<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended June 30, 2000
Commission file no. 0-27917
IPVoice.com, Inc.
(Name of small business issuer in its charter)
Nevada 65-0729900
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or organization)
7585 E. Redfield Road, Suite 202
Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (480) 948-1895
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------- ----------------
<S> <C>
None
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Copies of Communication Sent to:
I. Douglas Dunipace
Jennings, Strouss & Salmon, P.L.C.
Two North Central Avenue, Suite 1600
Phoenix, Arizona 85004-2393
Tel: (602) 262-5911
Fax: (602) 253-3255
Indicate by Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
As of June 30, 2000, there are 17,866,384 shares of voting stock of the
registrant issued and outstanding.
<PAGE> 2
PART I
Item 1. Financial Statements.
The Condensed Consolidated Financial Statements of IPVoice.com, Inc. for the
period ending June 30, 2000 are unaudited and are attached and incorporated by
this reference as Item 1.
Item 2. Management's Discussion and Analysis of Results of Operations and
Plan of Operations.
This analysis should be read in conjunction with the condensed consolidated
financial statements, the notes thereto, included in this on Form 10-QSB and the
financial statements and notes thereto included in IPVoice.com, Inc.'s December
31, 1999 Annual Report on Form 10-KSB.
All non-historical information contained in this Form 10-QSB is a
forward-looking statement. The forward looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Discussion and Analysis
IPVoice.com, Inc. ("IPVC"), as the parent company, and IPVoice Communications,
Inc. ("IPVCDE"), as a wholly-owned subsidiary, are collectively referred to
herein as "the Company". IPVCDE was incorporated in Delaware in December of
1997. In March 1998, IPVCDE entered into a reorganization agreement with Nova
Enterprises, Inc., which was incorporated February 1997 in the State of Nevada
("Nova"). Under the reorganization agreement, the shareholders of IPVCDE
exchanged all of the outstanding common shares of IPVCDE for 9,000,000 shares of
Nova. IPVCDE became a wholly-owned subsidiary of Nova. Nova changed its name to
"IPVoice.com, Inc." in May 1999. The reorganization agreement was accounted for
as a reorganization of IPVCDE.
In general terms a reverse acquisition is a transaction in which the inactive
public entity acquires an operating company and then changes its name as the
surviving parent corporation to the name of the subsidiary and allows the
subsidiary to appoint management in the surviving public entity. Thereafter, the
subsidiary may formally merge with the parent or may continue to operate as a
separate operating subsidiary. In this case, the subsidiary transferred all of
its assets to the parent.
The Company is quoted on the OTC Bulletin Board under the symbol "IPVC". The
Company conducted business from its headquarters in Denver, Colorado until
August 1999, when it relocated to Phoenix, Arizona.
Since inception the Company has been engaged in the business of developing its
MultiCom Business Management Software ("MultiCom") for use in Internet Protocol
telephony applications (telephone, fax, data, images and video over the
Internet). MultiCom is the business management system behind the Company's
TrueConnect Gateway product ("Gateway"), for which trademark protection is being
sought. Gateway provides a mechanism for bridging the public telephone system
with the Internet. The Company's business was developed on the premise that
traditional telephone systems wasted precious resources by assigning each call a
"nailed down" circuit. The Company's Gateway allows a packet of information
(voice, video, e-mail, data, images, etc.) to cross multiple networks on its way
to its final destination. Thus, instead of having one dedicated circuit for a
call, the entire network is shared. The Company continues to research the
availability of additional innovative products in the Internet Protocol
telephony and related industries for development, distribution or acquisition.
<PAGE> 3
It is the Company's intention to (i) continue to market its network and Gateway
product; (ii) to conduct research to further develop its Gateway product and
(iii) to develop further "add-ons" which will enhance and expand the Gateway
product. Current activities include software and hardware development, raising
additional equity, and negotiating with key personnel and facilities.
The Company is in the development stage, it is acquiring the necessary operating
assets and it is beginning its proposed business. While the Company is
developing tools necessary to enter the Internet Protocol telephony market,
there is no assurance that any benefit will result from such activities. The
Company's management expects to receive limited operating revenues and incur
expenses during its development, possibly in excess of revenue.
The Company has installed Gateways in New York, Los Angeles, Atlanta, Dallas,
Phoenix, Chicago and London. Within the next thirty days we anticipate having a
Gateway installed in Miami, Florida. Currently, we receive revenues from the
Company's involvement in the sale of prepaid calling cards.
Results of Operations
Comparison of Three and Six Months Ended June 30, 2000 and 1999
Overview
The Company is in the development stage. From its inception, the Company has
incurred losses from operations. As of June 30, 2000, the Company had cumulative
net losses totaling $3,766,000. We have only recently commenced operations of
the IPVoice System and have not begun generating any significant revenues, yet.
We expect to continue to generate losses until our revenues increase.
Revenues
Revenues for the three months ended June 30, 2000 and 1999 were $10,000 and $0,
respectively. For the six months ended June 30, 2000 and 1999, revenues were
$108,000 and $0, respectively. The Company engaged in the sale of prepaid
calling cards, which resulted in revenues for the three and six months ended
June 30, 2000.
Operating Expenses
Operating expenses for the three months ended June 30, 2000 were $498,000
compared to $537,000 for the three months ended June 30, 1999. Net loss was
$501,000 and $542,000 for the three months ended June 30, 2000 and 1999,
respectively. The operating expenses and net loss did not change significantly.
Operating expenses for the six months ended June 30, 2000 were $1,237,000
compared to $796,000 for the six months ended June 30, 1999. Net loss was
$1,262,000 and $801,000 for the six months ended June 30, 2000 and 1999,
respectively. The increases in the operating expenses and net loss are primarily
related to consulting and general and administrative expenses. During the six
months ended June 30, 2000, consulting fees of $52,000 were paid to an officer
and $304,000 to a shareholder. There were $70,000 and $49,000 outstanding to two
officers and a shareholder, respectively, in respect to fees and reimbursement
of expenses as of June 30, 2000.
Financial Condition, Liquidity and Capital Resources
At June 30, 2000, the Company had cash of $1,674,000 compared to $99,000 at
December 31, 1999.
<PAGE> 4
In the second quarter 2000, the Company made a Tender Offer to the holders of 46
Units that had been issued in the spring of 1999. Each unit consisted of (i) a
two-year note in the principal amount of $24,900 bearing interest at 9% per
year, (ii) a warrant to purchase 18,750 shares of common stock at an exercise
price of $.9875, and (iii) 25 shares of senior convertible (Series A) preferred
stock with a conversion feature providing that in the event of an uncured
default in the payment on the notes, the outstanding senior convertible (Series
A) preferred stock would be converted into common stock in an amount of shares
which, immediately after issuance would equal 51% of the Company's issued and
outstanding common stock on a fully diluted basis. Holders of the Units were
given three options: (1) convert each Unit into 17,832 shares of common stock,
(2) surrender the Series A preferred stock, retain the warrant and exchange the
note for an amended note that is convertible into common stock at a conversion
price of $7.00 per share, or (3) retain the Unit without modification. As a
result of the Tender Offer, the Company issued 543,876 shares of common stock in
exchange for the surrender of 950 shares of Series A preferred stock and
cancellation of $759,450 of debt.
