AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 2000
Registration No. 333-86031
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
PHON-NET.COM, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Florida 7372 98-0198225
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
750 West Pender Street
Suite 600
Vancouver, British Columbia V6C 2T7
(604) 437-3787
(Address and Telephone Number of Principal Executive Offices)
-------------------------
Brian Collins
750 West Pender Street
Suite 600
Vancouver, British Columbia V6C 2T7
(604) 437-3787
(Name, Address and Telephone Number of Agent For Service)
------------------------------
Copies of all communications to:
Steven I. Weinberger, Esq.
Atlas Pearlman, P.A.
350 East Las Olas Boulevard, Suite 1700
Fort Lauderdale, FL 33301
Telephone: (954) 763-1200
Facsimile No. (954) 766-7800
Approximate Date of Proposed Sale to the Public: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please 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 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. |_|
i
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<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Maximum Maximum
Class of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered Per Security Offering Price(1) Registration Fee(1)
-------------------- --------------- ---------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share 5,785,000 $0.20(1) $1,157,000 $321.65(2)
Common Stock, par value
$.001 per share 1,230,000(3) $3.56 $4,378,800 $1,271.31
Common Stock, par value
$.001 per share(4) 1,000,000(5) $.40 $400,000 $111.20
Common Stock, par value
$.001 per share(4) 1,000,000(5) $1.00 $1,000,000 $278.00
---------
Total Registration Fee $1,928.16
=========
</TABLE>
--------------------------
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457. Based upon the average of the closing bid and
asked prices for the common stock on August 25, 1999.
(2) Fee previously paid.
(3) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457. Based upon the average of the closing bid and
asked prices for the common stock on February 28, 2000.
(4) Shares issuable upon exercise of options.
(5) Fee based upon exercise price of 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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
ii
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Subject to Completion June 12, 2000
PROSPECTUS
PHON-NET.COM, INC.
9,015,000 SHARES OF COMMON STOCK
This prospectus covers the 9,015,000 shares of common stock of
Phon-Net.com, Inc. being offered for resale by certain selling securityholders.
We will not receive any proceeds from the sale of the shares by the selling
securityholders.
Our common stock is traded over-the-counter, in the pink sheets, under
the trading symbol "PNET". On June 7, 2000, the closing price for our common
stock was $.85.
----------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------
The date of this prospectus is ____________, 2000
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
Phon-Net.com, Inc. develops and markets software products primarily to
benefit Internet users, persons and businesses who operate Internet web sites
and advertisers on the Internet. Our two current products incorporate Direct
Connect, our patent- pending software that enables an Internet user whose
computer modem and telephone share a single phone line to establish telephone
contact with the web site operator or advertiser without disconnecting the
computer's modem. Following completion of the call, computer contact with the
web site is seamlessly reconnected. We have recently entered into distribution
and license agreements for the marketing of our products in the United States,
Canada, Australia and New Zealand. We have not yet generated revenues from
product sales.
Our executive offices are located at 750 West Pender Street, Suite 600,
Vancouver, British Columbia V6C 2T7, and our telephone number is (604) 437-3787.
References throughout this prospectus to "we", "us" and "our" are to
Phon-Net.com, Inc. and its subsidiaries.
THE OFFERING
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<CAPTION>
<S> <C>
Common Stock Outstanding:
Prior to the Offering .................................... 40,759,430 shares
After the Offering ...................................... 42,759,430 shares, including 2,000,000
shares covered by this prospectus that are
issuable upon exercise of options
Common Stock Reserved ........................................ 5,430,000 shares issuable upon exercise
of options that have been granted, and
2,829,750 shares issuable upon
conversion of promissory notes and
exercise of warrants issuable upon
conversion (including up to 257,250 shares
attributable to the conversion of accrued interest)
</TABLE>
2
<PAGE>
SELECTED FINANCIAL DATA
The following summary of our financial information has been derived
from our audited financial statements that are included in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended July 31, January 31,
----------------------------- -----------------------
1999 1998 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 43,867 $ 120,904 $ 1,771 $ 28,856
Operating Expenses $ 6,080,025 $ 708,989 $ 2,375,790 $ 333,517
Net (Loss) $(6,036,158) $(588,085) $(2,374,019) $(304,661)
Net (Loss) Per Share $ (0.36) $ (0.06) $ (0.07) $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
January 31, July 31,
2000 1999
---------- -------
<S> <C> <C>
Working Capital
(Deficit) $ 187,117 $ (30,903)
Total Assets $1,235,334 $1,291,254
Current Liabilities $162,289 $247,893
Notes Payable $214,936 $ -0-
Shareholder's Equity
(Deficit) $ 858,109 $1,043,361
</TABLE>
3
<PAGE>
RISK FACTORS
SINCE WE ONLY BEGAN TO MARKET OUR PRODUCT DURING THE THIRD QUARTER OF 1999, OUR
OPERATING HISTORY IS LIMITED AND OUR FUTURE PERFORMANCE MAY BE DIFFICULT TO
ASSESS
We began marketing our first product during the third quarter of 1999.
Accordingly, we have a limited operating history upon which you can evaluate our
performance. Before investing in our common stock, you should consider the risks
and difficulties we may encounter as an early-stage company in the new and
rapidly evolving e-commerce market.
WE ANTICIPATE THAT WE WILL BEGIN TO GENERATE FEE INCOME IN MID-2000, BUT TO THE
EXTENT EXPENSES EXCEED OUR REVENUES, OUR CONTINUED NET LOSSES COULD HINDER OUR
ABILITY TO OBTAIN ADDITIONAL FINANCING
We anticipate that we will begin to receive material license fee
revenues from our product distributors during the middle of calendar year 2000.
Our operations, particularly product development and marketing, are capital
intensive, and our growth will consume a substantial portion of our available
working capital. Prior to our receipt of license fee revenues, we will be
required to fund our operations through borrowings and sales of our securities,
the required amount of which will depend upon the timing and rate at which we
are able to generate revenues from operations. For the fiscal years ended July
31, 1999 and 1998, we experienced net losses of $(6,036,158) and $(588,085),
respectively. To the extent that additional funding is required to implement our
business plans, our net losses may make obtaining additional funding more
difficult and we may be required to accept funding on terms less favorable to us
than had we achieved profitable operations.
IF THE MARKETING EFFORTS OF THIRD PARTIES TO WHOM WE HAVE GRANTED DISTRIBUTION
RIGHTS ARE NOT SUCCESSFUL, WE CANNOT ACHIEVE PROFITABILITY
We have granted third parties the right to license and distribute our
Direct Connect software in the United States, Canada, Australia and New Zealand.
We intend to grant additional distribution arrangements in other parts of the
world. These marketing arrangements enable us to take advantage of the existing
broad customer bases of our distributors, without expending the financial and
other resources we would be required to expend in order to develop our own
customer base. As a result of these distribution arrangements, we are dependent
on the efforts of third party distributors of our revenues. To the extent that
third party distributors are delayed or unsuccessful in marketing Direct
Connect, we will not achieve market penetration of our product and our financial
condition will be adversely affected.
DURING THE LAG TIME BETWEEN OUR EXECUTION OF DISTRIBUTION AGREEMENTS, THE
DEVELOPMENT OF RELATED MARKETING PROGRAMS AND OUR RECEIPT OF FEES FROM THOSE
AGREEMENTS, WE MAY REQUIRE ADDITIONAL FUNDING IN ORDER TO SUSTAIN OUR OPERATIONS
4
<PAGE>
We have entered into several agreements granting third parties the
right to market our Direct Connect product. There will be a time delay between
the time we signed those agreements and our receipt of fee income from the
agreements. We anticipate that fee income will begin to be generated during the
middle of calendar year 2000. The development of marketing programs by our
distributors, and the time of marketing efforts, are out of our control.
However, we may need additional funding prior to our receipt of sufficient fee
income in order for us to sustain our operations. We cannot predict whether
additional funding, if needed, will be available to us on favorable terms.
THE LICENSE AND DISTRIBUTION AGREEMENTS WE HAVE ENTERED INTO GENERALLY PROVIDE
FOR SHORT INITIAL TERMS, AND IF THEY ARE NOT RENEWED UPON EXPIRATION, WE WILL BE
FORCED TO EXPEND ADDITIONAL TIME AND EXPENSE IN ORDER TO DEVELOP NEW MARKETING
ALLIANCES AND CAPABILITIES
Most of the license and distribution agreements we have entered into
provide for an initial term of one year. Upon expiration of the initial term,
the other parties to the agreements generally have the ability to renew the
agreements. If one or more of the agreements is not renewed, we will be forced
to seek other parties to replace the non-renewing parties. This could delay our
penetration of the markets covered by the agreements that are not renewed, and
could serve to delay our receipt of revenues from the territories covered by
those agreements. We do not know whether any of our license and distribution
agreements will be renewed upon expiration of their initial terms.
OUR DIRECT CONNECT SOFTWARE IS DESIGNED EXCLUSIVELY FOR CONSUMERS AND BUSINESSES
THAT USE THE INTERNET, AND OUR PROSPECTS FOR SUCCESS DEPEND UPON THE CONTINUED
USE AND ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR COMMERCE
Direct Connect was developed as a tool for consumers and business who
engage in e- commerce. The e-commerce marketplace is a new and emerging market.
Revenues to be derived by us from Direct Connect license fees depends upon
continued use of the Internet and growth of e-commerce. We cannot predict
whether acceptance and use of the Internet will continue to develop, or that a
sufficiently broad base of consumers will adopt, and continue to use the
Internet as a method of commerce.
WE RELY ON A SINGLE TECHNOLOGY AND OUR LACK OF PRODUCT DIVERSIFICATION COULD
HEIGHTEN THE EFFECTS OF ANY SETBACKS WE SUFFER
Our two products rely upon the same technology. In the event of
unforeseen adverse events in the development, enhancement, marketing or
acceptance of Direct Connect, we will be unable to ameliorate its effects by
relying upon sales of other products. While we are developing a limited number
of other products, we do not currently know when they will generate revenues, or
whether they can be successfully marketed.
5
<PAGE>
AS A RESULT OF OUR LIMITED OPERATING HISTORY, WE HAVE NOT YET UNDERGONE THE
SIGNIFICANT MANAGERIAL AND INTERNAL EXPANSION THAT WE EXPECT WILL OCCUR, AND OUR
INABILITY TO MANAGE GROWTH COULD HURT OUR RESULTS OF OPERATIONS
Expansion of our operations will be required to address anticipated
growth of our customer base and market opportunities. Expansion will place a
significant strain on our management, operational and financial resources.
Currently, we have only a limited number of employees, and we will need to
improve existing and implement new transaction processing, operational and
financial systems, procedures and controls, and to expand, train and manage our
employee base. We also will be required to expand our finance, administrative
and operations staff, and to enter into relationships with various strategic
partners, web site owners and operators, product manufacturers and distributors
and other online service providers and other third parties we deem necessary to
develop our business. Our failure to manage growth effectively could have a
damaging effect on our business, results of operations and financial condition.
RESALES UNDER THIS PROSPECTUS WILL MORE THAN DOUBLE THE NUMBER OF SHARES IN THE
PUBLIC MARKET, RESULTING IN MARKET PRESSURE THAT MAY CAUSE THE PRICE FOR OUR
SHARES TO DROP OR REMAIN AT LOW LEVELS
Prior to this offering, approximately 7,500,000 shares of our common
stock were freely tradeable in the public market. The addition to the public
market of the 9,015,000 shares covered by this prospectus could cause the market
price of our shares to fall or remain at lower levels.
The sale, or availability for sale, of a substantial number of shares
of common stock in the public market subsequent to the offering under Rule 144
under the Securities Act or this prospectus or otherwise, could have a major
negative effect on the market price of our common stock. It could also limit our
ability to raise additional capital from the sale of our equity securities or
debt financing.
CAPITALIZATION
The following table sets forth our capitalization as of January 31,
2000. The table should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this prospectus. The table
does not give effect to:
o the issuance of up to 5,430,000 shares in the event options
that have been granted, are exercised;
o the issuance of up to 2,829,750 shares in the event
outstanding promissory notes are converted and common stock
purchase warrants issuable upon conversion, are exercised
(including up to 257,250 shares attributable to the conversion
of accrued interest); and
o the issuance of 1,432,000 shares subsequent to January 31,
2000.
6
<PAGE>
<TABLE>
<CAPTION>
January 31, 2000
----------------
<S> <C>
Convertible notes and
notes payable $214,936
----------
Shareholder's equity (deficit):
Common Stock, $.001 par value,
80,000,000 shares authorized,
39,327,430 shares issued and
outstanding $1,139,890
Preferred Stock, $.01 par value,
10,000,000 shares authorized,
no shares issued or outstanding - 0 -
Additional paid-in capital $9,184,295
Accumulated deficit (9,399,331)
Other (66,745)
----------
Total shareholder's equity $ 858,109
----------
Total capitalization $2,127,565
==========
</TABLE>
USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
securityholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our shares of common stock are traded over-the-counter and, until May
24, 2000, were quoted on the OTC Electronic Bulletin Board under the symbol
"PNET". Since May 24, 2000, our shares are traded over-the-counter, in the pink
sheets. The reported high and low bid prices for the common stock are shown
below for the period from inception of trading in April 1998 through March 31,
2000. The closing price on June 7, 2000 is also shown. Until January 1998, the
symbol for our common stock was "XGAG". The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not represent
actual transactions.
7
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<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
April 1, 1998 - June 30, 1998 $3.25 $.75
July 1, 1998 - September 30, 1998 $2.375 $.0625
October 1, 1998 - December 31, 1998 $.37375 $.0625
January 1, 1999 - March 31, 1999 $1.50 $.12
April 1, 1999 - June 30, 1999 $.69 $.19
July 1, 1999 - September 30, 1999 $.41 $.19
October 1, 1999 - December 31, 1999 $.81 $.07
January 1, 2000 - March 31, 2000 $8.47 $.73
June 7, 2000 $.85
</TABLE>
We have never paid cash dividends on our common stock. We intend to
keep future earnings, if any, to finance the expansion of our business, and we
do not anticipate that any cash dividends will be paid for the foreseeable
future. The future dividend policy will depend on our earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
The market for securities of Internet-related technology companies and
companies that participate in emerging markets historically has been more
volatile than the market for stocks in general. The price of our common stock
may be subject to wide fluctuations in response to the following and other
factors:
o quarter-to-quarter variations in our operating results;
o our announcement of material events that affect our business;
o price fluctuations in sympathy to others engaged in our industry; and
o the effects of coverage of our business or our management by the
press.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Depending on
market fluctuations, our common stock would be considered a "penny stock". As a
result, it may be subject to rules that impose additional sales practice
requirements on broker-dealers who sell these securities to persons other than
established customers and accredited investors. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of our securities. In addition he must receive the purchaser's
written consent to the transaction prior to the purchase. He must also provide
certain written disclosures to the purchaser. Consequently, the "penny stock"
rules may restrict the ability of broker/dealers to sell our securities, and may
negatively affect the ability of holders of our shares to resell them.
8
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus discuss further expectations
or state other forward-looking information. Those statements are subject to
known and unknown risks, uncertainties and other factors that could cause our
actual results to differ materially from those contemplated by the statements.
Factors that might cause a difference include, but are not limited to, those
discussed in "Risk Factors" and elsewhere in this prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Fiscal Year Ended July 31, 1999 Compared to Fiscal Year Ended July 31, 1998
For the fiscal year ended July 31, 1999, we generated revenues of
$43,867, a 64% decrease from revenues of $120,904 for the fiscal year ended July
31, 1998. This decrease was primarily caused by a shift in our focus to
development and beta testing of our Direct Connect software.
For the 1999 fiscal year, we incurred a net loss of $(6,036,158)
approximately $(.36) per share, compared to a net loss of $(588,085) or
approximately $(.06) per share for the 1998 fiscal year. The 926% increase in
our net loss was primarily attributable to reduced revenues and expenses we
incurred in developing, testing and preliminary marketing and promotion
activities relating to Direct Connect.
Expenses of $6,080,025 for the year ended July 31, 1999 reflect an
increase of 751% over expenses of $708,989 incurred during the fiscal year ended
July 31, 1998. This increase in expenses results mainly from increased
advertising and promotion costs and management salaries and professional fees,
as well as travel expenses related to sales and marketing efforts, for the most
recent fiscal year.
