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As filed with the Securities and Exchange Commission on August 21, 2000
REGISTRATION NO. __________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
IPVoice.com, Inc.
(Name of small business issuer in its charter)
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Nevada 4813 65-0729900
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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7585 East Redfield Road, Suite 202, Scottsdale, Arizona 85260, (480) 948-1895
(Address and telephone number of principal executive offices
and principal place of business)
Barbara Will
President and Chief Operating Officer
7585 East Redfield Road, Suite 202
Scottsdale, Arizona 85260
(480) 948-1895
(Name, address and telephone number of agent for service)
With Copies to:
I. Douglas Dunipace
Jennings, Strouss & Salmon, P.L.C.
Two North Central, Suite 1600
Phoenix, Arizona 85004-2393
Telephone: (602) 262-5832
Fax: (602) 253-3255
Approximate date of proposed sale to the public: as soon as practicable from
time to time 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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of each class of securities Dollar amount to be Proposed maximum aggregate Amount of registration
to be registered registered offering price per share (1) fee
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Common Stock $.001 Par Value (2) $13,817,996 $.875 $3,192.00
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the
"Securities Act"), based on the average of the closing bid and asked prices for
the Company's Common Stock, $.001 par value (the "Common Stock") as reported on
the OTC Bulletin Board on August 14, 2000. With respect to the 350,000 shares
issuable upon exercise of the Warrants, the registration price per share is
based on the average exercise price of the Warrants.
(2) Pursuant to Rule 416 promulgated under the Securities Act, this Registration
Statement also registers such number of additional shares of Common Stock that
may be offered or issued for dividends on the Series B Convertible Preferred
Stock, $.001 par value (the "Series B Preferred Stock"), upon exercise of the
warrants or option of the Selling Stockholders and for other adjustments or to
prevent dilution resulting from stock splits, stock dividends or similar
transactions in connection with such Series B Preferred Stock, warrants and
options.
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 index for exhibits is on page II-7.
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IPVOICE.COM, INC.
15,287,595 SHARES OF COMMON STOCK, $.001 PAR VALUE
The selling stockholders listed on pages 39-40 of this prospectus (the "Selling
Stockholders") are offering and selling up to 15,287,595 shares (the "Shares")
of the common stock, $.001 par value (the "Common Stock") of IPVoice.com, Inc.,
a Nevada corporation (the "Company," "we", "us" or "our"). This registration
statement has been filed to register for resale Shares issued to certain Selling
Stockholders, and shares issued or issuable in connection with our Series B
Convertible Preferred Stock, $.001 par value (the "Series B Preferred Stock")
convertible into Common Stock and warrants or options (the "Warrants")
exercisable for shares of Common Stock on behalf the Selling Stockholders and to
account for certain adjustments to the number of shares issuable under the
Series B Preferred Stock and the Warrants. We will not receive any of the
proceeds from the sale of securities by the Selling Stockholders. However, we
could receive up to $3,247,600 in gross proceeds, if certain Selling
Stockholders exercise their rights under the Warrants or other equity rights to
purchase shares of Common Stock. All proceeds that we receive, if any, will be
used for sales and marketing of our products and services, service of our
products, deployment of our products and technology, continued research and
development, working capital and general corporate purposes. The Selling
Stockholders' securities may be offered from time to time by the Selling
Stockholders directly to purchasers or to or through broker-dealers who may act
as agents or principals, at market prices prevailing at the time of sale. See
"Description of Securities - Selling Stockholders" and "- Shares Eligible for
Future Sale" and "Plan of Distribution".
The Selling Stockholders intend to sell the Shares into the public market from
time to time. The Selling Stockholders will negotiate with the market makers for
Common Stock to determine the prices for each sale. They expect each sale price
to be near to the market price at the time of the sale. During the registration
period, the Selling Stockholders may not sell the Shares until the registration
statement filed with the Securities and Exchange Commission is effective.
The information in this prospectus is subject to the Securities and Exchange
Commission and may be changed. This prospectus is not an offer to sell the
Common Stock and it is not soliciting an offer to buy the Common Stock in any
state where the offer or sale is not permitted.
The Selling Stockholders will pay all brokerage commissions and discounts
attributable to the sale of the Shares plus brokerage fees and expenses relating
to the registration of their Shares. We are responsible for all other costs,
expenses and fees incurred in registering the shares offered by this prospectus,
which are estimated to be approximately $195,000.
Our Common Stock is traded under the symbol "IPVC" on the OTC Bulletin Board.
The last reported sale price on the OTC Bulletin Board for our Common Stock on
July 31, 2000 was $1.0625 per share. There has been a limited public market for
our Common Stock on the OTC Bulletin Board system and no other public market for
the Common Stock, and there can be no assurance that any such market will
develop.
THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 3.
THESE SECURITIES SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This date of this Prospectus is August 21, 2000
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ADDITIONAL INFORMATION
We have voluntarily elected to be a reporting company. Beginning January 1,
2000, we have or intend to regularly file annual, quarterly and current reports,
proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). You may read and copy any document we file at the SEC's
public reference room at the following locations:
- Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
- Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
- Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's public reference rooms
by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically. You can
access the electronic versions of these filings on the Internet at the SEC's web
site, located at http://www.sec.gov.
We have included this prospectus in our registration statement that we filed
with the SEC (the "Registration Statement"). The Registration Statement provides
additional information that we are not required to include in the prospectus.
You can receive a copy of the entire Registration Statement as described above.
Although this prospectus describes the material terms of certain contracts,
agreements and other documents filed as exhibits to the Registration Statement,
you should read the exhibits for a more complete description of the document or
matter involved.
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus and Registration Statement, including
without limitation information set forth under "Plan of Operations" contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"). Such forward-looking statements
concern the Company's expectations, beliefs, estimates, intentions, and
strategies about the future and are generally identified by the context of the
statement and use of words such as, "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," or variations of such words and
similar expressions which are intended to identify such forward-looking
statements, but their absence does not mean the statement is not
forward-looking. Such information contained in such statements is difficult to
predict. Actual results may differ materially from those expressed or
forecasted. The Company desires to avail itself of certain "safe harbor"
provisions of the Act and is therefore including this special note to enable the
Company to do so. Such forward-looking statements are subject to certain risks
and uncertainties, including those described in the section captioned "Risk
Factors" below.
TABLE OF CONTENTS
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Page
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Prospectus Summary ............................................................................................... 1
Risk Factors ..................................................................................................... 3
Risks Relating to Our Financial Condition ........................................................................ 3
Risks Relating To Our Business ................................................................................... 5
Other Risks ...................................................................................................... 10
Use Of Proceeds .................................................................................................. 13
Dividend Policy .................................................................................................. 13
Capitalization ................................................................................................... 13
Market Price Of The Registrant's Common Equity And Related Stockholder Matters ................................... 15
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Selected Financial Data .......................................................................................... 15
Plan Of Operations ............................................................................................... 16
Business ......................................................................................................... 16
Management ....................................................................................................... 32
Certain Relationships And Related Transactions ................................................................... 37
Selling Stockholders ............................................................................................. 39
Description Of Securities ........................................................................................ 40
Plan Of Distribution ............................................................................................. 44
Legal Matters .................................................................................................... 45
Experts .......................................................................................................... 45
Financial Statements ............................................................................................. F-1
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PROSPECTUS SUMMARY
READ THIS ENTIRE PROSPECTUS CAREFULLY. THE FOLLOWING SUMMARY IS
QUALIFIED BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS", APPEARING
ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERMS "WE," "US," "OUR" OR "COMPANY" MEAN IPVOICE.COM,
INC. AND ITS SUBSIDIARY, IPVOICE COMMUNICATIONS, INC.
The Company
Since 1998 we have been developing our MultiCom business management
software ("MultiCom") for use in Internet Protocol ("IP") telephony applications
(such as telephone, fax, data, images and video over the Internet). MultiCom is
the business management system behind our TrueConnect Gateway product and our
newly released next generation Gateway products called SuperConnect and
UltraConnect (each referred to herein as a "Gateway"). The MultiCom, Gateways
and other proprietary technology and products are generally referred to as the
"IPVoice System." A Gateway provides a mechanism for bridging the public
telephone system with the Internet. Our current business was founded on the
premise that traditional telephone systems underutilized resources by assigning
each call a "nailed down" circuit. Our Gateways allow 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. We continue to research the availability of
additional innovative products in IP telephony and related industries for
development, distribution or acquisition.
It is our intention to (i) continue to market our Gateway products,
(ii) to conduct research to further develop our Gateway products, and (iii) to
develop further "add-ons" which will enhance and expand the Gateway products.
Access through our Gateways is presently available in limited markets
in the United States and in the United Kingdom. We have Gateways and provide
service in New York, Los Angeles, Dallas, Chicago, Atlanta, Phoenix and London.
With the exception of New York and Los Angeles, we generally enter into
contracts with selected agents to operate our Gateways and sell our products and
services. We intend to expand the availability of the Gateways in selected U.S.
and foreign markets. We also receive revenue from the sale of prepaid calling
cards and TruePartners Programs.
The Company is comprised of IPVoice.com, Inc., the parent and a Nevada
corporation, and IPVoice Communications, Inc., the wholly-owned subsidiary and a
Delaware corporation. The parent was formed in 1997 as Nova Enterprises, Inc. In
April 1999, the parent changed its name to IPVoice.com, Inc. after it acquired
the subsidiary in March 1998 in a reorganization. The Company is quoted on the
OTC Bulletin Board under the symbol "IPVC." Our executive offices are located
7585 East Redfield Road, Suite 202, Scottsdale, Arizona 85260 and our telephone
number is (480) 948-1895.
The Selling Stockholders
The Selling Stockholders are using this prospectus to sell shares of
Common Stock to the public. Several of the Selling Stockholders have rights to
acquire some of the Shares as a result of a private financing of $2,500,000
consummated in May 2000.
Outstanding Shares
We are authorized to issue 50,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock, $.001 par value (the "Preferred Stock").
Our articles of incorporation permit our Board of Directors to determine the
relative rights, preferences and privileges in the Preferred Stock, except to
the extent set forth in our articles of incorporation. We have designated two
series of Preferred Stock outstanding, 10,000 shares designated as Senior
Convertible Preferred Stock, with 200 shares outstanding and 7,500 shares
designated as Series B Preferred Stock, with 2,500 shares outstanding. On the
date of this prospectus there were 18,566,384 shares of Common Stock
outstanding. In addition, there are warrants, options and contract rights
outstanding that could lead to additional shares of Common Stock being issued.
We cannot determine at this time the number of additional shares that could be
issued, because some of the contract rights are based on the future market price
of our Common Stock.
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Risk Factors
The Shares of Common Stock offered hereby involves a high degree of
risk. See "Risk Factors" beginning on page 3.
The Offering
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Common Stock offered by Selling Stockholders ........................ 15,287,595 shares
Common Stock Outstanding (1) ........................................ 18,566,384 shares
Use of Proceeds ..................................................... We will not receive any proceeds from the sale of
the Shares of Common Stock by the Selling
Stockholders. However, we may receive proceeds
from the exercise of warrants, options and rights
to purchase Common Stock and plan to use such
proceeds, if any, for sales and marketing of our
products and services, service of our products,
deployment of the IPVoice System, continued
research and development, working capital, and
other general corporate purposes.
OTC Bulletin Board Symbol ........................................... IPVC
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(1) Based on the number of shares outstanding on the date of this prospectus,
which does not include (i) 1,000,000 shares of Common Stock reserved for
issuance upon exercise of options outstanding or available for future
grant under our 2000 Executive Incentive Plan, (ii) shares of Common Stock
issuable upon the exercise of certain outstanding warrants and options and
other rights to purchase shares of Common Stock, or (iii) shares of Common
Stock issuable upon the occurrence of certain default events and resulting
conversion of shares of our Senior Convertible Preferred Stock. EXCEPT AS
OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO THE NUMBER OF
SHARES OF COMMON STOCK OUTSTANDING DO NOT INCLUDE THE FOREGOING SHARES.
Summary Financial Information
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Year Ended December 31, Six Months Ended June 30,
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STATEMENT OF OPERATIONS DATA:
1999 1998 2000 1999
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(Unaudited) (Unaudited)
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Net sales $321,279 $41,254 $107,973 $0
Gross Profit 15,845 41,254 3,997 0
Loss from operations (1,881,239) (507,685) 1,232,992 (796,028)
Other income (expense) (92,595) 0 (28,578) (5,161)
Net Loss (1,973,834) (507,685) (1,261,570) (801,189)
Loss per share $(0.13) $(0.04) $(0.07) $(0.05)
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Weighted average shares
Outstanding 15,413,751 11,620,451 17,268,264 14,762,758
BALANCE SHEET DATA:
Current Assets $256,348 $153,888 $2,232,163 $1,242,997
Total assets 633,903 191,513 2,855,038 1,291,909
Current Liabilities 406,339 307,129 337,148 123,150
Long-term debt 1,145,400 0 385,950 1,145,400
Total liabilities 1,551,739 307,129 723,098 1,268,550
Stockholders equity (deficiency) (917,836) (115,616) 2,131,940 23,359
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RISK FACTORS
In addition to other information in this prospectus, the following risk
factors should be considered carefully in evaluating us, our business and before
purchasing the Common Stock offered hereby.
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A
HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY THOSE PERSONS WHO ARE ABLE
TO AFFORD A LOSS OF THEIR ENTIRE INVESTMENT IN EVALUATING OUR BUSINESS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS.
RISKS RELATING TO OUR FINANCIAL CONDITION
Our Business Prospects are Difficult to Evaluate Because Our Current Operations
are New
IPVoice.com, Inc. (the "Parent"), as the parent company, and IPVoice
Communications, Inc. (the "Subsidiary"), as its wholly-owned subsidiary, are
collectively referred to herein as "the Company," "we," "us," or "our". The
Subsidiary was incorporated in Delaware in December of 1997. The Parent was
incorporated in February 1997 in the State of Nevada under the name Nova
Enterprises, Inc. In March 1998, the Subsidiary entered into a reorganization
agreement with the Parent. Under the reorganization agreement, the stockholders
of the Subsidiary exchanged all of the outstanding common shares of the
Subsidiary for 9,000,000 shares of the Parent. The Subsidiary became a
wholly-owned subsidiary of the Parent. The Parent changed its name to
"IPVoice.com, Inc." in April 1999. The reorganization agreement was accounted
for as a reorganization of the Subsidiary. We are considered a development stage
company. Our limited operating history, particularly since implementing the
IPVoice System, makes predicting future operating results difficult, and there
is no assurance that we will be profitable in the future.
We have been in the development stage since our reorganization. We only
recently have commenced operations of the IPVoice System and have not begun
generating any significant revenues for the IPVoice System. Accordingly, we have
only a limited operating history upon which you can evaluate our prospects and
us. We are subject to all the risks inherent in the operation of a development
stage business and cannot assure you that we will be successful in addressing
these risks.
We Have a History of Losses and Expect That Losses Will Continue in the Future
For the six months ending June 30, 2000 and 1999, we had revenues of
$108,000 and $0, respectively and operating expenses of $1,237,000, and
$796,000, respectively. For the six months ending June 30, 2000, we had cash of
$1,674,000 compared to cash of $99,000 for the year ended December 31, 1999, and
working capital (deficiency) of $1,895,000 and ($150,000), respectively. We
continue to generate cash losses from operations and expect to continue to
generate losses until our revenues increase or our expenses decrease. There is
no assurance that we can increase our revenue source and it is unlikely we can
lower our expenses. We may never earn a profit. If we continue to lose money
over a period of time, we may discontinue our operations.
As of June 30, 2000, our total assets were $2,855,000, consisting,
principally, of $1,674,000 in cash, $487,000 in prepaid expenses and deposits
and $518,000 in property and equipment, net. As a result of our limited assets
and a cumulative net loss from operations, in the amount of $3,766,000, as of
June 30, 2000, we only had working capital of $1,895,000 even after receipt of
net proceeds from the sale of $2,500,000 of Series B Preferred Stock in May
2000.
Lack of Working Capital
Other than revenues from the sale of our products and services, which
revenues have yet to produce a profit, and the proceeds from the sale of the
Series B Preferred Stock, we have no current source of working capital funds. We
have incurred a net loss in each year of our existence and have financed our
operations primarily through sales of equity and debt securities.
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We do not expect to overcome our history of losses unless sales
significantly exceed the current levels. While we anticipate the receipt of
increased operating revenues, such increased revenues cannot be assured.
Further, we may incur significant unanticipated expenditures, which deplete our
capital at a more rapid rate because of among other things, the stage of our
business, our limited personnel and other resources and our lack of a widespread
client base and market recognition. Because of these and other factors,
management is presently unable to predict what additional costs might be
incurred beyond those currently contemplated.
We May be Unable to Obtain the Financing We Need to Continue Our Operations
We have experienced significant cash flow difficulties from the lack of
revenues since our inception in February 1997. Our future capital requirements
will depend upon many factors, including the expansion of the IPVoice System,
requirements to maintain adequate telecommunications capabilities, the progress
of our research and development efforts, expansion of our marketing and sales
efforts and the status of competitive products and services. We will require
additional funding in order to exploit fully our plan for operations. We are
uncertain that additional financing will be available to us on acceptable terms,
or at all. If additional funds are raised by issuing equity securities, further
dilution to the existing stockholders will result. If adequate funds are not
available, we may be required to delay, scale back or eliminate our research and
development, marketing or expansion or obtain funds through arrangements with
partners or others that may require us to relinquish rights to certain of our
existing or potential products or other assets. Accordingly, the inability to
obtain such financing could have a material adverse effect on our business,
financial condition and results of operations.
We recently received proceeds, net of expenses of $2,157,000, from the
issuance of our Series B Preferred Stock and warrants. As of the date of the
prospectus, we have no commitments, agreements or understandings regarding
additional financings and we may be unable to obtain additional financing on
satisfactory terms or at all.
Our Future Revenue and Operating Results are Unpredictable and May Fluctuate
We have experienced, and expect to continue to experience, substantial
fluctuations in revenues and other operating results due to a variety of
factors. Our quarterly results of operations can be substantially affected by
factors such as costs of entering new markets, the amount of traffic over our
Gateways and the IPVoice System, the amount of minutes on the IPVoice System
purchased by the Company's distributors, agents and customers, research and
development expenditures, professional and other expenses, intellectual property
work and other activities to protect the Company's proprietary rights to the
IPVoice System technology, and the timing of the receipt of certain license and
other fees. In view of such fluctuations, we believe that quarterly comparisons
of our financial results are not necessarily meaningful and should not be relied
upon as a measure of future performance. The Company's operating results in the
first half of fiscal year 2000 are expected to be significantly affected by the
costs of entering into strategic alliances and other arrangements with new
distributors in additional markets in the United States and markets in foreign
countries.
Our short operating history and the rapidly changing nature of the
market in which we compete make it difficult to accurately forecast our revenues
and operating results. Our operating results are unpredictable and we expect
them to fluctuate in the future due to a number of factors. These factors may
include, among others:
- Internet and telecommunications growth;
- Demand for our services;
- Our ability to develop and introduce new products and services in
response to changing market conditions and customer preferences;
- The amount and timing of operating costs and capital expenditures
relating to the growth of our business;
- The announcement or introduction of new or enhanced products or
services by our competitors;
- Technical difficulties with customers' use of our service and
interruptions; and
- Changes in general economic or industry conditions.
Comparisons of our operating results for each period do not indicate
our future performance. It is likely that our operating results in some periods
will fall short of market expectations. If this occurs, the price of our Common
Stock may decline.
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RISKS RELATING TO OUR BUSINESS
Our Business Depends on One Form of Technology
We receive revenues primarily through the exploitation of the IPVoice
System technology. While the Company believes that this basic technology has
certain features that make it attractive to segments of the IP telephony market,
it has not yet had the opportunity to test the appeal of the IPVoice System
technology to those additional market segments. These features include the
ability to offer a carrier grade back office features such as least cost
routing, order entry, rating, product platforms, real time billing and multiple
reports. We believe that these features can make the IPVoice System attractive
to Internet providers, carriers, resellers, independent telephone companies
("ITCs"), large and small businesses and hospitality networks. The IPVoice
System offers the ability to interface with other switching vendors. However,
the IPVoice System has limitations, such as development time and cost to
interface or overlay MultiCom with top switching vendors. We have undertaken
limited efforts to date to take advantage of these capabilities of the IPVoice
System but have not had the resources to systematically market the IPVoice
System to these potential users. We also are continually working on upgrades and
enhancements to the basic IPVoice System technology with such items as TrueWeb,
PCTruePhone, Click'N Call and others. Our revenues are, and for the foreseeable
future will be, based on the market acceptance of products and services
utilizing our core IPVoice System technology. Any decline in demand for such
products and services, whether because of competition, technological changes or
other reasons, would have a material and adverse effect on our business,
financial condition and result of operations. Many of our existing competitors,
as well as a number of potential new competitors, have longer operating
histories, greater name recognition, larger client bases and significantly
greater financial, technical and marketing resources than us. This may allow
them to compete more effectively and be more responsive to industry and
technological change than us. We may be unable to compete successfully, and
competitive pressures may reduce our revenues and result in increased losses or
reduced profits.
No Assurance of Product Quality, Performance and Reliability
We expect that our distributors and their customers will continue to
establish demanding specifications for quality, performance and reliability.
Although we attempt to only deal with manufacturers who adhere to good
manufacturing practice standards, there can be no assurance that problems will
not occur in the future with respect to quality, performance, reliability, and
price. If such problems occur, we could experience increased costs, delays,
cancellations or rescheduling of orders and/or shipments or possible product
returns and discounts, any of which would have a material adverse effect on our
business, financial condition or results of operations.
Limited Distribution Capability
Our success depends in large part upon our ability to distribute our
products and services. Virtually all of our competitors or potential competitors
have much larger budgets for securing customers. In comparison, we lack the
financial resources, personnel and other resources required to compete
effectively with these larger, better-financed competitors. Although we have
entered into TruePartner and other agreements, these have produced only limited
revenues to date. Depending upon the level of operating capital generated or
funding obtained by us, we believe, that it will be possible for us to attract
additional customers for our products and services. However, in the event that
only limited funds are generated from operations or otherwise obtained, we
anticipate that our limited finances and other resources may be a determinative
factor in the decision to go forward with planned expansion. Until such time, if
ever, as we are successful in generating sufficient cash flow from operations or
securing additional capital, we intend to continue marketing our products
through our current distribution arrangement.
We Have Significant Competition
The telecommunications market and, in particular the IP telephony
market, are intensely and increasingly competitive. Many major internet backbone
companies and telephone carriers are involved in one or more aspects of the IP
telephony market. These include AT&T, MCI WorldCom, Cisco and Qwest, which offer
a variety of products from switching platforms to least cost routes and long
distance. We will be competing with these larger competitors, in international,
national, regional and local markets. In addition, we may encounter substantial
competition from new market entrants. Many of our competitors or potential
competitors have significantly greater name recognition and have
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greater marketing, financial and other resources than we do. There can be no
assurance that we will be able to compete effectively against such competitors
in the future.
We believe that an openly competitive market is desirable and that many
of our competitors could become customers because of MultiCom's advanced
capabilities and relative ease to interface with other types of equipment and
networks. To date, we are not aware of anyone else who has a system with the
capabilities and features of the IPVoice System, although we have not engaged in
extensive market research. Industry consolidation may also increase competition.
It is impossible to estimate what impact a similar system may have on the
competitive status of the IPVoice System.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
client bases and significantly greater financial, technical and marketing
resources than we have. This may allow them to compete more effectively and be
more responsive to industry and technological change than us. We may be unable
to compete successfully and competitive pressures may reduce our revenues and
result in increased losses.
Growth Opportunity through Acquisitions
We expect to grow through acquisitions, internal growth and by
expansion of our TruePartner relationships. We do not know if we will be able to
create a greater market presence or successfully enter other markets. Our
ability to grow will depend on a number of factors, including the availability
of working capital to support such growth, existing and emerging competition,
one or more qualified strategic alliances and our ability to maintain sufficient
profit margins in the face of pricing pressures. We must also manage costs in a
changing regulatory environment and adapt our infrastructure and systems to
accommodate growth within the niche market which we have created.
We also plan to expand our business, in part, through acquisitions.
Although we will continuously review potential acquisition candidates, we have
not entered into any agreement or commitment with respect to any additional
acquisitions at this time. We do not know if we will be able to successfully
identify suitable acquisition candidates, complete acquisitions on favorable
terms, or at all, or integrate acquired businesses into our operations.
Moreover, acquisitions may have a material adverse effect on our operating
results, particularly in the fiscal quarters immediately following the
consummation of such transactions, while the operations of the acquired business
are being integrated into our operations. Once integrated, acquisitions may not
achieve comparable levels of revenues, profitability or productivity as our
existing products and services or otherwise perform as expected. We are unable
to predict whether or when any prospective acquisition candidate will become
available or the likelihood that any acquisitions will be completed. We will be
competing for acquisition and expansion opportunities with entities that have
substantially greater resources than we have. In addition, acquisitions involve
a number of special risks, such as diversion of management's attention,
difficulties in the integration of acquired operations and retention of
personnel, unanticipated problems or legal liabilities, and tax and accounting
issues, some or all of which could have a material adverse effect on our results
of operations and financial condition.
Reduction of Traditional Long Distance Service
Our rates for long distance telephone calls are generally competitive
with and in some cases less than the telephone charges for the same
long-distance service that the customer would pay to a primary seller of such
services. Our ability to undersell such primary sellers arises as a result of
the use of the Internet to transmit long distance telephone calls. Therefore,
narrowing of the differential between the rates charged to our customers and the
cost of long distance telecommunications services provided by competitors or
traditional long distance carrier's customers would have a significant adverse
effect on us.
We Depend on Key Personnel
Our success depends to a significant extent on the continued service of
our key management and technical personnel, particularly Barbara Will, Anthony
Welch, Michael Scott and Harry Bowman. Virtually all decisions concerning the
marketing, distribution and sales of our products and services will be made or
significantly influenced by our officers. The loss of the services of any of
these officers would adversely affect the conduct of our business and our
prospects for the future.