During the second quarter of 2000, the Company received $2,157,000, net of
expenses of $343,000, from the issuance of 2,500 shares of convertible Series B
preferred stock with a 7.5% dividend rate. At the election of the shareholders,
the Series B preferred stock may be converted into shares of common stock by
dividing the purchase price by the conversion price. The conversion price equals
the lesser of: (1) 110% of the lowest closing bid price for the common stock for
the five trading days prior to the date of issuance or (2) 75% of the average of
the three lowest closing bid price for the common stock for the thirty
consecutive trading days preceding the conversion date. The Company has recorded
a beneficial conversion feature discount on the issuance of convertible Series B
preferred stock in the amount of $833,333 in accordance with EITF Topic D-60.
Based on the Series B preferred stockholders' agreement, the Company is
recording the Series B preferred stock dividend over 180 days from May 22, 2000.
Also, on the conversion date, the Series B preferred stockholders have an option
to acquire up to $2,500,000 of common stock at the conversion price. The Company
is currently evaluating the financial statement effects of this option.
Furthermore, in accordance with the Series B preferred stockholders' agreement,
the Company issued 350,000 warrants to purchase common stock at an exercise
price of $2.136 per share. Additional information about this financing is set
forth in the Form 8-K Report filed with the Securities and Exchange Commission
on June 16, 2000.
Impact of the Year 2000 Issue
The Year 2000 Issue was the result of potential problems with computer systems
or any equipment with computer chips that use dates where the date has been
stored as two digits (e.g. 98 for 1998). On January 1, 2000, any clock or date
recording mechanism including date sensitive software which used only two digits
to represent the year, might have recognized the date using 00 as the year 1900
rather than the year 2000. This could have resulted in a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
The Company was aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approached. All software
used for the Company's systems has been supplied by software vendors or outside
service providers. The Company had confirmed with such providers that its
present software was Year 2000 Compliant.
The Company believes, after investigation, that all software and hardware
products that it is currently in the process of developing (directly through
vendors) are Year 2000 compliant. The Company believes, after investigation,
that its own software operating systems are Year 2000 compliant and in
<PAGE> 5
fact, has experienced no Year 2000 problems since January 1, 2000. Further the
Company has experienced no difficulties or adverse effects due to untimely
conversion or failure to convert by any other company upon which it relies.
The Company believes that is has disclosed all required information relative to
Year 2000 issues relating to its business and operations.
Forward-Looking Statements
This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-QSB which address activities, events or development which the Company
expects or anticipates will or may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), demand
for the Company's products and services, expansion and growth of the Company's
business operations, and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions and expected future developments as well as other factors it
believes are appropriate in the circumstances. However, whether actual results
of developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, general economic market and
business conditions; the business opportunities (or lack thereof) that may be
presented to and pursued by the Company; changes in laws or regulation;
competition in the high technology area; and other factors, most of which are
beyond the control of the Company. Consequently, all of the forward-looking
statements made in this Form 10-QSB are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequence to or effects on the Company or its
business or operations.
Plan of Operations
Management estimates that the cash flow from operations over the next 12 months,
as well as the proceeds from the issuance of Series B convertible preferred
stock to Augustine Fund, L.P. and Shaar Fund, Ltd. will be sufficient to
continue the Company's operations and to cover its operational expenses.
Nevertheless, the Company reserves the right to raise additional proceeds or
incur debt or take such other actions to expand or sustain its operations.
The Company does plan to continue to make material investments into its products
research and development. The Company does anticipate making material purchases
of facilities and equipment. The Company anticipates increasing its number of
employees over the next 12 months to include clerical and other administrative
services, sales and tech personnel.
The historical background and general description of business is more
particularly set out in the last filed 10-KSB/A Report for the Company, which
was filed on April 12, 2000 as of December 31, 1999. A copy of this filing or
other filings to date under the Securities Act of 1934 by the Company will be
made available by the Company to any shareholder requesting the same, or to
other interested parties. All filed documents of the Company may further be
retrieved "on line" through the Internet at the SEC homepage at:
http://www.sec.gov.
Until the Company achieves a sustained level of profitability, it must be
considered a start-up entity. The Company remains dependent on continuing to
obtain financing for cash flows to meet certain
<PAGE> 6
operating expenses and no assurance of financial success or economic survival of
the Company can be assured during this period.
It should also be noted that as a start up entity, the Company has and will
necessarily continue to incur certain types of start up costs, including costs
related to the commencement of business, legal and accounting fees, initial
filing fees, and advertising and marketing fees which may not constitute ongoing
fees; or, if ongoing, may not be incurred at the same level or percentage of
revenues as experienced in the initial start-up period.
Management's general discussion of operations is limited by and should be
considered within the context of the actual Financial Statements and Notes
attached thereto and incorporated as part of Item 1 above.
PART II
Item 1. Legal Proceedings.
On April 25, 2000, Michael McKim filed a lawsuit against the Company alleging
breach of employment contract and fraud. [Michael McKim v. IPVoice
Communications, Inc., a/k/a IPVoice.com, Inc., United States District Court,
Western District of Kentucky, at Louisville, 3:00CV-229-H] The Company formerly
employed Mr. McKim as Vice President of Research and Development. In addition,
for a period of time, he was a member of the Company's Board of Directors. As a
part of his compensation, Mr. McKim was to receive 300,000 shares of common
stock, followed by an additional 750,000 shares of common stock over a
three-year period, subject to various limitations.
In his complaint, Mr. McKim alleges that the Company failed to issue the 300,000
shares to him, thereby breaching the employment agreement. In addition, he
alleges that, in failing to provide the shares to him, the Company committed
fraud. The Company filed its answer on June 19, 2000 denying the allegations of
the complaint. The Company also filed a counterclaim against Mr. McKim alleging
that, during the course of his employment, Mr. McKim engaged in intentional
misrepresentation, breach of fiduciary duty and intentional interference with
business relationships. The Company intends to vigorously defend the lawsuit and
aggressively pursue its counterclaim.
Item 2. Changes in Securities and Use of Proceeds.
On April 14, an existing stockholder exercised warrants to purchase 120,000
shares of common stock at a price of $1.00 per share. The proceeds were used for
general corporate purposes. In connection with the issuance of its common stock,
the Company relied on Section 4(2) of the Securities Act of 1933 and Rule 506.
On May 5, 2000, the Company created Series B convertible preferred stock. The
preferences, limitations and relative rights are set forth in Exhibit 3.(i).6 to
the Company's Form 10-QSB report filed May 15, 2000.