Six Months Ended January 31, 2000 Compared to Six Months Ended January 31, 1999
For the six months ended January 31, 2000, we generated revenues of
$1,771, a 94% decrease from revenues of $28,856 for the six months ended January
31, 1999. This decrease was primarily caused by the time lag between our
entering into license and distribution agreements, the development of related
marketing programs and our receipt of revenues from those activities. In light
of the license and distribution agreements we have entered into, we do believe
that we will achieve substantial revenue growth and that historic revenues are
not indicative of future operating results.
9
<PAGE>
For the 2000 third quarter, we incurred a net loss of $(2,374,019) or
approximately $(.07) per share, compared to a net loss of $(304,661) or
approximately $(.03) per share for the 1998 fiscal quarter. The 679% increase in
our net loss resulted from lower revenues due to the time lag described in the
preceding paragraph, and the wind-down of beta sales of products previously
under development, as well as higher development costs attributable to new
products.
Expenses of $2,374,019 for the six months ended January 31, 2000
reflect an increase of 612% over expenses of $333,517 incurred during the six
months ended January 31, 1999. This increase in expenses results mainly from
increased development costs associated with our Internet software product.
LIQUIDITY, CAPITAL RESOURCES AND PLAN OF OPERATIONS
As of July 31, 1999 and 1998, our auditors indicated in their audit
report that our net loss and working capital deficit raised substantial doubt
that we would be able to continue as a going concern.
To date, we have funded our cash requirements from limited revenues
from operations and from the sale of shares of our common stock. As of January
31, 2000, we had cash reserves of approximately $187,117, and working capital of
$1,204,683. While we anticipate that revenues from Direct Connect license fees
will commence in mid-2000, we have not yet generated Direct Connect license fee
revenues. Moreover, our distributors are expected to begin their marketing
programs over the next sixty days, and we cannot predict, with any degree of
certainty, if and when a revenue stream may actually commence.
Our operations through fiscal 1999 were related to the interactive real
estate and professional listing service conceived by our subsidiary, and not to
our current products and services. Our historic business and results of
operations should not be viewed as indicative of future operations. While little
or no revenues are currently being generated from contracts relating to our
interactive real estate and professional listing service, the viability of the
service has been established and we are not discontinuing its operation.
However, we are currently focusing our marketing efforts on the launch of Direct
Connect, and we may not devote substantial resources to our listing service
until after the launch of Direct Connect is complete.
Our business model includes our establishing marketing agreements and
strategic alliances with companies who have access to large databases of
business directories. We believe that this strategy will enable us to reach our
target customer-web site operators and advertisers. In so doing, we will use the
database resources of a third party, without the time and expense of developing
and maintaining that resource. In furtherance of implementing our business
model, we have entered into distribution agreements with Volt Information
Sciences, Inc. G.T.C. Transcontinental Group Ltd. and Brocker Technology Group
(NZ) Limited These agreements are designed to generate revenues through
third-party marketing of our products. We have also commenced discussions with
other entities which we anticipate will result in similar agreements in the near
10
<PAGE>
future. We will continue to seek out strategic partners whose access to our
target customer base can increase our sales and profitability.
It is also possible that our proprietary Direct Connect software will
be of sufficient value to a third party to warrant an offer to acquire it. We
will consider all proposals designed to enhance shareholder values. Until such
time as we generate meaningful revenues, we will require additional funds in
order to fund our operations, including our payment of rent at our Vancouver
offices, the salaries of our executive officers and stock appreciation to the
extent required to be paid to Mr. Collins. If we are unable to generate
sufficient revenues and proceeds from the sale of our securities, we may be
required to borrow funds to sustain our operations. We are engaged in active
discussions with several lenders to secure interim funding. None of these
discussions has yet resulted in our receipt of financing. We may not be able to
secure financing on acceptable terms.
YEAR 2000 ISSUE
The year 2000 issue relates to whether computer systems will properly
recognize and process information relating to dates in and after the year 2000.
These systems could fail or produce erroneous results if they cannot process
dates beyond the year 1999 and are not corrected. We have reviewed all software
and hardware used internally by us and have determined that they are year 2000
compliant and as of the date of this prospectus, we have not experienced any
disruptions of or failures in our day-to-day operations as a result of the
transition to calendar year 2000. Moreover, we were not required to expend
material sums in order to assure that our systems are year 2000 compliant. We
have also confirmed that the computer systems of third parties with whom we have
material relationships were not materially impacted by the year 2000 issue.
BUSINESS
We are a Florida corporation that develops and markets software
products that primarily benefit Internet users, persons and businesses who
operate Internet web sites and advertisers on the Internet. We currently have
two products. One is our "Phon-Net Direct Connect" software. The other is our
"Phon-Net Search Engine".
PHON-NET DIRECT CONNECT
Direct Connect provides increased capability to the Internet user whose
computer and telephone share the same phone line. A visitor to an Internet web
site can establish telephone contact with the web site operator or web site
advertiser, while continuing to view the web site. Among the features of Direct
Connect are that:
o the computer's modem connection is not disconnected during a
Direct Connect telephone call;
11
<PAGE>
o web site operators and advertisers can increase e-commerce
revenues by additional sales assisted by telephone
communication between the Internet consumer and the web site
retailer;
o security risks are reduced by providing personal and credit
card data by telephone, rather than transmitting it over the
Internet;
o following termination of a Direct Connect telephone call,
computer contact with the web site is seamlessly
reestablished; and
o the software is licensed by us to the web site operator or
advertiser - we retain all ownership rights - and it is free
to the consumer.
Our experience leads us to believe that security concerns, primarily
the transmission of personal and credit card information over the Internet, have
prevented Internet commerce from achieving widespread acceptance as a method of
commerce. A significant advantage that Direct Connect provides for Internet
commerce is that credit card payment may be made during the telephone portion of
the transaction, rather than transmitting personal and credit card information
over the Internet.
Direct Connect is currently available directly from us at our web site,
as well as through distributors who market Direct Connect along with their own
Internet related products and services. We license our Direct Connect software
to businesses. At the time of purchase, the customer is provided with a password
that allows the customer to download the information directly to its web site.
Our customers license Direct Connect for an initial one year license fee of $99.
After the expiration of one year, Direct Connect has a mechanism that makes it
inoperable unless the customer renews the license. Prior to the end of the year,
an E-Mail is sent to the customer advising that the license will terminate and
that the customer can then renew the license on a year to year basis.
A Direct Connect software function routes all telephone calls using
Direct Connect through a central computer server. This enables us to:
o activate a customer's initial use of Direct Connect;
o monitor usage to ensure that only licensed customers are
using Direct Connect;
o monitor the termination dates of customers' licenses so they
may be notified that it is time to renew; and
o gather data concerning usage of direct connect.
We currently use the services of Netcom Canada Inc. of Toronto, Canada,
to host our central server. We pay Netcom a fee for its services on an invoice
basis, however, there are numerous companies that provide server host services
and we are not dependent upon Netcom for this purpose.
12
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PHON-NET SEARCH ENGINE
Our other product is the Phon-Net Search Engine. The Search Engine
incorporates Direct Connect and functions as a yellow pages. This product
enables the user to search the world wide web and a local interactive telephone
database for a desired business listing. Once the business is identified and its
telephone number is found, the user can command Direct Connect to contact the
party by telephone.
Our Search Engine provides a service to consumers seeking to locate a
business. It is also designed to enable businesses to expand their presence in
the marketplace and to enable them to provide desired information to consumers
seeking their services. We intend to market the Search Engine to businesses for
an annual fee, including a license fee for Direct Connect.
We have beta-tested our Search Engine in Vancouver for over twelve
months. In November 1999, we delivered a customized Search Engine to Wazzu
Corporation under our agreement with them, for marketing to their customer base.
A description of our agreement with Wazzu is contained below.
PRODUCT DEVELOPMENT
On January 6, 1999, we entered into an agreement with Quad-Linq
Software, Inc., under which Quad-Linq agreed to develop, maintain, support and
upgrade our Direct Connect software, the concept for which was created by Brian
Collins. For its services, Quad-Linq was to acquire a 49% interest in the
software, and 49% of the net revenues from sales of the software. Under a June
30, 1999 amendment to the original agreement, Quad-Linq relinquished its
ownership interest in the software, as well as its percentage of net revenues
from sales of the software, in exchange for which we issued 1,000,000 shares of
our common stock to Quad-Linq and an additional 2,000,000 shares to three of its
principals. We also granted options for an additional 1,000,000 shares to
Quad-Linq and 1,000,000 shares to the three principals. The options are
exercisable at $.40 per share, until June 30, 2001. Under the amendment,
Quad-Linq also agreed to provide on-going service and support for the software.
In late 1999, we were advised that Quad-Linq had dissolved, and as a
result, Quad-Linq would not be able to perform under the January 6, 1999
agreement, as amended. Therefore, on December 3, 1999, we entered into an
agreement with Christopher Georgelin and Roger Betterton, two of the former
principals of Quad-Linq. Under this agreement, Messrs. Georgelin and Betterton
assumed the obligations of Quad-Linq under the June 30, 1999 amendment. No
additional consideration was paid to Messrs. Georgelin and Betterton, as they
had been assigned the 1,000,000 shares and 1,000,000 options previously paid to
Quad-Linq.
On February 2, 2000, we commissioned Quad-Linq Systems Inc., a
corporation recently formed by Messrs. Georgelin and Betterton, to develop a two
telephone line version of Direct
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<PAGE>
Connect. For its services, we agreed to pay Quad-Linq Systems $54,000, of which
$36,000 has been paid.
SALES AND MARKETING
We are actively marketing Direct Connect using several strategies to
reach Internet web site operators. The target market for Direct Connect
includes:
o web site operators;
o businesses that advertise on web sites;
o businesses that create and/or host web sites for others;
o distributors and resellers who "bundle" our software with
other Internet-related software products;
o developers of Internet-related software products, for
incorporation into their products; and
o resellers who believe that Direct Connect offers a viable
alternative to e-commerce security concerns.
We market Direct Connect through exclusive and non-exclusive
territorial licenses granted to third parties with whom we have contracted.
UNITED STATES: In September 1999, we entered into an agreement with
Wazzu Corporation to serve as a non-exclusive distributor of our Direct Connect
software throughout the United States. Wazzu is a California-based web page
designer and host and distributor of e- commerce solutions. We agree to assist
Wazzu in promoting our Direct Connect software to its customer database, by
offering an initial six months' use of Direct Connect without charge. Wazzu will
pay us a $99 annual license fee, for each customer who agrees to license Direct
Connect on an annual basis following the initial six month promotional period.
Wazzu is permitted to provide additional services to its customers in
conjunction with sales of Direct Connect licenses and to charge its customers
directly for those added services. This marketing promotion exposed Direct
Connect to over 18,000 business web pages owners and operators; however, we have
not generated any revenues from annual license fees following the six month
promotional period. The agreement with Wazzu cannot be canceled prior to
September 8, 2000 without the mutual consent of the parties, except in the event
of uncured material breaches or a party's bankruptcy. We understand that Wazzu
is currently facing adverse financial difficulties. While neither party has
sought to cancel this agreement, it is uncertain at this time whether Wazzu will
be in a position to successfully market Direct Connect to its customer base.
On December 2, 1999, we entered into an exclusive license distribution
agreement with Volt Information Sciences, Inc. Volt, with executive offices
located in New York City, is a leading national provider of staffing services,
telecommunications and information solutions and electronic publication,
including telephone directories. This relationship will exploit the synergies
between our Phon-Net Search Engine with Direct Connect and Volt's directory of
United States business listings and other business database directories. The
agreement grants Volt the exclusive license to use, market, distribute and
sublicense our Phon-Net Direct Connect software throughout the United States,
subject to the terms of our agreement with Wazzu.
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<PAGE>
We are entitled to a license fee from Volt for each Direct Connect
license activated by reason of agreements established between Volt and its
customers and end-users. Volt is obligated to pay us license fees based upon its
receipt of payment from its customers and end- users, however, Volt must pay us
at least a pro-rated three month license fee irrespective of its actual receipt
of payment. License fees from Volt are payable monthly. We are also entitled to
receive 20% of all sales or license fees generated by Volt from the user
database arising by reason of our agreement with Volt. In the event Volt does
not sell average annual software licenses of at least 1,000,000 for any two
successive years of the agreement, we have the right to terminate exclusivity of
the license granted to Volt.
The term of our agreement with Volt is one year. Volt may renew the
agreement for additional successive one-year terms provided that it is not in
material default of the agreement and has paid us all fees it is required to pay
to us. The agreement may be terminated by either party following an uncured
breach of the agreement by the other party, or upon a party's liquidation,
bankruptcy or similar event. We have agreed to place the source code for Direct
Connect software into a third-party escrow depository account. The source code
may be released to Volt so that it can continue to use Direct Connect in the
manner provided in the agreement, in the event of our uncured material breach of
the agreement, or our bankruptcy, liquidation or similar event.
CANADA: In September 1999, we also entered into a license agreement
with G.T.C. Transcontinental Group Ltd., a Canadian corporation, and licensed
our Direct Connect software to Transcontinental. Transcontinental, which is
based in Montreal, publishes and markets interactive Internet and print media
business directories, newspapers and flyers, in strategic partnership with
companies including Bell Actimedia. The agreement grants Transcontinental the
non-exclusive right to use, market and sublicense Direct Connect in Canada,
throughout the two year initial, and one year renewal term of the agreement. We
will receive a license fee from Transcontinental for each Direct Connect
software license we activate as a result of a product sale by Transcontinental.
We have agreed to deposit the source code for Direct Connect with a
trust company, and to grant Transcontinental access to the source code in the
event of our bankruptcy, insolvency or breach of the agreement. The agreement
may be terminated by either party in the event of an uncured breach, after
notice, by the other party. The agreement will terminate without notice in the
event of the dissolution or bankruptcy of a party.
AUSTRALIA AND NEW ZEALAND: On December 9, 1999, we entered into two
License Agreements with Brocker Technology Group (NZ) Limited, a publicly-held
New Zealand corporation. One license agreement covers New Zealand and the other
covers Australia. The agreements grant Brocker the exclusive license to use,
market, distribute and sublicense our Phon-Net Direct Connect software
throughout Australia and New Zealand. We understand that Brocker has established
relationships with Telecom New Zealand and Telstra in Australia, that
15
<PAGE>
will provide Brocker with access to a large segment of the New Zealand and
Australian market for Direct Connect.
We are entitled to a license fee from Brocker for each Direct Connect
license activated for Brocker. License fees from Brocker are payable quarterly.
We also share ownership with Brocker of the user database arising by reason of
our license agreement with Brocker. The term of our agreement with Brocker is
one year, upon expiration of which, Brocker may renew the agreement for one
additional year. The agreement may be terminated by either party following an
uncured breach of the agreement by the other party, or upon a party's
liquidation, bankruptcy or similar event. We have agreed to deposit a current
version of the source code for Direct Connect software with a third-party trust
company. The source code may be released to Brocker so that it can continue to
use Direct Connect in the manner provided in the agreement, in the event of our
uncured material breach of the agreement, or our bankruptcy, liquidation or
similar event.
COMPETITION
The market for online commerce over the Internet is new, rapidly
evolving and intensely competitive. Competition will likely increase in the
future. Barriers to entry are relatively low, and current and new competitors
can launch new sites at a relatively low cost using commercially available
software.
We do not believe there is any software product currently available or
under development that performs the functions of our Direct Connect software. To
the extent that Direct Connect receives patent protection, it is our
understanding that substantially new technology must be developed in order for a
third party to market software that performs the primary functions of Direct
Connect.
Our Phon-Net Search Engine will compete with a wide range of
interactive and printed business directories, including those published and/or
marketed by large regional telephone companies such as the Baby Bells and their
affiliates. Interactive search engine directories have become increasingly
popular, and we anticipate that continued competition for our Search Engine will
come from Internet-related and technology companies. These companies are
substantially larger and have greater financial and other resources that we
have. We believe that we can compete successfully with other search engine
directories because the Phon-Net Search Engine incorporates our proprietary
Direct Connect software.
