject matter hereof and may not be modified or amended except by a
writing duly signed by the party against whom enforcement of the modification
or amendment is sought.
20. Severability.
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
21. Captions.
The caption headings of the Sections of this Agreement are for convenience
of reference only and are not intended, nor should they be construed as, a part
of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Representatives and any other
registered Holder(s) of the Warrant Certificates or Warrant Securities any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole benefit of the Company and the
23
<PAGE>
Representatives and any other registered Holders of Warrant Certificates or
Warrant Securities.
23. Counterparts.
This Agreement may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and such
counterparts shall together constitute but one and the same instrument.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
CALLNOW.COM, INC.
By:
---------------------------------
Name:
Title:
Attest:
- -------------------------
Secretary
DIRKS & COMPANY, INC
By:
-------------------------------
Name:
Title:
NOLAN SECURITIES CORPORATION
By:
-------------------------------
Name:
Title:
25
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ____, 2005
No. W
Warrants to Purchase __ shares of
Common Stock and/or
_____ Underlying Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ____________, or registered
assigns, is the registered holder of Warrants to purchase initially, at any
time from ______, 2001 until 5:30 p.m. New York time on ______, 2005
("Expiration Date"), up to __________ fully-paid and non-assessable shares of
common stock, $0.001 par value ("Common Stock"), of CALLNOW.COM, INC., a
Delaware corporation (the "Company"), and ___ Underlying Warrants of the
Company (one Underlying Warrant entitling the owner to purchase one fully-paid
and non-assessable share of Common Stock) at the initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $_____ per
share of Common Stock and $_______ per Underlying Warrant upon surrender of
this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in
the warrant agreement dated as of ______, 2000 between the Company and DIRKS &
COMPANY, INC. and NOLAN SECURITIES CORPORATION (the "Warrant Agreement").
Payment of the Exercise Price shall be made by certified or official bank check
in New York Clearing House funds payable to the order of the Company or by
surrender of this Warrant Certificate.
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of
this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of ______, 2000
CALLNOW.COM, INC.
By:
-------------------------------
Name:
Title:
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
_____________ shares of Common Stock;
_____________ Underlying Warrants;
_____________ shares of Common Stock together with an equal number of
Underlying Warrants; or
_____________ shares of Common Stock together with
_____________ Underlying Warrants.
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House Funds to the order of
CallNOW.com, Inc. in the amount of $_______________________, all in accordance
with the terms of Section 3.1 of the Representatives' Warrant Agreement dated
as of ______, 2000 between CallNOW.com, Inc. and Dirks & Company, Inc and Nolan
Securities Corporation. The undersigned requests that a certificate for such
securities be registered in the name of __________________ whose address is
_________________ and that such Certificate be delivered to
___________________whose address is _____________________.
Dated:
Signature ____________________________
(Signature must conform in all respects
to name of holder as specified on the face
of the Warrant Certificate.)
-----------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
________________ shares of Common Stock;
________________ Underlying Warrants;
________________ shares of Common Stock together with an equal number of
Underlying Warrants; or
________________ shares of Common Stock together with _________________
________________ Underlying Warrants.
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representatives' Warrant
Agreement dated as of ______, 2000 between CallNOW.com, Inc. and Dirks &
Company, Inc and Nolan Securities Corporation. The undersigned requests that a
certificate for such securities be registered in the name of __________________
whose address is _______________ and that such Certificate be delivered to
_________________ whose address is _____________________
Dated:
Signature ___________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder
if such holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ______________________ hereby sells, assigns and transfers
unto
____________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:
------------- -------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
Insert Social Security or Other
Identifying Number of Assignee)