On May 19, 2000, the Company completed a tender offer for its outstanding Units
originally issued in the spring of 1999. A description of the tender offer is
contained in Item 2 of Part I under the caption "Financial Condition, Liquidity
and Capital Resources" and is incorporated herein by reference. In connection
with the issuance of its common stock in exchange for the Units, the Company
relied on the exemption from registration contained in Section 3(a)(9) of the
Securities Act of 1933.
<PAGE> 7
On May 22, 2000, the Company issued 2,500 shares of Series B convertible
preferred stock to two institutional investors. A description of the issuance is
contained in Item 2 of Part I under the caption "Financial Condition, Liquidity
and Capital Resources" and is incorporated herein by reference. In connection
with this offering, the Company relied on the exemption from registration
contained in Section 4(2) of the Securities Act of 1933 and Rule 506.
On June 14, 2000, two existing stockholders exercised warrants to purchase
18,750 shares of common stock at a price of $.9875 per share. Proceeds were used
for general corporate purposes. In connection with the issuance of its common
stock, the Company relied on Section 4(2) of the Securities Act of 1933 and Rule
506.
Item 5. Other Information.
In April 2000, J. Michael Scott began serving as the Vice President of Sales &
Marketing. In July 2000, Brian A. Auchey began serving as Acting Chief Financial
Officer.
On May 5, 2000, Barbara S. Will (President, Chief Operating Officer and a
Director), Anthony K. Welch (Senior Vice President and a Director) IPVoice
Communications, Inc. and Condor Worldwide, Ltd., assigned to the Company all of
their respective interests in the intellectual property constituting the
Multicom Business Management Software, a telecommunications software program,
which uses an Internet interface with the public telephone system and provides
real time billing, administration and control of the long distance telephone
calls, including any and all modifications and future improvements. James K.
Howson is the Chairman and CEO of Condor Worldwide, Ltd.
Effective May 31, 2000 the Company and IIP agreed to terminate the consulting
agreement under terms which excused IIP from providing any further services and
discontinued the Company's obligation to make the monthly payments for such
services. In addition, IIP agreed to exchange both outstanding warrants for
700,000 shares of Common Stock.
On June 1, 2000, the Company entered into a financial and business management
consulting agreement with Growth Capital Resources.com, LLC. The agreement is
terminable with thirty days notice. GCR is compensated on an hourly basis, plus
out-of-pocket expenses, for time spent by its staff in providing services to the
Company.
Item 6. Exhibits.
(a) Exhibits, as described in the following index of exhibits, are
filed herewith or incorporated herein by reference, as follows:
<TABLE>
<CAPTION>
Exhibit No. Description
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<S> <C> <C>
10.45 [1] Agreement dated May 5, 2000 with Condor Worldwide, Ltd., James K.
Howson, Anthony Welch, Barbara Will and IPVoice Communications, Inc.
10.46 [2] Augustine Fund, L.P. - Securities Purchase Agreement including all
exhibits
10.47 [2] The Shaar Fund, Ltd. - Securities Purchase Agreement including all
exhibits
10.48 * Employment Agreement dated April 2000 with J. Michael Scott
10.49 * Service Agreement dated May 15, 2000 with Telic Communications, Inc.
10.50 * Financial and Business Management Consulting Agreement dated June 1,
2000 with Growth Capital Resources.com, LLC
10.51 * Collocation Agreement dated June 23, 2000 with Intermedia
Communications Inc.
</TABLE>
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<TABLE>
<S> <C> <C>
10.52 * Service Agreement dated June 29, 2000 with Telecom Compliance Services,
Inc.
27.1 * Financial Data Sheet
</TABLE>
* Filed herewith
[1] Previously filed with the Company's Form 10-QSB for the period
ending March 31, 2000.
[2] Previously filed with the Company's Form 8-K report dated June 16,
2000.
(b) Reports on Form 8-K were filed during the quarter as
follows:
(i) Form 8-K Report filed May 9, 2000 with respect to Item 5
(ii) Form 8-K Report filed June 16, 2000 with respect to Item 5
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date August 9, 2000 IPVoice.com, Inc. (Registrant)
--------------------------------
/s/ Barbara S. Will
--------------------------------
Barbara S. Will
Director, President and
Chief Operating Officer
/s/ James Howson
--------------------------------
James Howson
Chairman, Chief Executive
Officer
/s/ Brian Auchey
--------------------------------
Brian Auchey
Acting Chief Financial
Officer
<PAGE> 9
IPVOICE.COM, INC.
<TABLE>
<CAPTION>
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets - June 30, 2000 (Unaudited)........................... F-1
Consolidated Statements of Operations (Unaudited)................................. F-2
Consolidated Statements of Stockholders' Equity (Deficiency) (Unaudited).......... F-3
Consolidated Statements of Cash Flows (Unaudited)................................. F-4
Notes to Consolidated Financial Statements........................................ F-5
</TABLE>
<PAGE> 10
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------------------
ASSETS Unaudited
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,673,557 $ 98,592
Certificates of deposit - restricted 50,829 25,205
Accounts receivable 20,642 108,100
Inventory -- 7,586
Prepaid expenses and deposits 487,135 16,865
-------------------------------
Total current assets 2,232,163 256,348
-------------------------------
FIXED ASSETS
Computer equipment 515,082 369,619
Office equipment 50,454 19,019
Furniture & fixtures 40,537 29,445
-------------------------------
Property & equipment, at cost 606,073 418,083
Less accumulated depreciation (88,230) (40,528)
-------------------------------
Property & equipment, net 517,843 377,555
-------------------------------
INTANGIBLE ASSETS 105,032 --
-------------------------------
Total Assets $ 2,855,038 $ 633,903
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts Payable
Trade $ 213,190 $ 326,524
Officer 70,490 17,403
Related party 49,247 40,896
Accrued payroll taxes -- 1,005
Accrued interest - stockholders 4,221 12,690
Deferred revenue -- 7,821
-------------------------------
Total current liabilities 337,148 406,339
-------------------------------
LONG-TERM LIABILITIES
Notes payable 385,950 1,145,400
-------------------------------
Total long-term liabilities 385,950 1,145,400
-------------------------------
Total liabilities 723,098 1,551,739