PATENT APPLICATION
On October 27, 1999, we filed a patent application for our Direct
Connect software with the United States Patent and Trademark Office. The
application is entitled "Communications Method Allowing for Alternating Voice
and Data Connections Over a Single Line". In the event our application results
in a patent being issued, the ability of others to develop technology that
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<PAGE>
performs substantially similar functions will be limited. However, the
application and review process can take considerable time and we are unable to
predict whether a patent for Direct Connect will issue.
GOVERNMENT REGULATION
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. We believe we are currently
in compliance with such laws and that they will not have a material impact on
our operations. Moreover, there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, we expect that laws and
regulations will be adopted. The enactment of any such laws or regulations in
the future may slow the growth of the Internet, which could in turn decrease the
demand for our services and increase our cost of doing business or otherwise
have an adverse effect on our business, results of operations and financial
condition.
CORPORATE HISTORY
Phon-Net.com, Inc. is a corporation organized under the laws of the
State of Florida on January 16, 1997, under the name XGA Golf International,
Inc. XGA Golf was formed for the purpose of acquiring three companies engaged in
various aspects of the golf and golf-travel industries. However, these
acquisitions were not completed. In June 1998, XGA Golf changed its name to
Agrosol, Inc. From June 1998 until October 1998, XGA Golf could be considered a
shell company seeking to acquire an operating business. Its officers and
directors during this period were Lana Bea Turner, Eric Redd and Steven Dadson.
Its principal shareholders at the time were Eric Redd, John Canavan, Dorothy A.
Cleveland and Richard Dibona.
Piedmont Technologies, Inc. was organized under the laws of British
Columbia on March 18, 1996. Phon-Net Corp. was organized under the laws of the
State of Nevada on August 28, 1998. Effective October 5, 1998, Piedmont was
reorganized to change its domicile from British Columbia to Nevada. The
reorganization was effected by Phon-Net Corp.'s acquisition of all of the
outstanding shares of Piedmont and its subsidiaries, The National-For-Sale Phone
Company and VNETT Enterprises Inc. At the time of the reorganization, Phon-Net
Corp. owned certain intellectual property developed by Brian Collins and
incorporated in various interactive voice and text products. At the time of the
reorganization, Piedmont, through its subsidiaries, had a Canadian operating
license for the technology that was owned by Phon-Net Corp. At that time, Brian
Collins was also an officer and director of Piedmont, and owned approximately
20% of Piedmont common stock. Following this transaction, Piedmont became a
wholly-owned subsidiary of Phon-Net Corp. and National and VNETT remain
wholly-owned subsidiaries of Piedmont.
On October 5, 1998, Agrosol, Inc. exchanged 11,410,000 shares of its
common stock, at an ascribed value of nil, for all of the outstanding shares of
Phon-Net Corp., and changed its name to Phon-Net Corporation. The assets we
acquired from Phon-Net Corp. at the time of the
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<PAGE>
share exchange consisted of ownership of the rights to our Phon-Net Direct
Connect and Phon- Net Search Engine, as well as the rights and assets of
Piedmont including the operations of National.
In January 1999, we changed our name to Phon-Net.com, Inc. On April 15,
1999, we increased the number of shares of common stock we are authorized to
issue to 80,000,000.
Currently, all ownership rights to our Direct Connect and Search Engine
products are owned by Phon-Net.com, Inc. Piedmont's operations are limited to
performing beta-testing of our products. National operates an interactive real
estate and professional listing service which, through an "800" telephone
number, allows users to access real estate listings, as well as providers of
related services such as real estate attorneys, surveyors and title companies.
National's operations are not currently material to our business or financial
condition. VNETT owns the rights to a search engine concept that enables users
to locate and reserve video tapes from retail video rental locations. VNETT is
not currently engaged in active operations.
EMPLOYEES
We currently employ seven people, six of whom are full-time employees,
in the following capacities: two executive officers, one administrative
employee, one sales and marketing person and two programmers. Our employees are
not represented by a collective bargaining unit. We believe relations with our
employees are good.
LEGAL PROCEEDINGS
We are not a party to any material legal proceeding, nor are any of our
officers, directors or affiliates a party adverse to us in any legal proceeding.
DESCRIPTION OF PROPERTY
On July 9, 1999, we entered into a three year lease for approximately
1,300 square feet of office space in Vancouver, British Columbia. We use this
space for our executive headquarters. The lease is for a term of three years
ending July 31, 2002, and we will pay the landlord monthly base rent of
approximately $889 (or $10,668 per year). We are also obligated to pay all
utility charges for our use of the space, as well as our proportionate share of
all operating expenses in the building. We are not permitted to assign or sublet
our lease without the landlord's prior written consent.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table includes the names, positions held and ages of our
executive officers and directors. All directors serve for one year and until
their successors are elected and qualify. Directors do not presently receive
compensation for their services as directors. Officers are elected by the Board
and their terms of office are, except as otherwise stated in employment
contracts, at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Brian Collins 44 Chairman of the Board of Directors,
Chief Executive Officer, President,
Chief Operating Officer, Secretary,
Treasurer and Director
Sloan Young 30 Vice President of Technology and
Operations
</TABLE>
Brian Collins has served as our Chief Executive Officer, President and
a Director since our acquisition of Phon-Net Corp., a Nevada corporation, in
October 1998. In 1998, Mr. Collins founded Phon-Net Corp., which owns the
intellectual property of its wholly-owned subsidiaries, Piedmont Technology,
Inc., a British Columbia corporation and National For Sale Phone, Inc., a
British Columbia corporation. Mr. Collins continues to serve as the President,
Chief Executive Officer and Chairman of Phon-Net Corp., Piedmont and National
For Sale Phone. In 1995, he founded Piedmont, which developed early versions of
our search engine product. In May 1993, Mr. Collins founded National, which
operates an interactive "1-800" real estate telephone channel coast-to-coast in
Canada.
Sloan Young has served as our Vice President of Technology and
Operations since October 1998. From 1993 until he joined us, Mr. Young was
employed as a restaurant manager for Cactus Club Cafe from November 1996 to June
1997, and Zachary's Restaurant from June 1995 to September 1996. He attended CDI
College of Business and Technology from September 1997 to November 1998 and
received a Programmer Analyst Diploma in 1998.
Board Committees: We do not as yet have an audit committee or a
compensation committee. We may organize these committees in the future.
Employment Agreements. Effective July 1, 1999, we entered into an
employment agreement with Brian Collins to serve as our President and Chief
Executive Officer for an initial three year term, with two renewal terms, each
for two years. If we decide not to renew, and we do not have cause for our
decision, we must pay Mr. Collins the equivalent of one year's
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<PAGE>
compensation. For his services, we pay Mr. Collins a salary of $150,000 each
year and provide a monthly automobile allowance of $700.
Our original agreement with Mr. Collins included our obligation to pay
Mr. Collins stock appreciation rights. These payments were to be calculated
based upon the difference between the market price of our stock at the beginning
and end of each year of the term of the employment agreement. Each annual one
dollar change in the price of our stock during each year of the agreement could
have required us to pay Mr. Collins an aggregate of $1,600,000 during the term
of the agreement. Greater than annual one dollar market price increases could
substantially increase our obligation to Mr. Collins, and could require us to
pay Mr. Collins substantial amounts attributable to his stock appreciation
rights at a time when our stock price may not be an accurate reflection of our
financial condition or results of operations, and when such payment could have a
material adverse effect on our financial condition.
Mr. Collins is our founder, and our future success depends upon his
services. In order to induce him to serve as our President and enter into the
employment agreement, we issued him 5,000,000 shares of our stock and granted
him options to purchase 2,000,000 additional shares. The options are exercisable
at $.40 each, until May 26, 2009.
In light of the uncertainty over our potential financial obligation
under the stock appreciation rights, on December 31, 1999, we agreed to issue
Mr. Collins 3,200,000 shares of our common stock, and Mr. Collins agreed to
relinquish any stock appreciation rights that were granted to him. Mr. Collins,
acting as an interested director, determined that the 3,200,000 shares was fair
to us in that:
o the 3,200,000 unregistered shares had a market value of
$1,664,000, based upon the closing price for our shares on
December 30, 1999;
o a one dollar rise in our stock price could have required us to
pay Mr. Collins $1,600,000 over the term of the stock
appreciation rights;
o our exposure for payment of stock appreciation rights to Mr.
Collins could be substantially higher than $1,600,000, to the
extent that our stock price increases; and
o the issuance of shares enables us to eliminate future
financial uncertainty under the stock appreciation rights.
Effective November 1, 1999, we entered into a three year employment agreement
with Sloan Young, our Vice President of Technology and Operations. Mr. Young's
salary is $55,000 for the first year, $59,500 for the second year and $66,000
for the last year of the term. We granted Mr. Young options to purchase 200,000
shares of our stock, exercisable at $.36 per share, which vest one-third each
year of the agreement, and expire on December 31, 2004. We also agreed to issue
Mr. Young 100,000 shares of our stock on each of November 1, 1999, 2000 and
2001. In addition, we have agreed to pay Mr. Young $1.00 for each Direct Connect
license sold, with such payment being made in the local currency of sale. We may
discontinue the payment of the $1.00 per license at any time, in our discretion.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information relating to the compensation
we paid during the past three fiscal years to our President and Chief Executive
Officer; and to each of our executive officers who earned more than $100,000
during the fiscal year ended July 31, 1999:
<TABLE>
<CAPTION>
Fiscal Other Annual LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Options/ (#) Payouts Compensation
--------------------------- ---- ------- ----- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Brian Collins, CEO 1999 $178,716 4,484,000 - 2,000,000 - -
1998 $52,926 - - - - -
1997 $21,899 - - - - -
</TABLE>
Bonus for the 1999 fiscal year consists of 5,000,000 shares of our
common stock, valued at $1,250,000, issued to Mr. Collins as an inducement for
him to enter into his employment agreement, as well as 8,085,000 shares, valued
at $3,234,000 issued for achieving certain development goals..
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning our grant of
options to purchase shares of our common stock and SARs during the fiscal year
ended July 31, 1999 to our President and Chief Executive Officer and to each of
our executive officers who earned more than $100,000 during the fiscal year
ended July 31, 1999.
<TABLE>
<CAPTION>
Percent of
Number of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price
Name Granted (#) Year ($/Sh) Expiration Date
---- ----------- ---- ------ ---------------
<S> <C> <C> <C> <C> <C>
Brian Collins, CEO 2,000,000 options 83% $.40 5/26/2009
1,600,000 SARs 100% $.36 2/15/2002
</TABLE>
Effective December 31, 1999, we terminated all SARs previously granted to
Mr. Collins and issued 3,200,000 shares to Mr. Collins in exchange for the
terminated SARs.
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
On May 27, 1999, the board of directors and shareholders adopted our
1999 stock option plan. We have reserved 3,000,000 shares of common stock for
issuance upon exercise of options granted from time to time under the 1999 stock
option plan. The 1999 stock option plan is
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intended to assist us in securing and retaining key employees, directors and
consultants by allowing them to participate in our ownership and growth through
the grant of incentive and non- qualified options.
Under the stock option plan we may grant incentive stock options only
to key employees and employee directors, or we may grant non-qualified options
to our employees, officers, directors and consultants. The 1999 stock option
plan is currently run by our board of directors.
Subject to the provisions of each of the stock option plans, the board
will determine who shall receive options, the number of shares of common stock
that may be purchased under the options, the time and manner of exercise of
options and exercise prices. The term of options granted under the stock option
plan may not exceed ten years or five years for an inventive stock option
granted to an optionee owning more than 10% of our voting stock. The exercise
price for incentive stock options will be equal to or greater than 100% of the
fair market value of the shares of the common stock at the time granted.
However, the incentive stock options granted to a 10% holder of our voting stock
are exercisable at a price equal to or greater than 110% of the fair market
value of the common stock on the date of the grant. The exercise price for non-
qualified options will be set by the board, in its discretion, but in no event
shall the exercise price be less than 75% of the fair market value of the shares
of common stock on the date of grant. The exercise price may be payable in cash
or, with the approval of the board, by delivery of shares or by a combination of
cash and shares. Shares of common stock received upon exercise of options will
be subject to restrictions on sale or transfer. As of the date of this
prospectus, we have granted options to purchase 2,430,000 shares under the stock
option plan.
OPTION EXERCISES AND HOLDINGS
The following table sets contains information with respect to the
exercise of options to purchase shares of common stock during the fiscal year
ended July 31, 1999 to our President and Chief Executive Officer and to each of
our executive officers who earned more than $100,000 during the fiscal year
ended July 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
On Value At FY-End (#) At FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brian Collins, CEO - - 2,000,000/-0- -0-/-0-
- - -0-/1,600,000 -0-/-0-
</TABLE>
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<PAGE>
Effective December 31, 1999, we terminated all SARs previously granted to
Mr. Collins and issued 3,200,000 shares to Mr. Collins in exchange for the
terminated SARs.
LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number Performance Estimated Future Payouts Under
of Shares or Other Non-Stock Price-Based Plans
Units or Period Until --------------------------------
Other Rights Maturation Threshold Target Maximum
Name (#) or Payout ($or #) ($or #) ($ or #)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Brian Collins, CEO - - - - --
</TABLE>
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the Florida Business Corporation Law, our articles of
incorporation provides that none of our directors shall be personally liable to
us or our shareholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
o any breach of the director's duty of loyalty to our company or
its shareholders;
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law
o unlawful payments of dividends or unlawful stock redemptions
or repurchases;
o any transaction from which the director derived an improper
personal benefit
This provision limits our rights and the rights of our shareholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any shareholder to seek injunctive relief or rescission
if a director breaches his duty of care. These provisions will not alter the
liability of directors under federal securities laws.
Our articles of incorporation further provides for the indemnification
of any and all persons who serve as our director, officer, employee or agent to
the fullest extent permitted under Florida law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC, this indemnification is against public policy as expressed
in the securities laws, and is, therefore unenforceable.
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<PAGE>
CERTAIN TRANSACTIONS
In April 1999, in connection with our acquisition of the outstanding
shares of Phon-Net Corp. and as consideration for the satisfaction of certain
product development goals provided for as part of our share exchange with
Phon-Net Corp., we issued 8,085,000 additional shares to Brian Collins, our
President and CEO.
On December 31, 1999, we agreed to issue Mr. Collins 3,200,000 shares
of our common stock, and Mr. Collins agreed to relinquish the stock appreciation
rights that we previously granted to him.
We have not entered into any other material transactions with our
officers, directors or affiliates except for employment arrangements which are
described elsewhere in this prospectus. While we have not adopted any corporate
policies for entering into transactions with affiliated parties,
o we are subject to Section 617.0832 of the Florida Business
Corporation Law which requires that transactions between
Phon-Net and one or more of its directors be approved by
disinterested directors, be approved by Phon-Net's
shareholders or be fair to Phon-Net; however,
o we are not subject to Section 617.0901 of the Florida Business
Corporation Law which places additional limitations and
restrictions on certain business transactions with affiliated
parties.
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us, as of May 31,
2000, relating to the beneficial ownership of shares of common stock by: each
person who is known by us to be the beneficial owner of more than five percent
of the outstanding shares of common stock; each director; each executive
officer; and all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of Phon-Net.com, Inc., 750 West Pender Street,
Suite 600, Vancouver, British Columbia V6C 2T7.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as being owned
by them.
Under securities laws, a person is considered to be the beneficial
owner of securities owned by him and that can be acquired by him within 60 days
from the date of this prospectus, including upon the exercise of options,
warrants or convertible securities. We determine a beneficial owner's percentage
ownership by assuming that options, warrants or convertible
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<PAGE>
securities that are held by him, but not those held by any other person, and
which are exercisable within 60 days of the date of this prospectus, have been
exercised or converted.
The table does not give effect to:
o except with respect to beneficial ownership of shares
attributed to the named person, the issuance of up to
5,430,000 shares in the event options that have been granted,
are exercised; and
o the issuance of up to 2,829,750 shares in the event in the
event outstanding promissory notes are converted and common
stock purchase warrants issuable upon conversion, are
exercised (including up to 257,250 shares attributable to the
conversion of accrued interest).
