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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A5
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
NETVOICE TECHNOLOGIES CORPORATION
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(Name of small business issuer in its charter)
Nevada 91-1986538
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13747 MONTFORT DRIVE, SUITE 250
DALLAS, TX 75240
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (972) 788-2988
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Securities to be registered under Section 12(b) of the Act: NONE
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Securities registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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PART I
IN THIS REGISTRATION STATEMENT THE TERMS "NETVOICE," "COMPANY," "WE,"
"US" AND "OUR" REFER TO NETVOICE TECHNOLOGIES CORPORATION AND OUR WHOLLY
OWNED SUBSIDIARIES, NETVOICE TECHNOLOGIES, INC. AND NETLD.COM, INC. WE REFER
TO NETVOICE TECHNOLOGIES, INC. AS NVT, INC.; WE REFER TO NETLD.COM, INC. AS
NLD; AND WE REFER TO OUR $.001 PAR VALUE COMMON STOCK AS COMMON STOCK. ALL
REFERENCE TO THE NUMBER OF SHARES OUTSTANDING AND OTHER RELATED CALCULATIONS
AND DATA ARE ADJUSTED THROUGHOUT THIS REGISTRATION STATEMENT TO REFLECT THE 2
FOR 1 STOCK SPLIT WHICH OCCURRED ON MARCH 14, 2000 UNLESS THE CONTEXT
REQUIRES OTHERWISE. A GLOSSARY OF THE TECHNICAL TERMS USED THROUGHOUT THIS
REGISTRATION STATEMENT IS INCLUDED AFTER PART III.
ITEM 1. DESCRIPTION OF BUSINESS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Business," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Registration Statement constitute forward-looking statements.
These statements involve known and unknown risks, significant uncertainties and
other factors what may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" including, but not limited to, "Our limited
operating history," "Our operating losses and anticipate losses will continue in
the foreseeable future," "We intend to pursue multiple streams of revenue," "We
may experience difficulties managing our expanding operations," "We may fail to
establish and maintain strategic relationships" and "We are dependent on sales
agents to market and distribute our products and services."
HISTORY
Our Company is a Nevada corporation. We and our wholly-owned operating
subsidiaries, NetVoice Technologies, Inc. and NetLD.com, Inc., both Nevada
corporations, have executive and operating offices at 13747 Montfort Drive,
Suite 250, Dallas, Texas 75240. Our telephone number is (972) 788-2988. Our
Website address is www.netvoice.net and www.netvoice.com.
The Company is the successor company to NetVoice Technologies, LLC, a Texas
limited liability company that began operations on January 7, 1998. NetVoice
Technologies, LLC was formed for the purpose of developing, acquiring and
operating telephone communication facilities and networks that were intended to
transmit voice over the Internet utilizing conventional and Internet
technologies. NetVoice Technologies, LLC was reincorporated in Nevada on June
30, 1998, as NetVoice Technologies, Inc.
On August 13, 1998, NVT, Inc. concluded a reverse acquisition of Blue
Pines, Inc. in which Blue Pines, Inc. issued 6,000,000 shares of common
stock in exchange for all of the outstanding shares of common stock of
NVT, Inc., the surviving accounting acquirer. As a result of the reverse
acquisition, NVT, Inc. became a wholly-owned subsidiary of Blue Pines, Inc.,
and
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the six former stockholders of NVT, Inc. became the holders of approximately
75% of the outstanding shares of common stock of the Company. The remaining 25%
of the shares were owned by the original non-affiliated stockholders of Blue
Pines, Inc. On August 11, 1998, Blue Pines, Inc. changed its name to NetVoice
Technologies Corporation. The value of assets that NVT, Inc. acquired as a
result of the reverse acquisition was negligible because Blue Pines, Inc. was an
inactive shell at the time of the reverse acquisition. There was no prior
affiliation between the parties. Shares outstanding prior to the reverse
acquisition have been restated to reflect the exchange ratio with Blue Pines,
Inc. See "Principal Shareholders" and "Certain Transactions."
NetLD.com, Inc. was incorporated in the State of Nevada as a wholly-owned
subsidiary of the Company on October 14, 1999. This corporation was initially
formed for the purpose of conducting the traditional long distance telephone
services of the Company. Currently, we have had no activity in this subsidiary
and it is not anticipated traditional long distance will be pursued as part of
our business model. We may disband this entity or use it for other corporate
purposes as yet to be determined.
OVERVIEW
We are a provider of voice transmission over the Internet, which allows our
customers to make high-quality, low-cost telephone calls on their personal
computers or traditional telephones with a technology known as Voice over
Internet Protocol ("VoIP"). The technology has advanced so that we now
communicate from:
* one personal computer to another
* personal computer to a conventional telephone
* conventional phone to conventional phone
We commenced offering our long distance Internet services during the past
year as part of our current business plan. We have aggressively been deploying
VoIP gateways in 25 markets located throughout the United States with leading
manufacturers such as Cisco Systems, Inc. and leading Internet backbone
suppliers. Currently, Cisco Systems supplies us with much of the equipment
involved in establishing our VoIP gateways and building our network.