-------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Senior convertible preferred stocks, $.001 par value,
authorized 10,000,000 shares
Series A, 200 and 1,150 issued and outstanding shares
at June 30, 2000 and December 31, 1999
Series B, 2,500 and 0 issued and outstanding shares
at June 30, 2000 and December 31, 1999 3 1
Common stock, $.001 par value, authorized 50,000,000
outstanding; 17,866,384 and 16,422,758 issued and
outstanding shares at June 30, 2000 and December 31, 1999 17,866 16,423
Beneficial conversion feature discount 833,333 --
Additional paid-in capital 5,227,363 1,570,240
Deficit accumulated in the development stage (3,946,625) (2,504,500)
-------------------------------
Total stockholders' equity (deficiency) 2,131,940 (917,836)
-------------------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 2,855,038 $ 633,903
===============================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-1
<PAGE> 11
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
February 19, 1997
Three Months Ended June 30, Six Months Ended June 30, (Inception)
------------------------------------------------------------ through
2000 1999 2000 1999 June 30, 2000
------------ ------------ ------------ ------------ -------------
Unaudited Unaudited Unaudited Unaudited
<S> <C> <C> <C> <C> <C>
NET SALES $ 10,345 $ -- $ 107,973 $ -- $ 470,506
COST OF SALES 9,450 -- 103,976 -- 409,410
------------ ------------ ------------ ------------ ------------
Gross Profit 895 -- 3,997 -- 61,096
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Compensation
Officers 107,176 81,232 177,343 147,329 661,696
Other 56,290 16,293 96,910 30,613 209,766
Consulting 201,928 -- 211,295 -- 727,410
Consulting - related party 37,600 370,624 356,194 493,017 678,485
General and administrative 69,585 80,724 319,385 120,209 1,200,843
Research and development -- -- 28,160 -- 125,563
Organizational expense - related party -- (14,000) -- -- 14,000
Depreciation and amortization 25,393 2,430 47,702 4,860 88,230
------------ ------------ ------------ ------------ ------------
Total operating expenses 497,972 537,303 1,236,989 796,028 3,705,993
------------ ------------ ------------ ------------ ------------
Loss from operations (497,077) (537,303) (1,232,992) (796,028) (3,644,897)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (20,021) (11,547) (46,088) (11,547) (110,475)
Interest income 16,336 6,386 17,510 6,386 37,834
Write-off of receivable -- -- -- -- (48,532)
------------ ------------ ------------ ------------ ------------
Total other income (expense) (3,685) (5,161) (28,578) (5,161) (121,173)
------------ ------------ ------------ ------------ ------------
Net Loss $ (500,762) $ (542,464) $ (1,261,570) $ (801,189) $ (3,766,070)
============ ============ ============ ============ ============
Loss per common share $ (0.03) $ (0.03) $ (0.07) $ (0.05)
Number of weighted average common
shares outstanding 17,536,934 15,541,769 17,268,264 14,762,758
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE> 12
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Par Value
Number of Shares ----------------------------- Additional
---------------------------- Preferred Common Paid-in
Preferred Common Stock Stock Capital
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE
February 19, 1997 (Inception) -- -- $ -- $ -- $ --
2/97 - founder's serv. ($0.001/sh.) -- 9,000,000 -- 9,000 --
3/97 - cash ($0.01/sh.) -- 1,400,000 -- 1,400 12,600
Net loss -- -- -- -- --
--------------------------------------------------------------------------------
BALANCE, 12/31/97 -- 10,400,000 -- 10,400 12,600
3/19 - donated-rel. party ($0.001/sh.) -- (9,000,000) -- (9,000) 9,000
3/19 - acquisition ($0.001) -- 9,000,000 -- 9,000 (9,000)
3/20 - cash received -- -- -- -- --
2nd qtr. - cash ($1.00/sh.) -- 144,000 -- 144 143,856
3rd qtr. - cash ($1.00/sh.) -- 10,000 -- 10 9,990
3rd qtr. - cash ($0.75/sh.) -- 53,333 -- 53 39,947
3rd qtr. - cash ($0.50/sh.) -- 20,000 -- 20 9,980
3rd qtr. - cash ($0.25/sh.) -- 100,000 -- 100 24,900
3rd qtr. - cash ($0.10/sh.) -- 627,000 -- 627 62,073
3rd qtr. - services ($0.10/sh.) -- 473,000 -- 473 46,827
4th qtr. - cash ($0.15/sh.) -- 396,666 -- 397 59,103
4th qtr. - services ($0.15/sh.) -- 275,000 -- 275 40,975
4th qtr. - cash ($0.19/sh.) -- 80,000 -- 80 14,920
Net loss -- -- -- -- --
--------------------------------------------------------------------------------
BALANCE, 12/31/98 -- 12,578,999 -- 12,579 465,171
1st qtr. - cash ($0.22/sh.) -- 687,499 -- 687 149,313
1st qtr. - services ($0.87/sh.) -- 493,760 -- 494 429,070
2nd qtr. - cash received -- -- -- -- --
2nd qtr. - cash ($4.00/sh.) 1,150 -- 1 -- 4,599
2nd qtr. - cash ($0.15/sh.) -- 2,005,000 -- 2,005 293,995
3rd qtr. - cash ($0.40/sh.) -- 437,500 -- 438 174,562
3rd qtr. - cash received -- -- -- -- --
3rd qtr. - services ($1.00) -- 10,000 -- 10 9,990
4th qtr. - services ($0.21) -- 210,000 -- 210 43,540
Net loss -- -- -- -- --
--------------------------------------------------------------------------------
BALANCE, 12/31/99 1,150 16,422,758 1 16,423 1,570,240
1st qtr. - cash ($1.00/sh.) -- 386,000 -- 386 385,614
1st qtr. - cash ($.99/sh.) -- 75,000 -- 75 73,988
1st qtr. - services/deposits ($2.92/sh.) -- 250,000 -- 250 730,528
1st qtr. - services ($2.92/sh.) -- 50,000 -- 50 145,950
2nd qtr. - Conversion due to Tender Offe r (950) 543,876 (1) 544 678,208
2nd qtr. - Issuance of Series B - cash 2,500 -- 3 -- 1,323,904
2nd qtr. - cash ($1.00/sh.) -- 120,000 -- 120 119,880
2nd qtr. - cash ($.99/sh.) -- 18,750 -- 18 18,496
Series B preferred stock dividend -- -- -- -- 180,555
Net loss -- -- -- -- --
--------------------------------------------------------------------------------
BALANCE, 6/30/2000, UNAUDITED 2,700 17,866,384 $ 3 $ 17,866 $ 5,227,363
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Deficit
Beneficial Accumulated Total
Stock Conversion During the Stockholders'
Subscription Feature Development Equity
Receivable Discount Stage (Deficiency)
<S> <C> <C> <C> <C>
BEGINNING BALANCE
February 19, 1997 (Inception) $ -- $ -- $ -- $ --
2/97 - founder's serv. ($0.001/sh.) -- -- -- 9,000
3/97 - cash ($0.01/sh.) (12,274) -- -- 1,726
Net loss -- -- (22,981) (22,981)
-------------------------------------------------------------
BALANCE, 12/31/97 (12,274) -- (22,981) (12,255)
3/19 - donated-rel. party ($0.001/sh.) -- -- -- --
3/19 - acquisition ($0.001) -- -- -- --
3/20 - cash received 12,274 -- -- 12,274
2nd qtr. - cash ($1.00/sh.) -- -- -- 144,000
3rd qtr. - cash ($1.00/sh.) -- -- -- 10,000
3rd qtr. - cash ($0.75/sh.) -- -- -- 40,000
3rd qtr. - cash ($0.50/sh.) -- -- -- 10,000
3rd qtr. - cash ($0.25/sh.) -- -- -- 25,000
3rd qtr. - cash ($0.10/sh.) (62,700) -- -- --
3rd qtr. - services ($0.10/sh.) -- -- -- 47,300