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<PAGE> 12
Our growth and future success will depend in large part upon our
ability to continue to hire, motivate and retain these and other qualified
employees. The competition for persons with comparable experience is intense and
the loss of key employees could have an adverse effect on us. Although Ms. Will,
Mr. Welch, Mr. Scott and Mr. Bowman have entered into employment agreements with
us, there can be no assurance that we will be able to retain them or other key
employees in the future. We do not hold key person life insurance on any of our
employees.
Significant Customer and Product Concentration
To date, a limited number of customers and distributors have accounted
for substantially all of our revenues with respect to product sales. Although we
have entered into TruePartner agreements, there is no assurance that we will be
able to obtain adequate distribution of our products to the intended end user.
Our ability to achieve revenues in the future will depend in significant part
upon our ability to obtain additional Gateway outlets, maintain relationships
with and provide support to, existing and new distributors, as well as the
financial strength of our distributors. As a result, any cancellation, reduction
or delay may materially adversely affect our business, financial condition and
results of operations. There can be no assurance that we will be able to support
or attract additional customers.
Our Industry is Changing Rapidly
Telecommunications technology and IP telephony are rapidly changing.
Our market is also characterized by frequent new product and service
introductions, short development cycles and evolving industry standards. The
recent growth of the Internet and intense competition in our industry exacerbate
these market characteristics. The development of new products involves
considerable expenditures and can take from several months to several years.
Accordingly, new product development requires a long-term forecast of market
trends and customer needs and often a substantial commitment of capital
resources with no assurance that such products or enhancements will be
commercially viable.
Our future success will depend significantly on our ability to enhance
the current IPVoice System capabilities or develop new technology that meets the
changing market demands on a timely and cost-effective basis by maintaining and
improving the performance features and reliability of our services, and to
continue to meet emerging industry standards and other technological changes. We
may experience technical difficulties that could delay or prevent the successful
development, introduction or marketing of new products and services. In
addition, any new enhancements to our products and services must meet the
requirements of our current and prospective users. We could incur substantial
costs to modify our services to adapt to rapid technological change.
We do not know if we will be successful in enhancing the existing
IPVoice System or developing new products on a timely basis or if such new or
enhanced products will achieve market acceptance or sustain such acceptance for
any significant period. Our failure to anticipate or respond adequately to
changes in technology and customer requirements and preferences, or any
significant delay in development of enhanced or new products, will have a
material and adverse effect on our business, financial condition and results of
operations.
Our Business Depends on Our Ability to Protect Our Intellectual Property
The IPVoice System is based upon a core technology encompassing a
combination of hardware and proprietary software which enables users to conduct
two-way voice communications via the Internet. Our ability to compete
effectively depends in large part on our ability to maintain the proprietary
nature of the essential parts of our technology. To protect our proprietary
rights, we rely on a combination of the copyright and trademark laws, trade
secret protection, confidentiality procedures, limited physical access, and
contractual provisions, including nondisclosure agreements with employees and
others. Although we intend to enforce aggressively our intellectual property
rights. Even so, this may not preclude competitors from developing products with
similar features and there can be no assurance that such protection will be
available or be enforceable in any particular instance of competition. We also
do not know if we will have the financial resources necessary to enforce our
trade secret or other intellectual property rights which may be infringed. Our
inability to enforce such rights could materially decrease the expected benefits
from our technology. Confidentiality and nondisclosure agreements with employees
and others may not provide adequate protection for our proprietary information
in the event of any unauthorized use or disclosure of such proprietary
information. We are aware that the laws of some foreign countries do not protect
our proprietary rights to the same extent as the laws of the
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<PAGE> 13
United States. In addition, we have not sought or received patent protection in
any jurisdiction nor trademark protection for our service mark in any foreign
jurisdiction.
Litigation may be necessary to protect our intellectual property rights
and trade secrets, to determine the validity of and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources. There
can be no assurance that infringement, invalidity, right to use or ownership
claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. In addition, should we
decide to litigate such claims, such litigation could be extremely expensive and
time consuming and could materially adversely affect our business, financial
condition and results of operations, regardless of the outcome of the
litigation.
Third Parties May Try to Claim Infringement
We believe that our products, service marks and other proprietary
rights do not infringe on the proprietary rights of third parties. We are not
currently engaged in intellectual property litigation or proceedings. There can
be no assurance, however, that third parties will not assert infringement claims
against us. In certain cases, we may agree to defend and indemnify licensees and
others against certain infringement and similar claims relating to the use of
the IPVoice System. The assertion of third party infringement claims could have
a material and adverse effect on our business, operating results and financial
condition. An adverse outcome in litigation or similar proceedings could subject
us to significant liabilities to third parties, require disputed rights to be
licensed from others or require us to cease using certain technology. If we are
required to obtain licenses under patents or proprietary rights of others, we do
not know if any required licenses would be available on terms acceptable to us,
if at all. In addition, the cost of responding to an intellectual property
litigation claim both in legal fees and expenses and the diversion of management
resources, whether or not the claim is valid, could have a material and adverse
effect on our operating results.
We Expect to Enter Into Additional Transactions, Which Result in Significant
Dilution or Substantial Indebtedness
We may pursue additional equity or debt financing transactions. Unless
otherwise required, stockholders will be unable to vote on any potential
relationships into which we may enter. Consequently, stockholders are dependent
upon the Board of Directors' judgment with respect to any such financings or
other transactions. These transactions, if realized, may involve the issuance of
a significant number of additional equity securities which could cause
significant dilution or the incidence, assumption or issuance by us of
substantial indebtedness and the undertaking by us of material obligations
including, among other things, long-term employment, consulting or management
agreements.
If the Market for IP Telephony Fails to Grow, Our Revenues Will Not Grow
Our success will depend in large part on the continued growth in the
use of the Internet for our IPVoice System. We do not have direct control over
the expansion of the Internet, and to the extent that the market for IP
telephony does not increase, our potential customer base and revenues will not
grow.
In addition, critical and unresolved issues concerning the commercial
use of the Internet may affect the development of the market for the IPVoice
System and our other products and services, including:
- the ability of users, distributors and other intermediaries to
conduct communications without interruption and on a secure basis;
- the reliability and quality of the Internet for communications;
- the availability of low-cost access to the Internet for users;
- availability of sufficient telecommunications bandwidth to consumers
to enhance their ability to conduct communications over the Internet;
and
- the possible imposition of sales, use or transaction privilege taxes
on Internet use.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth and its performance and
reliability may decline. In addition, a number of Internet-based businesses have
experienced interruptions in their services as a result of outages and other
delays occurring throughout the Internet. If outages or delays occur frequently
in the future, Internet usage, as well as electronic commerce and the usage of
our products and services could grow more slowly or decline, and this could have
an adverse effect on our business.
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<PAGE> 14
Uncertainty of Market Acceptance
Our future operating results depend to a significant extent upon the
continued development of products and services deemed necessary, useful,
convenient, affordable and competitive. There can be no assurance that we have
the ability to continuously introduce proprietary products and services into the
marketplace which will achieve the market penetration and acceptance necessary
for us to grow and become profitable on a sustained basis, especially given the
fierce competition that exists from companies more established and better
financed than we are.
To date, substantially all of our product sales have been to a limited
number of TruePartners. Our future results of operations will be dependent in
significant part on our ability to penetrate markets in the United States and
foreign countries in which we have not yet established a meaningful presence.
There can be no assurance that we will be successful in penetrating these
additional markets.
Inability to Expand Our IP Telephony Infrastructure
We may be required to expand and adapt our IP telephony infrastructure
as the number of users and the amount of information they wish to transfer
increases. The expansion and adaptation of our IPVoice System will require
substantial financial, operational and management resources. We cannot be
certain, however, that we will be able to expand or adapt our infrastructure to
meet additional demand or subscribers' changing requirements on a timely basis,
at a commercially reasonable cost, or at all, or that we will be able to deploy
successfully any necessary infrastructure expansion. Any failure to expand our
infrastructure, as needed, on a timely basis or to adapt to changing subscriber
requirements or evolving industry standards could have a material adverse effect
on our overall business, financial condition and results of operations.
High Risks and Unforseen Costs Associated With Our Expanded Entry into the IP
Telephony Industry
There can be no assurance that the funds expended for the establishment
of TruePartner arrangements and creation of a client base for our products and
services will not be significantly greater than those estimated by our
management. There could be cost overruns which could adversely affect us.
Further, unfavorable general economic conditions or a downturn in customer
confidence could have an adverse affect on our business. Additionally,
competitive pressures and changes in customer mix, among other things, could
reduce our gross profit margin from time to time. Accordingly, there can be no
assurance that we will be capable of establishing a commercially viable position
in local, state, national and international IP telephony markets.
We Rely on Other Businesses
The ability of the IPVoice System to operate in each market is
dependent upon maintaining operating agreements and good relations with the
companies offering multiple service. Presently, these companies are primarily
vendors. Should any of the local or long distance carriers currently providing
access to multiple services in a market terminate that relationship, we, our
TruePartners or our customers will be required to establish a new relationship
for such market. There can be no assurance given that such a relationship can be
established or that, if established, it can be done without an interruption in
the availability of the IPVoice System in that market. Entry into each
additional market will require new contracts with carriers and no assurance can
be given that such contracts can be attained upon terms, which are acceptable to
us or our TruePartners in a particular market.
Though we conduct final assembly of the TrueConnect system components
at our Scottsdale, Arizona facility, many of the components are manufactured to
our specifications by other firms. We are dependent upon these other firms for
the accurate manufacturing and timely delivery of necessary components.
Frequently there is a substantial waiting period between the placing of an order
and the receipt of finished products. This can have an adverse effect on our
ability to open a new market on short notice. To date, we have not experienced
any unexpected delays in obtaining components for the TrueConnect or the
SuperConnect system. If, however, any supplier is unable to provide products on
a timely basis because of labor disputes, shortages in raw materials or other
reasons, such delays would significantly impair our ability to open new markets
or to provide additional or upgraded equipment in existing markets.
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<PAGE> 15
Our Financial Condition Depends on the State of the Economy
A generally favorable economic climate in recent years is viewed as
having contributed to the rapid increase in Internet businesses and IP
telephony. It is impossible to predict whether an adverse change in the general
economic condition would materially adversely affect us. There has not been a
serious economic decline since IP telephony usage has become available.
International Operations, Risks of Doing Business in Developing Countries
We anticipate that international sales will, as a result of various
TruePartner distribution agreements entered into, account for an increasing
percentage of our revenues for the foreseeable future. Our international sales
may be denominated in foreign or United States currencies. We do not currently
engage in foreign currency hedging transactions. As a result, a decrease in the
value of foreign currencies relative to the United States dollar could result in
losses from transactions denominated in foreign currencies. With respect to our
international sales that are United States dollar-denominated, such a decrease
could make our products and services less price-competitive. Additional risks
inherent in our international business activities include changes in regulatory
requirements, costs and risks of local customers in foreign countries,
availability of suitable export financing, timing and availability of export
licenses, tariffs and other trade barriers, political and economic instability,
difficulties in staffing and managing foreign operations, difficulties in
managing distributors, potentially adverse tax consequences, foreign currency
exchange fluctuations, the burden of complying with a wide variety of complex
foreign laws and treaties and the possibility of difficulty in accounts
receivable collections. Some of our purchase, distributor and other agreements
may be governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, we may be limited in our ability to enforce our rights under such
agreements and to collect damages, if awarded. These factors may have a material
adverse effect on our business, financial condition and results of operations.
OTHER RISKS
Potential for Changes or Unfavorable Interpretation of Government Regulation
Presently, the Federal Communication Commission in the United States
("FCC") does not regulate companies that provide IP telephony services as common
carriers or telecommunications service providers. Notwithstanding the current
state of the rules, the FCC's potential jurisdiction over the Internet is broad
because the Internet relies on wire and radio communications facilities and
services over which the FCC has long-standing authority. The regulatory
environment in which we operate is subject to change. Regulatory changes, which
are affected by political, economic and technical factors, could significantly
impact our operations by restricting our development efforts and our customers,
making current products obsolete, making the delivery of IP telephony services
more costly or increasing the opportunity for additional competition. Any such
regulatory changes could have a material adverse effect on our business,
financial condition and results of operations. We might deem it necessary or
advisable to alter or modify our products to operate in compliance with such
regulations. Such modifications could be extremely expensive and, especially if
subject to regulatory review and approval, time-consuming.
There is a Limited and Volatile Market for Our Common Stock
Although there is a market for our Common Stock on the OTC Bulletin
Board, the shares of Common Stock are volatile and do not have much liquidity.
We obtained a submission for quotation on the OTC Bulletin Board as of July
1998. As a result, there is little historical record of trading in our Common
Stock. Moreover, our Common Stock must be considered "thinly" traded such that
the price appears to be very volatile. Each potential purchaser of Common Stock
should understand that our Common Stock has a very limited trading market and
there is no assurance that the price of our Common Stock may not be at risk or
adversely affected by the completion of this Offering, that the price will be
the same as currently quoted. Any additional issuances of Common Stock will
likely have a significant and adverse impacts upon the price of the Common Stock
and its market. The trading price of the Common Stock could also be subject to
significant fluctuations in response to variations in our quarterly results of
operations, announcements of technological innovations or new products or
services or our competitors, developments or disputes with respect to
proprietary rights, general trends in the telecommunications industry and
overall markets conditions and other factors.
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<PAGE> 16
The market for securities of early-stage, technology-based, small market
capitalization companies has been highly volatile in recent years, often as a
result of factors unrelated to a company's operations.
Sales of Restricted Shares Could Lower the Market Price of Our Common Stock and
Affect Our Ability to Obtain Equity Financing
Future sales of Common Stock by existing stockholders under exemptions
from registration or through the exercise of outstanding registration rights
could materially adversely affect the market price of our Common Stock and could
materially impair our future ability to raise capital through an offering of
equity securities. A substantial number of shares of Common Stock are, or will
be in the near future, available for sale under exemptions from registration or
are being registered pursuant to registration rights. We are unable to predict
the effect, if any, that market sales of these shares or the availability of
these shares for future sale will have on the market price of our Common Stock
prevailing from time to time. After the completion of this registration, up to
approximately 15,288,000 shares of previously restricted Common Stock will be
freely transferable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), by persons other than
"affiliates" of the Company (as that term is defined in Rule 144 promulgated
under the Securities Act). Approximately 9,500,000 shares of the remaining
Common Stock issued by the Company prior to this offering will still be
"restricted securities" (as that term is defined in Rule 144) and may be
publicly sold only if registered under the Securities Act or sold in accordance
with an applicable exemption from registration, such as Rule 144. Sales of
substantial amounts of shares in the public market following the expiration of
restrictions imposed by Rule 144, or the prospect of such sales, could adversely
affect the market price of the Common Stock.
The Exercise or Conversion of Warrants and Other Securities into Common Stock
Will Dilute Other Stockholders and Affect the Market Price of Our Common Stock
As of July 31, 2000, we had outstanding options, warrants and other
rights to acquire as many as 7,487,678 shares of our Common Stock. This includes
rights to acquire up to 6,985,803 shares of Common Stock held by the Selling
Stockholders. Additional shares of Common Stock may be issuable upon certain
default events in connection with the Senior Convertible Preferred Stock. More
options will be granted in the future under our 2000 Executive Incentive Plan.
The exercise or conversion of outstanding stock options, warrants or other
convertible securities will dilute the percentage ownership of our other
stockholders. In addition, any sales in the public market of shares of our
Common Stock issuable upon the exercise or conversion of such stock options,
warrants or convertible securities, or the perception that such sales could
occur, may adversely affect the prevailing market price of our Common Stock. We
lack control over the timing of any exercise or the number of shares issued or
sold if exercises occur.
Several Pending Litigation Matters Could Adversely Affect Our Financial
Condition
We are involved in litigation that could affect our financial
condition. Such litigation can be expensive and time consuming to defend. We
believe that our pending litigation matters, in the aggregate, could have a
material adverse effect on our operating results and financial condition if
resolved against us. Because they involve controversies over our failure to
issue securities, they could also result in dilution of the interest of our
other stockholders.
Limitations on Secondary Trading
Secondary trading in the Common Stock will not be possible in each
state until the shares of Common Stock are qualified for sale under the
applicable securities laws of the state or we verify that an exemption, such as
listing in certain recognized securities manuals, is available for secondary
trading in the state. There can be no assurance that we will be successful in
registering or qualifying the Common Stock for secondary trading, or availing
ourselves of an exemption for secondary trading in the Common Stock, in any
state. If we fail to register or qualify, or to obtain or verify an exemption
for the secondary trading of, the Common Stock in any particular state, the
shares of Common Stock could not be offered or sold to, or purchased by, a
resident of that state. In the event that a significant number of states refuse
to permit secondary trading in our Common Stock, the market for the Common Stock
could be adversely affected. We are listed in Standard and Poor's Standard
Corporation Records.
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Potential Anti-Takeover and Other Effects of Issuance of Preferred Stock May Be
Detrimental to Common Stockholders
We are authorized to issue shares of preferred stock ("Preferred
Stock"). The issuance of Preferred Stock does not require approval by the
stockholders of our Common Stock. The Board of Directors, in its sole
discretion, has the power to issue shares of Preferred Stock in one or more
series and to establish the dividend rates and preferences, liquidation
preferences, voting rights, redemption and conversion terms and conditions and
any other relative rights and preferences with respect to any series of
Preferred Stock. Holders of Preferred Stock may have the right to receive
dividends, certain preferences in liquidation and conversion and other rights;
any of which rights and preferences may operate to the detriment of the
stockholders of our Common Stock. Further, the issuance of any shares of
Preferred Stock having rights superior to those of our Common Stock may result
in a decrease in the value of market price of the Common Stock provided a market
exists, and additionally, could be used by the Board of Directors as an
anti-takeover measure or device to prevent a change in control of the Company.
We Are Subject to the Penny Stock Rules
Our Common Stock is subject to the Penny Stock Rules promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act"). The Penny Stock Rules
regulate broker-dealer practices in connection with transactions in "penny
stocks." Penny stocks generally are equity securities with a price less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the Nasdaq system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). These rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
disclosure document prepared by the Securities and Exchange Commission that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with the
current bid and offer quotations for the penny stocks, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer in writing before or
with the customer's confirmation.
In addition, the Penny Stock Rules require that, prior to a transaction
in a penny stock not otherwise exempt from such rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure and documentation requirements may have the
effect of reducing the level of purchases in the instant offering and trading
activity in the secondary market for our securities. The Penny Stock Rules may
make it more difficult for stockholders to sell the Common Stock.
We Are Not Likely to Receive Proceeds from this Offering
This Offering is for the Selling Stockholders. Therefore, except for
any amounts we receive from the exercise of the Warrants or other rights to
purchase Common Stock, we will not receive any proceeds from this Offering. Any
proceeds received will be used for sales and marketing of our products and
services, service of our products, deployment of the IPVoice System, continued
research and development, working capital and general corporate purposes. Our
management will have broad discretion as to the use of such proceeds and we
reserve the right to reallocate all proceeds. We, however, have agreed to pay
for all Offering expenses, except sales commissions. While we have no immediate
plans that would require us to seek additional funding for these purposes, we
may be required to do so, particularly if we must expand our marketing and sales
activity. There can be no assurance that such additional funding will be
available on terms acceptable to us and the failure to procure such funding on
acceptable terms could materially adversely affect our results of operations.
We Have Provisions Limiting the Liability of Our Directors
Our Articles of Incorporation substantially limit the liability of our
directors to the Company and our stockholders for breach of fiduciary duty and
other duties to the Company.
No Cumulative Voting
The election of directors and other questions will be decided by a
majority vote. Since cumulative voting is not permitted and a majority of our
outstanding Common Stock constitute a quorum, investors who purchase shares of
our
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Common Stock may not have the power to elect even a single director and, as a
practical matter, the current management could continue to effectively control
the Company.
Certain Members of Our Management Hold Our Common Stock
Our current officers and directors and their affiliates beneficially
own or have the voting control over approximately 46.89% of the outstanding
Common Stock. Accordingly, these individuals have the ability to influence the
election of the directors and effectively control most corporate actions. This
concentration of ownership may also have the effect of delaying, deterring or
preventing a change in control of the Company. If all Shares being offered under
this prospectus are issued, then the current officers and directors will
beneficially own approximately 26.84% of the outstanding Common Stock.
We Do Not Pay Dividends
We have never paid cash dividends on the Common Stock and do not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
Payment of dividends on the Common Stock is at the discretion of the Board of
Directors. Payment of dividends is contingent upon, among other things, our
future earnings, if any, and our financial condition, and capital requirements,
general business conditions and other factors which cannot be predicted.
USE OF PROCEEDS
The primary purpose of this Offering is to register the Shares issuable
to the Selling Stockholders and we do not expect to receive any proceeds.
However, if all of the outstanding Warrants and other rights to purchase shares
by the Selling Stockholders are exercised, we will receive approximately
$3,248,000 (approximately $3,053,000 after deducting estimated offering expenses
of approximately $195,000) excluding any commissions. We expect to use such
amounts, if any, for sales and marketing of our products, and services, service
of our products, deployment of our IPVoice System, continued research and
development, working capital and general corporate purposes.
DIVIDEND POLICY
We have never paid cash dividends on our Common Stock. We currently
intend to retain earnings for future growth and, therefore, do not anticipate
paying any cash dividends in the foreseeable future. The declaration of
dividends on our Common Stock in the future will be at the election of our Board
of Directors and will depend upon our earnings, capital requirements, financial
position, general economic conditions and other relevant factors.
CAPITALIZATION
The following table shows our capitalization at June 30, 2000 on an
actual basis and as adjusted to give effect to (1) our issuance of 700,000
shares of Common Stock during July in satisfaction of certain outstanding
warrants and obligations, and (2) our proposed issuance of shares of Common
Stock to be issued upon the conversion of the outstanding shares of Series B
Preferred Stock, including shares issuable as dividends on the Series B
Preferred Stock, and shares issuable upon exercise of warrants and other rights
to acquire Common Stock that were issued in connection with the sale of the
Series B Preferred Stock and our receipt of the net proceeds from the exercise
of such warrants and rights. The table assumes no exercise of options to
purchase 305,000 shares of Common Stock pursuant to the 2000 Executive Incentive
Plan and no exercise of warrants to purchase 196,875 shares of Common Stock. The
options under the 2000 Executive Incentive Plan do not vest and become
exercisable until July 2001. You should read this table in conjunction with "Use
of Proceeds" and our financial statements.
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<TABLE>
<CAPTION>
June 30,2000
-----------------------------------------------
Actual Adjustment(1) As Adjusted
------ ------------- -----------
<S> <C> <C> <C>
Long-term debt:
Notes payable to stockholders (secured by Senior Convertible
Preferred Stock) $199,200 $199,200(2)
Notes payable to stockholders (secured by assets) 186,750 186,750
-------- --------
Total long-term debt 385,950 385,950
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized
Series A, 200 shares issued and outstanding and as adjusted 1 0 1(2)
Series B, 2,500 shares issued and outstanding, 0 as adjusted 2 (2) 0(3)
Common stock, $.001 par value, 50,000,000 shares authorized,
17,866,384 issued and outstanding, 25,204,965 as adjusted 17,866 $7,339 25,205(3)
Additional paid in capital 5,227,363 4,167,346 9,394,709(4)
Beneficial conversion feature discount 833,333 (833,333) 0
Deficit accumulated in the development stage (3,946,625) (93,750) (4,040,375)
----------- ---------- -----------
Total stockholders' equity 2,131,940 3,247,600 5,379,540
----------- ---------- -----------
Total capitalization $2,517,890 $3,247,600 $5,765,490
=========== ========== ============
</TABLE>
(1) The following table represents the adjustments to our Series B Preferred
Stock, Common Stock, additional paid in capital, beneficial conversion feature
discount, stockholders' equity and total capitalization upon the conversion of
the Series B Preferred Stock, exercise of warrants, options and other equity
rights, and payment of Series B Preferred Stock dividends.
<TABLE>
<CAPTION>
Preferred Common
Stock Stock Total Common Preferred Beneficial
Issuance Additional Additional Additional Stock Stock Conversion
of Common Paid in Paid in Paid in Par Par Feature
Stock Capital Capital Capital Value Value Discount Deficit Proceeds
----- ------- ------- ------- ----- ----- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IIP 700,000 (700) (700) 700
Conversion of
Series B Preferred 3,086,420 (1,323,907) 2,154,156 830,249 3,086 (2) (833,333)
Stock
Options 3,086,420 2,496,913 2,496,913 3,087 2,500,000
Dividends 115,741 93,634 93,634 116 (93,750)
Warrants to Funds 250,000 533,750 533,750 250 534,000
Warrants to Delano 100,000 213,500 213,500 100 213,600
--------- ---------- --------- --------- ----- ----- -------- ------- ---------
7,338,581 (1,323,907) 5,491,253 4,167,346 7,339 (2) (833,333) (93,750) 3,247,600
========= ========== ========= ========= ===== ===== ======== ======= =========
</TABLE>
(2) Series A Preferred Stock, referred to elsewhere as Senior Convertible
Preferred Stock, is not convertible unless we fail to make timely payments of
interest and principal on $199,200 of promissory notes due to certain
stockholders. Interest on these notes is payable quarterly at a rate of 9% per
annum and the principal is due in May 2001. Upon payment of the notes, the
Series A Preferred Stock will be fully redeemed. If we fail to pay these notes
in a timely manner, the holders will be entitled to convert their shares of
Series A Preferred Stock into the number of shares of Common Stock as will equal
approximately 8.87% of the then issued and outstanding shares of Common Stock on
a fully diluted basis. We intend to pay this obligation in a timely manner.
(3) This data assumes that all 2,500 shares of Series B Preferred Stock will be
converted, that the dividends on the Series B Preferred Stock will be paid in
shares of Common Stock, that the holders of the Series B Preferred Stock will
fully exercise their rights to acquire one (1) additional share of Common Stock
for each share of Common Stock acquired upon conversion, and that the holders of
the warrants issued in connection with the issuance of the Series B Preferred
Stock will exercise all their warrants.