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
<S> <C> <C>
Brian Collins 24,486,287 57.3%
Sloan Young 194,667 0.5%
Roger L. Betterton 2,932,666 7.0%
R.R. 3, Box 142
Pana, Illinois 62557
Executive Officers and
Directors (as a group of 2) 24,680,954 57.6%
</TABLE>
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 80,000,000 shares of common
stock, $.001 par value per share and 10,000,000 shares of preferred stock, $.01
par value per share. As of the date of this prospectus, there are 40,759,430
shares of common stock issued and outstanding, which are held of record by
approximately 120 holders. As of the date of this prospectus, there are no
shares of preferred stock outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on
all matters submitted to a shareholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In the event of our liquidation, dissolution or winding up, each
outstanding share entitles its holder
25
<PAGE>
to participate in all assets that remain after payment of liabilities and after
providing for each class of stock, if any, having preference over the common
stock.
Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions for the common
stock. The rights of the holders of common stock are subject to any rights that
may be fixed for holders of preferred stock, when and if any preferred stock is
authorized and issued. All outstanding shares of common stock are, and the
shares underlying all option and warrants will be, duly authorized, validly
issued, fully paid an non-assessable upon our issuance of these shares.
PREFERRED STOCK
We may issue preferred stock from time to time, with such designations,
preferences, conversion rights, cumulative, relative, participating, optional or
other rights, including voting rights, qualifications, limitations or
restrictions as are determined by our Board of Directors. We have no present
intention of issuing shares of preferred stock.
CONVERTIBLE PROMISSORY NOTES
We have authorized, and there are currently outstanding, an aggregate
of $600,250 principal amount of our 8% convertible promissory notes. The notes
bear interest at the rate of 8% per year. Commencing in April 2000 and
continuing through not later than January 23, 2001, the outstanding principal
amount of the notes, and accrued but unpaid dividends may be converted at the
option of the holder into our common stock at a price of $.35 per share. Upon
conversion, we will also issue a number of common stock purchase warrants equal
to one-half the number of shares issued upon conversion of the promissory notes.
Each warrant, which is not freely transferable, entitles the owner to purchase
one share, until not later than January 23, 2001, for an exercise price of $.50.
For example, in the event of conversion of $35,000 principal amount promissory
note, the holder will receive 100,000 shares of common stock and warrants to
purchase an additional 50,000 shares. To the extent not converted, the
promissory notes mature on various dates through January 23, 2001.
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is Florida Atlantic Stock
Transfer, Inc. Its address is 7130 Nob Hill Road, Tamarac, Florida 33321, and
its telephone number is (954) 726- 4954.
26
<PAGE>
REPORTS TO SECURITYHOLDERS
We intend to furnish our stockholders with annual reports containing
audited financial statements. We may disseminate such other unaudited interim
reports to securityholders as we deem appropriate.
SELLING SECURITYHOLDERS
The following table sets forth the name of each selling securityholder,
the number or shares of common stock beneficially owned by each selling
securityholder as of the date of this prospectus, giving effect to the exercise
of the selling securityholders' warrants into shares of common stock, and the
number of shares being offered by each selling securityholder. The shares of
common stock being offered are being registered to permit public sales and the
selling securityholders may offer all or part of the shares for resale from time
to time. All expenses of the registration of the common stock on behalf of the
selling securityholder are being borne by us. We will receive none of the
proceeds of this offering.
The following table is derived from our books and records, as well as
from those of our transfer agent. No selling securityholder is affiliated with
us except Brian Collins, our President and CEO, and Sloan Young, our Vice
President. Jerry Collins, Matthew Collins, Phyllis Collins and Susan Collins are
family members of Brian Collins. Jan Douglas Atlas, Roxanne K. Beilly, Robin C.
Campbell, Joel D. Mayersohn, Charles B. Pearlman, Steven I. Weinberger and the
spouse of Susan Schneider are affiliated with Atlas Pearlman, P.A., our counsel.
Roger Betterton, Christopher Georgelin and Seidmehdi Seidbagherzadeh are current
or former affiliates of Quad- Linq Software, Inc. and/or Quad-Linq Systems,
Inc., the developers of our Direct Connect software.
Mark Vinci is the sole beneficial owner of Market Surveys
International, Inc. The beneficial owners of Alliance Corporate Services, Inc.
are Peter Laipnieks and Randy Hayward. The beneficial owner of AMYX Corporation
is Jim Mitchell.
An "*" indicates less than one percent.
<TABLE>
<CAPTION>
Shares Owned Shares
Beneficially Shares Available Beneficially Percent of
Prior to this Pursuant to Owned after Class
Selling Securityholder Offering this Prospectus Offering after Offering
---------------------- ----------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
1st Net Technologies, Inc. 60,000 60,000 - 0 - *
Jan Douglas Atlas 25,000 25,000 - 0 - *
Roxanne K. Beilly 5,000 5,000 - 0 - *
Roger Betterton 2,932,666 2,292,666 640,000 *
Robin C. Campbell and
Les Campbell Ten Ent 5,000 5,000 - 0 - *
27
<PAGE>
Brian Collins 24,486,287 1,000,000 23,486,287 50.2%
Jerry Collins 15,000 15,000 - 0 - *
Matthew Collins 15,000 15,000 - 0 - *
Phyllis Collins 15,000 15,000 - 0 - *
Susan Collins 327,587 290,000 37,587 *
Tim Collins 15,000 15,000 - 0 - *
Christopher E. Georgelin 1,513,677 1,213,677 360,000 *
Jim Hall 400,000 400,000 - 0 - *
Market Surveys
International, Inc. 400,000 400,000 - 0 - *
Joel D. Mayersohn and
Jamie Mayersohn Ten Ent 5,000 5,000 - 0 - *
Jerry McCoy 683,426 100,000 583,426 1.6%
Tony Musfelt 15,000 15,000 - 0 - *
Charles B. Pearlman 25,000 25,000 - 0 - *
Kathleen Roberts 22,000 22,000 - 0 - *
Susan Schneider 25,000 25,000 - 0 - *
Seidmehdi
Seidbagherzadeh 493,657 493,657 - 0 - *
Tom Ward 310,000 310,000 - 0 - *
Steven I. Weinberger 10,000 10,000 - 0 - *
Sloan Young 194,667 28,000 166,667 *
Bryce Boucher 45,000 5,000 40,000 *
Alliance Corporate
Services, Inc. 225,000 125,000 100,000 *
Peter Laipnieks 50,000 50,000 - 0 - *
Randy Hayward 50,000 50,000 - 0 - *
AMYX Corporation 1,500,000 1,500,000 - 0 - *
Jim Mitchell 500,000 500,000 - 0 - *
------------
Total 9,015,000
============
</TABLE>
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be distributed from time to
time by the selling securityholders in one or more transactions that may take
place on the over-the-counter market. These include ordinary broker's
transactions, privately-negotiated transactions or through sales to one or more
broker-dealers for resale of these shares as principals, at market prices
existing at the time of sale, at prices related to existing market prices,
through Rule 144 transactions or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the selling
securityholders in connection with sales of securities.
The selling securityholders may sell the securities in one or more of
the following methods:
28
<PAGE>
o a block trade in which a broker or dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principals to facilitate the transaction;
o purchasers by a broker or dealer as principal and resale by
the broker or dealer for its account under this prospectus;
o ordinary brokerage transactions and transactions which the
broker solicits purchases, and
o face-to-face transactions between sellers and purchasers
without a broker-dealer.
In making sales, brokers or dealers used by the selling securityholders
may arrange for other brokers or dealers to participate. The selling
securityholders and others through whom such securities are sold may be
"underwriters" within the meaning of the Securities Act for the securities
offered, and any profits realized or commission received may be considered
underwriting compensation.
At the time a particular offer of the securities is made by or on
behalf of a selling securityholder, to the extent required, a prospectus is to
delivered. The prospectus will include the number of shares of common stock
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, the purchase price paid by any underwriter for
the shares of common stock purchased from the selling securityholder, and any
discounts, commissions or concessions allowed or reallowed or paid to dealers,
and the proposed selling price to the public.
We have told the selling securityholders that the anti-manipulative
rules under the Securities Exchange Act of 1934, including Regulation M, may
apply to their sales in the market. We have provided each of the selling
securityholders with a copy of these rules. We have also told the selling
securityholders of the need for delivery of copies of this prospectus in
connection with any sale of securities that are registered by this prospectus.
Sales of securities by us and the selling securityholders or even the
potential of these sales may have a negative effect on the market price for
shares of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
On the date of this prospectus, we have 40,759,430 shares of common
stock issued and outstanding. Of those shares, 13,307,430 shares, including the
9,015,000 shares covered by this prospectus, are freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by an affiliate of ours. These amounts do not include shares
that may be issued upon exercise of options or conversion of promissory notes.
29
<PAGE>
The remaining 33,452,000 shares of common stock currently outstanding
are restricted securities, and will become eligible for public sale at various
times, provided the requirements of Rule 144 are complied with. In general, Rule
144 permits a shareholder who has owned restricted shares for at least one year,
to sell without registration, within a three month period, up to one percent of
our then outstanding common stock. We must be current in our reporting
obligations in order for a shareholder to sell shares under Rule 144. In
addition, shareholders other than our officers, directors or 5% or greater
shareholders who have owned their shares for at least two years, may sell them
without volume limitation or the need for our reports to be current.
We cannot predict the effect, if any, that market sales of common stock
or the availability of these shares for sale will have on the market price of
our shares from time to time. Nevertheless, the possibility that substantial
amounts of common stock may be sold in the public market could negatively damage
affect market prices for the common stock and could damage our ability to raise
capital through the sale of our equity securities.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Atlas Pearlman, P.A., 350 East Las Olas Boulevard, Suite
1700, Fort Lauderdale, FL 33301, Florida. Affiliates of that firm own an
aggregate of 100,000 shares of our common stock.
EXPERTS
The consolidated financial statements as of July 31, 1999 and July 31,
1998, and for each of the two years in the period ended July 31, 1999, appearing
in this prospectus and registration statement have been audited by Morgan &
Company, independent auditors, as set forth in their report thereon appearing
elsewhere in this prospectus, and are included in reliance upon this report
given on the authority of Morgan & Company as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2
under the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement, and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be inspected
without charge at the SEC's Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549, and at the SEC's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials
may also be obtained from the SEC's Public Reference at 450 Fifth Street, N.W.,
Room 1024, Washington D.C. 20549, upon the payment of prescribed fees. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1- 800-SEC-0330.
The registration statement, including all exhibits and schedules and
amendments, has been filed with the SEC through the Electronic Data Gathering,
Analysis and Retrieval system, and are publicly available through the SEC's Web
site located at http://www.sec.gov. Following the effective date of the
registration statement relating to this prospectus, we will become subject to
the reporting requirements of the Exchange Act and in accordance with these
requirements, will file quarterly and annual financial reports and other
information with the SEC.
30
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000
(Stated in U.S. Dollars)
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
JANUARY 31 JULY 31
2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash $ 341,066 $ 203,161
Accounts and advances receivable 6,483 13,829
Prepaid expenses 1,857 -
------------------- -------------------
349,406 216,990
Capital Assets 79,101 96,297
Intangibles 806,827 977,967
------------------- -------------------
$ 1,235,334 $ 1,291,254
====================================================================================================================
LIABILITIES
Current
Accounts payable and accrued liabilities $ 100,894 $ 146,376
Due to related parties 24,441 66,031
Notes payable 36,954 35,486
------------------- -------------------
162,289 247,893
Convertible Notes (Note 2) 214,936 -
------------------- -------------------
377,225 247,893
------------------- -------------------
STOCKHOLDERS' EQUITY
Capital Stock
Authorized:
80,000,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.01
Issued and outstanding
39,327,430 common shares at January 31, 2000, and 36,027,430
common shares at July 31, 1999 9,184,295 7,051,970
Additional paid in capital (9,399,331) (7,025,312)
Deficit (66,745) (119,987)
------------------- -------------------
Other 858,109 1,043,361
------------------- -------------------
$ 1,235,334 $ 1,291,254
====================================================================================================================
</TABLE>
F-1
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
INCEPTION
SIX MONTHS ENDED MARCH 19, 1996
JANUARY 31 TO JANUARY 31
2000 1999 2000
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 1,771 $ 28,856 $ 443,260
------------------------------------------------------------
Expenses
Advertising and promotion 49,812 11,954 439,502
Amortization of intangibles 171,140 8,140 262,410
Amortization of capital assets 32,606 40,681 198,471
Bank charges and interest 4,263 4,561 344,848
Amortization of convertible note discount 86,211 - 86,211
Office and sundry 16,972 15,307 187,482
Professional fees 84,805 5,668 223,226
Rent and utilities 12,908 15,759 97,501
Software support 66,000 - 66,000
Telephone 12,535 27,062 252,565
Transfer agent and filing fees 4,000 - 10,500
Travel 24,464 4,607 151,376
Salaries and benefits 1,810,074 199,778 7,240,485
------------------------------------------------------------
2,375,790 333,517 9,560,577
------------------------------------------------------------
Loss Before The Following 2,374,019 304,661 9,117,317
Forgiveness of debt - - (230,961)
Write-down of investments - - 99,028
------------------------------------------------------------
Net Loss For The Period 2,374,019 304,661 $ 8,985,384
====================
Deficit, Beginning Of Period 7,025,312 989,154
---------------------------------------
Deficit, End Of Period $ 9,399,331 $ 1,293,815
===============================================================================================
Loss Per Share $ (0.07) $ (0.03)
===============================================================================================
Weighted Average Number Of Shares Outstanding
36,294,096 9,422,000
===============================================================================================
Comprehensive Income
Net Loss For The Period $ (2,374,019) $ (304,661)
Foreign currency translation adjustment (12,758) 2,890
---------------------------------------
Comprehensive Income (Loss) $ (2,386,777) $ (301,771)
===============================================================================================
</TABLE>
F-2
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
INCEPTION
SIX MONTHS ENDED MARCH 19, 1996
JANUARY 31 TO JANUARY 31
2000 1999 2000
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow From Operating Activities
Loss for the period $ (2,374,019) $ (304,661) $ (9,146,051)
------------------ ----------------- --------------------
Adjustments To Reconcile Loss To Net Cash Used By
Operating Activities
Stock issued for other than cash 1,816,211 - 7,061,068
Amortization 203,746 48,821 451,048
Write-down of investments - - 99,028
Forgiveness of debt - - (230,961)
Change in accounts and advances receivable 7,346 (2,979) (6,483)
Change in due from related parties - 29,932 -
Change in prepaid expenses (1,857) 5,566 (1,857)
Change in accounts payable and accrued liabilities (45,482) 56,084 100,894
Change in due to related parties (41,590) 38,347 24,441
------------------ ----------------- --------------------
Total Adjustments 1,938,374 175,771 7,497,178
------------------ ----------------- --------------------
Net Cash Used In Operating Activities (435,645) (128,890) (1,648,873)
------------------ ----------------- --------------------
Cash Flow From Investing Activities
Capital assets (15,410) (1,350) (277,574)
Intangibles - - (81,404)
Excess of purchase price over net assets of
Subsidiaries Acquired (253,278)
Investments - - (160,068)
Proceeds on sale of investments - - 61,040
------------------ ----------------- --------------------
Net Cash Used In Investing Activities (15,410) (1,350) (711,284)
------------------ ----------------- --------------------
Cash Flow From Financing Activities
Common stock issued - 84,365 1,265,723
Stock issue costs - - (157,920)
Notes receivable - - 737,000
Convertible notes 600,250 - 600,250
Notes payable 1,468 - 267,915
------------------ ----------------- --------------------
Net Cash From Financing Activities 601,718 84,365 2,712,968
------------------ ----------------- --------------------
Effect Of Exchange Rate Changes On Cash (12,758) 2,890 (11,745)
------------------ ----------------- --------------------
Net Increase (Decrease) In Cash 137,905 (42,985) 341,066
Cash, Beginning Of Period 203,161 43,039 -
------------------ ----------------- --------------------
Cash, End Of Period $ 341,066 $ 54 $ 341,066
======================================================================================================================
</TABLE>
F-3
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------
Number Additional
Of Paid-In
Shares Amount Capital Other
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, July 31, 1998 9,422,000 $ 1,033,358 $ - $ 3,962
Issuance Of Common Stock 578,000 77,365 - -
-----------------------------------------------------------------
10,000,000 1,110,723 - 3,962
Consolidation Of Stock 1 For 2 Basis (5,000,000) - - -
------------------------------------------------------------------
5,000,000 1,110,723 - 3,962
Adjustment To Number Of Shares Issued And Outstanding
As A Result Of The Reverse Take-Over Transaction
Piedmont Technologies Inc. (5,000,000) - - -
Phon-net Corp. 7,000,000 - - -
------------------------------------------------------------------
7,000,000 - - -
Ascribed Value Of The Shares Issued In Connection With
The Acquisition Of Piedmont Technologies Inc. 5,000,000 5,000 2,000 -
------------------------------------------------------------------
12,000,000 1,115,723 2,000 3,962
Adjustment To Number Of Shares Issued And Outstanding
As A Result Of The Reverse Take-Over Transaction
Phon-net Corp. (12,000,000) - - -
Phon-net.com, Inc. 3,650,000 - - -
------------------------------------------------------------------
3,650,000 1,115,723 2,000 3,962
Ascribed Value Of The Shares Issued In Connection
With The Acquisition Of Phon-net Corp. 11,410,000 - - -
------------------------------------------------------------------
15,060,000 1,115,723 2,000 3,962
(RESTUBBED TABLE)
Accumulated
Deficit Total
----------------------------
<C> <C>
Balance, July 31, 1998 $ (989,154) $ 48,166
Issuance Of Common Stock - 77,365
----------------------------
(989,154) 125,531
Consolidation Of Stock 1 For 2 Basis - -
----------------------------
(989,154) 125,531
Adjustment To Number Of Shares Issued And Outstanding
As A Result Of The Reverse Take-Over Transaction
Piedmont Technologies Inc. - -
Phon-net Corp. - -
----------------------------
- 125,531
Ascribed Value Of The Shares Issued In Connection With
The Acquisition Of Piedmont Technologies Inc. - 7,000
----------------------------
(989,154) 132,531
Adjustment To Number Of Shares Issued And Outstanding
As A Result Of The Reverse Take-Over Transaction
Phon-net Corp. - -
Phon-net.com, Inc. - -
----------------------------
(989,154) 132,531
Ascribed Value Of The Shares Issued In Connection
With The Acquisition Of Phon-net Corp. - -
----------------------------
(989,154) 132,531
</TABLE>
F-4
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------
Number Additional
Of Paid-In
Shares Amount Capital Other
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Carried Forward 15,060,000 1,115,723 2,000 3,962
Issuance Of Common Stock
For cash 460,000 460 154,540 -
For services 1,715,000 1,715 480,285 -
For technology 3,000,000 2,643 975,357 -
For compensation expense 13,085,000 13,085 4,470,915 -
For conversion of promissory notes 2,707,430 2,707 1,050,150 -
For deferred compensation - 357 131,643 (132,000)
Stock Issue Costs - - (212,920) -
Amortization Of Deferred Compensation - - - 11,000
Translation Adjustment - - - (2,949)
Loss For The Year - - - -
--------------------------------------------------------------------
Balance, July 31, 1999 36,027,430 1,136,690 7,051,970 (119,987)
Issuance Of Common Stock
For compensation expense 3,200,000 3,200 1,660,800 -
Discount On Convertible Notes - - 471,525 -
Amortization Of Deferred Compensation - - - 66,000
Loss For The Period - - - -
Translation Adjustment - - - (12,758)
--------------------------------------------------------------------
Balance, January 31, 2000 39,227,430 $ 1,139,890 $ 9,184,295 $ (66,745)
====================================================================
(RESTUBBED TABLE)
Accumulated
Deficit Total
-------------------------------------
Balance Carried Forward (989,154) 132,531
Issuance Of Common Stock
For cash - 155,000
For services - 482,000
For technology - 978,000
For compensation expense - 4,484,000
For conversion of promissory notes - 1,052,857
For deferred compensation - -
Stock Issue Costs - (212,920)
Amortization Of Deferred Compensation - 11,000
Translation Adjustment - (2,949)
Loss For The Year (6,036,158) (6,036,158)
-------------------------------------
Balance, July 31, 1999 (7,025,312) 1,043,361
Issuance Of Common Stock
For compensation expense - 1,664,000
Discount On Convertible Notes - 471,525
Amortization Of Deferred Compensation - 66,000
Loss For The Period (2,374,019) (2,374,019)
Translation Adjustment - (12,758)
-------------------------------------
Balance, January 31, 2000 $ (9,399,331) $ 858,109
=====================================
</TABLE>
F-5
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000
(Stated In U.S. Dollars)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements as of January 31, 2000
included herein have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with United States generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
It is suggested that these consolidated financial statements be read in
conjunction with the July 31, 1999 audited consolidated financial
statements and notes thereto.