4th qtr. - cash ($0.15/sh.) -- -- -- 59,500
4th qtr. - services ($0.15/sh.) -- -- -- 41,250
4th qtr. - cash ($0.19/sh.) -- -- -- 15,000
Net loss -- -- (507,685) (507,685)
-------------------------------------------------------------
BALANCE, 12/31/98 (62,700) -- (530,666) (115,616)
1st qtr. - cash ($0.22/sh.) -- -- -- 150,000
1st qtr. - services ($0.87/sh.) -- -- -- 429,564
2nd qtr. - cash received 60,000 -- -- 60,000
2nd qtr. - cash ($4.00/sh.) -- -- -- 4,600
2nd qtr. - cash ($0.15/sh.) -- -- -- 296,000
3rd qtr. - cash ($0.40/sh.) -- -- -- 175,000
3rd qtr. - cash received 2,700 -- -- 2,700
3rd qtr. - services ($1.00) -- -- -- 10,000
4th qtr. - services ($0.21) -- -- -- 43,750
Net loss -- -- (1,973,834) (1,973,834)
-------------------------------------------------------------
BALANCE, 12/31/99 -- -- (2,504,500) (917,836)
1st qtr. - cash ($1.00/sh.) -- -- -- 386,000
1st qtr. - cash ($.99/sh.) -- -- -- 74,063
1st qtr. - services/deposits ($2.92/sh.) -- -- -- 730,778
1st qtr. - services ($2.92/sh.) -- -- -- 146,000
2nd qtr. - Conversion due to Tender Offer -- -- -- 678,751
2nd qtr. - Issuance of Series B - cash -- 833,333 -- 2,157,240
2nd qtr. - cash ($1.00/sh.) -- -- -- 120,000
2nd qtr. - cash ($.99/sh.) -- -- -- 18,514
Series B preferred stock dividend -- -- (180,555) --
Net loss -- -- (1,261,570) (1,261,570)
-------------------------------------------------------------
BALANCE, 6/30/2000, UNAUDITED $ -- $ 833,333 $(3,946,625) $ 2,131,940
=============================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE> 13
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 19, 1997
Six Months Ended June 30, (Inception)
---------------------------- through
2000 1999 June 30, 2000
----------- ----------- -------------
Unaudited Unaudited
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,261,570) $ (801,189) $(3,766,070)
Adjustments to reconcile net loss to net cash used by
Operating activities:
Stock issued for services/deposits - related party 730,778 429,564 862,392
Stock issued for services - other 146,000 -- 595,250
Depreciation 47,702 4,860 88,230
Interest credited to certificate of deposit (624) -- (829)
Changes in operating assets and liabilities:
(Increase) decrease in inventory 7,586 (15,791) --
(Increase) decrease in accounts receivable 87,458 (4,370) (20,642)
(Increase) decrease in prepaid expenses and deposits (470,270) -- (487,135)
Increase (decrease) in accounts payable - trade (113,334) (101,464) 213,190
Increase (decrease) in accounts payable - officers 53,087 (27,930) 70,490
Increase (decrease) in accounts payable - related party 8,351 (5,652) 49,247
Increase (decrease) in deferred revenue (7,821) -- --
Increase (decrease) in accrued payroll taxes (1,005) (35,730) --
Increase (decrease) in accrued interest (8,469) 11,547 4,221
----------- ----------- -----------
Net cash used by operating activities (782,131) (546,155) (2,391,656)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificate of deposit (25,000) -- (50,000)
Purchase of property and equipment (187,990) (16,147) (606,073)
Purchase of intangibles (105,032) -- (105,032)
----------- ----------- -----------
Net cash used by investing activities (318,022) (16,147) (761,105)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 1,145,400 1,145,400
Common stock issued for cash 598,577 446,000 1,524,803
Professional services in connection with Tender Offer (80,699) -- (80,699)
Preferred stock issued for cash, net of expenses 2,157,240 4,600 2,161,840
Repayment of shareholder advances -- (24,750) --
Proceeds from stock subscription receivable -- 60,000 74,974
----------- ----------- -----------
Net cash provided by financing activities 2,675,118 1,631,250 4,826,318
----------- ----------- -----------
Net increase (decrease) in cash and equivalent 1,574,965 1,068,948 1,673,557
CASH, beginning of period 98,592 908 --
----------- ----------- -----------
CASH, end of period $ 1,673,557 $ 1,069,856 $ 1,673,557
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid in cash $ 37,619 $ -- $ 89,316
=========== =========== ===========
NON-CASH FINANCING ACTIVITIES:
Conversion of debt to common stock due to Tender Offer $ 759,450 $ -- $ 759,450
=========== =========== ===========
Series B preferred stock dividend $ (180,555) $ -- $ (180,555)
=========== =========== ===========
Stock subscription receivable $ -- $ (175,000) $ --
=========== =========== ===========
Donated capital - related party $ -- $ -- $ 9,000
=========== =========== ===========
Inventory transferred to property and equipment $ -- $ -- $ 152,980
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE> 14
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the six-month period ending June 30, 2000 and
1999 is Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
THE COMPANY IPVoice.com, Inc., (the "Company"), is a Nevada chartered
development stage corporation which conducts business from its
headquarters in Phoenix, Arizona. The Company was incorporated on
February 19, 1997 as Nova Enterprises, Inc., and changed its name to
IPVoice Communications, Inc. in March 1998, and to IPVoice.com, Inc. in
April 1999. The Company is principally involved in the Internet
telephone industry. The Company is in the development stage. Although
the Company has received revenue, it is not yet considered material to
its intended operations. The Company has received limited operating
revenues and will continue to incur expenses during its development,
possibly in excess of revenue.
The following summarize the more significant accounting and reporting
policies and practices of the Company:
a) USE OF ESTIMATES The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statements of
financial condition, and revenues and expenses for the year then ended.
Actual results may differ from those estimates.
b) SIGNIFICANT ACQUISITION In March 1998, IPVoice.com, Inc., a Nevada
corporation, acquired 100% of the issued and outstanding shares of the
common stock of IPVoice Communications, Inc., a Delaware corporation,
in a reverse merger, which was accounted for as a reorganization of the
Delaware Company.
c) PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of IPVoice.com, Inc. and its wholly owned
subsidiary. All intercompany balances and transactions have been
eliminated.
d) NET LOSS PER SHARE Basic net loss per weighted average common share
is computed by dividing the net loss by the weighted average number of
common shares outstanding during the period.
e) STOCK COMPENSATION FOR SERVICES RENDERED The Company issues shares
of common stock in exchange for services rendered. The costs of the
services are valued according to generally accepted accounting
principles and have been charged to operations.