(4) For purposes of this table, we have assumed that the warrants issued in
connection with the issuance of the Series B Preferred Stock will be exercised
at a price of $2.136 per share and that the exercise price for the Series B
Preferred Stock will be $0.81 per share of Common Stock.
14
<PAGE> 20
MARKET PRICE OF THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our Common Stock currently is quoted on the OTC Bulletin Board under
the symbol "IPVC" and has been since July 1998. The high, low and average bid
information for each quarter since July 1998 to the present are presented below.
The quotations are interdealer prices without adjustment for retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
These prices may not necessarily be indicative of any reliable market value.
<TABLE>
<CAPTION>
Quarter High Low Average
1998
<S> <C> <C> <C>
Third Quarter....................... $1.17 $0.55 $0.86
Fourth Quarter...................... $0.56 $0.10 $0.24
1999
First Quarter....................... $1.38 $0.19 $0.95
Second Quarter...................... $7.50 $0.75 $3.13
Third Quarter....................... $3.06 $1.50 $2.17
Fourth Quarter ..................... $4.06 $1.44 $2.01
2000
First Quarter....................... $4.81 $2.00 $3.37
Second Quarter...................... $3.19 $1.00 $1.80
</TABLE>
On July 31, 2000, the last reported sale price of the Common Stock on
the OTC Bulletin Board was $1.0625 per share.
As of the date of this prospectus, there were 18,566,384 shares of
Common Stock held of record by 102 holders, 10,918,055 of which are restricted
Rule 144 shares and 7,648,329 of which are free-trading. Excluding the Warrants
and the Senior Convertible Preferred Stock, as of the date hereof, we had
outstanding options to purchase 305,000 shares of Common Stock. As of the date
hereof, we had 200 shares of Senior Convertible Preferred Stock outstanding and
2,500 shares of Series B Preferred Stock outstanding. See "Certain Relationships
and Related Transactions."
SELECTED FINANCIAL DATA
Our selected financial data below as of and for the years ended
December 31, 1998 and 1999 have been derived from the Financial Statements of
the Company audited by Durland & Company, CPAs, P.A., Palm Beach, Florida. The
selected financial data for the six-months ended June 30, 1999 and 2000 have
been derived from our unaudited financial records which, in our opinion, contain
all adjustments, consisting of only normal recurring adjustments, which we
consider necessary to present fairly the financial position and results of
operations for these periods. The selected financial information below should be
read in conjunction with, and is qualified in its entirety by our Financial
Statements and Notes attached as an exhibit to this prospectus. Results of
operations for an interim period should not be considered indicative of results
for a full year.
15
<PAGE> 21
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
STATEMENT OF OPERATIONS DATA:
1999 1998 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 321,279 $ 41,254 $ 107,973 $ 0
Gross Profit 15,845 41,254 3,997 0
Loss from operations (1,881,239) (507,685) 1,232,992 (796,028)
Other income (expense) (92,595) 0 (28,578) (5,161)
Net Loss (1,973,834) (507,685) (1,261,570) (801,189)
Loss per share $ (0.13) $ (0.04) $ (0.07) $ (0.05)
------------ ------------ ------------ ------------
Weighted average shares
Outstanding 15,413,751 11,620,451 17,268,264 14,762,758
BALANCE SHEET DATA:
Current Assets $ 256,348 $ 153,888 $ 2,232,163 $ 1,242,997
Total assets 633,903 191,513 2,855,038 1,291,909
Current Liabilities 406,339 307,129 337,148 123,150
Long-term debt 1,145,400 0 385,950 1,145,400
Total liabilities 1,551,739 307,129 723,098 1,268,550
Stockholders equity (deficiency) (917,836) (115,616) 2,131,940 23,359
</TABLE>
PLAN OF OPERATIONS
We estimate that the cash flow from operations over the next 12 months,
as well as the proceeds from agreements with Augustine Fund, L.P. and The Shaar
Fund Ltd. will be sufficient to continue our operations and to cover our
operational expenses. However, we reserve the right to raise additional proceeds
or incur debt or take such other actions to expand or sustain our operations.
We plan to continue to make material investments in our product
research and development. We anticipate making material purchases of equipment
and leasing new facilities. We anticipate increasing our number of employees
over the next 12 months to include clerical and other administrative services,
sales and technical personnel.
Until we achieve a sustained level of profitability, we must be
considered a start-up entity. We remain dependent on financing resources for
cash flows to meet certain operating expenses and no assurance of financial
success or economic survival of the Company can be given during this period.
It also should be noted that, as a start up entity, we have 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.
This general discussion of operations is limited by and should be
considered within the context of the actual Financial Statements and Notes.
BUSINESS
General
The Company's Parent was formed in February 1997 and had essentially no
operations until March 1998, when it acquired the Subsidiary. At the time of the
acquisition, the Subsidiary principally was involved in developing its MultiCom
business management software. Such software was developed by Anthony Welch, our
Senior Vice President of Research and Development.
With the agreement to acquire Satlink 3000 ("INS") in April 1999, we
intended to gain licenses to provide telecommunications services. At that time,
INS was licensed in thirty-one (31) states and the District of Columbia and
16
<PAGE> 22
had a pending tariff licensing in one other state. INS is a switchless reseller
of long distance telephone services. At the time of the acquisition of INS, we
believed that we were acquiring the Carrier Identification Code designated
10-10-460 (the "CIC Code"). As a result of the audit, there appeared to be a
question of whether INS gained title to the CIC Code and, in the event that it
did not, we resolved to unwind the acquisition. We determined that there was no
clear link between the ownership of the CIC Code and INS. Therefore we elected
to unwind the transaction and to rescind the issuances made under the
acquisition and the employment agreements. While such CIC Code is not
operational at this time, if the title issue had been resolved and if we had
elected to make such service operational, it would have allowed us to diversify
into distinct segments of the long distance market not currently provided by us.
INS has instituted a suit against the Company. See "Business - Legal
Proceedings."
Today, we primarily focus on Internet Protocol ("IP") telephony. In the
fast moving world of communications, especially IP telephony, the companies with
systems in the market are currently establishing both open and closed systems.
We have developed an open system that we believe will have an edge on closed
systems. In a closed system, the provider is limited to receiving calls only. In
an open system, the provider can both send and receive calls from any other
telephone carrier in the market.
With the growth of the Internet we believe that IP telephony can
provide cost savings to the consumer when such telephony services are provided
by a small IP telephony company. Smaller companies are able to compete with
large established telecommunications companies in this market because it is
easier for them to assimilate new technology and to adapt and make changes as
they are developed. We believe that our billing, management network and
marketing programs allow us to compete.
IP Telephony
Traditional telephone networks give every call a nailed-down circuit.
This means that a dedicated circuit must be utilized for the full time that the
call is connected. Such circuitry underutilizes resources because only one
person can talk at a time and also because there are breaks in the conversation.
In a normal conversation, one person speaks while the other listens, using half
of the capacity of the dedicated circuit. At best, a traditional telephone
network uses 25% of capacity for each call. This significantly inflates the
costs of making telephone calls.
Internet Protocol is the most significant of the communication methods
on which the Internet (and thus the World Wide Web) is based. It allows a packet
of information (e.g., voice, video, e-mail, data and images) 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 "conversation"
(voice, data, images, video, etc.) is split into many small packets and each
packet is sent down whichever path is open at that time. Packets are reassembled
at the destination. Until recently, packet switching was very slow. New
technology can zip packets around networks at lightning speed. Fast packet
networks will make voice sound as good as (and possibly better than) the
circuit-switched voice networks used currently.
Since our inception, our MultiCom system has been installed and run in
a carrier-grade switching environment to interact with voice over the Internet
applications. It is marketed under the product name of TrueConnect Gateways and
our newly released next generation gateway products named SuperConnect and
UltraConnect (referred to herein as "Gateways"). By introducing carrier-grade
business management into the marketplace, we believe we are poised to take
advantage of the potential in IP telephony. We are in the final stages of
developing products which allow companies and individuals to route their phone
calls, faxes, and other data across the Internet at substantial cost savings
with limited sacrifice of voice transmission quality, although we plan to
conduct continued research and development.
We have proprietary rights in advanced software and hardware solutions
which we believe can bridge the gap between the telephone and the Internet. Our
technology includes billing, management network and marketing programs.
The hardware technology to route calls over the Internet (IP telephony)
has existed for several years. It avoids traditional telephone networks, and is
faster, more direct and efficient. These factors ultimately result in cheaper
call cost than traditional telephone networks.
In the past, competition in the IP telephony industry has been focused
on the software applications necessary to switch an Internet call. There is,
however, a current movement toward the development of back office applications.
17
<PAGE> 23
Traditionally, the business of telephone companies is to sell minutes.
Blocks of minutes represent the commodity of the industry. The more minutes you
can switch through your network switches, the more money you can make. For
example, under traditional phone networks, a call from the suburbs to New York
City will pass through switches belonging to a local provider near the suburbs,
a regional provider, a national provider, a second regional provider and the
local provider on the other end. Each provider benefits from the "per minute
charge".
IP telephony provides the ability to leapfrog the middle men, thereby
creating potential savings to the customer, as well as allowing immediate
monitoring of telephone services which were not available prior to the new
technology.
The deregulation of the telephone industry allowed independent
companies access to the telephone market. We anticipate our technology can
achieve significant savings over circuit-switched voice for both domestic and
international calls. The potential market for IP telephony appears to be broad.
Products
Our products are being designed at our facilities in Scottsdale,
Arizona and by personnel located in Denver, Colorado. Our products are made from
Company-designed software and Company-configured hardware, as well as materials
purchased from a few major suppliers. See "Business - Sources and Availability
of Raw Materials."
In the first quarter of 1999, we deployed the first beta version of
our Gateway in Hong Kong, which is no longer in operation. We have since
installed Gateways in London, New York, Los Angeles, Atlanta, Dallas, Phoenix
and Chicago. Within the next 30 days, we anticipate having a Gateway installed
in Miami, Florida.
The launch of our Gateway products follows three years of extensive
research and development, field-testing and trials of the MultiCom system, which
is the business management software behind the Gateways. The Gateways bridge the
public telephone system with the Internet and is able to conduct real-time, full
duplex, high quality two-way voice communications over the Internet. We
anticipate that this method will produce substantial savings compared to
standard long distance services. We have recently completed the development of
our next generation of IP telephony Gateways which we call SuperConnect.
SuperConnect provides for fax and "softphone" capabilities. "Softphone" is
software within a computer that allows the placement of calls without a
telephone through the use of a microphone and speaker. Both TrueConnect and
SuperConnect Gateways offer phone to phone calling at this time. We also
introduced our next Gateway product called UltraConnect. Our UltraConnect
Gateway is designed to increase the amount of call traffic a site can handle,
allowing fewer gateways to handle more minutes. Currently our UltraConnect
Gateway is in operation in Phoenix.
To support our Gateway products, we have developed several proprietary
products that allow us and our distributors to offer a full solution in IP
telephony. These products include: (i) MultiCom, which offers a complete order
entry, billing, customer service, agent management and switching network
management system for telecommunication businesses worldwide; and (ii)
AuditRite, a software module add-on for the MultiCom system, which allows
MultiCom to read and interpret carrier-supplied data-tapes. The AuditRite system
provides a powerful tool for analyzing call patterns and finding possible errors
in a vendor's billing. We also developed TrueWeb, a Web-browser interface to
MultiCom. TrueWeb is designed to be a complete business management system
available over the Internet and is scheduled for future release. In addition, we
plan to develop PCTruePhone, a software package for softphoning and Click'N
Call, a software package that will allow visitors to a business' website to
establish voice communications with the business by clicking a display button at
no cost to the visitor. We have applied for trademark protection for several of
our product names. See "Business - Patents, Trademarks and Copyrights."
With the new technology, our software applications control a variety of
functions ranging from routing to billing. Many companies entering the industry
have concentrated on software which simply switches the minutes across the
network, without any concern as to how they will manage the network, conduct
billing and implement feature functionality. Our MultiCom, AuditRite,
TrueConnect and SuperConnect platforms were designed to handle billing, design
upgrades and service options as future technology develops. We protect against
pirating by randomly changing our source code for our software, up to four times
daily.
18
<PAGE> 24
Our proprietary software includes:
- Real-Time Billing - Real-time billing provides a customer with the
ability to secure reports on the volume of calls, locations called, exact amount
owed and other features.
- Full Feature Functionality - We can add services to our software,
online or when requested. Traditional phone companies are saddled with huge
costs and implementation time, as they update each switch individually across
their network. We can update our international network from our home base.
- Effective Agent Control - A single agent can sit in front of a
Gateway terminal and control the operation. Moreover, we can directly control
the network from our main office in the U.S. This gives us the capability to add
and service customers from our home base without the need of onsite
installation.
Our software can switch through multiple networks, both Internet and
traditional, giving it a universal application. The Gateways employ an open
system, which means that the Gateways can both send and receive calls from any
other telephone carrier in the market.
We sell our Gateway switches to our TruePartner Master Distributors,
who may also market our services directly or through agents. A single, similar
traditional switch, with all the attendant hardware and support for services and
billing functions, typically costs significantly more than our Gateway switches.
The MultiCom software allows for the use of prepaid debit card and
travel calling card functions which are already built into the system. The
software modules have been designed to work seamlessly and efficiently with each
other.
Under our current business plan, we plan to set up our own switches, or
partner with a local switching business and take a percentage of the minutes.
Our Gateways can route calls over the Internet in areas where our network is
established, or use traditional phone lines when desired or necessary and we
also can procure bulk minutes at a lower rate.
Contractual Relationships
In order to manufacture our TrueConnect Gateways, we currently rely
upon an arrangement with Natural Microsystems Corporation ("NMS"). The
relationship with NMS commenced in February 1998 and is on a purchase order
basis. For each shipment ordered under an invoice, we are granted a sixty (60)
day evaluation period from the date we receive from NMS both hardware and the
operating software for the Gateways. Within the sixty (60) day period, we
purchase the product, or ship it back to NMS with no further obligation. Our
SuperConnect Gateways use a combination of hardware from several manufacturers.
In November 1999, for our SuperConnect Gateway, we executed a
memorandum of understanding with Telic.net describing a strategic alliance under
which Telic.net will provide enhanced services to us and we will acquire from
Telic.net gateways at Telic.net's cost for use by our customers. Although the
term under our agreement expired, the parties have expressed the wish to
maintain the alliance as long as it is beneficial to each of them. We retain the
right to purchase hardware elsewhere. In addition, we can license certain of
Telic.net's software and acquire certain source codes, Telic.net will modify our
Gateways to accommodate our billing system and call flow. It is intended that
Telic.net will provide us with full network support to advance our timetable for
full integration of our network.
The Gateways operate as a transporter between the incoming carrier
(access) and the outgoing termination (egress). The Gateways can be installed in
customer locations or under co-location agreements. We may construct some of our
own locations.
Access/Egress Carriers (Local Providers) provide us the ability to
originate and terminate calls across their traditional telephone networks. In
addition, we purchases wholesale minutes from them. We can acquire such services
from a Local Bell Company or from an independent provider.
19
<PAGE> 25
- In June 1999, we entered into an agreement with ICG Telecom Group,
Inc. ("ITG") for local exchange service. The term of the contract is a period of
three (3) years, although it is terminable by us earlier if ITG raises its
prices twenty percent (20%) above the amounts stated in the contract. In
addition, in the event we wish to purchase telecommunications services from a
third party in ITG's areas of service, we must first offer to purchase like
services from ITG.
- In July 1999, we entered into a twelve-month agreement with RSL Com
U.S.A., Inc. ("RSL") for the purchase of wholesale long distance minutes for
domestic and international calls. We have not renewed this agreement and
currently are operating on a month-to-month basis. We are required to purchase a
minimum of 100,000 minutes per month.
- In August 1999, we entered into an agreement with Star
Telecommunications, Inc. for telephone communications between its locations in
New York and Los Angeles and the outbound to termination points around the
world. The initial term was for six (6) months with an automatically renewable
month-to-month term, under which we are currently operating.
- In August 1999, we entered into an agreement with ILD Communications,
Inc. ("ILD") for switching services and long distance wholesale minutes. The
agreement is for a term of one (1) year and is automatically renewable. It is
our intention not to renew this agreement.
Internet bandwidth provides us with the ability to transmit and receive
information utilizing IP technology.
- In June 1999, we entered into an agreement with Level 3
Communications, LLC ("Level 3") for wholesale bandwidths. The contract is for no
defined period of time and the terms of each order are governed by both a
separate Customer Order Form, which is filled out for each individual order as
well as by the original agreement signed in June 1999.
- In August, 1999, we entered into an agreement with MCI WorldCom
Technologies, Inc. for use of its UUNET network for wholesale bandwidths. The
contract is for a term of three (3) years.
- In December 1999, we entered into an agreement with UUNET to provide
hosting for our website and e-mail facilities. UUNET bills us monthly for these
services. This arrangement replaces the services we previously contemplated
obtaining through INS.
- In June 2000, we entered into a co-location agreement with Intermedia
Communications, Inc for space in Miami, Florida. Certain telecommunications
equipment is located at this site. The term of this agreement is three (3)
years.
Gateway Locations
We have entered into a series of TruePartner and other agreements to
establish locations of our Gateways.
- In March 1999, we entered into a TruePartner Agreement with Teleco
Service International, Inc. ("Teleco"). We granted Teleco the exclusive right to
market, advertise and sell our products and services in China, Nicaragua, El
Salvador, Guatemala, Honduras and Panama. Teleco will share with us all revenues
resulting from the proceeds of sales in the Teleco territory. The term of the
agreement is for a period of two (2) years. Due to non-performance, Teleco lost
the rights to China and Panama.
- In March 1999, we entered into a TruePartner Agreement with Billion
Telecommunication Services, Ltd. ("Billion"). We granted Billion the exclusive
right to market, advertise and sell certain of our products and services in Hong
Kong and Taiwan. As payment for these services, we must pay Billion commissions
on all sales of our products and services. The term of the agreement is for a
period of three (3) years. Under the agreement, Billion can acquire the rights
to China as well. Our first beta version Gateway was delivered to Billion in
1999 and is no longer in operation.
20
<PAGE> 26
- In May 1999, we entered into an agreement with FirstNet Telephony
Ltd. ("FirstNet"). We granted FirstNet the exclusive right to market, advertise
and sell our products and services in London and Manchester, with a right of
first refusal in the remainder of the United Kingdom. As consideration for these
services, FirstNet is entitled to purchase our products and services at a
wholesale rate. The term of the agreement is for a period of two (2) years. The
FirstNet Gateway was delivered in October 1999 and installation has been
completed.
- In July 1999, we entered into an agreement with MetroPlus
Communication Technology, Inc. ("MetroPlus"). We granted MetroPlus the exclusive
right to market, advertise and sell our products and services in certain cities
in Canada, Washington and Oregon. As consideration for these services, MetroPlus
is entitled to purchase our products and services at a wholesale rate. The term
of the agreement is for a period of three (3) years. No date has been scheduled
for this installation. Moreover, pursuant to the agreement, MetroPlus was to
have installed 20 Gateways no later than July 19, 2000. In that MetroPlus has
not done so, it is in default of the agreement. On July 27, 2000, we provided
MetroPlus with written notice of the default and have indicated it has ninety
(90) days within which to cure the default. If the default is not cured within
the ninety (90) day period, the agreement may be terminated ninety (90) days
thereafter.
We plan to retain the rights for all domestic sites not licensed to
other parties. We installed two (2) Gateways in New York and Los Angeles. These
sites are to be used as demonstration sites for sale of our products and
services. In January 2000, we entered into a three (3) year equipment lease with
International Investment Partners Ltd, a Delaware corporation, ("IIP Domestic").
IIP Domestic purchased three (3) Gateways from Telic.net for installation in New
York and Los Angeles. We paid IIP Domestic $120,000 to purchase the Gateways and
terminate this agreement.
We secure Gateway sales and sales of other products and services, as
well as assistance in the acquisition of wholesale minutes, co-locations and
carriers through our TruePartner Program and a program of advertising, trade
shows, direct sales, telemarketing and agents.
- In July 1998, we entered into an agreement with Armstrong wherein we
granted Armstrong the non-exclusive right to market, advertise and sell our
domestic and international calling services. As payment for these services, we
agreed to issue Armstrong warrants to purchase 50,000 shares of our Common Stock
exercisable at a price of $0.75 per share or, at our option, for a total sum of
$37,500 cash as well as commissions on sales of our products and services. The
term of the agreement is for a period of three (3) years.
- In February 1999, we entered into an agreement with IIP Domestic in
which we granted IIP Domestic the non-exclusive right to market, advertise and
sell our domestic and international calling services. The agreement was
terminated.
- In March 1999, we entered into an agreement with Kenneth M. Brown
("Brown"), wherein we granted Brown the non-exclusive right to market, advertise
and sell our domestic and international calling services. As payment for these
services, we must pay Brown commissions on sales of our products and services.
The term of the agreement is for a period of three (3) years.
- In April, 1999, we entered into a marketing and advertising agreement
with Net Genie ("NG") to provide marketing services to a minimum of 75,000
customers in thirty (30) cities we designate within a twelve (12) month period
in exchange for 100,000 shares of restricted Common Stock valued at $103,100 at
the time, which shares must be returned if NG fails to deliver a minimum of
eight (8) cities each for a total of 75,000 customers before December 31, 1999.
In addition, NG may earn performance bonuses of: 50,000 restricted shares if
eight (8) cities are delivered within ninety (90) days of execution; 50,000
restricted shares if fifteen (15) cities are delivered within one hundred fifty
(150) days; and 10,000 restricted shares for each additional city thereafter
before December 31, 1999 up to 30 cities. Further, NG will be granted warrants
to purchase warrants to purchase 30,000 shares of the Company's restricted
Common Stock exercisable for a period of two (2) years at an exercise price of
$2.50 per share for every block of 5,000 pre-registered customers up to 75,000
pre-registered customers in a twelve (12) month period. We plan to renegotiate
our agreement with NG this year since it has been unable to meet the incentive
goals in a timely manner.
21
<PAGE> 27
- In April 1999, we entered into a marketing agreement with Benae to
market our telephony services and to register a minimum of one hundred (100)
customers in the thirty (30) cities in which we plan to offer telephony services
within twelve (12) months in exchange for 200,000 shares of the unrestricted
Common Stock of the Company valued at $206,200. The shares are to be returned to
us if the minimum is not met. We plan to renegotiate the Benae contract this
year since it has been unable to meet the incentive goals in a timely manner.
Planned Additional Services
In addition to the sale of the Gateways and the licensing of our
software, we plan to derive our revenues from the sale of the following pre-paid
services:
- flat-rate calling plans such as Flat25, Flat5 and 4 x 4
- wholesale long distance services for other international
carriers
- prepaid long distance calling card services
- corporate long distance, fax and data networking services
- e-commerce communications services for businesses selling
products and services over the Internet
- other telecommunications applications and services
Flat-Rate Calling Plans
We have implemented portions of and plan to expand a flat-rate calling
plan option to be marketed under the name Flat25 which will allow unlimited
calling between cities in which the Gateways are installed for a single rate per
month of $25.
In addition, we designed a pre-paid, flat-rate long distance plan for
calls originating from any of our Gateways to be marketed under the name Flat5
which will allow calls from the Gateway to anywhere in the mainland United
States and Canada for $.05 per minute. The customer will receive a number to
access the nearest Company Gateway. There will be a one time registration fee of
$25 and the customer may elect from three monthly pre-payment plans.
Further, we have designed a pre-paid flat-rate long distance plan for
calls originating from any of our Gateways to be marketed under the name 4 x 4
which will allow calls from the Gateway to anywhere in the mainland United
States and Canada for $.04 per minute plus calls to up to four (4) international
countries at a 10% discounted rate. The customer will receive a number to access
the nearest Company Gateway. There will be a one time registration fee of $25
and the customer may elect from three monthly pre-payment plans.
Wholesale Long Distance Services
We plan to market our IP telephony services to other international long
distance carriers and wholesale customers that have a need for large blocks of
long distance telephone time between selected locations. Although margins at the
wholesale level are lower than retail margins, the sale of blocks of long
distance time to other carriers will enable us to generate revenues with only a
limited number of Gateways installed. We are in the process of pre-marketing our
services and have identified several potential wholesale sellers of block
minutes.
Prepaid Calling Cards
We are marketing prepaid calling cards to persons traveling to
destinations such as Mexico, Central and South America, Asia, Europe and other
regions where long distance telephone calls are substantially more expensive
than domestic long distance telephone calls. Through June 30, 2000, we received
$108,000 in revenue for shipped cards. We received calling card revenues of
$262,000 and $41,000 for the fiscal years ended December 31, 1999 and 1998
respectively. Based upon expressions of interest, we believe that this market
could produce between $10,000 and $50,000 in monthly revenue.
A typical long distance telephone call from Mexico to Vancouver,
British Columbia, made from a public payphone in Mexico can cost more than $2.00
per minute, and frequently surcharges are levied by third party credit card call
processing companies located outside of Mexico. However, due to competition in
North America, rates for calls
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from North America to Central and South America are significantly less expensive
than calls made from this area to North America.
We plan to market our pre-paid calling cards through travel agents,
tourist agencies, airline ticketing offices, tourist agencies, tour companies,
car rental agencies and hotel personnel in denominations of $10, $20, $30 and
$50. We plan to have an automated voice response system to enable card holders
to add time to their calling cards by charging their credit card while on the
phone.
Our calling card provides instructions for the use of the IPVoice
system. To place a long distance call to North America, the cardholder dials a
local access number (or an 800 number if an originating Gateway does not exist
in the local calling area) and is then prompted to dial the destination number
as well as the cardholder's calling card number. The call is then routed to the
nearest originating Gateway. After reaching the originating Gateway the call is
transmitted over the Company's network to the terminating Gateway or the least
cost route to the destination number. Once the call reaches the terminating
Gateway, the call is then switched to the local telephone network and is routed
to the destination number.