2. CONVERTIBLE NOTES
In December 1999 and January 2000, the Company issued promissory notes in
the amount of $600,250. The notes bear interest at 8% per annum, and are
convertible to a maximum of 1,886,500 common shares (including 171,500
common shares relating to the conversion of accrued interest totalling
$60,025), and a maximum of 943,250 non-transferable share purchase warrants
(including 85,750 warrants relating to the conversion of the accrued
interest), commencing 120 days from the loan date for a twelve month period
at a price of $0.35 per share. The number of share purchase warrants on
conversion will be half the number of common shares. Each warrant will
entitle the holder to purchase one additional common share at a price of
$0.50 per share for a period of twelve months from the conversion date.
Should the notes not be converted, principal and accrued interest is
repayable in April 2001 and May 2001. Principal unpaid after the due date
accrues interest at 18% per annum.
In accordance with E.I.T.F. 98-5, a discount of $471,525 was recorded on
the notes representing the difference between the fair market value of the
Company's common shares at the date of issue of the notes and the principal
amount of the notes. The discount is being amortized over a 120 day period
from the date the principal on the notes was advanced to the first
available date of convertibility. For the period ended January 31, 2000,
$86,211 of convertible note discount has been amortized.
<TABLE>
<CAPTION>
2000 1999
---------------------------
<S> <C> <C>
Principal of convertible notes $ 600,250 $ -
Less: unamortized discount 385,314 -
---------------------------
$ 214,936 $ -
===========================
</TABLE>
F-6
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors
Phon-net.com, Inc.
(a development stage company)
We have audited the consolidated balance sheets of Phon-net.com, Inc. (a
development stage company) as at July 31, 1999 and 1998, and the consolidated
statements of operations and deficit, cash flows, and stockholders' equity for
the years ended July 31, 1999, 1998, and 1997. 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 on our audit.
We conducted our audits in accordance with United States and Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 1999 and
1998 and the results of its operations and its cash flows for the years ended
July 31, 1999, 1998, and 1997 in accordance with United States generally
accepted accounting principles.
Without qualifying our opinion we draw attention to Note 1 to the consolidated
financial statements. The Company incurred a net loss of $6,036,158 during the
year ended July 31, 1999, and as at that date, has not attained profitable
operations and is dependent upon obtaining adequate financing to fulfil its
development activities. These factors raise substantial doubt that the Company
will be able to continue as a going concern.
Vancouver, Canada
November 1, 1999, except for Note 12 Chartered Accountants
which is as of April 7, 2000
Comments by Auditors on United States - Canada Difference
In Canada, reporting standards for auditors do not permit the addition of an
explanatory paragraph when the financial statements account for, disclose and
present in accordance with generally accepted accounting principles conditions
and events that cast substantial doubt on the Company's ability to continue as a
going concern. Although our audit was conducted in accordance with both United
States and Canadian generally accepted auditing standards, our report to the
shareholders dated November 1, 1999 is expressed in accordance with United
States reporting standards which require a reference to such conditions and
events in the auditors' report.
Vancouver, Canada
November 1, 1999, except for Note 12 Chartered Accountants
which is as of April 7, 2000
F-7
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
JULY 31
1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash $ 203,161 $ 43,039
Accounts and advances receivable 13,829 4,943
Due from related parties - 29,932
Prepaid expenses - 7,950
------------------------------------
216,990 85,864
Capital Assets (Note 4) 96,297 160,725
Intangibles (Note 5) 977,967 43,415
------------------------------------
$ 1,291,254 $ 290,004
===================================================================================================================
LIABILITIES
Current
Accounts payable and accrued liabilities $ 146,376 $ 179,694
Due to related parties 66,031 26,658
Current portion of notes payable (Note 6) 35,486 -
------------------------------------
247,893 206,352
Notes Payable (Note 6) - 35,486
------------------------------------
247,893 241,838
------------------------------------
STOCKHOLDERS' EQUITY
Capital Stock (Note 7)
Authorized:
80,000,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.01
Issued and outstanding
36,027,430 common shares at July 31, 1999 and
9,422,000 common shares at July 31, 1998 1,136,690 1,033,358
Additional paid in capital 7,051,970 -
Deficit (7,025,312) (989,154)
Other (119,987) 3,962
------------------------------------
1,043,361 48,166
------------------------------------
$ 1,291,254 $ 290,004
===================================================================================================================
</TABLE>
Approved by the Sole Director:
--------------------------------------------------
F-8
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
INCEPTION
MARCH 19, 1996
YEAR ENDED JULY 31 TO JULY 31
1999 1998 1997 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 43,867 $ 120,904 $ 249,239 $ 441,489
----------------------------------------------------------------------------
Expenses
Advertising and promotion 506,329 28,777 10,426 389,690
Amortization of intangibles 43,448 16,281 16,281 91,270
Amortization of capital assets 80,041 54,295 21,111 165,865
Bank charges and interest 334,354 2,544 3,687 340,585
Office and sundry 55,295 84,351 28,243 170,510
Professional fees 87,015 8,532 18,272 138,421
Rent and utilities 34,439 31,292 15,066 84,593
Software support 11,000 - - -
Telephone 52,130 85,662 77,428 240,030
Transfer agent and filing fees 6,500 - - 6,500
Travel 18,608 88,319 15,997 126,912
Salaries and benefits 4,850,866 308,936 230,250 5,430,411
----------------------------------------------------------------------------
6,080,025 708,989 436,761 7,184,787
----------------------------------------------------------------------------
Loss Before The Following 6,036,158 588,085 187,522 6,743,298
Forgiveness of debt - - (230,961) (230,961)
Write-down of investments - - 99,028 99,028
----------------------------------------------------------------------------
Net Loss For The Year 6,036,158 588,085 55,589 $ 6,611,365
====================
Accumulated Deficit, Beginning of Year
989,154 401,069 345,480
-------------------------------------------------------
Accumulated Deficit, End of Year $ 7,025,312 $ 989,154 $ 401,069
============================================================================================================
Loss Per Share $ 0.36 $ 0.06 $ 0.01
============================================================================================================
Weighted Average Number Of Shares Outstanding 16,923,300 9,422,000 9,422,000
============================================================================================================
Comprehensive Income
Net Loss For The Year $ (6,036,158) $ (588,085) $ (55,589)
Foreign currency translation adjustment (2,949) 987 532
-------------------------------------------------------
Total Comprehensive Income (Loss) $ (6,039,107) $ (587,098) $ (55,057)
============================================================================================================
</TABLE>
F-9
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
INCEPTION
MARCH 19, 1996
YEAR ENDED JULY 31 TO JULY 31
1999 1998 1997 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flow From Operating Activities
Loss for the year $ (6,036,158) $ (588,085) $ (55,589) $ (6,772,032)
--------------------------------------------------------------------------
Adjustments To Reconcile Loss To Net Cash Used By
Operating Activities
Stock issued for other than cash 5,244,857 - - 5,244,857
Amortization 123,489 70,576 37,392 247,302
Write-down of investments - - 99,028 99,028
Forgiveness of debt - - (230,961) (230,961)
Change in accounts and advances receivable (8,886) (3,826) 3,456 (13,829)
Change in due from related parties 29,932 (4,427) (10,906) -
Change in prepaid expenses 7,950 (7,950) - -
Change in accounts payable and accrued liabilities (33,318) 112,421 (373) 146,376
Change in due to related parties 39,373 15,938 (78) 66,031
--------------------------------------------------------------------------
Total Adjustments 5,403,397 182,732 (102,442) 5,558,804
--------------------------------------------------------------------------
Net Cash Used In Operating Activities (632,761) (405,353) (158,031) (1,213,228)
--------------------------------------------------------------------------
Cash Flow From Investing Activities
Capital assets (15,613) (174,225) (167) (262,164)
Intangibles - - - (81,404)
Excess of purchase price over net assets of
Subsidiaries Acquired - - - (253,278)
Investments - - - (160,068)
Proceeds on sale of investments - - 61,040 61,040
--------------------------------------------------------------------------
Net Cash Used In Investing Activities (15,613) (174,225) 60,873 (695,874)
--------------------------------------------------------------------------
Cash Flow From Financing Activities
Common stock issued 232,365 618,259 78,103 1,265,723
Stock issue costs (157,920) - - (157,920)
Notes receivable 737,000 - - 737,000
Notes payable - (3,343) (283) 266,447
--------------------------------------------------------------------------
Net Cash From Financing Activities 811,445 614,916 77,820 2,111,250
--------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash (2,949) 987 532 1,013
--------------------------------------------------------------------------
Net Increase (Decrease) In Cash 160,122 36,325 (18,806) 203,161
Cash, Beginning Of Year 43,039 6,714 25,520 -
--------------------------------------------------------------------------
Cash, End Of Year $ 203,161 $ 43,039 $ 6,714 $ 203,161
====================================================================================================================================
</TABLE>
F-10
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Stated in U.S. Dollars)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Effective October 5, 1998, the Company acquired 100% of the issued and
outstanding shares of Phon-net Corp. by issuing 11,410,000 common shares at an
ascribed value of $Nil.
The Company issued 8,085,000 common shares at an ascribed value of $3,234,000 to
a director for accomplishing certain development goals, and issued 5,000,000
common shares to the same director at an ascribed value of $1,250,000 pursuant
to an employment agreement commencing July 1, 1999.
The Company issued 3,000,000 common shares at an ascribed value of $1,110,000
for the acquisition of technology at an ascribed value of $978,000, and for
deferred compensation expense of $132,000.
The Company issued 1,715,000 common shares for advertising, promotion services,
stock issue costs and for legal services at an ascribed value of $509,000.
The Company issued 2,707,430 common shares on the conversion of promissory notes
totalling $737,000 (Note 7a).