F-5
<PAGE> 15
f) INVENTORY Inventory consists of unused telephone time related to the
prepaid calling cards sold. The Company receives transaction reports by
activated PIN codes from the long distance provider.
g) PROPERTY AND EQUIPMENT All property and equipment is recorded at
cost and depreciated over their estimated useful lives, using the
straight-line method. Upon sale or retirement, the costs and related
accumulated depreciation are eliminated from their respective accounts,
and the resulting gain or loss is included in the results of
operations. Repairs and maintenance charges, which do not increase the
useful lives of the assets, are charged to operations as incurred.
h) INTANGIBLES. In the second quarter of 2000, the Company engaged a
law firm for the preparation and filing of the required applications
and tariffs with the state regulatory authorities in 48 continental
United States, Hawaii, and District of Columbia and FCC at an estimated
total cost of $230,000. Through June 30, 2000 the Company recorded
expenditures of $105,032.
i) REVENUE RECOGNITION The Company currently has two revenue streams:
1) prepaid telephone calling cards and 2) the sale of its "Gateways".
The Company recognizes revenue on the prepaid telephone cards based
upon actual usage since, as provided by the service provider in reports
detailing usage by activated PIN codes. Since the Company requires
payment in full by the wholesaler upon PIN code activation, in blocks,
the amount received by the Company in excess of that reported by the
provider is classified as deferred revenue. Revenue from the sale of
the Company's "Gateways" is recognized upon acceptance of the equipment
by the purchaser. Although the accounting for the two revenue streams
is different, they are both part of the Company's single line of
business.
j) RESEARCH AND DEVELOPMENT Research and development costs are expensed
in the period incurred.
k) INTERIM FINANCIAL INFORMATION. The financial statements for the six
months ended June 30, 2000 and 1999 are unaudited and include all
adjustments, which in the opinion of management are necessary for fair
presentation, and such adjustments are of a normal and recurring
nature. The results for the six months are not indicative of a full
year result.
(2) STOCKHOLDERS' EQUITY The Company has authorized 50,000,000 shares of $0.001
par value common stock and 10,000,000 shares of $0.001 par value
preferred stock. Rights and privileges of the preferred stock are to be
determined by the Board of Directors prior to issuance. The Company had
17,866,384 and 16,422,758 shares of common stock issued and outstanding
at June 30, 2000 and December 31, 1999, respectively. The Company had
200 and 1,150 shares of Series A preferred stock issued and outstanding
at June 30, 2000 and December 31, 1999, respectively. The Company had
2,500 and 0 shares of Series B preferred stock issued and outstanding
at June 30, 2000 and December 31, 1999, respectively. In February 1997,
the Company issued 9,000,000 shares to its founder for services
rendered to the Company valued at par value, or $9,000. In March 1997,
the
F-6
<PAGE> 16
Company completed a Regulation D Rule 504 Placement for 1,400,000
shares in exchange for $14,000 cash.
In March 1998, a majority shareholder donated 9,000,000 shares of
common stock to the Company. 9,000,000 shares were simultaneously
issued for the acquisition of IPVoice Communications, Inc., a Delaware
corporation (Note (1)(b). During the second quarter of 1998, the
Company issued 144,000 shares of common stock for $144,000 in cash. The
Company issued 473,000 shares of common stock for services rendered,
valued at the current market rate of $47,300, during the third quarter
of 1998. Also during the third quarter, the Company issued 183,333
shares of common stock for $85,000 in cash, and 627,000 shares of
common stock for a subscription receivable of $62,700. In the fourth
quarter of 1998, the Company issued 275,000 shares of common stock for
services rendered, valued at the current market rate of $41,250. In the
same quarter, 476,666 shares of common stock were issued for $121,800
in cash.
In January 1999, the Company issued 93,760 shares of common stock in
exchange for services, valued at $14,064. In January and February 1999,
the Company issued 499,999 shares of common stock in exchange for
$75,000 in cash. In March 1999, the Company issued 187,500 shares of
common stock for $75,000 in cash. These issuances were to then current
stockholders. In March 1999, the Company issued 400,000 shares of
common stock for services, valued at the current market rate of
$415,500, to three previously unrelated entities.
In April 1999, the Company issued 250,000 shares of common stock to an
existing stockholder for $100,000 cash. In April 1999, an existing
stockholder exercised a warrant for 155,000 shares of common stock by
tendering $100,000 cash. In April 1999, an existing stockholder
exercised a warrant for 1,600,000 shares of common stock by tendering
$96,000 in cash. In the second quarter, the Company completed a
Regulation D Rule 506 Private Placement for units, which included the
issuance of 1,150 shares of senior convertible (Series A) preferred
stock in exchange for $4,600 in cash. These senior convertible (Series
A) preferred shares, as a group, were convertible into common shares
equaling 51% of the issued and outstanding common shares after
conversion, in the event of an uncured default of the notes payable. In
July 1999, the Company discovered that it had failed to issue and
record 10,000 shares of common stock in exchange for legal services,
valued at $10,000 in 1997, as originally contracted. These shares were
recorded in July 1999. In August 1999, the Company issued 437,500
shares of common stock for $175,000 cash. All common stock shares
issued in exchange for cash, except the two warrant exercises, were
subscribed for in January 1999. In November 1999, the Company issued
10,000 shares of common stock in exchange for services valued at
$23,750. In December 1999, the Company discovered that it had failed to
issue and record 200,000 shares of common stock for services valued at
$20,000, which had been contracted for in October 1998, and were
recorded in December 1999.
In the first quarter 2000, an existing shareholder exercised warrants
for 386,000 shares of common stock for $386,000 cash. In the first
quarter 2000, an existing 506 investor
F-7
<PAGE> 17
exercised his warrants for 75,000 shares of common stock by tendering
$74,063 cash. In the first quarter 2000, the Company issued 300,000
shares of common stock for services/deposits, valued at the current
market rate of $876,778, to two entities one related party ($730,778)
and the other unrelated ($146,000).
In the second quarter 2000, an existing shareholder exercised warrants
for 120,000 shares of common stock for $120,000 cash. In the second
quarter 2000, an existing 506 investor exercised his warrants for
18,750 shares of common stock by tendering $18,514 cash.
In the second quarter 2000, the Company made a Tender Offer to the
senior convertible (Series A) preferred stockholders who were given the
option of: (1) converting all of the units into 17,832 shares of common
stock, (2) converting a portion of the units to shares of common stock
and amend the notes or (3) retain the units and not to agree to the
offer. As a result of the Tender Offer, the Company issued 543,876
shares of common stock in exchange for the cancellation of 950 shares
of Series A preferred stock and $759,450 of debt.