Travelers making long distance calls from local calling areas which do
not have originating Gateways will nevertheless be able to use our calling
cards. However, our operating margin will be less since these calls must be
routed via an 800 number to a distant originating Gateway. By establishing
Gateways in North America and select foreign countries, we believe we can
service a large and identifiable market of travelers with cost-effective prepaid
calling cards to use in placing calls to North America.
Corporate Services
We also plan to market services to corporate customers who need a
cost-effective means of combining long distance voice, fax and video
communications between their international offices. We plan to begin marketing
our corporate IP telephony services in the US and Canada to businesses that
operate branch offices or subsidiaries in the foreign countries in which we
operate our Gateways.
E-Commerce Services
Our software also will support "web-to-phone" and "call-me" services.
"Click'N Call" connections enable the users of multimedia PCs to establish a
voice conversation with the owner of the website or their designated customer
service representative. We plan to introduce this new capability to website
owners and developers in those markets in which we have Gateways and demand for
e-commerce services is increasing. We believe that this service will contribute
to the development of sales made through the Internet. "Click'N Call" will
provide new capabilities for customers to speak directly with sales people and
reservation agents while they are online and reviewing the content of a
particular website. "Click'N Call" personalizes the experience of shopping over
the Internet and provides a new level of customer service.
PCTruePhone is our planned software for softphoning. We anticipate this
software will allow users to place telephone calls to any telephone in the world
using their computer and a connection to the Internet.
Business Strategy
We intend to obtain a significant market with our products. We believe
that many of our current competitors lack a well-developed component to their
solutions: effective data management and billing. Therefore, we also plan to
market to some of our competitors as our billing and management software has the
potential to communicate with other platforms. We are capable of providing the
following unique features:
- IP Telephony solutions and a mature, real-time billing system
for ease of use, affordability and quality.
- Real-time remote access and manageability of information.
- IP telephony technology, Internet remote-access technology and
an order-entry and invoicing system.
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We have targeted international markets and support our sales efforts by
participating in trade shows targeting the telecommunication industry and large
businesses. We also utilize professional articles, peer-reviewed studies, direct
calls and a marketing campaign in our sales.
We established our TruePartner Program as part of our sales strategy.
Under this program, a TruePartner Master Distributor can purchase and operate
Gateways, market our other products and services and contract with other agents
to market our products and services (called TruePartner Agents). A TruePartner
Master Distributor serves as a liaison for the Company in designated
territories, depending on our agreement.
We have executed TruePartner Master Distributor and partner agreements
for Gateway installations in the following locations:
- Billion: Hong Kong and Taiwan (China was originally granted to
Teleco, but Billion now has the option for it.) The Billion
Gateway is no longer in operation.
- FirstNet: London and Manchester, England. This Gateway was
shipped and installed and is currently operational.
- MetroPlus: certain major Canadian cities, Oregon and
Washington. This Gateway has not been scheduled for shipment.
For the status of the MetroPlus Agreement, see "Gateway
Locations."
We are retaining the rights for New York and Los Angeles, where we have
installed two (2) Gateways in each city. These sites are to be used for
demonstration purposes for international sales.
In addition, we have entered into a series of agency agreements for the
sale of our Gateways and other products and for assistance in the acquisition of
wholesale minutes, co-locations and carriers. We intend to seek associations
with professional agents who will help promote our products and services.
Marketing and Distribution
Marketing
According to industry sources, the global telecommunications market
could generate revenues in excess of $250 billion annually. According to IDC,
international switched telecommunications traffic grew from 28 billion minutes
of use in 1989 to 81.8 billion minutes in 1997 and is projected to reach between
approximately 128.7 and 158.6 billion minutes by 2001. Also according to IDC, in
the United States, residential long distance calls represent a $67 billion
dollar market. In its infancy today, the IP telephony services market is
estimated to increase to $1.8 billion by the year 2001. Due to deregulation,
competition has reduced rates for both business and residential calls placed
within North America. However this is not the case for international calls to
certain countries where higher per minute rates are common. The international
telecommunications industry is growing rapidly due to:
- deregulation;
- privatization;
- expansion of telecommunications infrastructure;
- technological improvements;
- globalization of the world's economies; and
- free trade.
In addition to the growth in the telecommunications industry,
significant improvements have occurred in the compression and transmission of
voice over the Internet over the last several years. The quality of service of
IP telephony is now capable of being equivalent to that of a digital cellular
phone connection. IP telephony technology is evolving continuously and it is
expected that further improvements will allow it to rival conventional telephony
networks. The Gateway equipment we deploy utilizes digital signal processing and
error correction technologies for improved voice sampling and compression and
reduced latency. Latency is the time spent waiting for a signal to travel from
one Gateway to another and it is affected by network conditions between the
Gateways as well as the processing time required to create the signal for
transmission. These technologies enable us to provide high quality, commercial
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voice services with carrier class reliability. Carrier class reliability is
determined by how often the system is operational (99.999% availability of
service).
It is our goal to have at least the same if not better reliability as
those systems commonly used by the large telecommunications companies such as
AT&T and MCI.
We plan to market our products and services using four methods. The
first of those methods is to rely upon our agreements for marketing with our
direct TruePartner Master Distributor program, such as the agreements with NG,
Armstrong, IIP and Brown, as well as others. There can be no assurances that the
current agreements will continue, that the efforts of such parties will be
successful or that we will be able to develop additional agreements in the
future. The second method of marketing our products and services is through
outside telemarketing agencies. These firms are paid on a commission only basis.
We have not engaged any such firm to date and there can be no assurance that we
will engage one, or that if engaged, such firm would be successful. The third
method of marketing our products and services utilizes our sales force. Our
sales effort currently is headed by Mr. Scott and Ms. Will, who have extensive
experience in the telecommunications business. There can be no assurance that
these endeavors will be successful. The fourth method of marketing our products
and services utilizes the Internet. We currently market and distribute our
products and services through the Internet utilizing our IPVoice.com web page.
We do not know if the web page will generate sufficient interest to be a
significant marketing tool. We believe these four marketing methods will be
adequate to sustain us now and for the foreseeable future.
Distribution
We distribute our products through agreements for our services with
Teleco, Billion, FirstNet and MetroPlus and through TruePartner Master
Distributor Agreements and other agency agreements with Armstrong, IIP, Brown,
NG and Benae. We also believe that our strategic alliance with Tel.net will
enhance the market potential for our products. We are currently involved in
negotiations with other potential TruePartner Master Distributors and other
business relationships.
We intend to seek other professional agents who wish to promote our
products and services.
Status of Publicly Announced New Products and Services
TrueConnect Gateways are our in-house-produced telephony gateways for
the delivery of IP Telephony services. This system is based on Natural
MicroSystems hardware and is controlled by our in-house-developed proprietary
software that controls the hardware and interfaces to MultiCom. We currently are
deploying TrueConnect Gateways. We have also introduced our SuperConnect and
UltraConnect Gateways. Enhancements are made on an "as needed" basis.
MultiCom is a telecommunications and network management system
addressing multiple aspects of operating and managing a telecommunications
network and operations, and which provides a full "back office" solution.
MultiCom provides a low barrier of entry for partners and alliances of the
Company as it does not require special computers for access. We, as well as our
partners, can access MultiCom and manage their business operations from any
location at any time of day. The MultiCom Data Management platform is fully
functional and complete. Enhancements are made on an "as needed" basis.
AuditRite is a software module add-in for MultiCom that allows MultiCom
to read and interpret carrier-supplied data-tapes. AuditRite provides a tool for
analyzing call patterns and finding possible errors in a vendor's billing.
AuditRite system is fully active.
TrueWeb is a soon-to-be-released web-browser interface to MultiCom.
Included within the functions of this interface is its ability to display and
interact with the user in his or her native language, including the native
alphabet. We believe the TrueWeb multi-lingual capability to be unique to us.
TrueWeb is currently in alpha-production. We hope to release the initial version
in the fourth quarter fiscal year 2000.
PCTruePhone and Click'N Call are under development. No release date of
the initial versions have been set at this time.
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We recently introduced and are marketing our Flat25 flat-rate calling
plan. We also plan to introduce or other flat-rate calling plans, Flat5 and 4 x
4. The Flat25 calling plan is discussed above under "Flat-Rate Calling Plans."
Competition
Two significant barriers to entry in the traditional long distance
telephone market are size (minimum efficient scale of operations) and regulatory
constraints which preclude smaller companies from gaining significant market
share. IP telephony effectively eliminates or reduces these barriers since it is
presently unregulated and enjoys economies of scope and scale by using the
Internet and private IP networks as a common voice, video and data network. We
believe that IP telephony can decrease barriers to entry and increase
competition in the long distance industry.
We believe that our ability to compete in the IP telephony industry
successfully will depend upon a number of factors including: the pricing
policies of competitors and suppliers; the capacity, reliability, availability
and security of the IP telephony infrastructure; marketing strategies; the
timing of introductions of new products and services into the industry; our
ability to support existing and emerging industry standards; our ability to
balance network demand with the fixed expenses associated with network capacity;
and industry and general economic trends.
The market for telecommunications services is extremely competitive and
there is a growing number of competitors in the IP telephony industry. There are
many companies that offer business communications services and which will
compete with us at some level. These include large telecommunications companies
and carriers such as AT&T, MCI WorldCom and Qwest; smaller, regional resellers
of telephone line access; and other existing IP telephony companies. These
companies, as well as others, including manufacturers of hardware and software
used in the business communications industry such as Lucent, could in the future
develop products and services that could compete with our products and services
on a direct basis. Many of these entities have far greater name recognition and
financial and organizational resources than we have and control significant
market share in their respective industry segments. There is no assurance that
we will be able to successfully compete in the IP telephony industry.
Certain large public telephone companies are positioning themselves to
enter the IP telephony market to protect their dominant domestic market from
competition. Many of these companies are testing other existing IP telephony
gateway technology which at the present time has limited call volume
capabilities. A number of companies are waiting for gateway manufacturers to
introduce advanced gateways that will be able to handle larger call volumes and
provide better quality and service.
In North America considerable discounting has been experienced in
recent years as competition has increased. While in many countries outside of
North America local telephone companies have begun offering discounts to very
large business and government customers with high call volumes, there are few
discounts available for individuals or small and medium sized companies. It is
expected that competition in the United States will be led by carriers providing
low cost but high quality IP telephony services at rates of $0.05 to $0.09 per
minute. Smaller Internet service providers and new carriers are expected to
focus primarily on international or niche markets.
We believe that international markets are attractive to smaller
carriers and new entrants while large carriers may be evaluating the technology
and marketplace and contending with competition and deregulation in their
domestic markets. With international long distance rates in many countries
costing well in excess of $0.50 per minute, we believe that we can earn
attractive gross profit margins while offering service at substantial discounts
to currently available long distance rates.
Although we anticipate that our primary competitors will be other IP
telephony companies which offer phone-to-phone or PC phone services, they have
not yet captured the international market in the manner in which we plan to
pursue with TruePartner Gateway installations and pre-paid calling cards. We
believe that other IP telephony companies have not introduced a full billing and
back office system or integrated product offering containing corporate and
e-commerce communications services as we have.
Sources and Availability of Raw Materials
Our products are made from company-designed software and
company-configured hardware as well as materials purchased from a few major
suppliers. They include the following:
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In February 1998, we entered into an agreement with NMS. Under the
terms of the contract, we can acquire both hardware and software for Gateways.
With regard to both hardware and software, we can take advantage of free
shipping and a no-risk sixty (60) day trial period, after which we may purchase
the product, or ship it back to NMS with no further obligation.
In November 1999, we executed a memorandum of understanding with
Telic.net whereby the parties entered a strategic alliance under which Telic.net
will provide us with enhanced services and we will acquire from Telic.net
gateways at Telic.net's cost for use by our customers. Although the term under
our agreement expired, both parties have expressed the wish to maintain the
alliance as long as it is beneficial to each of them. We maintain the right to
purchase hardware elsewhere. In addition, we can license certain of Telic.net's
software, acquire certain source codes and Telic.net will modify our Gateways to
accommodate our billing system and call flow. Telic.net agreed to provide full
network support for us thereby advancing our timetable for full integration of
our network.
Dependence on Major Customers
In March 1999, we entered into an agreement with Teleco for
installation of Gateways in China, Nicaragua, El Salvador, Guatemala, Honduras
and Panama. Teleco lost the rights to China and Panama due to non-performance.
In March 1999, we entered into an agreement with Billion for the
installation of a beta version Gateway in Hong Kong. This Gateway is no longer
in operation.
In May 1999, we entered into an agreement with FirstNet, in which we
granted FirstNet the exclusive right to market, advertise and sell our products
and services in London and Manchester, with a right of first refusal in the
remainder of the United Kingdom. This installation was completed in October 1999
and currently is operating.
In July 1999, we entered into an agreement with MetroPlus , wherein we
granted MetroPlus the exclusive right to market, advertise and sell our products
and services in certain cities in Canada, Washington and Oregon. No installation
date has been scheduled by MetroPlus. For the status of the MetroPlus situation,
see "Gateway Locations."
Patents, Trademarks and Copyrights
We do not hold and have not applied for any patents.
On August 18, 1998, we filed for service mark protection with the
United States Patent and Trademark Office ("USPTO") for IPVoice, MultiCom,
AuditRite, 4Com, ICB Connect, TrueConnect and IPJack Design.
In March 30, 1999, the USPTO issued Office Actions on MultiCom, 4Com
and TrueConnect, finding that MultiCom could be confused with an existing
trademark; finding that 4Com's identification of goods was unacceptable as
indefinite; and finding that TrueConnect could be confused with an existing
trademark. Our trademark attorney has filed responses to each of these.
On April 7 and 8, 1999, the USPTO issued Office Actions on AuditRite,
TruePartner and ICB Connect finding that AuditRite's identification of goods was
unacceptable as indefinite; finding that TruePartner could be confused with an
existing trademark; and finding that ICB Connect's identification of goods was
unacceptable as indefinite. Our trademark attorney has filed responses to each
of these.
On April 23, 1999, the USPTO issued Office Actions on IPVoice stylized
and design finding that IPVoice design's recitation of services was unacceptable
as indefinite; and finding that IPVoice stylized was an inappropriate mark since
it merely describes the applicant's services. Responses were filed. As to the
response filed on the IPVoice stylized and design finding, on December 6, 1999,
the USPTO notified us that it did not find the response acceptable and required
us to amend our filing. As to the response filed on the IPVoice stylized, the
USPTO has advised us that it is maintaining its position that the mark is
inappropriate since it merely describes the applicant's services.
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On September 4, 1998, we filed for service mark protection with the
USPTO for IPJack. On June 7, 1999, the USPTO issued an Office Action on IPJack
finding the drawing unacceptable because the mark is not typed entirely in
capital letters. Our trademark attorney filed a response on December 7, 1999.
On October 16, 1998, we filed for service mark protection with the
USPTO for COMMUNICATIONS OUT OF THE BOX and COMMUNICATIONS OUT OF THE BOX
stylized. On April 30. 1999, the USPTO issued an Office Action finding the mark
unacceptable as indefinite. A response was filed on November 1, 1999.
We have filed for service mark protection with the USPTO for
IPVoice.NET, IPVoice.COM, FLAT5, FLAT25, and 4X4.
Effect of Existing or Probable Governmental Regulation on the Business
Federal
We have no current license with the Federal Communications Commission
("FCC"). We use the Internet for transmission of long distance telephone calls.
Presently, the FCC does not regulate companies that provide IP telephony
services as common carriers or telecommunications service providers.
Notwithstanding the current state of the rules, the FCC's potential jurisdiction
over the Internet is broad because the Internet relies on wire and radio
communications facilities and services over which these regulatory authorities
have long-standing authority.
In Canada, the Canadian Radio-Television and Telecommunication
Commission ("CRTC") determined in 1998 that IP telephony services providers must
pay local contribution charges for calls terminating on local telephone
networks, while those calls that originate and terminate on computers are not
subject to these charges. The possibility exists that regulatory authorities may
one day make a determination to apply international call termination fees or
otherwise tariff IP telephony.
We also will be required to comply with the regulations regarding the
operation of our business in several foreign jurisdictions and will be subject
to compliance with the requirements of the authorities of these locales
regarding the establishment and operation of our business.
Access charges are assessed by local telephone companies to long
distance companies for the use of the local telephone network to originate and
terminate long distance calls generally on a per minute basis. Access charges
have long been a source of dispute; with long distance companies arguing that
the access rates are substantially in excess of cost and local telephone
companies arguing that access rates are needed to subsidize lower local rates
for end user and other purposes. The FCC currently is considering whether
subscriber calls to Internet service providers should be classified as "local"
or "interstate" calls. Although the FCC to date has determined that Internet
service providers should not be required to pay interstate access charges to
local telephone companies, this decision may be reconsidered in the future if
the FCC finds these calls to be "interstate." Our costs for doing business would
increase if we were required to pay interstate access charges.
State
We are subject to varying levels of regulation in the states in which
we currently anticipate providing intrastate telecommunications services. The
vast majority of the states require us to apply for certification to provide
intrastate telecommunications services, or at least to register or to be found
exempt from regulation, before commencing intrastate service. The vast majority
of states also require us to file and maintain detailed tariffs listing our
rates for intrastate service.
Many states also impose various reporting requirements and/or require
prior approval for transfers of control of certified carriers, corporate
reorganizations, acquisitions of telecommunications operations, assignments of
carrier assets, including subscriber bases, carrier stock offerings and
incurrence by carriers of significant debt obligations. Certificates of
authority can generally be conditioned, modified, canceled, terminated or
revoked by state regulatory authorities for failure to comply with state law and
the rules, regulations and policies of the state regulatory authorities. Fines
and other penalties, including the return of all monies received for intrastate
traffic from residents of a state, may
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be imposed for such violations. In certain states, prior regulatory approval may
be required for acquisitions of telecommunications operations.
As we expand our efforts we must remain attentive to relevant federal
and state regulations. FCC rules prohibit switching a customer from one long
distance carrier to another without the customer's consent and specify how that
consent can be obtained. Most states have consumer protection laws that further
define the framework within which our marketing activities must be conducted. We
intend to comply fully with all laws and regulations, and the constraints of
federal and state restrictions could impact the success of direct marketing
efforts.
We currently are not subject to any State regulation with respect to
our Internet related services. However, there can be no assurances that we will
not be subject to such regulations in the future. Additionally, we are not aware
of any pending legislation that would have a material adverse effect on our
operations. We have, however, started the process of filing in every state and
have requested our C-LEC and IXC status in the U.S. A C-LEC designation permits
the resale of local telecommunications services and an IXC designation, which
stands for InterExchange carrier, allows for the resale of long distance
telecommunications services. We also have received a 214 international license
from the FCC for international long distance service.
Future Regulation
As our services are available over the Internet in multiple states and
foreign countries, these jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each such state and foreign country.
New legislation or the application of laws and regulations from jurisdictions in
this area could have a detrimental effect upon our business.
In a report to Congress, the FCC stated its intention to consider
whether to regulate voice and fax telephony services provided over the Internet
as "telecommunications" even though Internet access itself would not be
regulated. The FCC is also considering whether such Internet-based telephone
service should be subject to universal service support obligations, or pay
carrier access charges on the same basis as traditional telecommunications
companies.
A governmental body could impose sales and other taxes on the provision
of our services, which could increase the costs of doing business. A number of
state and local government officials have asserted the right or indicated a
willingness to impose taxes on Internet-related services and commerce, including
sales, use and access taxes; however, no such laws have become effective to
date. We cannot accurately predict whether the imposition of any such taxes
would materially increase our costs of doing business or limit the services
which we provide, since it may be possible to pass on some of these costs to the
consumer and continue to remain competitive.
If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our Gateways, it may be necessary
for us to take steps to reduce our exposure to this type of liability through
alterations in our equipment, insurance or other methods. This may require us to
spend significant amounts of money for new equipment or premiums and may also
require us to discontinue offering certain of our products or services.
Due to the increasing popularity and use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to adult content by
minors, pricing, bulk e-mail (spam), encryption standards, consumer protection,
electronic commerce, taxation, copyright infringement and other intellectual
property issues. We cannot predict the impact, if any, that future regulatory
changes or developments may have on our business, financial condition, or
results of operation. Changes in the regulatory environment relating to the
Internet access industry, including regulatory changes that directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone companies or others, could increase our
operating costs, limit our ability to offer services and reduce the demand for
our services.
Local telephone companies assess access charges to long distance
companies for the use of the local telephone network to originate and terminate
long distance calls, generally on a per-minute basis. Access charges have been a
matter of continuing dispute, with long distance companies complaining that the
rates are substantially in excess of cost, and local telephone companies arguing
that access rates are justified to subsidize lower local rates for end users and
other purposes. Both local and long distance companies, however, contend that
Internet-based telephony should be subject to these charges. Since we currently
plan to install our Gateways and to offer telephony, we would be directly
affected by
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these developments. However, we cannot predict whether these debates will cause
the FCC to reconsider its current policy of not regulating Internet service
providers.
Cost of Research and Development
Research and development was completed prior to the formation of the
Subsidiary and its acquisition by the Company. However, we paid a third-party
for additional testing in fiscal year 1999 at a cost of about $97,000 and
$28,000 in the six months ended June 30, 2000.
We plan to and currently conduct research and development on a
continuing basis, particularly in connection with our Gateways and other
products. At the current time, we do not anticipate that such costs will be
borne directly or indirectly by the customer; however there is no guarantee that
such costs will not be borne by customers in the future.
Cost and Effects of Compliance with Environmental Laws
Our business is not subject to regulation under the state and Federal
laws regarding environmental protection and hazardous substances control,
including the Occupational Safety and Health Act, the Environmental Protection
Act, and Toxic Substance Control Act. We are unaware of any bills currently
pending in Congress, which could change the application of such laws so that
they would affect us.
Employees
At July 31, 2000, we employed twelve (12) persons all on a full-time
basis. None of these employees are represented by a labor union for purposes of
collective bargaining. We consider our relations with our employees to be
satisfactory.
We have employment agreements with Barbara Will, Anthony Welch, Harry
Bowman and Michael Scott. Ms. Will, Mr. Welch, Mr. Bowman and Mr. Scott act as
the President, Senior Vice President, Executive Vice President and Vice
President of the Company, respectively. See "Management-Employment Agreements"
and "Certain Relationships and Related Transactions."
Properties
We maintain our executive offices at 7585 East Redfield Road, Suite
202, Scottsdale, Arizona 85260. Our telephone number is (480) 948-1895 and our
facsimile number is (480) 948-1213.
On July 10, 2000, we executed a lease effectively dated August 1, 2000.
We moved into our new space in August 2000. We occupy approximately 6,170 square
feet of space at our corporate offices.
The lease has a term of three (3) years. Monthly rental payments are as
follows: for the period of time from August 1, 2000 to July 31, 2001,
$10,797.50, plus sales tax; for the period of time from August 1, 2001 to July
31, 2002, $11,229.40, plus sales tax; for the period of time from August 1, 2002
to July 31, 2003, $11,678.58, plus sales tax.
Moreover, as "additional rent" under the terms of the lease, we are
required to pay a percentage share of the building impositions and operating
expenses. Under the lease, our percentage share of the expenses is an amount
equal to (a) the amount by which, if any, the property's operating expenses
exceed the annual operating expense base, plus (b) the amount by which, if any,
the property's impositions exceed the annual imposition base.
The term "operating expenses" is defined in the lease as including (a)
all reasonable and necessary costs and expenses incurred by the landlord for the
servicing, operation, maintenance and repair of the building and related
interior and exterior appurtenances for which the premises is part; (b) the
costs incurred in order to achieve a reduction of or to minimize the increase in
operating expenses, including management fees; (c) capital expenditures for
equipment or systems installed to reduce or minimize increases in operating
expenses; (d) capital expenditures required by any governmental ordinance or
act; (e) depreciation or amortization based on the useful life expectancy of
such equipment or systems or expenditures; and (f) the cost of contesting the
validity or amount of real estate taxes.
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The term "impositions" is defined in the lease as including all forms
of real property taxes and assessments, license fees and taxes, commercial
rental taxes, levies, charges, penalties and other taxes and similar impositions
imposed on the property or the landlord by any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
or special assessment district or similar taxing authority, or any other
imposition which after the date of the lease shall be assessed, levied or
imposed or becomes due and payable from, or becomes a lien upon the premises or
the facilities or appurtenances used in connection therewith. Our percentage
share of these impositions and operating expenses is 25.29%.
We lease a corporate apartment in Phoenix, Arizona which is used by
corporate personnel. The lease is for a term of one year commencing November 1,
1999 and terminating October 31, 2000. We pay monthly rent in the amount of
$866.12 plus a ratable adjustment for taxes. The lease has an automatic month to
month renewal at the end of the term that extends until the landlord receives
30-day notice that the tenant intends to vacate.
We own no real property and our personal property consists of hardware,
inventory, software, furniture, fixtures and equipment, with an original cost of
$606,000 as of June 30, 2000.
In December 1999, we executed an agreement effective January 2000
replaced the existing phone system equipment with a new system under a finance
lease purchase arrangement. The arrangement is for a term of four (4) years and
we make monthly payments in the amount of $375.
We currently employ our capital reserves in a sweep account. Activity
is monitored on a daily basis.
Legal Proceedings
On December 22, 1999, Peter Stazzone, former Secretary Treasurer of the
Company, filed a suit against us [Peter M. Stazzone v. IPVoice.com, Inc., a
Nevada Corporation, Superior Court of the State of Arizona, County of Maricopa,
No. CV 99-22828] (the "Stazzone Action"). Mr. Stazzone alleges breach of his
employment contract, breach of fiduciary duty by certain advisors, tortious
interference by certain advisors, had intentional and negligent
misrepresentation by us. Mr. Stazzone seeks his salary, liquidated damages, the
award of stock and options, interest and attorneys fees. We intend vigorously to
defend such action and believe we have meritorious defenses. We filed an answer
on January 18, 2000. The parties have exchanged disclosure schedules but no
discovery has been undertaken.