F-11
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------
Additional
Number Paid-In
Of Shares Amount Capital Other
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, August 1, 1996 2,308,580 $ 336,996 $ - $ 2,443
Issuance of common stock 5,147,096 78,103 - -
Translation adjustment - - - 532
Loss for the year - - - -
----------------------------------------------------------------------
Balance, July 31, 1997 7,455,676 415,099 - 2,975
Issuance of common stock 1,966,324 618,259 - -
Translation adjustment - - - 987
Loss for the year - - - -
----------------------------------------------------------------------
Balance, July 31, 1998 9,422,000 1,033,358 - 3,962
Issuance of common stock 578,000 77,365 - -
----------------------------------------------------------------------
10,000,000 1,110,723 - 3,962
Consolidation of stock on 1 for 2 basis (5,000,000) - - -
----------------------------------------------------------------------
5,000,000 1,110,723 - 3,962
Adjustment to number of shares issued and outstanding
as a result of the reverse take-over transaction
Piedmont Technologies Inc. (5,000,000) - - -
Phon-net Corp. 7,000,000 - - -
----------------------------------------------------------------------
7,000,000 - - -
Ascribed value of the shares issued in connection with
the acquisition of Piedmont Technologies Inc. 5,000,000 5,000 2,000 -
----------------------------------------------------------------------
12,000,000 1,115,723 2,000 3,962
(RESTUBBED TABLE)
Accumulated
Deficit Total
-------------------------------------
Balance, August 1, 1996 $ (345,480) $ (6,041)
Issuance of common stock - 78,103
Translation adjustment - 532
Loss for the year (55,589) (55,589)
-------------------------------------
Balance, July 31, 1997 (401,069) 17,005
Issuance of common stock - 618,259
Translation adjustment - 987
Loss for the year (588,085) (588,085)
-------------------------------------
Balance, July 31, 1998 (989,154) 48,166
Issuance of common stock - 77,365
-------------------------------------
(989,154) 125,531
Consolidation of stock on 1 for 2 basis - -
-------------------------------------
(989,154) 125,531
Adjustment to number of shares issued and outstanding
as a result of the reverse take-over transaction
Piedmont Technologies Inc. - -
Phon-net Corp. - -
-------------------------------------
- 125,531
Ascribed value of the shares issued in connection with
the acquisition of Piedmont Technologies Inc. - 7,000
-------------------------------------
(989,154) 132,531
</TABLE>
F-12
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------------
Additional
Number Paid-In
Of Shares Amount Capital Other
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances carried forward 12,000,000 1,115,723 2,000 3,962
Adjustment to number of shares issued and outstanding as a
result of the reverse take-over transaction
Phon-net Corp. (12,000,000) - - -
Phon-net.com, Inc. 3,650,000 - - -
--------------------------------------------------------------------
3,650,000 1,115,723 2,000 3,962
Ascribed value of the shares issued in connection with the
acquisition of Phon-net Corp. 11,410,000 - - -
--------------------------------------------------------------------
15,060,000 1,115,723 2,000 3,962
Issuance of common stock
for cash 460,000 460 154,540 -
for services 1,715,000 1,715 480,285 -
for technology 2,643,244 2,643 975,357 -
for compensation expense 13,085,000 13,085 4,470,915 -
on conversion of promissory notes 2,707,430 2,707 1,050,150 -
for deferred compensation expense 356,756 357 131,643 (132,000)
Stock issue costs - - (212,920) -
Amortization of deferred compensation - - - 11,000
Translation adjustment - - - (2,949)
Loss for the year - - - -
--------------------------------------------------------------------
Balance, July 31, 1999 36,027,430 $ 1,136,690 $ 7,051,970 $ (119,987)
====================================================================
(RESTUBBED TABLE)
Accumulated
Deficit Total
--------------------------------------
<C> <C>
Balances carried forward (989,154) 132,531
Adjustment to number of shares issued and outstanding as a
result of the reverse take-over transaction
Phon-net Corp. - -
Phon-net.com, Inc. - -
--------------------------------------
(989,154) 132,531
Ascribed value of the shares issued in connection with the
acquisition of Phon-net Corp. - -
--------------------------------------
(989,154) 132,531
Issuance of common stock
for cash - 155,000
for services - 482,000
for technology - 978,000
for compensation expense - 4,484,000
on conversion of promissory notes - 1,052,857
for deferred compensation expense - -
Stock issue costs - (212,920)
Amortization of deferred compensation - 11,000
Translation adjustment - (2,949)
Loss for the year (6,036,158) (6,036,158)
--------------------------------------
Balance, July 31, 1999 $ (7,025,312) $ 1,043,361
======================================
</TABLE>
F-13
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
1. NATURE OF OPERATIONS
Development Stage Activities
Phon-net. com Inc. was organized to provide consumers with quick and easy
access through any touch tone telephone, cellular/PCS phone, screenphone
and the Internet to instantly access interactive information on area
business and their current product and services, special promotions and
other source information. Phon-net.com, Inc. provides information services
in a published directory format or through telephone information input to
locate a business, product or service, by either a generic category search,
or by entering a specific ad number listed in the Company's director.
Phon-net.com, Inc. is in the development stage; therefore recovery of its
assets is dependent upon future events, the outcome of which is
indeterminable. In addition, successful completion of Phon-net.com, Inc.'s
development program and its transition, ultimately to the attainment of
profitable operations is dependent upon obtaining adequate financing to
fulfil its development activities and achieve a level of sales adequate to
support its cost structure.
Management is of the opinion that sufficient short-term funding will be
obtained and that current negotiations with potential users of its products
will be successful.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles in the United States. Because
a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period
necessarily involves the use of estimates which have been made using
careful judgement.
The financial statements have, in management's opinion, been properly
prepared within reasonable limits of materiality and within the framework
of the significant accounting policies summarized below:
a) Consolidation
These financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Phon-net Corp., (incorporated in Nevada,
U.S.A.), Piedmont Technologies Inc., The National For Sale Phone
Company Inc., and V NETT Enterprises Inc., all incorporated in Canada.
F-14
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Revenue Recognition
The Company's revenue arises from contracts entered into to facilitate
beta-testing of its various products and is recognized over the term of
the contract. The Company's revenues through July 31, 1999 were
generated from contracts relating to its interactive real estate and
professional listing service which was the initial product under
development, as well as the search engine product. No revenue has been
generated to July 31, 1999 from the Direct Connect product. Once
revenue is generated by the Direct Connect or Search Engine products,
the revenue allocated to post contract support will be recognized
rateably over the term of the support and revenue allocated to service
elements will be recognized as the services are performed.
c) Capital Assets
Capital assets are recorded at cost and amortized as follows:
Computer equipment 3 years straight line basis Computer
software 3 years straight line basis Telephone and equipment 2
and 3 years straight line basis Leasehold improvements Lease
term
d) Intangibles
Intangibles are recorded at cost and amortized as follows:
<TABLE>
<CAPTION>
<S> <C>
Goodwill 5 years straight line basis
Technology costs 3 years straight line basis
</TABLE>
Management reviews goodwill and technology costs for impairment
whenever events or changes in circumstances indicate that the carrying
amounts may not be recoverable.
e) Capitalized Costs
Costs for developing computer software will be capitalized when
technological feasibility has been established for the computer
software product. Capitalization of computer software costs will be
discontinued when the product is available for general release to
customers and such costs are amortized on a product-by-product basis
over the estimated lives of the products. At each balance sheet date,
the unamortized capitalized costs of a computer software product shall
be compared to the net realizable value of that product. The amount by
which the unamortized capitalized costs of a computer software product
exceed the net realizable value of that asset shall be written off. To
date, the Company has not capitalized any costs related to the
development of computer software.
F-15
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Capitalized Costs (Continued)
Purchased computer software, which includes programs used for company
management and software development are capitalized and amortized as
disclosed in the capital assets significant accounting policy note.
f) Income Taxes
The Company has adopted Statement of Financial Accounting Standards No.
109 - "Accounting for Income Taxes" (SFAS 109). This standard requires
the use of an asset and liability approach for financial accounting and
reporting on income taxes. If it is more likely than not that some
portion of all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
g) Foreign Currency Translation
The Company's subsidiary's operations are located in Canada, and its
functional currency is the Canadian dollar. The financial statements of
the subsidiary have been translated using the current method whereby
the assets and liabilities are translated at the year end exchange
rate, capital accounts at the historical exchange rate, and revenues
and expenses at the average exchange rate for the period. Adjustments
arising from the translation of the Company's subsidiary's financial
statements are included as a separate component of shareholders'
equity.
h) Financial Instruments
The Company's financial instruments consist of cash, accounts and
advances receivable, accounts payable, and amounts due to and from
related parties.
Unless otherwise noted, it is management's opinion that this Company is
not exposed to significant interest or credit risks arising from these
financial instruments. The fair value of these financial instruments
approximate their carrying values, unless otherwise noted.
i) Loss Per Share
The loss per share is calculated using the weighted average number of
common shares outstanding during the year. Fully diluted loss per share
is not presented, as the impact of the exercise of options is
anti-dilutive.
F-16
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
3. ACQUISITION OF SUBSIDIARIES
a) Effective October 5, 1998, Phon-net Corp. acquired 100% of the issued
and outstanding shares of Piedmont Technologies Inc., by issuing
5,000,000 common shares. Effective the same date, Phon-net.com, Inc.
acquired 100% of the issued and outstanding shares of Phon-net Corp.,
by issuing 11,410,000. Since the transactions resulted in the former
shareholders of Piedmont Technologies Inc. owning the majority of the
issued shares of Phon-net,com, Inc., the transactions, which are
referred to as a "reverse take-over", have been treated for accounting
purposes as an acquisition by Piedmont Technologies Inc. of the net
assets and liabilities of Phon-net Corp. and Phon-net.com, Inc. Under
this purchase method of accounting, the results of operations of
Phon-net Corp. and Phon-net.com, Inc. are included in these financial
statements from October 5, 1998.
Piedmont Technologies Inc. is deemed to be the purchaser for accounting
purposes. Accordingly, its net assets are included in the balance sheet
at their previously recorded values.
The statements of operations and cash flows consist of the operations
of Phon-net Corp. and Phon-net.com, Inc. from October 5, 1998. Prior to
that date, the operations are those of Piedmont Technologies Inc.
Phon-net Corp. had net assets of $7,000 at the acquisition date while
Phon-net.com, Inc. had net assets of $Nil. As a result, the shares
issued on the acquisition of Phon-net Corp. were issued at an ascribed
value of $7,000, and the shares issued on the acquisition of
Phon-net.com, Inc. were issued at an ascribed value of $Nil. The
reverse acquisition was a reorganization and recapitalization of a
private operating company with a public shell in which no goodwill or
other intangibles were recorded as part of the transaction.
b) i) By an agreement dated March 31, 1996, Piedmont Technologies
Inc. acquired 100% of the issued and outstanding shares of The
National For Sale Phone Company Inc., by issuing 1,324,180 common
shares at a value of $0.12 per share. Of the shares outstanding,
84% were held by two directors of Piedmont Technologies Inc.
F-17
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
3. ACQUISITION OF SUBSIDIARIES (Continued)
The acquisition was accounted for using the purchase method with
the results of operations included in these financial statements
from the date of acquisition. The purchase price has been
allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Working capital (deficiency) $ (147,167)
Capital assets 72,688
Non-current liabilities assumed (6,065)
-----------------
(80,544)
Consideration (158,518)
-----------------
Excess of purchase price over net assets acquired (charged
to deficit as the entities are under common control)
$ (239,062)
=================
</TABLE>
ii) By an agreement dated March 31, 1996, the Company acquired from a
director of Piedmont Technologies, Inc. 100 % of the issued and
outstanding shares of V NETT Enterprises Inc. for cash consideration of
$1.
The acquisition was accounted for using the purchase method. The
purchase price has been allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Working capital (deficiency) $ (14,215)
Consideration -
---------------
Excess of purchase price over net assets acquired (charged
to deficit as the entities are under common control)
$ (14,215)
===============
</TABLE>
iii) By an agreement dated March 18, 1996, and as amended July 30,
1997, the Company purchased certain assets from an arms-length
private company for consideration of a note payable of $272,065.
F-18
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
3. ACQUISITION OF SUBSIDIARIES (Continued)
<TABLE>
<CAPTION>
<S> <C>
The purchase price has been allocated as follows:
Investment - in listed company shares $ 161,245
Advance receivable from The National For Sale Phone Company Ltd. 29,416
Goodwill, representing the right to purchase the issued and outstanding shares of
The National For Sale Phone Company Ltd. 81,404
----------------
$ 272,065
================
</TABLE>
On September 13, 1996, certain subscribers advanced $272,065 to
Piedmont Technologies Inc. for the purchase of 1,480,000 common
shares at a price of $0.18 per share. The Company did not accept
the subscriptions and did not issue shares to the subscribers. By
an agreement dated July 30, 1997, for consideration of the
issuance of promissory notes in the amount of $41,104, the
subscribers released and forgave the Company from the issue of any
shares subscribed for.
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------- ----------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
--------------- ------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Computer equipment $ 72,356 $ 44,961 $ 27,495 $ 34,607
Telephone and equipment 33,571 20,446 13,125 21,864
Computer software 154,620 98,943 55,677 102,411
Leasehold improvements - - - 1,843
------------------------------------------------- ----------------
$ 260,547 $ 164,350 $ 96,297 $ 160,725
================================================= ================
</TABLE>
F-19
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
5. INTANGIBLES
<TABLE>
<CAPTION>
1999 1998
------------------------------------
<S> <C> <C>
Goodwill, at cost $ 81,404 $ 81,404
Technology, at cost 978,000 -
------------------------------------
1,059,404 81,404
Less: accumulated amortization (81,437) (37,989)
------------------------------------
$ 977,967 $ 43,415
====================================
</TABLE>
Goodwill arose on the acquisition of certain assets (Note 3(b)(iii)).
Technology cost was determined as follows:
Consideration paid pursuant to an amended agreement dated June 30, 1999
<TABLE>
<CAPTION>
Number of Stated
Shares Value
---------------------------------
<S> <C> <C>
Common shares issued at a fair market value of $0.27 per share 3,000,000 $ 810,000
Fair market value of the option to purchase 2,000,000 common shares at $0.40
per share to June 30, 2001 (based on the Black-Scholes model)
- 300,000
---------------------------------
3,000,000 1,110,000
Less: portion of the consideration attributable to deferred compensation
expense 356,756 132,000
---------------------------------
2,643,244 $ 978,000
=================================
</TABLE>
6. NOTES PAYABLE
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Unsecured and due August 31, 1999, with interest at 5% p.a. $ 35,486 $ 35,486
=============== =================
</TABLE>
F-20
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
7. CAPITAL STOCK
a) During the year ended July 31, 1999, the Company issued promissory
notes in the amount of $737,000 convertible into common stock at the
lesser of $0.50 per share and 70% of the market price of the shares.
The notes bear interest at a rate of 10% per annum.
An amount of $315,857 has been charged to interest expense arising from
the 30% discount from fair market value of the shares at the date of
issue of the promissory notes.
The Company issued 2,707,430 common shares on conversion of the
promissory notes.
b) On May 29, 1999 the Company adopted a Stock Option Plan that provides
for the granting to employees of stock options designed to qualify as
"incentive stock options" under the Internal Revenue Code. An option
gives the participant the right to purchase from the company a
specified number of shares of common stock for a specified price during
a specified period not exceeding 10 years. Options become exercisable
two years after date of grant. A total of 3,000,000 shares of common
stock have been reserved for issuance under the Stock Option Plan.
Options issued as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Weighted Average
Number of Exercise Price Exercise Price Per Number
Shares Per Share Share Exercisable
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding August 1, 1998 0 - - 0
Granted 2,200,000 $0.36-0.40 0.39 2,100,000
-------------- ---------------
Outstanding July 31, 1999 2,200,000 $0.36-0.40 0.39 2,100,000
============== ===============
</TABLE>
The options outstanding at July 31, 1999 expire May 26, 2009.
The weighted-average grant-date fair value of options granted in 1999
was $0.15. The fair value of the options is estimated using the
Black-Scholes option pricing model with the following assumptions:
dividend yield, Nil percent for all years; expected volatility of 127%;
risk free interest rate of 5.25% ; and expected life of 10 years.
F-21
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
7. CAPITAL STOCK (Continued)
The Company has elected not to adopt the fair value method of
accounting for employee stock compensation plans as prescribed by
Statement of Financial Accounting Standards (SFAS) No. 123 issued by
the Financial Accounting Standards Board. Instead, as permitted by SFAS
No.123, the Company has elected to continue to apply the intrinsic
value method of accounting prescribed by Accounting Principles Board
Opinion No.25. If the fair value method of accounting under SFAS No.
123 had been followed, net income and earnings per share of the Company
would have been reduced by amortization of the grant-date fair value of
the options over the vesting period.
The pro forma net loss and earnings per share for 1999, 1998 and 1997
as if the fair value method had been used is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
<S> <C> <C> <C>
Net loss $ 6,781,648 $ 588,085 $ 55,589
------------------- ------------------ ------------------
Per share: $ 0.40 $ 0.06 $ 0.01
=================== ================== ==================
</TABLE>
Under the Stock Option Plan the Company may grant non -qualifying stock
options at an exercisable price of not less than 75% of fair market
value at the date the option is granted. Compensation expense will be
recognized at the date of grant of any non-qualifying options at the
difference between the fair market value and the exercise price. No
non-qualifying stock options are granted as at July 31, 1999.
8. RELATED PARTY TRANSACTIONS
(i) During the year ended July 31, 1999, the Company paid $4,662,716 (1998
- $52,926; 1997 - $21,899) to a director for salaries. The amount paid
includes the issue of 5,000,000 common shares of the Company, at a
value of $0.25 per share issued pursuant to an employment agreement,
and 8,085,000 common shares at a value of $0.40 per share for
accomplishing certain development goals.
(ii)Amounts due to and from related parties are to a director of the
Company and to the director of a subsidiary company.