During the second quarter of 2000, the Company received $2,157,240, net
of expenses of $342,760, from the issuance of 2,500 shares of
convertible Series B preferred stock with a 7.5% dividend rate. At the
election of the shareholders, the Series B preferred stock may be
converted into shares of common stock by dividing the purchase price by
the conversion price. The conversion price equals the lesser of: (1)
110% of the lowest closing bid price for the common stock for the five
trading days prior to the date of issuance or (2) 75% of the average of
the three lowest closing bid price for the common stock for the thirty
consecutive trading days preceding the conversion date. The Company has
recorded a beneficial conversion feature discount on the issuance of
convertible Series B preferred stock in the amount of $833,333 in
accordance with EITF Topic D-60. Based on the Series B preferred
stockholders' agreement, the Company is recording the Series B
preferred stock dividend over 180 days from May 22, 2000. Also, on the
conversion date, the Series B preferred stockholders have an option to
acquire up to $2,500,000 of common stock at the conversion price. The
Company is currently evaluating the financial statement effects of this
option. Furthermore, in accordance with the Series B preferred
stockholders' agreement, the Company issued 350,000 warrants to
purchase common stock at an exercise price of $2.136 per share.
(3) INCOME TAXES Deferred income taxes (benefits) are provided for certain
income and expenses which are recognized in different periods for tax
and financial reporting purposes. The Company had net operating loss
carry-forwards for income tax purposes of approximately $3,766,000,
which expire beginning December 31, 2117. There may be certain
limitations on the Company's ability to utilize the loss carry-forwards
in the event of a change of control, should that occur.
The amount recorded as a deferred tax asset, cumulative as of June 30,
2000, is $1,506,000, which represents the amount of tax benefits of the
loss carry-forwards. The Company has established a valuation allowance
for this deferred tax asset of $1,506,000,
F-8
<PAGE> 18
as the Company has no history of profitable operations. The significant
components of the net deferred tax asset as of June 30, 2000 are:
<TABLE>
<S> <C>
Net operating losses $ 1,506,000
-----------
Valuation allowance (1,506,000)
-----------
Net deferred tax asset $ 0
===========
</TABLE>
(4) RELATED PARTIES At June 30, 2000, the Company owed two of its officers
$70,490 for reimbursement of expenses paid on behalf of the Company.
This amount is represented in Accounts Payable - Officer. At June 30,
2000, the Company owed a shareholder $49,247 for consulting services
performed on behalf of the Company. This amount is represented in
Accounts Payable - Related party. Total consulting fees incurred by a
shareholder during the six months ended June 30, 2000 amounted to
$303,744. Consulting fees in the amount of $52,450 were paid to an
officer during the six months ended June 30, 2000.
(5) SIGNIFICANT ACQUISITION On April 7, 1999, the Company acquired all of the
issued and outstanding common stock of SatLink 3000, Inc., d/b/a
Independent Network Services, a Nevada Corporation (INS). The Company
issued 250,000 shares of redeemable convertible preferred shares. Each
share is convertible, on or after one year after Closing, into one
share of the Company's common stock or, at the shareholder's option,
redeemable by the Company at a price of $2 per share, giving a total
valuation of $500,000 to this transaction.
During the course of the audit of the SatLink 3000, Inc. 1998 financial
statements, certain information was disclosed to the Company. Based on
this information, the Board of Directors elected, on October 29, 1999,
to rescind the acquisition transaction ab initio and nullify the
above-mentioned agreements with the President and Chief Executive
Officer of SatLink 3000, Inc. These transactions are being treated as
if they never occurred, except for the assumption of an office space
lease and the writeoff of a receivable of $48,532.
(6) PRIVATE OFFERING OF SECURITIES During the second quarter of 1999, the
Company raised $1,150,000 through the issuance of forty-six investment
units in the amount of $25,000. Each unit consisted of a two-year note
in the principal amount of $24,900, with a maturity of June 3, 2001,
with interest payable quarterly at 9% per annum; a warrant for 18,750
shares of common stock of the Company; and twenty-five senior
convertible (Series A) preferred shares. These preferred shares, as a
group, were convertible into common shares equaling 51% of the issued
and outstanding common shares after conversion, in the event of an
uncured default of the notes payable. The note payable maturity can be
extended for two additional years at the option of the Company, with no
consideration to the unit holders. During the second quarter the
Company completed a Tender Offer, which reduced the debt from
$1,145,400 to $385,950 and cancelled 950 shares of senior convertible
(Series A) preferred stock.
F-9
<PAGE> 19
During the second quarter of 2000, the Company received $2,157,240, net
of expenses of $342,760, from the issuance of 2,500 shares of
convertible Series B preferred stock with a 7.5% dividend rate. At the
election of the shareholders, the Series B preferred stock may be
converted into shares of common stock by dividing the purchase price by
the conversion price. The conversion price equals the lesser of: (1)
110% of the lowest closing bid price for the common stock for the five
trading days prior to the date of issuance or (2) 75% of the average of
the three lowest closing bid price for the common stock for the thirty
consecutive trading days preceding the conversion date. Also, on the
conversion date, the Series B preferred stockholders have an option to
acquire up to $2,500,000 of common stock at the conversion price.
Furthermore, in accordance with the Series B preferred stockholders'
agreement, the Company issued 350,000 warrants to purchase common stock
at an exercise price of $2.136 per share.
(7) RESTRICTED CERTIFICATES OF DEPOSIT In October 1999, the Company purchased a
$25,000 one-year Certificate of Deposit (CD), which bears interest at
the rate of 4.89%. The Company has pledged this CD as collateral to a
letter of credit in the amount of $25,000 issued in favor of the
supplier of prepaid telephone card services as a guarantee of payment.
This contract was cancelled in July 2000. In June 2000, the Company
purchased a $25,000 one-year CD, which bears interest at the rate of
4.89%. The Company has pledged this CD as collateral to a Letter of
Credit in the amount of $25,000 issued in favor of the co-location, PRI
lines and Internet connections.
(8) COMMITMENT AND CONTINGENCIES
a) CONSULTING AGREEMENTS - RELATED PARTIES In December 1997, the
Company entered into a consulting agreement with a previously unrelated
company controlled by the present Chairman of the Board of Directors of
the Company. This agreement, as amended, called for the payment of
$5,000 per month for six years. This agreement was subsequently amended
by verbal agreement, increasing the payment to $12,500 per month and in
September 1999, reduced to $7,500 per month until the Company obtained
financing. The Company is obligated to pay a total of $125,000 in 2000,
$150,000 in 2001 and $137,500 in 2002. In June 2000, the consulting fee
was changed back to $12,500 per month.
In October 1998, the Company entered into a consulting agreement with a
previously unrelated party. This agreement called for the issuance of
350,000 shares of common stock valued at $35,000, an option for
1,600,000 shares of common stock at an exercise price of $0.06 per
share, an option for 350,000 shares of common stock at an exercise
price of $3.90 per share, a five-year warrant for common stock shares
equal to five per cent of the then issued and outstanding common stock
at exercise with a strike price of $1.00 per share and consulting fees
for a 30 month period, beginning in September 1998, in the amounts of :
$4,000 per month for the first 6 months, $6,000 per month for the next
12 months, and $8,000 for the last 12 months. At December 31, 1999,
fifteen months remain under this agreement. The Company was obligated
for payments totaling $90,000 in 2000, and $24,000 in 2001. This
contract was terminated in July 2000 in exchange for the issuance of
700,000 shares of common stock.