On December 17, 1999, Satlink 3000, doing business as Independent
Network Services ("INS") filed a suit against the Company [Satlink 3000, Inc., a
Nevada Corporation v. IPVoice.com, Inc., a Nevada Corporation, Superior Court of
the State of Arizona, County of Maricopa, No. CV 99-22560] (the "INS Action").
The INS Action is seeking actual and punitive damages as a result of the
rescission of our merger with INS. We intend vigorously to defend such action
and believe we have meritorious defenses and counterclaims against INS. We filed
a Motion to Dismiss on the basis that the injury claimed was that of the INS
stockholders and that the suit had to be in their names, not the company name.
INS conceded this point and filed an Amended Complaint in February 2000 listing
all but one of its stockholders. We filed a reply asserting that the Amended
Complaint fails to name all of the stockholders. The court acknowledged this
deficiency and requested that the parties attempt to resolve the issue. No
resolution has yet been reached. In the meantime, we have received an open
extension for filing an answer.
Prior to the vote by the Board of Directors to rescind the transactions
with INS and Mr. Stazzone, advice of counsel was sought as to the
appropriateness of such actions. It was determined that affirmative legal action
instigated by us was not the best use of our assets which would be better spent
pursuing our business. However, it was determined that, in the event Mr.
Stazzone or INS took action, we would defend and pursue all of our remedies at
law and in equity.
On April 25, 2000, Michael McKim filed a lawsuit against us 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.] We formerly employed
Mr. McKim in Kentucky as our Vice President of Research and Development. In
addition, for a period of time, Mr. McKim was a member of the Company's Board of
Directors. As part of his compensation, Mr. McKim was to receive 300,000 shares
of Common Stock, followed by an additional 750,000 shares over a three-year
period, subject to various limitations.
31
<PAGE> 37
The complaint alleges that we failed to issue the 300,000 shares to Mr.
McKim, thereby breaching our employment contract with him. In addition, the
complaint alleges that in failing to provide the shares to him after having
represented we would, we committed fraud. We filed our answer to the complaint
on June 19, 2000. In the answer, we denied the allegations. Along with our
answer, we 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. We intend to vigorously defend the lawsuit, and to aggressively
pursue our counterclaim.
We know of no other legal proceedings to which we are a party or to
which any of our property is the subject, which are pending, threatened or
contemplated. There are no unsatisfied judgments against us.
MANAGEMENT
Directors, Executive Officers and Key Employees
The directors, executive officers and key employees of the Company and
their ages and positions held with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C>
James K. Howson 57 Director, Chairman and Chief Executive Officer
Barbara Will 47 Director, President and Chief Operating Officer
Anthony Welch 31 Director, Senior Vice President of Research and Development
Russell Watson 50 Director and Secretary
Harry R. Bowman 56 Executive Vice President
Brian Auchey 42 Acting Chief Financial Officer
Michael Scott 29 Vice President, Sales and Marketing
</TABLE>
Each of Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal. No compensation is currently paid to directors for their
service on the Board though the non-officer directors are reimbursed for travel
and other direct expenses in attending meetings of the Board.
James K. Howson has served as Chairman since June 1999 and as Chief
Executive Officer since September 1999. Mr. Howson is an entrepreneur and has
been an investor for thirty (30) years in small businesses and start-up
companies in Europe, Latin American and the United States. From 1991 to 1996,
Mr. Howson was an investor in and consultant to Mid-America Venture Capital
Partners, Inc., a privately held company that provided seed capital to promising
young businesses. Mr. Howson was also an investor in Environmental Systems, Inc.
located in Lancaster, Pennsylvania. Mr. Howson attended Roan College in London
England in 1959.
Barbara S. Will has served as a Director, President and Chief Operating
Officer since March 1998. She also served as Chairman between March 1998 to June
1999. Ms. Will has over twenty (20) years of experience in all areas of
telecommunications, both domestic and international. Prior to joining the
Company, from 1984 to 1997, Ms. Will was in a senior capacity with MCI and was
responsible for signing some of the largest contracts with a carrier/reseller in
MCI's history. Her extensive industry experience includes international and
international private line; International 800; data; DSO, DSI, DSC, OC3;
dedicated in and outbound; One-Plus; calling and debit cards; Operator
Assistance; Internet; Enhanced Services; and Enhanced Network. During her time
at MCI, she received numerous awards for her outstanding performance. Ms. Will
attended Colorado State University for two years.
32
<PAGE> 38
Anthony K. Welch has served as a Director and Senior Vice President
since March, 1998 and as Senior Vice President of Research and Development since
August 1999. Mr. Welch is the original designer of the MultiCom, AuditRite, and
TrueConnect platforms and has served as Special Consultant to various
telecommunications organizations. From 1997 to 1998, Mr. Welch was involved in
the formation of the Company and the development of the MultiCom business
management software. From 1991 to 1997, Mr. Welch served as Special Consultant
and Project Design Leader for such organizations as Nation's Bank CS
Headquarters, Frito-Lay Worldwide Headquarters, NEC America Mobile
Radio/Cellular/Pager Division Headquarters, and Southwestern Bell Mobile
(Cellular/Pager) Systems Headquarters. Mr. Welch has received numerous awards
and recognition for his work in Artificial Intelligence both in military and
academic circles - and has applied this experience to creating technology
solutions that are both intelligent and flexible. The technology behind the
MultiCom system has received recognition from several telecom trade magazine
publications including "Computer Telephony" and "Telephony" magazines. Mr. Welch
obtained first place in the International Science competition for Artificial
Intelligence at the age of 17. Mr. Welch attended the University of Mississippi
and was the first freshman in the history of the college to be admitted into the
artificial intelligence Ph.D. Program.
Russell Watson has served as a Director since September 1999. Mr.
Watson also has served as Secretary since May 2000. Currently, Mr. Watson is the
Business Manager for Behrwood Capital Service, Inc., an investment management
company which he joined in 1998. Mr. Watson also is the Secretary for Redstone
Resources, Inc. since December 1999. He previously served as the Vice President
of Operations for Venison America, Inc., a meat processor and distributor during
1999. From 1994 to 1998, Mr. Watson was Operations Manager for Mid-Atlantic
Snack, Inc., a snack food distributor. Mr. Watson owned and operated a snack
food marketing business from 1993 to 1994. From 1974 to 1993, Mr. Watson was CFO
and Operations Manager for Weyerhauser Company, Hardwood Division. Mr. Watson
received a B.S. degree from Indiana University of Pennsylvania in 1971.
Harry R. Bowman has served as Executive Vice President since November
1999. Mr. Bowman is an experienced telecommunications operations professional
who was employed by AT&T from 1961 until 1995, when he retired. During his time
with AT&T, Mr. Bowman held various managerial positions, last serving as Manager
for Creative Software, where he was responsible for sales, contracts, personnel
and financials. Previously he had served as Manager of Technical Services, Date
Center Operations and in other management positions. After spending four years
in retirement, Mr. Bowman was provided with the opportunity to join the Company
as its Executive Vice President, which he accepted. Mr. Bowman holds a BS Degree
in Accounting from St. Joseph's University, Philadelphia, Pennsylvania.
Brian Auchey currently serves as Acting Chief Financial Officer, a
position he assumed on July 26, 2000. Mr. Auchey is not our employee. He
provides his services as the designated representative of Growth Capital
Resources.com, LLC ("GCR") with whom we entered into a financial and business
management consulting agreement on June 1, 2000. Mr. Auchey has been Vice
President of GCR since its formation in May 2000. Our agreement with GCR is
terminable with thirty (30) days notice. GCR is compensated on an hourly basis,
plus out-of-pocket expenses, for time spent by its staff in providing services
to us. For Mr. Auchey's services while he is acting CFO, we have agreed to pay
GCR $175 per hour, subject to certain adjustments. Prior to joining GCR, Mr.
Auchey had been Vice President of International Investment Partners, Ltd., a
Delaware corporation with offices in Lancaster, Pennsylvania (referred to as
"IIP Domestic"), from December 1999 to May 2000. In that capacity, he also
provided financial and management consulting services for us and became familiar
with our financial structure and condition. From 1998 to 1999, Mr. Auchey was a
Controller with Breuners Home Furnishings Corporation, a national furniture
retailer. From 1988 to 1998, he worked in the Corporate Finance Department of
DENTSPLY International Inc., a worldwide manufacturer and distributor of dental
and medical products. Mr. Auchey began his professional career with KPMG Peat
Marwick, LLP in 1980 and spent nine years working with SEC reporting clients in
the manufacturing, retail and distribution, and financial services industries.
Mr. Auchey received a BS in Accounting from Bloomsburg University and has been a
Certified Public Accountant since 1982.
Michael Scott, age 29, currently serves as Vice President, Sales and
Marketing. Prior to joining the Company in April 2000, Mr. Scott has held
multiple positions within the sales, marketing and technical support realm. He
has worked with a variety of organizations from start-up firms such as ISOsafe,
Inc., to Fortune 500 companies including Ortho Clinical Diagnostics, a Johnson &
Johnson Company. Mr. Scott received a Bachelor of Science degree in Mechanical
Engineering from Clemson University in 1993, and is currently pursuing his MBA.
33
<PAGE> 39
Executive Compensation
The following table sets forth certain information concerning
compensation paid to or accrued by the Company for the benefit of the Company's
President/Chief Operating Officer and Senior Vice President of Research and
Development, the only executive officers of the Company whose total annual
compensation has exceeded $100,000.
<TABLE>
<CAPTION>
OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) YEAR
<S> <C> <C> <C> <C>
James K. Howson, Director, Chairman $ 0 $ 0 $ 0 1997
and Chief Executive Officer
$ 0 $ 0 $ 35,000 1998
$ 0 $ 0 $ 106,500(2) 1999
Anthony Welch, Director and Senior $ 0 $ 0 $ 0 1997
Vice President of Research and
Development $ 48,000 $ 0 $ 0 1998
$106,956 $ 0 $ 0 1999
Barbara Will, Director, President $ 0 $ 0 $ 0 1997
and Chief Operating Officer
$ 48,000 $ 0 $ 0 1998
$106,956 $ 0 $ 0 1999
</TABLE>
(1) Other compensation includes certain health and life insurance benefits paid
by the Company on behalf of its employee.
(2) Mr. Howson was a consultant prior to becoming the Chief Executive Officer
in June 1999 and continues to be paid under the consulting agreement we
have with Condor which has a six (6) year term ending in November 2003.
1999 Year End Option Values for Executive Officers
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS/SHARES
NAME AND PRINCIPAL POSITION VALUE OF OPTIONS/SHARES GRANTED GRANTED IN FISCAL YEAR 1999
--------------------------- ------------------------------- ---------------------------
<S> <C> <C>
James K. Howson 0 0%
Barbara S. Will 0 0%
Anthony K. Welch 0 0%
Harry R. Bowman 0 0%
</TABLE>
The Company has adopted a 2000 Executive Incentive Plan. Mr. Bowman has
been granted options to purchase 50,000 shares of Common Stock. Mr. Scott has
been granted options to purchase 20,000 shares of Common Stock. These options
will vest over a three-year period so long as the optionee remains employed by
us. The exercise price of the options is $1.21 per share. Russell Watson, a
Director, has been granted options to purchase 20,000 shares of common Stock on
the same basis. Additional options may be granted in the future under the 2000
Executive Incentive Plan.
Committees
The Bylaws of the Company authorize the establishment of committees of
the Board of Directors. The Board of Directors, by resolutions, have authorized
the formation of an Executive Committee, an Audit Committee, a Compensation
Committee and a Nominating Committee. The Company, however, has not adopted an
Audit Committee charter. Usually outside directors serve on these committees.
However, the Company only has one outside director, Mr. Watson. Prior to this
offering, the Board of Directors has performed all the duties of these
respective committees but anticipates that, following completion of the
offering, it will activate those committees and assign them certain
responsibilities such as designating the Compensation Committee as the
administrator of the 2000 Executive Incentive Plan.
34
<PAGE> 40
Limitation of Liability and Indemnification Matters
The Company's Articles of Incorporation provide that no director of the
Company shall have personal liability to the Company or any of its stockholders
for monetary damages for breach of any duty as a director or officers involving
any act or omission of any such director or officer. Such a provision, however,
under Nevada law, cannot eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or, which involve
intentional misconduct or a knowing violation of the law, (iii) under applicable
Sections of the Nevada Revised Statutes, (iv) the payment of dividends in
violation of the Nevada Revised Statutes or, (v) for any transactions from which
the director derived an improper personal benefit. The Company's Bylaws provide
for indemnification of officers and directors pursuant to Nevada law.
Compliance with Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's directors and
officers and persons who beneficially own more than ten percent of the Company's
Common Stock to file with the Securities and Exchange Commission ("Commission")
initial reports of ownership and reports of changes in ownership of Common Stock
in the Company. Officers, directors and greater-than-ten percent stockholders
are required by Commission regulation to furnish the Company with copies of all
Section 16(a) reports they filed. To the Company's knowledge, based solely on
review of the copies of such reports, if any, furnished to the Company certain
stockholders, officers and directors have not filed their reports under Section
16(a).
Employment Agreements
We have employment agreements with Barbara Will, Anthony Welch, Harry
Bowman and Michael Scott, who respectively act as the President, Senior Vice
President, Executive Vice President and Vice President, Sales and Marketing of
the Company.
The agreement with Ms. Will is for a period ending January 1, 2003. Her
base salary is $150,000 per year and she is eligible for bonuses of up to 5
times her base salary upon achieving certain performance goals. No bonuses were
paid in 1999, the first full year of the agreement. During a portion of 1999 and
2000, because of cash flow considerations, Ms. Will voluntarily reduced her base
salary to a rate of $90,000 per year. She is also entitled to an automobile
allowance and other benefits within the general benefit programs provided to all
employees.
After the initial term, the agreement renews automatically on a
year-to-year basis unless we or she gives notice of termination at least 180
days prior to the next renewal date. Additionally, either of us may terminate
without cause upon 60 days' written notice and for cause upon immediately
effective written notice. If Ms. Will is terminated other than for cause, death
or disability or if she terminates for good reason, she is entitled to a lump
sum payment equal to (i) all unpaid salary and bonuses for any prior years, (ii)
the remaining unpaid base salary for the year, (iii) the maximum potential
bonuses for the current year, (iv) an extra bonus equal to 3 times her annual
base salary, and (v) any contributions that would have been made by us to any
employee pension or profit sharing plans. Additionally, she would receive
ongoing benefits for up to two years and outplacement assistance.
The agreement with Mr. Welch is essentially identical to that of Ms.
Will with respect to the term, compensation, benefits and rights upon
termination. During portions of 1999 and 2000 he also voluntarily reduced his
base salary to a rate of $90,000 per year.
The agreement with Mr. Bowman is for a term ending November 22, 2001.
It does not renew automatically. His minimum base salary is $78,000 per year.
Mr. Bowman is a resident of Pennsylvania but is required to spend at least 3
weeks each month at the corporate headquarters in Arizona. We provide travel
expenses to Pennsylvania 12 times per year. He also receives an automobile
allowance and a subsistence allowance while in Arizona. He participates in other
benefit programs made available to all employees. Mr. Bowman is also a
participant in the 2000 Executive Incentive Plan and has been awarded options to
purchase 50,000 shares of Common Stock at an exercise price of $1.21 per share.
The options vest over the next three years.
The agreement with Mr. Scott is for an indefinite term and may be
terminated by either us or Mr. Scott upon 30 days' written notice. His base
salary is $85,000. He participates in benefits programs made available to all
employees.
35
<PAGE> 41
Mr. Scott is also a participant in the 2000 Executive Incentive Plan and has
been awarded options to purchase 20,000 shares of Common Stock at an exercise
price of $1.21 per share. The options vest over the next three years.
Stock Option Plan
On December 9, 1999, our 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. Under the Option Plan, options can be granted to select employees,
officers, executives, directors and consultant and advisors to 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 which currently is made
up of James Howson, Director and Chief Executive Officer and Russell Watson,
Director; however, a lesser price may be set by such Committee. The exercise
period for the options is determined by the Committee but cannot exceed six (6)
years. Pursuant to the terms of the approved Option Plan, the Board of Directors
is authorized to alter, amend or modify the Option Plan under certain
conditions. The Board of Directors approved a modified Option Plan on February
28, 2000 that maintains the key features of the approved plan as required. 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, including Mr. Bowman, and Mr. Scott,
and to Mr. Watson, a Director.
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 grant. Options may be granted to any employee of the Company or its
subsidiaries, including employees who are also officers or directors, selected
by the Board of Directors in its discretion.
Other Options
No other options or rights to acquire Common Stock have been granted to
any current employees, officers or directors.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 2000, by (i) each person
who is known to own beneficially more than 5% of the outstanding shares of the
Company's Common Stock, (ii) each of the Company's directors and executive
officers, and (iii) all directors and executive officers of the Company as a
group. The information is determined in accordance with Rule 13d-3 under the
Exchange Act based upon information furnished by the persons listed or contained
in filings made by them with the SEC. Under this rule, a person is deemed to own
beneficially the number of shares issuable upon exercise of options, warrants or
convertible securities it holds that are exercisable within 60 days. Each
beneficial owner's percentage ownership is determined by assuming that
convertible securities, options or warrants that are held by such person (but
not those held by any other person) and which are exercisable within 60 days
have been exercised.
36
<PAGE> 42
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
NAME AND ADDRESS OF SHARES BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER(1) TITLE OF CLASS OWNED OWNED(2)
------------------- -------------- ----- --------
<S> <C> <C> <C>
Barbara S. Will Common 3,000,000 16.16%
Condor Worldwide, Ltd. Common 3,000,000(3) 16.16%
Anthony K. Welch Common 2,706,523 14.58%
International Investment Partners, Common 1,486,000 8.00%
Ltd., an Irish Corporation
Officers and Directors as a group Common 8,706,523 46.89%
</TABLE>
----------
(1) Such persons have sole voting and investment power with respect to all
shares of Common Stock shown as being beneficially owned by them, subject
to community property laws, where applicable, and the information contained
in the footnotes to this table. The address of all stockholders, other than
International Investment Partners, Ltd., is c/o the Company, 7585 East
Redfield Road, Suite 202, Scottsdale, Arizona 85260. The address of
International Investment Partners, Ltd. is 428 Bay Street, Nassau, Bahamas.
(2) Assumes no exercise of certain outstanding warrants and options held by
others, rights held by employees of the Company to acquire up to an
aggregate of 305,000 shares and the issuance of approximately 6,986,000
shares upon the exercise by the Selling Stockholders of the Warrants and
other rights to acquire shares of Common Stock.
(3) These shares are owned of record by Condor Worldwide, Ltd. of which Mr.
James K. Howson is principal owner.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have employment agreements with certain executive officers. See
"Management-Employment Agreements."
In November 1997, prior to its acquisition by us, the Subsidiary
entered into a consulting agreement with Condor Worldwide, Inc. ("Condor"),
whereby Condor agreed to provide certain sales, marketing and public relations
services in exchange for 600,000 shares of the Subsidiary's Common Stock to be
issued upon listing of the Subsidiary's stock on the OTC Bulletin Board. Such
shares were never issued and the agreement was amended in July 1998 deleting the
issuance of such shares. The consulting agreement was modified in March 2000 to
disclaim all interest in the shares. The term of the Agreement was for a period
of six (6) years and is still in effect. James K. Howson, our Chairman and CEO,
serves as the Chairman and CEO of Condor and he is the beneficial owner of
Condor. The contract initially provided for a cash fee of $150,000 per year.
Effective September 1999, Condor agreed to reduce its consulting fees to the
rate of $90,000 per year.
In March 1998, IPVoice.com, Inc., then known as Nova Enterprises, Inc.,
(the "Parent") entered into a share exchange agreement with IPVoice
Communications, a Delaware corporation (the "Subsidiary") and its stockholders
whereby the Parent issued 9,000,000 shares of its Common Stock to the
Subsidiary's stockholders for all of the Subsidiary's outstanding capital stock,
which then became a wholly-owned subsidiary of the Parent. In connection with
the agreement, the Company entered into employment agreements with Barbara Will,
our current Chief Operating Officer and President and a Director and with
Anthony Welch, designer of our proprietary software, who currently serves as the
Senior Vice-President of Research and Development and a Director. As part of the
exchange, Ms. Will, Mr. Welch and Condor each received 3,000,000 shares of
Common Stock. James K. Howson, our Chairman and Chief Executive Officer, is the
beneficial owner of Condor.
In October 1998, we executed a consulting agreement with International
Investment Partners, Ltd., an Irish corporation ("IIP"). IIP owns approximately
8.00% of our outstanding Common Stock and is a Selling Stockholder. The
consulting agreement memorializes an oral agreement made in March 1998, to
provide financial, consulting and advisory services over a three-year period in
exchange for the issuance of 350,000 shares of Common Stock at an agreed value
of $35,000, the grant of warrants to purchase an additional 1,600,000 shares of
the Common Stock exercisable
37
<PAGE> 43
without time limitation at an exercise price of $0.06 per share, the grant of
warrants to purchase an additional 350,000 shares of Common Stock exercisable
without time limitation at an exercise price of $3.90 per share and, in
consideration of $100 cash, the grant of warrants to purchase up to 5% of the
Common Stock of the Company on a fully-diluted basis at a price of $1.00 per
share. In addition, the agreement required us to pay a monthly fee of $4,000
from September 1998 through March 1999, $6,000 from April 1999 through March
2000 and $8,000 from April through the end of the agreement. In January 1999,
IIP received 93,760 shares of Common Stock in lieu of payment for $14,064 in
services under the consulting agreement. IIP exercised its warrant to purchase
1,600,000 shares in April 1999 at an exercise price of $96,000. As to the
warrant to purchase up to 5% of our Common Stock, in January through April 14,
2000, IIP purchased 506,000 shares of Common Stock at an exercise price of
$506,000. IIP retained the right to purchase additional shares until the full 5%
on a fully-diluted basis had been acquired. Effective May 31, 2000, we and IIP
agreed to terminate the consulting agreement under terms which excused IIP from
providing any further services and discontinued our obligation to make the
monthly payments for such services. In addition, IIP agreed to exchange both
outstanding warrants and terminate the agreement for 700,000 shares of Common
Stock.
At December 31, 1998, we owed Ms. Will $34,268 for reimbursement of
expenses paid on our behalf. During the year ended December 31, 1998, we owed
two of our stockholders, Condor and IIP, $20,564 for consulting services. Total
consulting fees incurred to these stockholders during the year ended December
31, 1998 amounted to $31,096. During 1998, additional consulting fees of $35,000
were paid to Mr. Howson. There were no outstanding amounts owed respective to
these fees as of December 31, 1998. During the year ended December 31, 1998, IIP
advanced funds totally $24,750 for payment of general operating expenses which
was repaid in fiscal 1999.
From December 1998 through January 1999, we sold 896,665 shares of its
Common Stock to eight (8) investors for $134,500 including 166,667 shares sold
to IIP for $25,000.
In February 1999, we entered into an agreement with IIP Domestic
wherein we granted IIP Domestic the non-exclusive right to market, advertise and
sell our domestic and international calling services. Brian Auchey, the
Company's Acting Chief Financial Officer, was Vice President of IIP Domestic
until May 2000 when he joined Growth Capital Resources.com, LLC ("GCR") of
Lancaster, Pennsylvania. The agreement was terminated.
On April 7, 1999, we entered into a share exchange agreement with
Satlink 3000, doing business as Independent Network Services ("INS"), whereby we
exchanged 250,000 shares of our Redeemable Convertible Preferred Stock valued at
$500,000 for all of the outstanding capital stock of INS. The Redeemable
Convertible Preferred Stock contained 1 for 1 conversion rights after one (1)
year and was redeemable at $2.00 per share. The President of INS, Peter M.
Stazzone, remained as the President of INS. At the time of the exchange Mr.
Stazzone became our Secretary, Treasurer and Chief Financial Officer under an
employment agreement. Also at the time of the exchange, Mr. Stazzone received
50,000 shares of the Redeemable Convertible Preferred Stock. Pursuant to the
Employment Agreement, Mr. Stazzone received 200,000 shares of Common Stock, a
bonus of 100,000 shares of Common Stock deemed earned on the date of the Share
Exchange Agreement, but to be delivered on the earlier of (i) the first
anniversary date of his employment, or (ii) Mr. Stazzone's termination, and
options to purchase an additional 200,000 shares of Common Stock exercisable for
a period of three (3) years at an exercise price of $1.00 per share. In
connection with the exchange, INS and Mr. Stazzone represented that INS had
acquired certain assets, including the rights to INS' name, from the Bankruptcy
Court in the Chapter 11 filing of Telsave. Mr. Stazzone had been the Chief
Financial Officer of Telsave at the time the bankruptcy was filed and the
Bankruptcy Court was provided with disclosure of his involvement with INS prior
to the Court's approval of the sale of certain Telsave assets to INS. At the
time of the acquisition of INS, the Company believed that it was acquiring the
rights to the "10-10-460" CIC Code. The purchase price was based in part upon an
appraisal of the value of the CIC Code which is loaded in approximately 60% of
the domestic market. However, during the course of our audit for 1999, it was
discovered that clear title may not have passed to INS and subsequently to us.
Therefore, our Board determined that, in the event clear title had not passed to
us, it would be in our best interest to rescind the transaction. We sought a
legal opinion on the status of such title and were advised that there was no
clear link between the ownership of the CIC Code and INS. Therefore the Board
voted to rescind the transaction, to rescind the Redeemable Preferred Stock,
Common Stock and warrant issuances made under the acquisition and the employment
agreement and to terminate Mr. Stazzone's employment. The matter is now the
subject of litigation between us and INS and Mr. Stazzone. See "Business - Legal
Proceedings."