F-22
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
9. COMMITMENTS
The Company entered into an employment agreement dated July 1, 1999 with
a director for a period of three years at an annual remuneration of
$150,000. In addition, and as an inducement to enter into the employment
contract, the Company has agreed to issue to the director, 5,000,000
common shares. The employment agreement also grants the director an
annual Stock Appreciation Right ("SAR"), pursuant to which, on (i)
February 15, 2000, the director shall be entitled to receive a sum of
money in an amount equal to four hundred thousand (400,000) times the
difference between the "fair market value" of the Company's common stock
at the close of trading on June 30, 1999 and February 1, 2000, (ii) on
February 15, 2001, the director shall be entitled to receive a sum of
money in an amount equal to six hundred thousand (600,000) times the
difference between the "fair market value" of the Company's common stock
at the close of trading on February 1, 2000 and February 1, 2001 and
(iii) on February 15, 2002, the director shall be entitled to receive a
sum of money in an amount equal to six hundred thousand (600,000) times
the difference between the "fair market value" of the Company's common
stock at the close on February 1, 2001 and February 1, 2002 (Note 12).
No expense has been accrued at July 31, 1999 as the market price of the
stock at July 31, 1999 is less than the market price at June 30, 1999.
Subsequent to July 31, 1999, the Company entered into an agreement with a
director to issue 3,200,000 common shares of the Company to the director
in consideration of the relinquishment of all entitlements under the
Stock Appreciation Rights referred to above.
10. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect an
entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 issue affecting
the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
F-23
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
11. OTHER
During the year the Company changed its name from Phon-net Corporation
to Phon-net.com, Inc.
12. SUBSEQUENT EVENTS
a) The Company issued 3,200,000 common shares to the director of the
Company at an ascribed value of $1,664,000, and for which the
director relinquished all rights to the stock appreciation rights
referred to in Note 9.
b) On January 6, 1999, the Company entered into an agreement with
Quad-Linq Software, Inc. ("Quad-Linq"), under which Quad-Linq agreed
to develop, maintain, support and upgrade the Company's Direct
Connect software. As consideration, Quad-Linq was to acquire a 49%
interest in the software, and 49% of the net revenues from sales of
the software. Under a June 30, 1999 amendment to the original
agreement, Quad-Linq relinquished its ownership interest in the
software, as well as its percentage of net revenues from sales of the
software in consideration of the issuance of 3,000,000 common shares,
and the granting of options to purchase an additional 2,000,000
common shares at $0.40 per share to June 30, 2001.
As a result of the subsequent dissolution of Quad-Linq, the Company
entered into an agreement, dated December 3, 1999, with two former
principals of Quad-Linq, who agreed to assume Quad-Linq's obligations
under the June 30, 1999 amended agreement, in consideration of the
assignment of the stock options previously granted to Quad-Linq.
c) By an investor relations agreement dated December 1, 1999, the
Company granted an option to purchase 1,000,000 common shares at a
price of $0.40 per share until July 30, 2000, and 1,000,000 common
shares at a price of $1.00 per share until December 31, 2000. The
fair value consideration of these options is $163,397 and $112,929,
respectively. On February 17, 2000, the Company issued 1,000,000
common shares for cash consideration of $400,000 on the exercise of
the initial option.
d) By an agreement dated February 2, 2000, the Company contracted to pay
$54,000 for software development and implementation.
e) The Company issued 200,000 common shares at an ascribed value of
$762,000 for the termination of an investor relations contract.
F-24
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
12. SUBSEQUENT EVENTS (Continued)
f) Pursuant to an investor relations agreement dated December 3, 1999,
the Company has issued 125,000 common shares at an ascribed value of
$51,250, and granted an option to acquire 100,000 common shares at
$0.40 per share until February 15, 2000, and a further 100,000 common
shares at $0.50 per share until May 15, 2000. The fair value
consideration of these options is $8,365 and $10,140 respectively. On
February 17, 2000, the Company issued 100,000 common shares for cash
consideration of $40,000 on the exercise of the initial option.
g) In accordance with the terms of an employment agreement, the
Company's vice president of technology is to be issued 100,000 common
shares on each of November 1, 1999, 2000 and 2001. The initial
100,000 has been issued at an ascribed value of $9,375.
h) The Company has issued 7,000 common shares for services at an
ascribed value of $26,670.
i) In December 1999 and January 2000, the Company issued promissory
notes in the amount of $600,250. The notes bear interest at 8% per
annum, and are convertible to a maximum of 1,886,500 common shares
(including 171,500 common shares relating to the conversion of
accrued interest totalling $60,025), and a maximum of 943,250
non-transferable share purchase warrants (including 85,750 warrants
relating to the conversion of accrued interest), commencing 120 days
from the loan date for a twelve month period at a price of $0.35 per
share. The number of share purchase warrants on conversion will be
half the number of common shares. Each warrant will entitle the
holder to purchase one additional common share at a price of $0.50
per share for a period of twelve months from the conversion date.
Should the notes not be converted, principal and accrued interest is
repayable over the period April to May 2001. Principal unpaid after
the due date accrues interest at 18% per annum.
In accordance with EITF98-5, over the period from the date the
principal on the notes was advanced to the first available date of
convertibility (120 days), a total amount of $471,525 will be charged
to interest expense, representing the discount from fair market value
of the Company's common shares at the date of the issue of the
promissory notes.
F-25
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
12. SUBSEQUENT EVENTS (Continued)
j) Subsequent to July 31, 1999, the Company has entered into the
following strategic alliances:
(i) On September 8, 1999, the Company entered into a distribution
agreement with Wazzu Corporation, a U.S. corporation, to serve
as a non-exclusive distributor of the Direct Connect software
throughout the United States. Under the agreement, the Company
has agreed to assist Wazzu in promoting the software to its
customer database. Wazzu will pay an annual licence fee for each
customer who agrees to licence the software after a six month
trial period. The agreement cannot be cancelled prior to
September 8, 2000 without the mutual consent of the partners,
except in the event of uncured material breaches or a party's
bankruptcy.
(ii) On September 8, 1999, the Company entered into a licence
agreement with G.T.C. Transcontinental Group Ltd., a Canadian
corporation. The agreement grants Transcontinental the
non-exclusive right to use, market and sublicence the Direct
Connect software in Canada, throughout the two year initial, and
one year renewal term of the agreement. The Company will receive
a licence fee from Transcontinental for each Direct Connect
software licence activated as a result of a product sale by
Transcontinental. The agreement may be terminated by either
party in the event of an uncured breach, after notice, by the
other party. The agreement will terminate without notice in the
event of the dissolution or bankruptcy of a party.
(iii)On December 2, 1999, the Company entered into an exclusive
licence distribution agreement with Volt Information Sciences,
Inc. The agreement grants Volt the exclusive licence to use,
market, distribute and sublicence the Direct Connect software
throughout the United States, subject to the terms of the
agreement with Wazzu.
The Company is entitled to a licence fee from Volt for each
Direct Connect licence activated by reason of agreements
established between Volt and its customers and end-users. Volt
will pay the Company licence fees based upon its receipt of
payment from its customers and end-users, however, Volt must pay
at least a pro-rated three month licence fee irrespective of its
actual receipt of payment. Licence fees from Volt are payable
monthly. The Company is also entitled to receive 20% of all
sales or licence fees generated by Volt from the user database
arising by reason of the agreement. In the event Volt does not
average the sale of 1,000,000 annual software licences for any
two successive years of the agreement, the Company has the right
to terminate exclusivity of the licence granted to Volt.
F-26
<PAGE>
PHON-NET.COM, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
(Stated in U.S. Dollars)
12. SUBSEQUENT EVENTS (Continued)
The term of the agreement with Volt is one year. Volt may renew
the agreement for additional successive one-year terms provided
that it is not in material default of the agreement, and has
paid all fees. The agreement may be terminated by either party
following an uncured breach of the agreement by the other party,
or upon a party's liquidation, bankruptcy or similar event.
(iv) On December 9, 1999, the Company entered into two licence
agreements with Brocker Technology Group (NZ) Limited, a
publicly-held New Zealand corporation. One licence agreement
covers New Zealand and the other covers Australia. The
agreements grant Brocker the exclusive licence to use, market,
distribute and sublicence the Direct Connect software throughout
Australia and New Zealand.
The Company will be entitled to a licence fee from Brocker for
each Direct Connect licence activated for Brocker. Licence fees
from Brocker are payable quarterly. The term of the agreement
with Brocker is one year, upon expiration of which, Brocker may
renew the agreement for one additional year. The agreement by
the other party, or upon a party's liquidation, bankruptcy or
similar event.
None of these agreements results in any significant funding
obligations or contingent liabilities for the Company.
F-27
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
Page
----
Available Information........................
Prospectus Summary...........................
Risk Factors.................................
Capitalization...............................
Use of Proceeds..............................
Price Range of Common Stock
and Dividend Policy.......................
Forward-Looking Statements...................
Management's Discussion and
Analysis or Plan of Operation.............
Business.....................................
Management...................................
Executive Compensation.......................
Certain Transactions.........................
Principal Shareholders.......................
Description of Securities....................
Selling Securityholders......................
Plan of Distribution ........................
Shares Eligible for Future Sale..............
Legal Matters................................
Experts......................................
Additional Information.......................
Financial Statements.........................
9,015,000 SHARES
PHON-NET.COM, INC.
PROSPECTUS
----------
________________, 2000
UNTIL _________, 2000 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRI BUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act (the "Corporation Act") permits
the indemnification of directors, employees, officers and agents of Florida
corporations. The Company's Articles of Incorporation (the "Articles") and
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by the Corporation Act.
The provisions of the Corporation Act that authorize indemnification do
not eliminate the duty of care of a director, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Florida law. In addition, each director will continue to
be subject to liability for (a) violations of criminal laws, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (b) deriving an improper personal
benefit from a transaction, (c) voting for or assenting to an unlawful
distribution and (d) willful misconduct or conscious disregard for the best
interests of the Company in a proceeding by or in the right of a shareholder.
The statute does not affect a director's responsibilities under any other law,
such as the Federal securities laws.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed 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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed 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 estimated expenses payable by the Company in connection with the
distribution of the securities being registered are as follows:
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SEC Registration and Filing Fee................................................. $ 1,928
Legal Fees and Expenses*........................................................ 35,000
Accounting Fees and Expenses*................................................... 9,500
Financial Printing*............................................................. 3,000
Transfer Agent Fees*............................................................ 1,250
Blue Sky Fees and Expenses*..................................................... 750
Miscellaneous*.................................................................. 2,572
-------
TOTAL................................................................. $54,000
=======
</TABLE>
* Estimated
None of the foregoing expenses are being paid by the selling securityholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Effective October 5, 1998, Phon-Net Corp., a Nevada corporation,
acquired all of the issued and outstanding shares of Piedmont Technologies, Inc.
and its subsidiaries, The National- For-Sale Phone Company and VNETT Enterprises
Inc., in a reorganization changing the domicile of Piedmont from British
Columbia to Nevada. In connection with the reorganization, Phon-Net Corp. issued
5,000,000 shares of its common stock to the 46 former shareholders of Piedmont
Technologies Inc. The reorganization of Piedmont and the issuance of shares of
Phon- Net Corp. in connection therewith did not involve a sale of securities and
was, therefore, exempt from the registration requirements of the Securities Act
of 1933, as amended (the "Act") since the transaction was one of form and not
substance. Moreover, this was an extraterritorial transaction, effected outside
the United States, to non-U.S. persons, and by placing a legend on the
certificates, restricting transferability of the shares absent registration
under the Act or, in the opinion of counsel, the availability of an applicable
exemption therefrom, the Company took reasonable precautions to assure that the
securities came to rest abroad. The Company, therefore, also claims exemptions
from the registration requirements of the Act under Regulation S and/or the
SEC's position announced in Interpretive Release 4708, dated July 9, 1964
("Release 4708").
Effective October 5, 1998, the Company acquired all of the outstanding
shares of Phon- Net Corp., a Nevada corporation, and issued an aggregate of
11,410,000 shares of our common stock to the 48 former shareholders of Phon-Net
Corp. Pursuant to the Share Exchange Agreement governing the acquisition, (a)
each shareholder of Phon-Net Corp. represented that he or she was acquiring the
Company's shares for his or her own account, for investment purposes only and
not with a view to the resale or distribution thereof, and (b) the Company made
available to Phon-Net Corp. and its shareholders, specified information
concerning the Company, including corporate and shareholder records and audited
financial statements. In addition, all but two of the purchasers was a former
shareholder of Phon-Net Corp. and was fully familiar with the business of
Phon-Net (with such two shareholders being attorneys who, from time to time, had
represented Phon-Net and were familiar with its operations). Therefore, each of
such
II-2
<PAGE>
persons was "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. As a result, the transaction was exempt from the
registration requirements of the Act, by reason of Section 4(2) of the Act and
the rules and regulations thereunder, including, without limitation, Rule 506.
Moreover, this was an extraterritorial transaction, effected outside the United
States, to non-U.S. persons, and by placing a legend on the certificates,
restricting transferability of the shares absent registration under the Act or,
in the opinion of counsel, the availability of an applicable exemption
therefrom, the Company took reasonable precautions to assure that the securities
came to rest abroad. The Company, therefore, also claims exemptions from the
registration requirements of the Act under Regulation S and/or the SEC's
position announced in Release 4708.
On or about November 1, 1998, the Company issued 200,000 shares of
common stock to RCS Financial Group ("RCS"), as consideration for services
provided to the Company valued at $200,000 or $.10 per share. The services
provided by RCS consisted of identifying and introducing the Company to
prospective reverse acquisition candidates and providing guidance in connection
with structuring such acquisitions. RCS provides no on-going services to the
Company. The issuance of these shares was exempt from the registration
requirements of the Act by reason of Rule 504 of Regulation D under the Act.
On or about November 1, 1998, the Company issued 350,000 shares of
common stock valued at $35,000 or $.10 per share, to New Iberian Equity Managers
Ltd. ("New Iberian"). The shares were issued to replace 350,000 registered
shares delivered by New Iberian to Schenstead, Woytkiw & Associates ("SWA"), in
payment of a debt of the Company. The debt was incurred by the Company for
services rendered to it by SWA in preparing a profile of the Company for
dissemination to brokers, market-makers, other interested members of the
investment community and those interested in the Company's products and
technology, its handling of telephone inquiries, including those in response
thereto, as well as providing introductions to market- makers and funding
sources. Neither New Iberia nor SWA provides on-going services to the Company.
The issuance of these shares was exempt from the registration requirements of
the Act by reason of Rule 504 of Regulation D under the Act.
On or about January 15, 1999, the Company issued an aggregate of
115,000 shares of common stock to Patrick Braid (as to 45,000 shares), James
Kyle (as to 45,000 shares) and Todd Violet (as to 25,000 shares), valued in the
aggregate at $25,000 or approximately $.217 per share. Messrs. Kyle and Braid
are principals of Kason, Inc., a former provider of product marketing and
business and financial consulting services to the Company. The shares were
issued, at the request of Messrs. Kyle and Braid, as an inducement for them to
cause Kason, Inc. to enter into agreements with the Company. Neither Kason, Inc.
nor Messrs. Kyle or Braid provides any continuing services to the Company. The
Shares were issued to Mr. Violet as partial consideration for a $21,000 loan to
the Company, as well as for identifying and introducing the Company to
prospective market-makers and sources of funding. He provides no continuing
services to the Company. The issuance of these shares was exempt from the
registration requirements of the Act by reason of Rule 504 of Regulation D under
the Act.
II-3
<PAGE>
On or about January 15, 1999, the Company issued 10,000 shares of
common stock to L. J. Hassey for a purchase price of $5,000 or $.50 per share.
The issuance of these shares was exempt from the registration requirements of
the Act by reason of Rule 504 of Regulation D under the Act.
Between February 9 and 12, 1999, the Company issued 230,000 shares of
common stock to J. Prince, Inc., for a purchase price of $100,000 or
approximately $.435 per share. The issuance of these shares was exempt from the
registration requirements of the Act by reason of Rule 504 of Regulation D under
the Act.
On or about March 5, 1999, the Company issued 220,000 shares of common
stock to Roger Betterton for a purchase price of $50,000 or approximately $.23
per share. Mr. Betterton, individually and through Quad-Linq Systems, Inc., a
corporation owned by Mr. Betterton and Christopher Georgelin, provides software
development services to the Company. Accordingly, the issuance of these shares
was exempt from the registration requirements of the Act by reason of Rule 504
under Regulation D of the Act.