F-10
<PAGE> 20
At the end of the first quarter of 1999, the Company entered into three
marketing agreements with three previously unrelated companies. Those
agreements called for the issuance of 100,000, 200,000 and 100,000
shares of common stock. One agreement also called for the performance
based issuance of up to 150,000 shares of common stock and the
performance based issuance of warrants for up to 450,000 shares of
common stock, with an exercise price of $2.50 per share.
b) CONSULTING AGREEMENTS - OTHER In June 1999, the Company entered into
a one-year consulting agreement with an unrelated individual for a
total consideration of $100,000. In 1999, the Company paid $45,800 of
this fee, and is obligated to pay the $54,200 balance during 2000.
c) LEASES The Company entered into a one-year lease for its office
space beginning in August 1999. The Company is obligated to rental
payments amounting to $27,000 in 2000. This lease expires on July 31,
2000. The Company and lessor have agreed to extend the lease for an
additional month. In 1999, the Company paid $35,000 in office rent. In
July 2000, the Company entered a three-year lease for new office space.
The Company is obligated to pay $57,409 in year 2000, $140,077 in year
2001, and $146,636 in year 2002. In November 1999, the Company entered
into a one-year lease for an apartment for the Company's use. In 1999,
the Company paid $1,700 in rent, and is obligated to pay $8,700 in
2000. In January 2000, the Company entered into a financing lease for a
telephone system valued at $13,000, which calls for the Company to make
payments totaling $4,500 per year for four years. In January 2000, the
Company entered into a three-year operating lease with a stockholder of
the Company. This lease calls for a fair market value purchase at lease
end. The lease is for the Company's "Gateway" equipment located in New
York City and Los Angeles. The Company was obligated to the following
payments: $36,800 in 2000; $40,000 in 2001; $40,000 in 2002 and $3,300
in 2003. In July 2000, the Company purchased the equipment at its fair
market value from the lessor. In March of 2000, the Company leased an
automobile for 36 months with payments totaling $9,000. In July 2000,
the Company entered an agreement to lease seven laptop computers for
forty-eight months for a total obligation of $27,000. In July 2000, the
Company signed an agreement to lease furniture for a period of sixty
months for a total obligation of $57,000.
d) LAWSUITS In December 1999, SatLink filed a lawsuit alleging breach
of contract as a result of the rescission of the acquisition in October
1999, as discussed in Note 5 above. In December 1999, the former CFO of
the Company filed a lawsuit alleging breach of contract as a result of
the rescission of the employment agreement in October 1999, as
discussed in Note 5 above.
On April 25, 2000, Michael McKim filed a lawsuit against the Company
alleging breach of employment contract and fraud. The Company formerly
employed Mr. McKim as Vice President of Research and Development. In
addition, for a period of time, he was a member of the Company's Board
of Directors. As a part of his compensation, Mr.
F-11
<PAGE> 21
McKim was to receive 300,000 shares of common stock, followed by an
additional 750,000 shares of common stock over a three-year period,
subject to various limitations.
In his complaint, Mr. McKim alleges that the Company failed to issue
the 300,000 shares to him, thereby breaching the employment agreement.
In addition, he alleges that, in failing to provide the shares to him,
the Company committed fraud. The Company filed its answer on June 19,
2000 denying the allegations of the complaint. The Company also filed a
counterclaim against Mr. McKim alleging that, during the course of his
employment, Mr. McKim engaged in intentional misrepresentation, breach
of fiduciary duty and intentional interference with business
relationships.
The Company believes these suits have no merit and intends to
vigorously defend them.
e) EMPLOYMENT AGREEMENTS In April 1998, the Company entered into
three-year employment agreements with the President and the Senior Vice
President. These agreements call for salaries in the amount of $150,000
per year for each of those officers. In September 1999, those officers
agreed to temporarily reduce this compensation to $90,000 per year
until the Company obtained financing in May 2000. The reduction
agreements did not call for an accrual and payment of the difference.
In November 1999, the Company entered into a two-year employment
agreement with its Executive Vice President, (EVP), which calls for a
minimum salary of $78,000 per year and granted the EVP options for
50,000 shares of common stock, with an exercise price of $1.21. The
Company is obligated to pay a total of $258,000 in 2000 and $110,000 in
2001, under these employment agreements.
f) STOCK OPTION PLAN In December 1999, the stockholders adopted an
executive incentive plan the "Option Plan" or "2000 Executive Incentive
Plan") under which 1,000,000 shares of common stock are reserved for
grants under the Option Plan. The Option Plan took effect on January 1,
2000 and terminates on December 31, 2005. Options granted under the
Option Plan may qualify as "incentive stock options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended, and
become exercisable in accordance with the terms approved at the time of
the grant. To be eligible, a grantee must be an employee, officer,
director, or consultant of the Company. It is intended that all options
be granted at fair market value on a particular date determined by the
Compensation and Option Committee of the Board of Directors . As of
July 31, 2000, options to purchase 305,000 shares at an exercise price
of $1.21 per share have been granted to 8 employees and to a director.
(9) SUBSEQUENT EVENT In July 2000, the Company and the previously unrelated
party agreed to terminate the consulting agreement, including the
outstanding warrants, in exchange for 700,000 shares of common stock.
F-12
<PAGE> 22
INDEX TO EXHIBITS
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<CAPTION>
Exhibit No. Description
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<S> <C> <C>
10.45 [1] Agreement dated May 5, 2000 with Condor Worldwide, Ltd., James K.
Howson, Anthony Welch, Barbara Will and IPVoice Communications, Inc.
10.46 [2] Augustine Fund, L.P. - Securities Purchase Agreement including all
exhibits
10.47 [2] The Shaar Fund, Ltd. - Securities Purchase Agreement including all
exhibits
10.48 * Employment Agreement dated April 2000 with J. Michael Scott
10.49 * Service Agreement dated May 15, 2000 with Telic Communications, Inc.
10.50 * Financial and Business Management Consulting Agreement dated June 1,
2000 with Growth Capital Resources.com, LLC
10.51 * Collocation Agreement dated June 23, 2000 with Intermedia
Communications Inc.
10.52 * Service Agreement dated June 29, 2000 with Telecom Compliance Services,
Inc.
27.1 * Financial Data Sheet
</TABLE>
* Filed herewith
[1] Previously filed with the Company's Form 10-QSB for the period
ending March 31, 2000.
[2] Previously filed with the Company's Form 8-K report dated June 16,
2000.
(b) Reports on Form 8-K were filed during the quarter as
follows:
(i) Form 8-K Report filed May 9, 2000 with respect to Item 5
(ii) Form 8-K Report filed June 16, 2000 with respect to Item 5