On December 9, 1999, the stockholders adopted its 2000 Executive
Incentive Plan under which 1,000,000 shares of Common Stock are reserved for
grants under the plan. The plan took effect on January 1, 2000 and terminates
38
<PAGE> 44
on December 31, 2005. Under the plan, options can be granted to select
employees, officers, executives, directors and consultants and advisors. It is
intended that options will generally be exercisable at fair market value
determined at issuance by the Compensation and Option Committee which is made up
of James Howson, Director and Chief Executive Officer, and Russell Watson,
Director. However, a lesser price may be set by such Committee. The exercise
period for the options is determined by the Committee but cannot exceed six (6)
years. Pursuant to the terms of the approved plan, the Board of Directors is
authorized to alter, amend or modify the plan under certain conditions. The
Board of Directors approved a modified plan on February 28, 2000 that maintains
the key features of the approved plan as required, and has now granted options
for 305,000 shares to 8 employees, including Mr. Bowman and Mr. Scott, and to
one Director, Mr. Watson. See "Description of Securities - Options."
At December 31, 1999, we owed Mr. Howson and Ms. Will $17,363 and $40
respectively. During the year ended December 31, 1999, we owed IIP and Behrwood
Capital $40,000 and $896 respectively. Total consulting fees paid to IIP during
the year amounted to $131,000. Total consulting fees paid to Condor and Mr.
Bowman were $106,500 and $30,000 respectively. Mr. Bowman received consulting
fees prior to becoming an officer. During 1999, we purchased for cash
approximately $14,000 of furniture and fixtures from Ms. Will at the fair market
value.
In January 2000, we entered into a three (3) year equipment lease with
IIP Domestic. IIP Domestic purchased three (3) Gateways from Telic.net for
installation in New York and Los Angeles. We paid IIP Domestic $120,000 to
purchase the Gateways and terminate this agreement. Brian Auchey, the Company's
Acting Chief Financial Officer, was Vice President of IIP Domestic until May
2000 when he joined GCR.
On May 5, 2000, Barbara S. Will, Anthony K. Welch and James K. Howson,
in their individual capacities, and IPVoice Communications, Inc. and Condor
Worldwide Ltd., assigned to us all of the intellectual property in 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. Barbara S. Will,
Anthony K. Welch, and James K. Howson constitute three of the four members of
our board of directors. James K. Howson is the Chairman and CEO of Condor.
On June 1, 2000, we entered into a financial and business management
consulting agreement with GCR. GCR is compensated on an hourly basis, plus
out-of-pocket expenses, for time spent by its staff in providing services to us.
Presently, because we have no full-time Chief Financial Officer, we have
designated Brian Auchey, a Vice President of GCR, as our Acting Chief Financial
Officer. He is devoting such time to our affairs as is deemed commensurate with
that responsibility. GCR is paid $175 per hour, subject to certain adjustments,
for Mr. Auchey's services.
On August 2, 2000, we entered into a TruePartner Master Distributor
Agreement and TruePartner Master Agent Marketing Agreement with GCR. Under these
agreements, GCR is granted nonexclusive rights to market and sell the IPVoice
equipment and services and is paid percentage of sales of equipment and
services. Brian Auchey, our Acting Chief Financial Officer, is a Vice President
of GCR.
SELLING STOCKHOLDERS
The following list of Selling Stockholders includes: (i) the number of
shares of Common Stock currently beneficially owned by each Selling Stockholder;
(ii) the number of shares being offered for resale by this prospectus by each
Selling Stockholder; and (iii) the number and percentage of shares of Common
Stock to be held by each Selling Stockholder after the completion of this
offering, assuming all offered shares are sold.
Except as otherwise indicated in the footnotes to such table, no
Selling Stockholder has been an officer, director or employee of the Company for
the past three years. The registration of the shares does not necessarily mean
that the Selling Stockholders will sell all or any of the shares.
The Selling Stockholders provided us with all information with respect
to their share ownership. Because the Selling Stockholders may sell all or part
of their shares, we are unable to estimate the number of shares that will be
held by any Selling Stockholders by the termination of any offering made hereby.
In addition, beneficial ownership is determined in accordance with SEC rules and
generally includes voting or investment power with respect to securities.
39
<PAGE> 45
Shares of common stock subject to options, warrants and convertible preferred
stock currently exercisable or convertible, or exercisable or convertible within
sixty (60) days, are counted as outstanding for computing the percentage of the
person holding such options or warrants but are not counted as outstanding for
computing the percentage of any other person. See "Plan of Distribution."
<TABLE>
<CAPTION>
Shares Held After Offering(2)
-----------------------------
Number of
Beneficial Owner(1) Current Ownership Shares Offered Shares Percentage
------------------- ----------------- -------------- ------ ----------
<S> <C> <C> <C> <C>
Augustine Fund, L.P. 3,442,902(3)(4) 3,442,902(5) 0 *%
The Shaar Fund Ltd. 3,442,902(3)(4) 3,442,902(5) 0 *%
International Investment Partners, Ltd.,
an Irish Corporation 1,486,000 1,312,240 173,760 *%
Delano Group Securities 100,000(4) 100,000 0 *%
Jeffrey E. S. Packer(6) 75,000 75,000 0 *%
McGinn Smith & Co. 10,000 10,000 0 *%
Raleigh D. Buckmaster 18,291 9,375 8,916 *%
Robert R. Buckmaster Residual Trust 36,123 9,375 26,748 *%
</TABLE>
----------
* Less than one percent
(1) Unless otherwise noted, we believe that all persons named have sole voting
and investment power with respect to all shares of Common Stock shown as
being beneficially owned by them, subject to community property laws, where
applicable.
(2) Assumes no exercise of outstanding warrants held by other stockholders or
options held by employees and directors, but gives effect to the maximum
conversion of the Series B Preferred Stock and exercise of all outstanding
Warrants held by the Selling Stockholders.
(3) Assumes the Series B Preferred Stock conversion price is $.81 per share of
Common Stock and that the Selling Stockholder converts 1,250 shares of
Series B Preferred Stock, receives shares of Common Stock in payment of two
years of dividends on the Series B Preferred Stock, and exercises fully the
right to purchase additional shares of Common Stock at the time the Series
B Preferred Stock is converted.
(4) Assumes the Warrant exercise price is $2.136 per share and that the Selling
Stockholder fully exercises its Warrants.
(5) Depending on the actual conversion price of the Series B Stock, the number
of shares offered will be adjusted but will not be less than 1,371,174
shares for this Selling Stockholder. The terms of the registration rights
agreement require us to register 200% of the estimated maximum number of
shares.
(6) Dr. Packer also holds 100 shares of Senior Convertible Stock which in the
event of a default in our payment of a promissory note for $99,600 held by
him, would entitle him to convert those shares into the number of shares of
Common Stock which would then be equal to approximately 4.35% of the issued
and outstanding Common Stock on a fully diluted basis. Payments on the
promissory note are current and no conversion right has accrued.
DESCRIPTION OF SECURITIES
The following summary of certain provisions of our capital stock is
subject to, and qualified in its entirety by, the provisions of our Articles of
Incorporation, as amended, and our Bylaws that are referenced as exhibits to
this Registration Statement and by provisions of applicable law.
Common Stock
We are authorized to issue up to 50,000,000 shares of Common Stock,
$.001 par value. As of the date of this prospectus, there were 18,566,384 shares
of Common Stock outstanding, held of record by 102 stockholders. Except as may
be provided to holders of certain series of preferred stock, holders of Common
Stock are entitled to receive ratably
40
<PAGE> 46
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. We have not paid any dividends to date on our Common Stock.
In the event of a liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding senior
securities, subject to the rights of holders of preferred stock. Holders of
Common Stock have no preemptive rights and have no rights to convert their
Common Stock into any other securities. The outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby will be, when issued, validly
issued, fully paid and nonassessable. The holders of Common Stock are entitled
to one vote for each share held of same on each matter submitted to a vote of
stockholders.
Preferred Stock
We are presently authorized to issue up to 10,000,000 shares of
preferred stock, $.001 par value per share. Such preferred stock may be issued
in one or more series, on such terms and with such rights, preferences and
designations as our Board of Directors may determine except to the extent set
forth in our articles of incorporation. The preferred stock may be issued
without action by stockholders. As of July 25, 2000, there were 2,700 shares of
preferred stock outstanding held by 5 stockholders of record. Currently, we have
outstanding shares for two series of preferred stock. Any future issuance of
preferred stock could adversely affect the rights of the holders of Common
Stock, and therefore reduce the value of our Common Stock. In particular,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with, or sell our assets, to a third-party,
thereby preserving control of the Company by its present owners.
Senior Convertible Preferred Stock ("Senior Preferred Stock")
Initially, 1,150 shares of Senior Preferred Stock were issued as part
of an offering of units between February and May 1999. Each unit consisted of 25
shares of Senior Preferred Stock, a promissory note for $24,900 and a warrant to
purchase 18,750 shares of common stock at an exercise price of $.9875 per share.
The Senior Preferred Stock represented security for the payment of the
promissory notes. They provided that so long as all the shares remained
outstanding, in the event of default in the payment of the promissory notes
which is not seasonably cured, all Senior Preferred Stock would convert into a
number of shares of Common Stock which, immediately after issuance, would equal
51% of the issued and outstanding shares of Common Stock (including all warrants
and options to purchase Common Stock). We also agreed, upon default, to call a
special stockholders meeting to provide the new Common Stock owners the
opportunity to elect a majority of the Board of Directors from among persons
nominated by the holders of the promissory notes.
The Senior Preferred Stock is redeemable at no cost at the time that
each promissory note is fully paid. Upon redemption of each promissory note, the
51% conversion right reduces proportionately. In a tender offer which concluded
on May 19, 2000, we redeemed 950 shares of Senior Preferred Stock and thereby
reduced the conversion right from 51% to approximately 8.87% of the issued and
outstanding Common Stock on a fully diluted basis. We are current on all
payments due on the promissory notes and do not intend to allow a default to
occur with respect to their payment.
The Senior Preferred Stock shares have no voting rights and do not pay
dividends.
Series B Convertible Preferred Stock ("Series B Preferred Stock")
The 2,500 outstanding shares of Series B Preferred Stock were issued at
a price of $1,000 per share and carry a 7 1/2 % dividend payable at the time the
shares are converted into Common Stock or are redeemed. Conversion may occur any
time after the earlier of (i) the effective registration or the Common Stock or
(ii) 180 days after the issuance of the Series B Preferred Stock. The dividend
is payable in cash or, at our option, in additional shares of Common Stock at
the then applicable conversion price. The conversion price is the lower of (i)
110% of the lowest bid price of the common stock on the OTC Bulletin Board for
the 5 trading days prior to the issuance of the Series B Preferred Stock, or
(ii) 75% of the average of the three lowest closing bid prices during the 30
consecutive trading days prior to the conversion of the Series B Preferred Stock
to shares of Common Stock. When the Series B Preferred Stock was issued on May
22, 2000, the effective conversion price, based on 110% of the lowest bid price
during the 5 preceding trading days would have been $1.96 per share of Common
Stock. This is the maximum conversion price for the Series B Preferred Stock. It
is possible that the alternative conversion price, based up prices during the 30
days prior to actual conversion, will be less, resulting in the issuance of a
greater number of shares of Common Stock upon conversion. The
41
<PAGE> 47
Series B Preferred Stock may also be converted in part from time to time which
could result in a variety of actual conversion prices. The holders of the Series
B Preferred Stock also have the right to purchase, at the time of conversion,
one additional share of Common Stock for each share of Common Stock acquired
upon conversion. If this option is exercised, the stockholder will pay the
applicable conversion price, in cash, for each additional share acquired
pursuant to this right.
We have the right to redeem the Series B Preferred Stock prior to its
conversion upon paying $1,275 per share of Series B Preferred Stock plus all
accrued and unpaid dividends. The redemption must be paid in cash.
Holders of the Series B Preferred Stock have no voting rights except in
the event of a proposed amendment to our articles of incorporation that would
affect their rights.
Holders of the Series B Preferred Stock also received a total of
250,000 warrants to purchase Common Stock which are described below under
"Warrants."
In connection with the issuance of the Series B Preferred Stock, we
agreed to register the Common Stock which is issuable upon conversion of the
Series B Preferred Stock, including sufficient shares to cover the shares which
may be issued as dividends, shares that may be issued should the right to
acquire additional shares be exercised, and shares issuable upon exercise of
their warrants. This commitment is the primary reason for this registration.
Redeemable Convertible Preferred Stock ("Redeemable Stock")
In connection with the share exchange with Satlink 3000 described more
fully under "Certain Relationships and Related Transactions," we issued 300,000
shares of Redeemable Stock to the stockholders of Satlink 300. The Redeemable
Stock is convertible into shares of Common Stock on a one-for-one basis
beginning April 7, 2000. The Redeemable Stock may be redeemed by the holder at a
price of $2.00 per share. Subsequent to the closing of that transaction, we
learned that material representations made to induce us to enter into the share
exchange were untrue. The Board of Directors undertook to rescind the
transaction and cancel the shares of Redeemable Stock. We do not deem the
Redeemable Stock to be outstanding at this time. The recipients of the
Redeemable Stock are contesting this action and have filed suit to retain the
Redeemable Stock. The status of that matter is described more fully under
"Business - Legal Proceedings."
Warrants
We have issued warrants to purchase shares of Common Stock in a variety
of transactions. Generally, warrants may be exercised by surrendering the
warrant agreement to the transfer agent together with the exercise price.
Warrants may be exercised in whole or in part from time to time until they
expire or have been fully exercised. Several previously issued warrants have
been exercised or have expired. As of July 31, 2000, warrant holders holding
unexercised warrants had a right to acquire 546,875 shares of Common Stock.
Included within this total are the following:
- Warrants for 350,000 shares issued in connection with the sale of the
Series B Preferred Stock. These are exercisable at a price of $2.136 per
share, subject to adjustment in certain events, and will expire, if not
previously exercised, on May 22, 2005. The shares of Common Stock
issuable upon exercise of these warrants are included in this
registration statement.
- Warrants for 196,875 shares issued in connection with our offering of
units in 1999. These are exercisable at a price of $.9875 per share and
will expire, if not previously exercised, between May 11 and May 17,
2001.
Options
In addition to the right granted to the holders of Series B Preferred
Stock, to acquire additional shares of Common Stock upon conversion of the
Series B Preferred Stock, described above, we have granted options to 8
employees and one director to purchase a total of 305,000 shares of Common Stock
pursuant to our 2000 Executive Incentive Plan. One-third of these options will
vest on July 25 in each of the years 2001, 2002 and 2003. The exercise price is
$1.21 which was the average between the closing bid and asked prices of our
Common Stock on the date of issuance.
42
<PAGE> 48
In April 1999, in connection with the share exchange with Satlink 3000,
we issued to Peter Stazzone options to purchase 200,000 shares of Common Stock
at an exercise price of $1.00 per share. These options were exercisable for a
period of three years. Subsequent to the closing of that transaction, we learned
that material representations made to induce us to enter into the share exchange
were untrue. The Board of Directors undertook to rescind the transaction and
cancel the options issued to Mr. Stazzone along with 300,000 shares of Common
Stock also issued to Mr. Stazzone. We do not deem the options or shares to be
outstanding at the present time. Mr. Stazzone is contesting this action and has
filed suit to retain the options as well as the Common Stock. The status of that
matter is described more fully under "Business - Legal Proceedings."
Registration Rights
All of the shares offered in connection with this registration were
issued in transactions in which the securities being issued, whether Common
Stock, Preferred Stock or Warrants, were restricted securities and granting
registration rights to the purchasers of those securities. In most instances,
the registration rights are "piggyback" rights which only require us to include
the shares for registration if we are otherwise undertaking the filing of a
registration statement. Those "piggyback rights" generally require only that we
register the number of shares beneficially held by the Selling Stockholder.
However, in connection with the issuance of the Series B Preferred
Stock, we agreed that we would register on behalf of those Selling Stockholders
the greater of (i) 3,000,000 shares of Common Stock, or (ii) the number of
shares equal to 200% of the shares issuable upon conversion of the Series B
Preferred Stock, payment of the Series B Preferred Stock dividends in shares of
Common Stock, exercise of the right to acquire additional shares of Common
Stock, and exercise of the Warrants held by the Series B Preferred Stock
stockholders. Because the number of shares issuable to the holders of the Series
B Preferred Stock will vary with the market price of our Common Stock, we agreed
that we would determine the number of shares to be registered on the assumption
that they would all have been issued at the conversion or exercise price on the
day this Registration Statement was filed. On that basis, 13,771,605 shares have
been included in this registration for the holders of the Series B Preferred
Stock.
Penny Stock
The Securities and Exchange Commission has adopted Rule 15g-9 which
established the definition of a "penny stock," for the purposes relevant to the
Company, as any equity security that has a market price of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require: (i) that a broker or dealer approve a person's account for
transactions in penny stocks; and (ii) the broker or dealer receive from the
investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a person's
account for transactions in penny stocks, the broker or dealer must (i) obtain
financial information and investment experience objectives of the person; and
(ii) make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks. The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prepared by the Commission relating to
the penny stock market, which, in highlight form, (i) sets forth the basis on
which the broker or dealer made the suitability determination; and (ii) that the
broker or dealer received a signed, written agreement from the investor prior to
the transaction. Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Shares Eligible for Future Sale
Future sales of substantial amounts of common stock in the public
market could adversely affect market prices prevailing from time to time. Under
the terms of this offering, the shares of Common Stock being sold by the Selling
Stockholders, may be resold without restrictions or further registration under
the Securities Act of 1933, except that any shares purchased by our
"affiliates," as that term is defined under the Securities Act, may generally
only be sold in compliance with the limitations of Rule 144 under the Securities
Act.
43
<PAGE> 49
Approximately 9,503,000 outstanding shares of Common Stock not included
in this offering are restricted securities within the meaning of Rule 144 and
may not be sold in the absence of registration under the Securities Act unless
an exemption from registration is available, including the exemption from
registration offered by Rule 144. In general, under Rule 144, as currently in
effect, a person who has beneficially owned restricted shares for at least one
year, including a person who may be deemed to be our affiliate, may sell within
any three-month period a number of shares of common stock that does not exceed a
specified maximum number of shares. This maximum is equal to the greater of 1%
of the then outstanding shares of our common stock or the average weekly trading
volume in the common stock during the four calendar weeks immediately preceding
the sale. Sales under Rule 144 are also subject to restrictions relating to
manner of sale, notice and availability of current public information about us.
In addition, under Rule 144(k) of the Securities Act, a person who is not our
affiliate, has not been an affiliate of ours within three months prior to the
sale and has beneficially owned shares for at least two years would be entitled
to sell such shares immediately without regard to volume limitations, manner of
sale provisions, notice or other requirements of Rule 144.
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is Interwest
Transfer Co., Inc. which is located at 1981 E. Murray Holladay Road, Suite 100,
Salt Lake City, UT 84117, telephone (801) 272-9294, facsimile (801) 277-3147. We
serve as our own transfer agent for the Preferred Stock.
PLAN OF DISTRIBUTION
The Selling Stockholders may from time to time sell all or a portion of
the Common Stock offered by the Selling Stockholders hereby in transactions at
prevailing market prices on the OTC Bulletin Board, in privately negotiated
transactions at negotiated prices, or in a combination of such methods of sale.
The Selling Stockholders may sell the securities offered hereby to purchasers
directly or may from time to time offer the securities through dealers or agents
who may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders or the purchasers of the securities
for whom they may act as agent. The Selling Stockholders and any persons who
participate in the sale of the securities offered hereby may be deemed to be
"underwriters" within the meaning of the Securities Act and any commissions paid
or discounts or concessions allowed to any person and any profits received on
resale of the securities offered hereby may be deemed to be underwriting
compensation under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the securities may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or an exemption from any
registration or qualification requirement is available and the requirements
therefore have been satisfied.
The Company will receive no proceeds from the sale by the Selling
Stockholders of the securities offered hereby. However, we will receive cash
payments from the Selling Stockholders to the extent they exercise their
Warrants or rights to purchase additional shares of Common Stock prior to
selling the resulting shares. All of the expenses incurred in connection with
the registration of the securities offered hereby will be paid by the Company,
except for compensation of brokers or dealers and any transfer fees incurred in
connection with the sale of the securities by the Selling Stockholders, which
compensation and fees will be paid by the Selling Stockholders.
There can be no assurance that the Selling Stockholders will sell all
or any of the securities offered by them hereby. To the extent required, the
specific securities to be sold by the Selling Stockholders in connection with a
particular offer will be set forth in an accompanying prospectus supplement.
Before offers and sales of securities are made by the Selling Stockholders: (a)
to the extent the securities are sold at a fixed price or by option at a price
other than the prevailing market price, the prospectus will be amended to set
forth such price, and (b) if the compensation paid to brokers or dealers is
other than usual and customary discounts, concessions or commissions, this
prospectus will be amended to set forth the terms of the transaction.
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<PAGE> 50
LEGAL MATTERS
The validity of the shares of the Company's Common Stock offered hereby
will be passed upon for the Company by Jennings, Strouss & Salmon, P.L.C.,
Phoenix, Arizona.
EXPERTS
The audited financial statements of the Company as of December 31, 1999
and the related statements of operations, stockholders' deficiency and cash
flows for the years ended December 31, 1999 and 1998, included elsewhere in this
prospectus, have been so included in reliance on the report of Durland &
Company, CPAs, P.A., Palm Beach, Florida, independent certified public
accountants, given on the authority of such firm as experts in auditing and
accounting.
45
<PAGE> 51
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report ............................................ F-2
Consolidated Balance Sheets ............................................. F-3
Consolidated Statements of Operations ................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) ............ F-5
Consolidated Statements of Cash Flows ................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
</TABLE>
F-1
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
IPVoice.com, Inc.
(A Development Stage Enterprise)
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of IPVoice.com,
Inc., a development stage enterprise, (the "Company") as of December 31, 1999
and the related consolidated statements of operations, stockholders' deficiency
and cash flows for the two years ended December 31, 1999 and from February 19,
1997 (Inception) through December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 financial position of the Company as of
December 31, 1999 and the results of their operations and their cash flows for
the two years ended December 31, 1999 and from February 19, 1997 (Inception)
through December 31, 1999, in conformity with generally accepted accounting
principles.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
March 7, 2000, except
Paragraph 2 of Note 6, as to which
the date is August 9, 2000
F-2
<PAGE> 53
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 98,592 $ 1,673,557
Certificate of deposit - restricted 25,205 50,829
Accounts receivable 108,100 20,642
Inventory 7,586 0
Prepaid expenses and deposits 16,865 487,135
Total current assets 256,348 2,232,163
PROPERTY AND EQUIPMENT
Computer equipment 369,619 515,082
Office equipment 19,019 50,454
Furniture and fixtures 29,445 40,537
Subtotal property and equipment 418,083 606,073
Less accumulated depreciation (40,528) (88,230)
Total property and equipment 377,555 517,843
OTHER ASSETS
Intangible assets 0 105,032
Total other assets 0 105,032
Total Assets $ 633,903 $ 2,855,038
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses
Trade $ 326,524 $ 213,190
Officer 17,403 70,490
Related party 40,896 49,247
Accrued payroll taxes 1,005 0
Accrued interest - stockholders 12,690 4,221
Deferred revenue 7,821 0
Total current liabilities 406,339 337,148
LONG-TERM LIABILITIES
Notes payable 1,145,400 385,950
Total long-term liabilities 1,145,400 385,950
Total Liabilities 1,551,739 723,098
STOCKHOLDERS' EQUITY (DEFICIENCY)
Senior convertible preferred stock, $0.001 par value, authorized
10,000,000 shares; Series A, 1,150 and 200 issued and outstanding shares,
Series B, 0 and 2,500 issued and outstanding shares 1 3
Common stock, $0.001 par value, authorized 50,000,000 shares;
16,422,758 and 17,866,384 issued and outstanding shares 16,423 17,866
Additional paid-in capital 1,570,240 5,227,363
Beneficial conversion feature discount 0 833,333
Deficit accumulated during the development stage (2,504,500) (3,946,625)
Total stockholders' equity (deficiency) (917,836) 2,131,940
Total Liabilities and Stockholders' Equity (Deficiency) $ 633,903 $ 2,855,038
=========== ===========
</TABLE>
F-3
<PAGE> 54
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
February 19, 1997
Six Months Ended (Inception)
Year Ended December 31, June 30, through
1999 1998 2000 1999 June 30, 2000
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES $ 321,279 $ 41,254 $ 107,973 $ 0 $ 470,506
COST OF SALES 305,434 0 103,976 0 409,410
Gross profit 15,845 41,254 3,997 0 61,096
OPERATING EXPENSES
Compensation
Officers 340,896 140,076 177,343 147,329 661,696
Other 78,522 37,715 96,910 30,613 209,766
Consulting 470,765 0 211,295 270,000 727,410
Consulting - related party 267,564 91,096 356,194 223,017 678,485
General and administrative 605,749 275,709 319,385 120,209 1,200,843
Research and development 97,403 0 28,160 0 125,563
Organization expense - related party 0 0 0 0 14,000
Depreciation and amortization 36,185 4,343 47,702 4,860 88,230
Total operating expenses 1,897,084 548,939 1,236,989 796,028 3,705,993
Loss from operations (1,881,239) (507,685) (1,232,992) (796,028) (3,644,897)
OTHER INCOME (EXPENSE)
Interest expense (64,387) 0 (46,088) (11,547) (110,475)
Interest income 20,324 0 17,510 6,386 37,834
Write-off of receivable (48,532) 0 0 0 (48,532)
Total other income (expense) (92,595) 0 (28,578) (5,161) (121,173)
Net loss $ (1,973,834) $ (507,685) $ (1,261,570) $ (801,189) $ (3,766,070)
Loss per common share $ (0.13) $ (0.04) $ (0.07) $ (0.05)
Number weighted average common shares
outstanding 15,413,751 11,620,451 $ 17,268,264 $ 14,762,758
============ ============ ============ ============
</TABLE>
F-4
<PAGE> 55
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Bene.
Par Value Add'l Stock Conv.