On or about March 5, 1999, the Company issued 40,000 shares of common
stock to Bryce Boucher as consideration for printing services provided to the
Company valued at $20,000 or $.50 per share. The issuance of these shares was
exempt from the registration requirements of the Act by reason of Rule 504 of
Regulation D under the Act.
On or about March 24, 1999, the Company issued convertible promissory
notes in the aggregate principal amount of $737,000 to five accredited
investors, pursuant to Rule 504 of Regulation D of the Act. The notes bear
interest at the rate of 10% per annum and are convertible into shares of the
Company's common stock at the lower of $.50 per share or 70% of the average
closing price for the common stock over the five trading days immediately
preceding the conversion date. As of April 30, 1999 all of the notes had been
converted into an aggregate of 2,707,430 shares of common stock. Cash interest
payments of $4,278.91 have been made on the notes, and an additional $315,857 in
interest expense has been recorded as a result of the discount from fair market
value of the shares issued on conversion of the notes.
On or about May 1, 1999, the Company issued 8,085,000 shares of common
stock to Brian Collins, the Company's President, CEO and sole director, an
accredited investor. The shares were issued pursuant to the Company's
acquisition of Phon-Net Corp., as consideration for the satisfaction of certain
obligations contained in the acquisition agreement. In addition, the shares
issued contained a legend restricting their transferability absent registration
under the Act or an available exemption therefrom. The shares were issued in
reliance upon exemptions under Sections 4(2) and/or 4(6) of the Act and the
rules and regulations thereunder, including, without limitation, Rule 506..
Moreover, this was an extraterritorial transaction, effected outside the United
States, to a non-U.S. person, and by placing a legend on the certificates,
restricting transferability of the shares absent registration under the Act or,
in the opinion of counsel, the availability of an applicable exemption
therefrom, the Company took reasonable precautions to assure that the securities
came to rest abroad. The Company, therefore, also claims exemptions
II-4
<PAGE>
from the registration requirements of the Act under Regulation S and/or the
SEC's position announced in Release 4708.
On or about May 19, 1999, the Company issued 400,000 shares of common
stock, having a market value of $164,000, to Market Survey's International,
Inc., as consideration for public relations services to be provided to the
Company. Market Survey's International, Inc., whose beneficial owner is Mark
Vinci, no longer provides services to the Company. It had access to information
concerning the Company, has such experience in financial and business matters to
enable it to evaluate the risks and merits of acquiring such shares, and was,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. In addition, the shares issued contained a legend
restricting their transferability absent registration under the Act or an
available exemption therefrom. Accordingly, this transaction was exempt from the
registration requirements of the Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, including, without limitation, Rule 506..
On or about May 28, 1999, the Company issued 60,000 shares, having a
market value of $20,500, to 1st Net Technologies, Inc. (OTCBB:FNTT), which,
along with a $2,000 fee, were paid as consideration for public relations,
marketing and database services to be provided for the Company. 1st Net
Technologies, Inc. no longer provides services to the Company. It had access to
information concerning the Company, has such experience in financial and
business matters to enable it to evaluate the risks and merits of acquiring such
shares, and was, therefore, "sophisticated" within the meaning of regulations
promulgated under Federal securities laws. In addition, the shares issued
contained a legend restricting their transferability absent registration under
the Act or an available exemption therefrom. Accordingly, this transaction was
exempt from the registration requirements of the Act by reason of Section 4(2)
of the Act and the rules and regulations thereunder, including, without
limitation, Rule 506..
On or about March 5, 1999 the Company issued 250,000 shares of common
stock, having a market value of $102,500, to Kason, Inc., as consideration for
product distribution and financial and business consulting services to be
rendered to the Company. The beneficial owners of Kason, Inc. are James Kyle and
Patrick Braid. In February 2000, we issued an additional 200,000 shares, having
a market value of $762,500, to Kason, Inc. and its affiliate in consideration of
termination of the distribution agreement. The Company paid a fee of 5,000
shares, having a market value of $18,313, to Bryce Boucher, a third-party
intermediary, for his services in negotiating the terms of the termination
agreement. Kason, Inc., its affiliate and Mr. Boucher had access to information
concerning the Company, have such knowledge and experience in financial and
business matters to enable it to evaluate the risks and merits of acquiring such
shares, and were, therefore, "sophisticated" within the meaning of regulations
promulgated under Federal securities laws. In addition, the shares issued
contained a legend restricting their transferability absent registration under
the Act or an available exemption therefrom. Accordingly, the issuance of these
shares is exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder, including,
without limitation, Rule 506..
On or about May 28, 1999, the Company issued an aggregate of 200,000
shares of common stock, valued at $68,000, to Charles Jarvis and Karen Argone,
its principals, in
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<PAGE>
consideration of market development and sales and promotion of the Company's
products. BCD Online and its principals had access to information concerning the
Company, has such knowledge and experience in financial and business matters to
enable it to evaluate the risks and merits of acquiring such shares, and were,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. In addition, the shares issued contained a legend
restricting their transferability absent registration under the Act or an
available exemption therefrom. Accordingly, the issuance of these shares is
exempt from the registration requirements of the Act by reason of Section 4(2)
of the Act and the rules and regulations thereunder, including, without
limitation, Rule 506..
On or about July 1, 1999, the Company issued 5,000,000 shares of common
stock, valued at $1,250,000, to Brian Collins, as an inducement to provide his
employment services to the Company. Mr. Collins is an executive officer and
director of the Company and is fully familiar with the business of the Company.
In addition, the shares issued contained a legend restricting their
transferability absent registration under the Act or an available exemption
therefrom. Accordingly, the issuance of these shares is exempt from the
registration requirements of the Act by reason of Sections 4(2) and 4(6) of the
Act and the rules and regulations thereunder, including, without limitation,
Rule 506.. Moreover, this was an extraterritorial transaction, effected outside
the United States, to a non-U.S. person, and by placing a legend on the
certificates, restricting transferability of the shares absent registration
under the Act or, in the opinion of counsel, the availability of an applicable
exemption therefrom, the Company took reasonable precautions to assure that the
securities came to rest abroad. The Company, therefore, also claims exemptions
from the registration requirements of the Act under Regulation S and/or the
SEC's position announced in Release 4708.
On or about July 1, 1999, the Company issued an aggregate of 3,000,000
shares of common stock and options to purchase 2,000,000 shares of common stock,
valued in the aggregate at $1,110,000, to Quad-Linq Software, Inc. and Roger
Betterton, Christopher Georgelin and Seidmehdi Seidbagherzadeh, its three
principals, in consideration of the relinquishment of ownership of and net
revenue rights to the Company's Direct Connect software. The investors had
access to information concerning the Company, have such knowledge and experience
in financial and business matters to enable them to evaluate the risks and
merits of acquiring such shares, and were, therefore, "sophisticated" within the
meaning of regulations promulgated under Federal securities laws. In addition,
the shares issued contained a legend restricting their transferability absent
registration under the Act or an available exemption therefrom. Accordingly, the
issuance of these shares is exempt from the registration requirements of the Act
by reason of Section 4(2) of the Act and the rules and regulations thereunder,
including, without limitation, Rule 506.. Moreover, this was an extraterritorial
transaction, effected outside the United States, to non-U.S. persons, and by
placing a legend on the certificates, restricting transferability of the shares
absent registration under the Act or, in the opinion of counsel, the
availability of an applicable exemption therefrom, the Company took reasonable
precautions to assure that the securities came to rest abroad. The Company,
therefore,
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<PAGE>
also claims exemptions from the registration requirements of the Act under
Regulation S and/or the SEC's position announced in Release 4708.
On or about July 1, 1999, the Company issued 100,000 shares of common
stock, valued at $27,000, to attorneys with Atlas Pearlman, P.A. ("AP"), counsel
to the Company. The investors had access to information concerning the Company
and has such knowledge and experience in financial and business matters to
enable it to evaluate the risks and merits of acquiring such shares, and were,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. In addition, the shares issued contained a legend
restricting their transferability absent registration under the Act or an
available exemption therefrom. Accordingly, the issuance of these shares is
exempt from the registration requirements of the Act by reason of Section 4(2)
of the Act and the rules and regulations thereunder, including, without
limitation, Rule 506..
On December 1, 1999, the Company granted an option to AMYX Corporation
to purchase 1,000,000 shares of common stock at an exercise price of $.40 per
share until July 31, 2000. Subject to exercise of such option, the Company
granted AMYX Corporation a second option to purchase 1,000,000 shares at an
exercise price of $1.00 per share until December 31, 2000. The options were
valued, in the aggregate, at $276,326. The beneficial owner of AMYX Corporation
is Jim Mitchell. The options were granted as consideration for investor
relations services to be provided to European investors, including providing
introductions to members of the European investment community, disseminating
corporate promotional materials, drafting corporate promotional materials
including press releases and assisting in capital raising, if so requested by
the Company. AMYX Corporation had access to information concerning the Company,
has such knowledge and experience in financial and business matters to enable it
to evaluate the risks and merits of investing in the Company, and was,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. On February 11, 2000, AMYX Corporation exercised and
paid for the initial option to purchase 1,000,000 shares. The shares that were
issued contained a legend restricting their transferability absent registration
under the Act or an available exemption therefrom. Accordingly, the grant of
options and issuance of shares is exempt from the registration requirements of
the Act by reason of Section 4(2) of the Act and the rules and regulations
thereunder, including, without limitation, Rule 506.. Moreover, this was an
extraterritorial transaction, effected outside the United States, to non-U.S.
persons, and by placing a legend on the certificates, restricting
transferability of the shares absent registration under the Act or, in the
opinion of counsel, the availability of an applicable exemption therefrom, the
Company took reasonable precautions to assure that the securities came to rest
abroad. The Company, therefore, also claims exemptions from the registration
requirements of the Act under Regulation S and/or the SEC's position announced
in Release 4708.
In December 1999, the Company agreed to issue 125,000 shares of common
stock, and granted an option to purchase 200,000 shares of common stock to
Alliance Corporate Services, Inc. Options to purchase 100,000 shares carry an
exercise price of $.40 per share and may be
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<PAGE>
exercised until February 15, 2000. The 125,000 shares were issued on February
17, 2000. Options to purchase the remaining 100,000 shares carry an exercise
price of $.50 per share and may be exercised until May 15, 2000. The shares and
options were valued, in the aggregate, at $69,755. The shares were issued and
options were granted as consideration for investor relations and marketing
consulting services to be provided to Canadian investors, including providing
introductions to members of the Canadian investment community, disseminating
corporate promotional materials, drafting corporate promotional materials
including press releases and assisting in capital raising, if so requested by
the Company. Alliance Corporate Services, Inc. had access to information
concerning the Company, has such knowledge and experience in financial and
business matters to enable it to evaluate the risks and merits of investing in
the Company, and was, therefore, "sophisticated" within the meaning of
regulations promulgated under Federal securities laws. On February 15, 2000,
Alliance Corporate Services, Inc. exercised and paid for the option to purchase
100,000 shares, on behalf of its principals Peter Laipnieks and Randy Hayward.
The shares that were issued contained a legend restricting their transferability
absent registration under the Act or an available exemption therefrom.
Accordingly, the grant of options and issuance of shares is exempt from the
registration requirements of the Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, including, without limitation, Rule 506..
Moreover, this was an extraterritorial transaction, effected outside the United
States, to non-U.S. persons, and by placing a legend on the certificates,
restricting transferability of the shares absent registration under the Act or,
in the opinion of counsel, the availability of an applicable exemption
therefrom, the Company took reasonable precautions to assure that the securities
came to rest abroad. The Company, therefore, also claims exemptions from the
registration requirements of the Act under Regulation S and/or the SEC's
position announced in Release 4708.
On December 31, 1999, the Company issued 3,200,000 shares of its common
stock, valued at $1,664,000, to Brian Collins, and Mr. Collins surrendered all
stock appreciation rights previously granted to him under his employment
agreement. Mr. Collins is an executive officer of the Company and the shares
that were issued contained a legend restricting their transferability absent
registration under the Act or an available exemption therefrom. Accordingly, the
issuance of these shares is exempt from the registration provisions of the Act
by reason of Sections 4(2) and 4(6) of the Act and the rules and regulations
thereunder. Moreover, this was an extraterritorial transaction, effected outside
the United States, to a non-U.S. person, and by placing a legend on the
certificates, restricting transferability of the shares absent registration
under the Act or, in the opinion of counsel, the availability of an applicable
exemption therefrom, the Company took reasonable precautions to assure that the
securities came to rest abroad. The Company, therefore, also claims exemptions
from the registration requirements of the Act under Regulation S and/or the
SEC's position announced in Release 4708.
In December 1999 and January 2000, we issued an aggregate of $600,250
principal amount of our 8% convertible promissory notes, for an aggregate
purchase price of $600,250. The securities were sold to 27 non-U.S. persons.
This was an extraterritorial transaction, effected outside the United States, to
non-U.S. persons, and was (a) not subject to the registration provisions of
Federal securities laws and (b) was exempt from the registration requirements
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<PAGE>
thereof pursuant to the provisions of Regulation S. The purchasers had access to
financial and other information about us and was afforded the opportunity to ask
questions of us concerning our operations and the terms of the offering. The
notes that were issued contained a legend restricting their transferability
absent registration under the Act or an available exemption therefrom. Each
purchaser represented that he was acquiring the shares for investment purposes
and the documentation evidencing the transaction contained the disclosure
required by Regulation S.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<S> <C>
2 Agreement of Share Exchange between XGA Golf International, Inc. and Phon-Net Corp.(1)
3.1(a) Articles of Incorporation of XGA Golf International, Inc.(1)
3.1(b) Articles of Amendment changing name to Agrosol, Inc.(1)
3.1(c) Articles of Amendment changing name to Phon-Net Corporation (1)
3.1(d) Articles of Amendment changing name to Phon-Net.com, Inc.(1)
3.1(e) Articles of Amendment increasing authorized capital (1)
3.2 Bylaws (1)
5 Opinion and Consent of Atlas Pearlman, P.A.(1)
10.1 Stock Option Plan (1)
10.2 Employment Agreement with Brian Collins (1)
10.3 Office Lease for 750 Pender Street (1)
10.4 Agreement, as amended, with Quad-Linq Software, Inc.(1)
10.5 Employment Agreement with Solan Young (1)
10.6 License Agreement with Transcontinental Group (1)
10.7 Agreement with Wazzu Corporation(1)
10.8 Agreements with Brian Collins re: SARs(1)
10.9 License Agreement with Brocker Technology Group (NZ) Ltd.(Australia)(1)
10.10 License Agreement with Brocker Technology Group (NZ) Ltd.(New Zealand)(1)
10.11 License Distribution Agreement with Volt Information Sciences, Inc.(1)
10.12 Form of 8% Convertible Promissory Note, including Form of Common Stock Purchase Warrant (1)
10.13 Amendment to License Agreement with Transcontinental Group (1)
10.14 Agreements with Alliance Corporate Services (1)
10.15 Agreements with AMYX Corporation(1)
10.16 Letter of clarification with Roger L. Betterton and Christopher E. Georgelin (2)
23(i) Consent of Atlas Pearlman, P.A. (see Exhibit 5)(1)
23(ii) Consent of Morgan & Company (2)
21 Subsidiaries of Registrant (1)
27(i) Financial Data Schedule (1)
27(ii) Financial Data Schedule (1)
------------------
(1) Previously filed.
(2) Filed herewith.
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<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") 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 (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by 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 preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to 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 for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Vancouver, British Columbia on June 9, 2000.
PHON-NET.COM, INC.
By: /s/ Brian Collins
----------------------
Brian Collins
Chairman, Chief Executive
Officer, Principal Financial
and Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this Form
SB-2 registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brian Collins Chairman of the Board, Chief June 9, 2000
------------------------------------ Executive Officer, President and
Brian Collins Sole Director (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Sloan Young Vice President of Technology June 9, 2000
------------------------------------ and Operations
Sloan Young
</TABLE>
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.16 Letter of clarification with Roger L. Betterton and
Christopher E. Georgelin
23(ii) Consent of Morgan & Company