Number of Shares Preferred Common Paid-in Subs. Feature
Preferred Common Stock Stock Capital Rec. Discount
<S> <C> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE,
February 19, 1997 (Inception) 0 0 $0 $0 $0 $0 $0
2/97 - founder's serv. ($0.001/sh.) 0 9,000,000 0 9,000 0 0 0
397 - cash ($0.01/sh.) 0 1,400,000 0 1,400 12,600 (12,274)
Net loss 0 0 0 0 0 0 0
BALANCE, December 31, 1997 0 10,400,000 0 10,400 12,600 (12,274) 0
3/19 - donated-rel. party 0 (9,000,000) 0 (9,000) 9,000 0 0
($0.001/sh.)
3/19 - acquisition ($0.001/sh.) 0 9,000,000 0 9,000 (9,000) 0 0
3/20 - cash received 0 0 0 0 0 12,274 0
2nd qtr. - cash ($1.00/sh.) 0 144,000 0 144 143,856 0 0
3rd qtr. - cash ($1.00/sh.) 0 10,000 0 10 9,990 0 0
3rd qtr. - cash ($0.75/sh.) 0 53,333 0 53 39,947 0 0
3rd qtr. - cash ($0.50/sh.) 0 20,000 0 20 9,980 0 0
3rd qtr. - cash ($0.25/sh.) 0 100,000 0 100 24,900 0 0
3rd qtr. - cash ($0.10/sh.) 0 627,000 0 627 62,073 (62,700) 0
3rd qtr. - services ($0.10/sh.) 0 473,000 0 473 46,827 0 0
4th qtr. - cash ($0.15/sh.) 0 396,666 0 397 59,103 0 0
4th qtr. - services ($0.15/sh.) 0 275,000 0 275 40,975 0 0
4th qtr. - cash ($0.19/sh.) 0 80,000 0 80 14,920 0 0
Net loss 0 0 0 0 0 0 0
BALANCE, December 31, 1998 0 12,578,999 0 12,579 465,171 (62,700) 0
1st qtr. - cash ($0.22/sh.) 0 687,499 0 687 149,313 0 0
1st qtr. - services ($0.87/sh.) 0 493,760 0 494 429,070 0 0
2nd qtr. - cash received 0 0 0 0 0 60,000 0
2nd qtr. - cash ($4.00/sh.) 1,150 0 1 0 4,599 0 0
2nd qtr. - cash ($0.15/sh.) 0 2,005,000 0 2,005 293,995 0 0
3rd qtr. - cash ($0.40/sh.) 0 437,500 0 438 174,562 0 0
3rd qtr. - cash received 0 0 0 0 0 2,700 0
3rd qtr. - services ($1.00/sh.) 0 10,000 0 10 9,990 0 0
4th qtr. - services ($0.21/sh.) 0 210,000 0 210 43,540 0 0
Net loss 0 0 0 0 0 0 0
BALANCE, December 31, 1999 1,150 16,422,758 1 16,423 1,570,240 0 0
1st qtr. - cash ($1.00/sh.) 0 386,000 0 386 385,614 0 0
1st qtr. - cash ($.99/sh.) 0 75,000 0 75 73,988 0 0
1st qtr. - services/deposits 0 250,000 0 250 730,528 0 0
($2.92/sh.)
1st qtr. - services ($2.92/sh.) 0 50,000 0 50 145,950 0 0
2nd qtr. - conversion due to tender (950) 543,876 (1) 544 678,208 0 0
offer
2nd qtr. - issuance of Series B - 2,500 0 3 0 1,323,904 0 833,333
cash
2nd qtr. - cash ($1.00/sh.) 0 120,000 0 120 119,880 0 0
2nd qtr. - cash ($0.99/sh.) 0 18,750 0 18 18,496 0 0
Series B preferred stock dividend 0 0 0 0 180,555 0 0
Net loss 0 0 0 0 0 0
ENDING BALANCE, June 30, 2000
(unaudited) 2,700 17,866,384 $3 $17,866 $5,227,363 $0 $833,333
===== ========== == ======= ========== == ========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accum.
During Total
the Stockholders'
Dev. Equity
Stage (Deficiency)
<S> <C> <C>
BEGINNING BALANCE,
February 19, 1997 (Inception) $0 $0
2/97 - founder's serv. ($0.001/sh.) 0 9,000
397 - cash ($0.01/sh.) 0 1,726
Net loss (22,981) (22,981)
BALANCE, December 31, 1997 (22,981) (12,255)
3/19 - donated-rel. party 0 0
($0.001/sh.)
3/19 - acquisition ($0.001/sh.) 0 0
3/20 - cash received 0 12,274
2nd qtr. - cash ($1.00/sh.) 0 144,000
3rd qtr. - cash ($1.00/sh.) 0 10,000
3rd qtr. - cash ($0.75/sh.) 0 40,000
3rd qtr. - cash ($0.50/sh.) 0 10,000
3rd qtr. - cash ($0.25/sh.) 0 25,000
3rd qtr. - cash ($0.10/sh.) 0 0
3rd qtr. - services ($0.10/sh.) 0 47,300
4th qtr. - cash ($0.15/sh.) 0 59,500
4th qtr. - services ($0.15/sh.) 0 41,250
4th qtr. - cash ($0.19/sh.) 0 15,000
Net loss (507,685) (507,685)
BALANCE, December 31, 1998 (530,666) (115,616)
1st qtr. - cash ($0.22/sh.) 0 150,000
1st qtr. - services ($0.87/sh.) 0 429,564
2nd qtr. - cash received 0 60,000
2nd qtr. - cash ($4.00/sh.) 0 4,600
2nd qtr. - cash ($0.15/sh.) 0 296,000
3rd qtr. - cash ($0.40/sh.) 0 175,000
3rd qtr. - cash received 0 2,700
3rd qtr. - services ($1.00/sh.) 0 10,000
4th qtr. - services ($0.21/sh.) 0 43,750
Net loss (1,973,834) (1,973,834)
BALANCE, December 31, 1999 (2,504,500) (917,836)
1st qtr. - cash ($1.00/sh.) 0 386,000
1st qtr. - cash ($.99/sh.) 0 74,063
1st qtr. - services/deposits 0 730,778
($2.92/sh.)
1st qtr. - services ($2.92/sh.) 0 146,000
2nd qtr. - conversion due to tender 0 678,751
offer
2nd qtr. - issuance of Series B - 0 2,157,240
cash
2nd qtr. - cash ($1.00/sh.) 0 120,000
2nd qtr. - cash ($0.99/sh.) 0 18,514
Series B preferred stock dividend (180,555) 0
Net loss (1,261,570) (1,261,570)
ENDING BALANCE, June 30, 2000
(unaudited) $(3,946,625) $2,131,940
=========== ==========
</TABLE>
F-5
<PAGE> 56
IPVOICE.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 19,
Six Months Ended 1997
Year Ended December 31, June 30, (Inception)
through
1999 1998 2000 1999 June 30, 2000
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,973,834) $ (507,685) $(1,261,570) $ (801,189) $(3,766,070)
Adjustments to reconcile net loss to net cash used by
operating activities:
Stock issued for services - related party 34,064 88,550 730,778 429,564 862,392
Stock issued for services - other 449,250 0 146,000 0 595,250
Depreciation 36,185 4,343 47,702 4,860 88,230
Interest credited to certificate of deposit (205) 0 (624) 0 (829)
Changes in operating assets and liabilities
(Increase) decrease in inventory (7,586) (152,980) 7,586 (15,791) 0
(Increase) decrease in accounts receivable (108,100) 0 87,458 (4,370) (20,642)
(Increase) decrease in prepaid expenses (16,865) 0 (470,270) 0 (487,135)
Increase (decrease) in accounts payable - trade 134,707 191,817 (113,334) (101,464) 213,190
Increase (decrease) in accounts payable - officer (16,865) 34,268 53,087 (27,930) 70,490
Increase (decrease) in accounts payable - related 20,332 6,564 8,351 (5,652) 49,247
party
Increase (decrease) in deferred revenue 7,821 0 (7,821) 0 0
Increase (decrease) in accrued payroll taxes (34,725) 35,730 (1,005) (35,730) 0
Increase (decrease) in accrued interest 12,690 0 (8,469) 11,547 4,221
Net cash used by operating activities (1,463,131) (299,393) (782,131) (546,155) (2,391,656)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase certificate of deposit (25,000) 0 (25,000) 0 (50,000)
Purchase of property and equipment (223,135) (41,968) (187,990) (16,147) (606,073)
Purchase of intangibles 0 0 (105,032) 0 (105,032)
Net cash used by investing activities (248,135) (41,968) (318,022) (16,147) (761,105)
CASH FLOW FROM FINANCING ACTIVITIES:
Increase (decrease) in advance from shareholder (24,750) 24,750 0 (24,750) 0
Proceeds from notes payable 1,145,400 0 0 1,145,400 1,145,400
Common stock issued for cash 621,000 303,500 598,577 446,000 1,524,803
Professional services in connection with Tender 0 0 (80,699) 0 (80,699)
Offer
Preferred stock issued for cash 4,600 0 2,157,240 4,600 2,161,840
Proceeds from stock subscription receivable 62,700 12,274 0 60,000 74,974
Net cash provided by financing activities 1,808,950 340,524 2,675,118 1,631,250 4,826,318
Net increase (decrease) in cash 97,684 (837) 1,574,965 1,068,948 1,673,557
CASH, beginning of period 908 1,745 98,592 908 0
CASH, end of period $ 98,592 $ 908 $ 1,673,557 $ 1,069,856 1,673,557
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 51,697 $ 0 $ 37,619 $ 0 $ 89,316
NON-CASH FINANCING ACTIVITIES:
Conversion of debt to common stock due to TO $ 0 $ 0 $ 759,450 $ 0 $ 759,450
Series B preferred stock dividend $ 0 $ 0 $ (180,555) $ 0 $ (180,555)
Stock subscription receivable $ 0 $ (62,700) $ 0 $ 0 $ (74,974)
Donated capital - related party $ 0 $ 9,000 $ 0 $ 0 $ 9,000
Inventory transferred to property and equipment $ 152,980 $ 0 $ 0 $ 0 $ 152,980
=========== =========== =========== =========== ===========
</TABLE>
F-6
<PAGE> 57
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with regard to 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) 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, generally
three, five and seven years, 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) 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, 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
F-7
<PAGE> 58
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
H) REVENUE RECOGNITION (CONTINUED) 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.
I) RESEARCH AND DEVELOPMENT Research and development costs are expensed
in the period incurred.
J) 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.
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
16,422,758 and 12,578,999 shares of common stock issued and outstanding
at December 31, 1999 and 1998, respectively. The Company has 1,150 and
0 shares of senior convertible preferred stock issued and outstanding
at December 31, 1999 and 1998, 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 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
$415,000, 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
F-8
<PAGE> 59
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) STOCKHOLDERS' EQUITY (CONTINUED) 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 preferred stock in exchange for $4,600 in
cash. These senior convertible preferred shares, as a group, are
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 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 exercised his warrants for 75,000 shares
of common stock by tendering $74,063 cash. In the first quarter, the
Company issued 300,000 shares of common stock for services/deposits,
valued at the current market rate of $830,778, 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.
F-9
<PAGE> 60
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 resulting from the conversion of
the senior convertible preferred stock, 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, as the Company has no
history of profitable operations.
The significant components of the net deferred tax asset are:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
(unaudited)
<S> <C> <C>
Net operating losses $1,002,000 $1,506,000
Valuation allowance (1,002,000) (1,506,000)
Net deferred tax asset $ 0 $ 0
=========== ==========
</TABLE>
(4) RELATED PARTIES At June 30, 2000, the Company owed two of its officers
$64,148 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 $65,419 for consulting services
performed on behalf of the Company. This amount is represented in
Accounts payable - related party. Total consulting fees incurred to a
shareholder during the six months amounted to $303,744. Consulting fees
in the amount of $52,450 was paid to an officer.
At December 31, 1999, the Company owed two of its officers $17,403 for
reimbursement of expenses paid on behalf of the Company. This amount is
represented in Accounts payable - officer. At December 31, 1999, the
Company owed two of its shareholders $40,896 for consulting services
performed on behalf of the Company. This amount is represented in
Accounts payable - related party. Total consulting fees incurred to a
shareholder during the year amounts to $131,064. Consulting fees in the
amount of $136,500 were paid to two officers, $30,000 of which was paid
to one officer prior to his election. During 1999, the Company
purchased for cash approximately $14,000 of furniture and fixtures from
an officer of the Company at the fair market value.
During the year ended December 31, 1998, one of the Company's
shareholders advanced funds totaling $24,750 for payment of general
operating expenses. This amount was repaid in 1999.
(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 shareholders' 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 Sat Link 3000, Inc. 1998
financial statements, certain information was disclosed to the Company.
Based upon this information, the Board of Directors elected, on October
29, 1999,
F-10
<PAGE> 61
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) SIGNIFICANT ACQUISITION (CONTINUED) 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 were unwound and, accordingly, have not been given any
accounting recognition in the accompanying financial statements, except
for the assumption of an office space lease and the writeoff of a
receivable of $48,532. (See Note 8d.)
(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 preferred shares. The preferred shares, as a group, are
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 of 2000,
the Company completed a Tender Offer, which reduced the debt from
$1,145,400 to $385,950 and canceled 950 shares of senior convertible
(Series A) preferred stock.
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 CERTIFICATE OF DEPOSIT In October 1999, the Company
purchased a $25,000 one-year certificate of deposit, 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) COMMITMENTS 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 is
profitable. At December 31, 1999, the Company is obligated to pay a
total of $90,000 in 2000, $90,000 in 2001 and $82,500 in 2002.
F-11
<PAGE> 62
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
a) CONSULTING AGREEMENTS - RELATED PARTIES (CONTINUED) 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 is obligated
for payments totaling $90,000 in 2000, and $24,000 in 2001.
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 which
called for payment 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. 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 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. In March of 2000,
the Company leased an automobile for 36 months, with payments totaling
$9,000. The Company is obligated to the following payments: $36,800 in
2000; $40,000 in 2001; $40,000 in 2002 and $3,300 in 2003.
d) LITIGATION In December 1999, SatLink filed a lawsuit alleging breach
of contract as a result of the recission 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 recission 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. 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.
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<PAGE> 63
IPVOICE.COM, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
d) LITIGATION (CONTINUED) 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 reduce this compensation to $90,000 per year until such time
as the Company is profitable. The reduction agreements do 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 salary of $78,000 per year and
granted the EVP four-year options for 50,000 shares of common stock,
with an exercise price of $1.75. These options are not exercisable
until the stock trades above $7.50 and $12.00 per share for ten days
out of thirty consecutive days, one-half and one-half, respectively.
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 approved for
the Board of Directors to adopt an employee stock option plan. This
plan reserves up to 1,000,000 shares to be issued upon the exercise of
such granted options. The plan, which was not finalized until early
2000, allows for the grant of qualified and non-qualified options, as
defined by Section 422 of the Internal Revenue Code of 1986, as
amended. 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 EVENTS
a) LEASES In July 2000, the Company purchased the equipment at its fair
market value from the lessor. 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. In July 2000, the Company entered into 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.
b) CONSULTING AGREEMENTS - RELATED PARTIES 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-13
<PAGE> 64
IPVOICE.COM, INC.
FORM SB-2
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of IPVoice.com, Inc., a Nevada
corporation, (the "Parent") contain a provision that eliminates or limits the
personal liability of the Parent's directors or officers to the Parent or its
stockholders for breach of fiduciary duty except acts or omissions which include
misconduct or fraud. The Nevada Revised Statutes do not permit elimination or
limitation of personal liability of an officer or director for (i) acts or
omissions which involve intentional misconduct, fraud or knowing violation of
law or (ii) the payment of distributions under Section 78.300 of the Nevada
Revised Statutes.
The Parent's Bylaws provide that the Parent indemnifies each person
(including the heirs, executors, administrators or estate of such person) who is
or was a director or officer of the Parent to the fullest extent permitted or
authorized by current or future legislation or judicial or administrative
decision against all fines, liabilities, costs and expenses, including attorneys
fees, arising out of his or her status as a director, officer, agent, employee
or representative. The rights accruing to any person under this Bylaws provision
do not exclude any other right to which such indemnified person lawfully may be
entitled. The Parent's Bylaws also provide that the Parent will pay any costs,
charges or expenses (including attorneys' fees) incurred by an indemnified
person in advance of the final disposition of the action if the indemnified
person is obligated to repay all amounts if it is ultimately determined that
such indemnified person is not entitled to indemnification. The Parent's Bylaws
provide that the Parent shall indemnify such persons to the fullest extent
permitted by the Bylaw provisions have not been invalidated and to the fullest
extent permitted by law.
Section 78.7502 of the Nevada Revised Statutes ("NRS") provides that:
(1) a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believes to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful;
provided the termination of any action, suit or proceeding by judgment, order
settlement, conviction or upon plea of nolo contendere or its equivalent, does
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believes to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful and
(2) a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation; provided indemnification may not be
made for any claim, issue or matter as to which such a person has been adjudged
by a court of competent jurisdiction, after exhaustion of all appeals therefrom,
to be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to be indemnified for such expenses as the court
deems proper and (3) to the extent that a director, officer, employee or agent
of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (1) and (2) above, or
in defense of any claim, issue or matter therein, the corporation shall
indemnify him against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
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<PAGE> 65
The NRS also provides that any discretionary indemnification under
NRS 78.7502 unless ordered by a court or advanced may be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made: (a) by the stockholders; (b) by
the board of directors by majority vote of a quorum consisting of directors who
were not parties to the action, suit or proceeding; (c) if a majority vote of a
quorum consisting of directors who were not parties to the action, suit or
proceeding so orders, by independent legal counsel in a written opinion; or (d)
if a quorum consisting of directors who were not parties to the action, suit or
proceeding cannot be obtained, by independent legal counsel in a written
opinion.
The NRS also permits a corporation's articles of incorporation, bylaws
or arrangement to provide that the expenses of officers and directors incurred
in defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
corporation.
The NRS provides that indemnification and advancement of expenses
authorized in or ordered by a court: (1) do not exclude any other rights to
which a person seeking indemnification or advancement of expenses may be
entitled under the articles of incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either an action in
his official capacity or an action in another capacity while holding his office,
except that indemnification, unless ordered by a court pursuant to NRS 78.7502
or for the advancement of expenses made pursuant to the preceding paragraph, may
not be made to or on behalf of any director if a final adjudication establishes
that his acts or omissions involved intentional misconduct, fraud or a knowing
violation of the law and was material to the cause of action and (2) continues
for a person who has ceased to be a director, officer, employee or agent and
inures to the benefit of the heirs, executors and administrators of such a
person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
<TABLE>
<CAPTION>
EXPENSE AMOUNT*
<S> <C>
SEC Registration Fee $ 4,076.31
Legal Fees and Expenses $ 125,000.00*
Accounting Fees and Expenses $ 15,000.00*
Printing and Related Expenses $ 25,000.00*
Blue Sky Fees and Expenses $ 18,000.00*
Federal and State Taxes and Fees $ 0
Transfer Agent's Fees $ 1,500.00*
Miscellaneous $ 6,423.69*
-------------
Total $ 195,000.00
</TABLE>
--------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
GENERAL INFORMATION.
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<PAGE> 66
The Company relied upon Section 3(a)(9) of the Securities Act of 1933,
as amended (the "Act") for certain of its sales of unregistered securities. In
each instance, such reliance was based upon the following: (i) the securities
being issued were exchanged exclusively with the Company's existing security
holders, and (ii) no commission or remuneration was paid or given directly or
indirectly for soliciting such exchange.
The Company relied upon Section 3(b) of the Act and Rule 504 for
several transactions regarding the sale of its unregistered securities. In each
instance, such reliance was based on the following: (i) the aggregate offering
price of the offering of the shares of securities did not exceed $1,000,000,
less the aggregate offering price for all other securities sold with the twelve
months before the start of and during the offering of shares in reliance on any
exemption under Section 3(b) or in violation of Section 5(a) of the Act; (ii) no
general solicitation or advertising was conducted by the Company in connection
with the offering of any of the shares; and (iii) the Company had not been since
its inception (a) subject to the reporting requirements of Section 13 or 15(d)
of the Securities Act of 1934, as amended, nor (b) an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, nor (c) a
development stage company that either had no specific business plan or purpose
or had indicated that its business plan was to engage in a merger or acquisition
with an unidentified company or companies or other entity or person.
The Company relied upon Section 4(2) of the Act and Rule 506 for
several transactions regarding the sale of its unregistered securities. In each
instance, such reliance was based upon the following: (i) the issuance of the
shares did not involve a public offering, (ii) there were no more than
thirty-five (35) investors (excluding "accredited investors"), (iii) each
investor who was not an accredited investor either alone or with his purchaser
representative(s) had such knowledge and experience in financial and business
matters that he was capable of evaluating the merits and risks of the
prospective investment, or the Company reasonably believed immediately prior to
making any sale that such purchaser came within this description, (iv) the
offers and sales were made in compliance with Rules 501 and 502, (v) the
securities were subject to restrictions on resale and (vi) each of the parties
was a sophisticated purchaser and had full access to the information on the
Company necessary to make an informed investment decision by virtue of the due
diligence conducted by the purchaser or available to the purchaser prior to the
transaction.
SALES OF UNREGISTERED SECURITIES WITHIN THE PAST THREE YEARS.
In March 1998, IPVoice.com, Inc., a Nevada corporation and the
registrant under this Form SB-2, (the "Parent"), then known as Nova Enterprises,
Inc., entered into a share exchange agreement with IPVoice Communications, a
Delaware corporation (the "Subsidiary") and its stockholders whereby the Parent
issued 9,000,000 shares of its Common Stock to the Subsidiary's stockholders for
all of the outstanding capital stock of the Subsidiary, which then became a
wholly-owned subsidiary of the Parent. The Parent and the Subsidiary are
collectively referred to at the "Company", as the context requires. The Parent
changes its name to IPVoice.com, Inc. after the transaction. In connection with
the agreement, the Company entered into employment agreements with Barbara Will,
its current Chief Operating Officer and President and a Director and with
Anthony Welch, designer of the Company's proprietary software, who currently
serves as the Senior Vice-President of Research and Development and a Director.
As part of the exchange, Ms. Will, Mr. Welch and Condor Worldwide, Ltd.
("Condor") each received 3,000,000 shares of the Company's restricted common
stock. James K. Howson, the Company's Chairman and Chief Executive Officer, is
the beneficial owner of Condor. For such offering, the Company relied upon
Section 4(2) of the Act and Rule 506. A Form D was filed with the SEC.
Between April 23 and August 14 1998, the Company sold 154,000 shares of
its Common Stock to five (5) investors for $154,000 cash. For such offering, the
Company relied upon Section 3(b) of the Act and Rule 504. A Form D was filed
with the SEC.
In July 1998, the Company sold 53,333 shares of its Common Stock to one
(1) investor for $40,000. For such offering, the Company relied upon Section
3(b) of the Act and Rule 504. A Form D was filed with the SEC.
In July 1998, the Company entered into three related consulting
services agreements with Calpe, Ltd ("Calpe"), The Investor Communication Group,
Inc. ("ICG") and Corporate Imaging ("CI"). Calpe agreed to provide international
sales and public relations assistance to the Company for a three-year period
ending June 30,
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<PAGE> 67
2001 for which Calpe received 627,000 shares of the Company's Common Stock in
lieu of $62,700 of commissions on product sales. ICG agreed to provide financial
public relations and direct marketing assistance to the Company for a period of
six months ended January 15, 1999, for which ICG received monthly payments of
$12,500, 200,000 shares of the Company's Common Stock and 100,000 warrants to
purchase Common Stock at an exercise price of $2.00 per share. CI agreed to
provide media and public relations management services for the Company for a
two-year period ending July 31, 2000 for which CI received 23,000 shares of
Common. For this offering, the Company relied upon Section 3(b) of the Act and
Rule 504. Three separate Forms D were filed with the SEC.
In July 1998, the Company entered into an agreement with AIG
International ("AIG") wherein the Company granted AIG the non-exclusive right to
market, advertise and sell the Company's domestic and international calling
services for a period of three years. As payment for these services, the Company
issued warrants to purchase 50,000 shares of the Company's Common Stock
exercisable at a price of $0.75 per share or, and agreed to pay commissions on
sales of the Company's products and services. For such offering, the Company
relied upon Section 4(2) of Act and Rule 506. A Form D was filed with the SEC.
In September 1998, the Company issued 200,000 shares of its Common
Stock to two (2) investors in three separate sales for an aggregate purchase
price of $50,000 cash. For such sales, the Company relied upon Section 3(b) of
the Act and Rule 504. A Form D was filed with the SEC for each sale.
In October 1998, the Company executed a consulting agreement with
International Investment Partners, Ltd., an Irish corporation ("IIP"),
memorializing an oral agreement made in March 1998, to provide financial,
consulting and advisory services over a three-year period in exchange for the
issuance of 350,000 shares of Common Stock at an agreed value of $35,000, the
grant of warrants to purchase an additional 1,600,000 shares of the Common Stock
exercisable without time limitation at an exercise price of $0.06 per share, the
grant of warrants to purchase an additional 350,000 shares of Common Stock
exercisable without time limitation at an exercise price of $3.90 per share and,
in consideration of $100 cash, the grant of warrants to purchase up to 5% of the
Common Stock of the Company on a fully-diluted basis at a price of $1.00 per
share. In addition, the agreement required the Company to pay a monthly fee of
$4,000 from September 1998 through March 1999, $6,000 from April 1999 through
March 2000 and $8,000 from April through the end of the agreement. In January
1999, IIP received 93,760 shares of Common Stock in lieu of payment for $14,064
in services under the consulting agreement. IIP exercised its warrant to
purchase 1,600,000 shares in April 1999 at an exercise price of $96,000. As to
the warrant to purchase up to 5% of the Common Stock of the Company, in January
through April 14, 2000, IIP purchased 506,000 shares of Common Stock at an
exercise price of $506,000. IIP retained the right to purchase additional shares
until the full 5% had been acquired. 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. In connection with the
initial issuance of 243,760 shares of Common Stock and the warrants and the
exercise of the warrant for 1,600,000, the Company relied upon Section 3(b) of
the Act and Rule 504. A Form D was filed with the SEC. In connection with the
issuance of 106,240 shares of the initial Common Stock, the shares of Common
Stock in April 1999, and the shares of Common Stock upon exercise of the 5%
warrant, the Company relied on Section 4(2) of the Act and Rule 506. A Form D
was filed with the SEC. In connection with the exchange of the outstanding
warrants for Common Stock, the Company relied on Section 3(a)(9) of the Act.
On October 13, 1998, the Company entered into a consulting agreement
with Inside.com, Inc. to provide media relations services and consulting advice
to the Company for a one-year period in exchange for the issuance of 275,000
shares of Common Stock and the grant of warrants to purchase an additional
155,000 shares of Common Stock exercisable for a period of one year at a price
of $0.645 per share. Inside.com, Inc. exercised its warrant to purchase 155,000
shares on April 30, 1999 at an exercise price of $100,000. In connection with
the issuance of the Common Stock and warrants, the Company relied upon Section
3(b) of the Act and Rule 504. A Form D was filed with the SEC.
From December 1998 through January 1999, the Company sold 896,665
shares of its Common Stock to eight (8) investors for $134,500 cash. For such
offering, the Company relied upon Section 3(b) of the Act and Rule 504. A Form D
was filed with the SEC.
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From February 1999 through May 1999, the Company sold forty-six (46)
units to twenty-four (24) investors for $1,150,000 cash. Each unit consisted of
(i) a note payable in two (2) years with an option for the Company to extend it
for an additional two (2) years in the principal amount of $24,900 bearing
interest at 9% per annum payable quarterly in cash or, at the option of the
Company, in shares of the Company's Common Stock; (ii) a warrant to purchase
18,750 shares of the Company's Common Stock exercisable during the period in
which the note is outstanding at an exercise price equal to 125% of the average
closing price of the stock for the thirty (30) trading days immediately prior to
February 1, 1999, which warrants contain piggy-back registration rights; and
(iii) twenty-five (25) of the Company's Senior Convertible Preferred shares. In
the event of a default in repayment of the notes, all outstanding Senior
Convertible Preferred shares shall be converted into Common Stock of the Company
in an amount which will equal 51 % of the issued and outstanding shares,
warrants and options of the Company. For such offering, the Company relied upon
Section 4(2) of the Act and Rule 506. A Form D was filed with the SEC. Between
April 20 and May 19 2000, the Company made a tender offer for the outstanding
units pursuant to which the Company issued 543,876 shares of Common Stock in
exchange for the surrender of $753,450 in notes, warrants to purchase 571,875
shares of Common Stock, and 950 shares of Senior Convertible Preferred Stock.
Additionally, three (3) warrantholders have exercised 93,750 warrants at a price
of $.9875 per share of Common Stock. The tender offer was made in reliance upon
Section 3(a)(9) of the Act. A tender offer statement was filed with the SEC on
April 21, 2000.
Between March 4 and April 2, 1999, the Company sold 875,000 shares of
its Common Stock to one (1) investor for $350,000 cash. For such offering, the
Company relied upon Section 3(b) of the Act and Rule 504. A Form D was filed was
filed with the SEC.
On March 29, 1999, the Company entered into a consulting agreement with
Buying Power Network ("BPN") to provide financial public relations consulting
services to the Company for which the Company agreed to pay $40,000 for the
first month, $30,000 for the second month and $25,000 for the third, payable in
shares of the Company's Common Stock. The contract term was through September
1999 and has expired without renewal. In exchange for services rendered by BPN,
the Company issued 100,000 shares of its Common Stock, valued at $106,200, to
Joyce Research Group, of which BPN is a division. For the fourth, fifth and
sixth months of the contract, the Company granted Joyce Research Group options
to purchase 150,000 shares of the Company's Common Stock at an exercise price
equal to 60%, 65% and 70% of the market price, respectively. For such offering,
the Company relied upon Section 3(b) of the Act and Rule 504. A Form D was filed
with the SEC.
On April 1, 1999, the Company entered into a marketing agreement with
Benae International, Inc. to market the Company's telephony services and to
register a minimum of one hundred (100) customers in the thirty (30) cities in
which the Company plans to offer telephony services within twelve (12) months in
exchange for 200,000 shares of the Common Stock of the Company. The shares are
to be returned to the Company if the minimum is not met. For such offering, the
Company relied upon Section 3(b) of the Act and Rule 504. A Form D was filed
with the SEC.
On April 1, 1999, the Company entered into a marketing and advertising
agreement with Netgenie.com ("NG") to provide marketing services to a minimum of
75,000 customers in thirty (30) cities designated by the Company within a twelve
(12) month period in exchange for 100,000 shares of the Common Stock of the
Company, which shares must be returned if NG fails to deliver a minimum of eight
(8) cities for a total of 75,000 customers. In addition, NG may earn performance
bonuses of: 50,000 shares if eight (8) cities are delivered within ninety (90)
days of execution; 50,000 shares if fifteen (15) cities are delivered within one
hundred fifty (150) days; and 10,000 shares for each additional city thereafter
before December 31, 1999 up to 30 cities. Further, NG was granted warrants to
purchase 30,000 shares of the Company's Common Stock exercisable for a period of
two (2) years at an exercise price of $2.50 per share for every block of 5,000
pre-registered customers up to 75,000 pre-registered customers in a twelve (12)
month period. NG did not satisfy any of the incentive performance criteria and
the right to acquire the additional shares or exercise the warrants has expired.
For such offering, the Company relied upon Section 4(2) of the Act and Rule 506.
A Form D was filed with the SEC.
On April 7, 1999, the Company entered into a share exchange agreement
with Satlink 3000, doing business as Independent Network Services ("INS"),
whereby the Company exchanged 250,000 shares of its Redeemable
II-5
<PAGE> 69
Convertible Preferred stock valued at $500,000 for all of the outstanding
capital stock of INS. Such Redeemable Convertible Preferred stock contains 1 for
1 conversion rights after one (1) year and is redeemable at $2.00 per share. The
President of INS, Peter M. Stazzone, remained with the Company as the President
of the subsidiary. At the time of the exchange Mr. Stazzone became Secretary,
Treasurer and Chief Financial Officer of the Company under an employment
agreement. Also at the time of the exchange, Mr. Stazzone received 50,000 shares
of the Redeemable Convertible Preferred Stock of the Company. Pursuant to the
Employment Agreement, Mr. Stazzone received 200,000 shares of the Company's
Common Stock, a stock bonus of 100,000 shares of Common Stock deemed earned on
the date of the Share Exchange Agreement, but to be delivered on the earlier of
(i) the first anniversary date of his employment, or (ii) Mr. Stazzone's
termination, and options to purchase an additional 200,000 shares of the Common
Stock of the Company exercisable for a period of three (3) years at an exercise
price of $1.00 per share. For such offering, the Company relied upon Section
4(2) of the Act and Rule 506. A Form D was filed with the SEC. In connection
with the exchange, INS and Mr. Stazzone represented that INS had acquired
certain assets, including the rights to INS' name, from the Bankruptcy Court in
the Chapter 11 filing of Telsave. Mr. Stazzone was the Chief Financial Officer
of Telsave at the time the bankruptcy was filed and the Bankruptcy Court was
provided with disclosure of his involvement with INS prior to the Court's
approval of the sale of certain Telsave assets to INS. At the time of the
acquisition of INS, the Company believed that it was acquiring the rights to the
CIC Code. The purchase price was based in part upon an appraisal of the value of
the CIC Code which is loaded in approximately 60% of the domestic market.
However, during the course of the Company's audit for 1999, it was discovered
that clear title may not have passed to INS and subsequently the Company.
Therefore, the Company's Board determined that, in the event clear title had not
passed to the Company, it would be in the best interest of the Company to
rescind the transaction. The Company sought a legal opinion on the status of
such title and was advised that there was no clear link between the ownership of
the CIC Code and INS. Therefore the Board voted to rescind the transaction, to
rescind the Redeemable Preferred Stock, Common Stock and warrant issuances made
under the acquisition and the employment agreement and to terminate Mr.
Stazzone's employment. The matter is now the subject of litigation between the
Company and INS and Mr. Stazzone.
On November 29, 1999, the Company issued 10,000 shares of Common Stock
to McGinn Smith & Co. as a retainer for its services as a financial advisor in
identifying prospective institutional investors for the Company. For such
offering, the Company relied upon Section 4(2) of the Act.
On May 22, 2000, the Company issued 1,250 shares of its Series B Senior
Convertible Preferred Stock ("Series B Stock") at a price of $1,000 per share to
each of the Augustine Fund, L.P. and The Shaar Fund Ltd., for an aggregate
price of $2.5 million. Each share of Series B Stock is convertible into shares
of Common Stock at a price which is the lower of (i) $1.96 per share, or (ii)
75% of the average of the 3 lowest closing bid prices of the Common Stock during
the 30 trading days immediately prior to the conversion. Each investor has the
further right to purchase one additional share of Common Stock at the same price
for each share received upon conversion. In addition, the Company has the right
to pay the 7.5% dividend on the Series B Stock in shares of Common Stock at the
same price. Each investor was also granted warrants to purchase 125,000 shares
of the Company's common stock at an exercise price of $2.136 per share for a
period of five years. In addition, the Company granted registration rights to
the investors, the primary purpose for the filing of this Registration
Statement. In connection with this offering, the Company paid fees to Delano
Group Securities in the amount of $250,000 cash plus a warrant to purchase
100,000 shares of Common Stock at $2.136 per share. In issuing these securities,
the Company relied on Section 4(2) of the Act and Rule 506. A Form D was filed
with the SEC.
In July 2000, pursuant to its 2000 Executive Inventive Plan, the
Company issued a total of 305,000 options to purchase Common Stock to 8
employees and 1 director. At the same time, the Company cancelled the previously
authorized but unissued options for Harry Bowman, a Vice President of the
Company, to purchase 50,000 shares of Common Stock, and for Russell Watson, a
Director of the Company, to purchase 20,000 shares of Common Stock. In issuing
these options, the Company relied on Section 4(2) of the Act and Rule 506. As
soon as practicable, the Company intends to register these options and shares on
Form S-8.
II-6
<PAGE> 70
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
Item No. Description
-------- -----------
<S> <C>
3.(i).1 [1] Articles of Incorporation of Nova Enterprises, Inc. filed February 19, 1997
3.(i).2 [1] Certificate of Amendment of Articles of Incorporation changing name to IPVoice
Communications, Inc. filed March 24, 1998.
3.(i).3 [1] Certificate of Amendment of Articles of Incorporation changing name to IPVC.com, Inc.
3.(i).4 [1] Certificate of Amendment of Articles of Incorporation changing name to IPVoice.com, Inc.
3.(i).5 [4] Certificate of Correction completing the description of the Senior Convertible Preferred Shares
listed in the Amendment to the Articles of Incorporation filed on April 19, 1999
3.(i).6 [4] Certificate of Amendment of the Articles of Incorporation designating the preferences, limitations
and relative rights of Series B Preferred Stock
3.(ii).1 [1] Bylaws of Nova Enterprises, Inc.
4.1 [1] Form of Private Placement Offering of 1,600,000 common shares at $0.01 per share.
4.2 [1] Form of Private Placement Offering of 992,500 common shares at $1.00 per share.
4.3 [1] Form of Private Placement Offering of 100,000 common shares at $0.50 per share.
4.4 [1] Form of Private Placement Offering of 1,000,000 common shares at $0.15 per share.
4.5 [1] Form of Private Placement Offering of 1,250,000 common shares at $0.40 per share.
4.6 [1] Form of Private Placement Offering of 104 Units at $25,000.00 per unit.
4.7 [1] Form of Promissory Note for Private Placement Offering of 104 Units at $25,000 per unit.
4.8 [1] Form of Warrant for Private Placement Offering of 104 Units at $25,000 per unit.
5.1 * Opinion of Jennings, Strouss & Salmon P.L.C.
10.1 [1] Agreement dated March 1998 with Nova Enterprises, Inc.
10.2 [1] Agreement dated April 1999 with Independent Network Services.
10.3 [1] Agreement dated February 1998 with Natural MicroSystems Corporation.
10.4 [1] Agreement dated June 1999 with ICG Telecom Group, Inc.
10.5 [1] Agreement dated August 1999 with RSL Com U.S.A., Inc.
10.6 [1] Agreement dated July 1999 with Star Telecommunications, Inc.
10.7 [1] Agreement dated August 1999 with ILD Communications, Inc.
10.8 [1] Agreement dated June 1999 with Level 3 Communications LLC.
10.9 [1] Agreement dated August, 1999 with Worldcom Technologies, Inc.
10.10 [1] Agreement dated March 1999 with Teleco Service International, Inc.
10.11 [1] Agreement dated March 1999 with Billion Telecommunication Services, Ltd.
10.12 [1] Agreement dated May 1999 with Firstnet Telephany Ltd.
10.13 [1] Agreement dated July 1999 with MetroPlus Communication Technology, Inc.
10.14 [1] Agreement dated February 1999 with BlueGrass Net.
10.15 [1] Agreement dated July 1998 with The Armstrong International Group, Inc.
10.16 [1] Agreement dated February 1999 with International Investment Partners, Ltd.
10.17 [1] Agreement dated March 1999 with Kenneth M. Brown
10.18 [1] Agreement dated April 1999 with Netgenie.com LLC
10.19 [1] Agreement dated April 1999 with Benae International Inc.
10.20 [1] Consulting Agreement dated November 1997 with Condor Worldwide, Ltd.
10.21 [1] Consulting Agreement dated July 1998 with Calpe, Ltd.
10.22 [1] Consulting Agreement dated July 1998 with The Investor Communications Group, Inc.
10.23 [1] Consulting Agreement dated July 1998 with Corporate Imaging.
10.24 [1] Consulting Agreement dated September 1998 with First Capital Partners, Inc.
10.25 [1] Consulting Agreement dated October 1998 with International Investment Partners, Ltd.
10.26 [1] Consulting Agreement dated October 1998 with Insidestock.com, Inc.
10.27 [1] Consulting Agreement dated March 1999 with Buying Power Network.
10.28 [1] Employment Agreement dated April 1998 with Barbara S. Will.
</TABLE>
II-7
<PAGE> 71
<TABLE>
<S> <C>
10.29 [1] Employment Agreement dated April 1998 with Anthony K. Welch.
10.30 [1] Employment Agreement dated April 1999 with Peter M. Stazzone.
10.31 [1] Lease effective August 1, 1999 for Phoenix offices
10.32 [1] Employment Agreement dated November 10, 1999 with Harry R. Bowman
10.33 [2] Memorandum of Understanding between the Company and Telic.net dated
November 17, 1999
10.34 [2] Executive Incentive Stock Awards Plan adopted by Shareholders on December 9, 1999
10.35 [3] Engagement Letter dated November 24, 1999 with McGinn, Smith & Co., Inc.
10.36 [3] Engagement Letter dated February 16, 2000 with Delano Group Securities
10.37 [3] UUNET Agreement dated December 15, 1999
10.38 [3] Equipment Lease dated January 20, 2000 with International Investment Partners
10.39 [3] Professional Service Agreement dated October 8, 1999 with Natural Microsystems Corp.
10.40 [3] Apartment Rental Agreement effective November 1, 1999
10.41 [3] Telephone Equipment Lease/Purchase Agreements dated December 10, 1999
10.42 [3] Amended 2000 Stock Plan
10.43 [4] Agreement dated March 30, 2000 with Condor Worldwide, Ltd.
10.44 [4] Promissory Note dated May 5, 2000 and Pledge and Security Agreement
10.45 [4] Agreement dated May 5, 2000 with Condor Worldwide, Ltd., James K. Howson, Anthony Welch,
Barbara Will and IPVoice.com
10.46 [5] Augustine Fund, L.P. - Securities Purchase Agreement including all exhibits
10.47 [5] The Shaar Fund, Ltd. - Securities Purchase Agreement including all exhibits
10.48 [6] Employment Agreement dated April 2000 with J. Michael Scott
10.49 [6] Service Agreement dated May 15, 2000 with Telic Communications, Inc.
10.50 [6] Financial and Business Management Consulting Agreement dated June 1, 2000 with Growth
Capital Resources.com, LLC
10.51 [6] Collocation Agreement dated June 23, 2000 with Intermedia Communications Inc.
10.52 [6] Service Agreement dated June 29, 2000 with Telecom Compliance Services, Inc.
10.53 * Office Lease Agreement dated July 10, 2000 with Cornwell Corporation
10.54 * Support Agreement dated July 28, 2000 with Sepesi, Inc.
23.1 * Consent of Durland & Company, CPAs, P.A.
24.1 * Power of Attorney (included on signature page)
27.1 * Financial Data Sheet
99.1 [5] Press Release issued by the Registrant on May 24, 2000 entitled "IPVoice.com, Inc. Finalizes
$2.5 Million Funding Led by Augustine and Schaar Funds"
</TABLE>
[1] Previously filed with the Company's Form 10SB filed November 3, 1999
[2] Previously filed with the Company's Form 10QSB for the Quarter ended
September 30, 1999
[3] Previously filed with the Company's Form 10KSB/A for the fiscal year
ended December 31, 1999
[4] Previously filed with the Company's Form 10QSB for the Quarter ended
March 31, 2000
[5] Previously filed with the Company's Form 8K filed June 16, 2000
[6] Previously filed with the Company's Form 10QSB for the Quarter ended
June 30, 2000
(* Filed herewith)
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
II-8
<PAGE> 72
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(i) 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;
(ii) 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.
(iii) To include any additional or changed material
information on the plan of distribution.
(2) For the purpose of determining liability under the Securities Act
of 1933, to treat each post-effective amendment as a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time as the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the 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
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the 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, the Registrant will, less 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 of 1933 and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Phoenix,
State of Arizona, on August 18, 2000.
IPVOICE.COM, INC.
By: /s/ Barbara Will
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby authorizes
Barbara Will with full power of substitution to execute in the name of such
person and to file any Amendment or Post-Effective Amendment to this
Registration Statement making such changes in this Registration Statement as the
Company deems appropriate and appoints Barbara Will with full power of
substitution, attorney-in-fact to sign and to file any amendment and
Post-Effective Amendment to this Registration Statement.
II-9
<PAGE> 73
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James K. Howson Director and August 18, 2000
James K. Howson Chief Executive Officer
[Principal Executive Officer]
/s/ Barbara Will Director and President August 18, 2000
Barbara Will
/s/ Brian Auchey Acting Chief Financial Officer August 18, 2000
Brian Auchey [Principal Financial
and Accounting Officer]
/s/ Anthony Welch Director August 18, 2000
Anthony Welch
/s/ Russell Watson Director August 18, 2000
Russell Watson
</TABLE>
II-10
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Item No. Description
3.(i).1 [1] Articles of Incorporation of Nova Enterprises, Inc. filed
February 19, 1997
3.(i).2 [1] Certificate of Amendment of Articles of Incorporation changing
name to IPVoice Communications, Inc. filed March 24, 1998.
3.(i).3 [1] Certificate of Amendment of Articles of Incorporation changing
name to IPVC.com, Inc.
3.(i).4 [1] Certificate of Amendment of Articles of Incorporation changing
name to IPVoice.com, Inc.
3.(i).5 [4] Certificate of Correction completing the description of the
Senior Convertible Preferred Shares listed in the Amendment to
the Articles of Incorporation filed on April 19, 1999
3.(i).6 [4] Certificate of Amendment of the Articles of Incorporation
designating the preferences, limitations and relative rights of
Series B Preferred Stock
3.(ii).1 [1] Bylaws of Nova Enterprises, Inc.
4.1 [1] Form of Private Placement Offering of 1,600,000 common shares at
$0.01 per share.
4.2 [1] Form of Private Placement Offering of 992,500 common shares at
$1.00 per share.
4.3 [1] Form of Private Placement Offering of 100,000 common shares at
$0.50 per share.
4.4 [1] Form of Private Placement Offering of 1,000,000 common shares at
$0.15 per share.
4.5 [1] Form of Private Placement Offering of 1,250,000 common shares at
$0.40 per share.
4.6 [1] Form of Private Placement Offering of 104 Units at $25,000.00
per unit.
4.7 [1] Form of Promissory Note for Private Placement Offering of 104
Units at $25,000 per unit.
4.8 [1] Form of Warrant for Private Placement Offering of 104 Units at
$25,000 per unit.
5.1 * Opinion of Jennings, Strouss & Salmon P.L.C.
10.1 [1] Agreement dated March 1998 with Nova Enterprises, Inc.
10.2 [1] Agreement dated April 1999 with Independent Network Services.
10.3 [1] Agreement dated February 1998 with Natural MicroSystems
Corporation.
10.4 [1] Agreement dated June 1999 with ICG Telecom Group, Inc.
10.5 [1] Agreement dated August 1999 with RSL Com U.S.A., Inc.
10.6 [1] Agreement dated July 1999 with Star Telecommunications, Inc.
10.7 [1] Agreement dated August 1999 with ILD Communications, Inc.
10.8 [1] Agreement dated June 1999 with Level 3 Communications LLC.
10.9 [1] Agreement dated August, 1999 with Worldcom Technologies, Inc.
10.10 [1] Agreement dated March 1999 with Teleco Service International,
Inc.
10.11 [1] Agreement dated March 1999 with Billion Telecommunication
Services, Ltd.
10.12 [1] Agreement dated May 1999 with Firstnet Telephany Ltd.
10.13 [1] Agreement dated July 1999 with MetroPlus Communication
Technology, Inc.
10.14 [1] Agreement dated February 1999 with BlueGrass Net.
10.15 [1] Agreement dated July 1998 with The Armstrong International
Group, Inc.
10.16 [1] Agreement dated February 1999 with International Investment
Partners, Ltd.
10.17 [1] Agreement dated March 1999 with Kenneth M. Brown
10.18 [1] Agreement dated April 1999 with Netgenie.com LLC
10.19 [1] Agreement dated April 1999 with Benae International Inc.
10.20 [1] Consulting Agreement dated November 1997 with Condor Worldwide,
Ltd.
10.21 [1] Consulting Agreement dated July 1998 with Calpe, Ltd.
10.22 [1] Consulting Agreement dated July 1998 with The Investor
Communications Group, Inc.
10.23 [1] Consulting Agreement dated July 1998 with Corporate Imaging.
10.24 [1] Consulting Agreement dated September 1998 with First Capital
Partners, Inc.
10.25 [1] Consulting Agreement dated October 1998 with International
Investment Partners, Ltd.
10.26 [1] Consulting Agreement dated October 1998 with Insidestock.com,
Inc.
10.27 [1] Consulting Agreement dated March 1999 with Buying Power Network.
10.28 [1] Employment Agreement dated April 1998 with Barbara S. Will.
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
Item No. Description
-------- ----- -------------------------------------------------------------------------------------------------------
<C> <C> <S>
10.29 [1] Employment Agreement dated April 1998 with Anthony K. Welch.
10.30 [1] Employment Agreement dated April 1999 with Peter M. Stazzone.
10.31 [1] Lease effective August 1, 1999 for Phoenix offices
10.32 [1] Employment Agreement dated November 10, 1999 with Harry R. Bowman
10.33 [2] Memorandum of Understanding between the Company and Telic.net dated November 17, 1999
10.34 [2] Executive Incentive Stock Awards Plan adopted by Shareholders on December 9, 1999
10.35 [3] Engagement Letter dated November 24, 1999 with McGinn, Smith & Co., Inc.
10.36 [3] Engagement Letter dated February 16, 2000 with Delano Group Securities
10.37 [3] UUNET Agreement dated December 15, 1999
10.38 [3] Equipment Lease dated January 20, 2000 with International Investment Partners
10.39 [3] Professional Service Agreement dated October 8, 1999 with Natural Microsystems Corp.
10.40 [3] Apartment Rental Agreement effective November 1, 1999
10.41 [3] Telephone Equipment Lease/Purchase Agreements dated December 10, 1999
10.42 [3] Amended 2000 Stock Plan
10.43 [4] Agreement dated March 30, 2000 with Condor Worldwide, Ltd.
10.44 [4] Promissory Note dated May 5, 2000 and Pledge and Security Agreement
10.45 [4] Agreement dated May 5, 2000 with Condor Worldwide, Ltd., James K. Howson, Anthony Welch,
Barbara Will and IPVoice.com
10.46 [5] Augustine Fund, L.P. -- Securities Purchase Agreement including all exhibits
10.47 [5] The Shaar Fund, Ltd. -- Securities Purchase Agreement including all exhibits
10.48 [6] Employment Agreement dated April 2000 with J. Michael Scott
10.49 [6] Service Agreement dated May 15, 2000 with Telic Communications, Inc.
10.50 [6] Financial and Business Management Consulting Agreement dated June 1, 2000 with Growth Capital Resources.com LLC
10.51 [6] Collocation Agreement dated June 23, 2000 with Intermedia Communications Inc.
10.52 [6] Service Agreement dated June 29, 2000 with Telecom Compliance Services, Inc.
10.53 * Office Lease Agreement dated July 10, 2000 with Cornwell Corporation
10.54 * Support Agreement dated July 28, 2000 with Sepsesi, Inc.
23.1 * Consent of Durland & Company, CPAs, P.A.
24.1 * Power of Attorney (included on signature page)
27.1 * Financial Data Sheet
99.1 [5] Press Release issued by the Registrant on May 24, 2000 entitled "IPVoice.com, Inc. Finalizes $2.5 Million
Funding Led by Augustine and Schaar Funds"
</TABLE>
[1] Previously filed with the Company's Form 10SB filed November 3, 1999
[2] Previously filed with the Company's Form 10QSB for the Quarter ended
September 30, 1999
[3] Previously filed with the Company's Form 10KSB/A for the fiscal year ended
December 31, 1999
[4] Previously filed with the Company's Form 10QSB for the Quarter ended
March 31, 2000
[5] Previously filed with the Company's Form 8K filed June 16, 2000
[6] Previously filed with the Company's Form 10QDSB for the Quarter ended
June 30, 2000
(* Filed herewith)