Furthermore, we participate in the "Jump Start" program with Cisco, where we
receive marketing dollars from them in exchange for our purchase of Cisco
equipment and use of their name in conjunction with our marketing efforts. To
date, we have only received approximately $25,000 from Cisco through this
program. For a more detailed discussion of our relationship with Cisco and
other suppliers, see "Contractual Relationships" below.
The Company's IP telephony network is built to handle and transport IP
telephony minutes. This is accomplished through leased lines that allow us to
connect and expand our network between various cities. Currently each market has
sufficient capacity to provide 50 million minutes of communication time per
year, and this represents our break-even point.
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However, this number will increase as we continue to expand our network. Thus,
the communication time we provide on our network is limited by the size of the
network.
Our goal is to expand our gateway network after an assessment of locations
which provide high potential traffic and investigate new VoIP applications and
develop new installation sites.
Our operations currently do not require the use of any raw materials. Our
major customers in 1999, included IXC Communications, Inc., Caprock
Communications Corporation, World Access, Inc., Landmark Community News and
Z-Tel, Inc. These customers purchase minutes at either a flat rate or on a per
minute basis. We do not believe that the loss of these customers would have a
significant impact on our revenues in the year 2000 due to our current marketing
efforts to other large customers.
We have filed a patent application for a communications enabled browser and
have filed a trademark application for the mark "CAB" as applied to the browser
software. Both of these applications are currently pending.
Since inception, we have spent approximately $25,000 on research and
development involving our network, however none of these costs were borne
directly by our customers.
The Company is not currently subject to any environmental laws.
INDUSTRY BACKGROUND
Management believes the Internet is experiencing unprecedented growth as a
medium for communications and commerce and companies are increasingly using the
Internet as a communications medium. A recent study by E-Marketer, a market
research firm, estimated that 9.4 billion e-mail messages are delivered
daily. Instant text communication through online "chat" rooms is also gaining
widespread acceptance.
We also believe online commerce is also becoming widely accepted as a means
of doing business, however, projections for Internet commerce growth involve a
multitude of variables, many of which cannot be readily predicted. International
Data Corporation projects that commerce over the Internet will grow to
approximately $1.3 trillion in 2003. Projections for Internet commerce growth
involve a multitude of variables, none of which can be reliably predicted.
The use of the Internet to make long distance calls will enable consumers
the ability to talk directly to online sellers and facilitate the online
purchasing experience at lower prices. We believe Internet long distance will
become an important component of online purchasing and communicating with
customers.
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EMERGENCE OF INTERNET TELEPHONY
Internet telephony has emerged as a low cost alternative to traditional
long distance calls. The revenue of an IP telephony service provider depends on
the volume of minutes that it originates, it terminates, or that transits its
network, or a combination of the three. Thus, the minutes of use is the critical
metric for assessing an IP telephony service providers opportunity. According to
International Data Corporation, VoIP Telephony will be 135 billion minutes by
2004, up from 2.7 billion today. IDC also estimates the IP telephony services
annual revenue will reach $19 billion by 2004, however, only 2.75 billion will
be attributed to the domestic market which is our current focus. However, it is
estimated that as IP technology improves, domestic use will increase
substantially.
Internet telephone calls are currently less expensive than traditional long
distance calls primarily because the technology by which Internet phone calls
are made is more cost-effective than the technology by which traditional long
distance calls are made. First, no modifications are necessary to existing home
telephones. Second, transport of the calls between users is more efficient than
traditional long distance technology that uses circuit-switching technology.
Third, calls carried over the Internet or our network bypass a significant
portion of long distance tariffs and taxes because Internet telephony is
currently an unregulated industry. Finally, our network provides a more cost
effective solution because it allows for the transmission of Internet, data,
voice and video over the same network. See "Regulation of the Internet" for a
more detailed description. Management estimates that Internet telephony is on
average approximately 35% cheaper than traditional long distance rates.
We use a technology called "packet-switching" to break voice and fax calls
into discrete data packets, route them over the Internet or our network and
reassemble them into their original form for delivery to the recipient.
Traditional long distance calls, in contrast, are made using a technology called
"circuit switching" which carries these calls over voice telephone networks.
These networks are typically owned by governments or carriers who charge a
tariff for their use. Circuit switching requires a dedicated connection between
the caller and the recipient that must remain open for the duration of the call.
As a result, circuit-switching technology does not allow multiple conversations
to be carried over the same line. The greater efficiency involved in
packet-switching technology creates network cost savings that can be passed on
to the consumer in the form of lower long distance rates.
Currently, there exists certain barriers to entry into the telephony market
which consist of the time to order the necessary hardware and circuits; develop
internal expertise to build and monitor the network and the capital investment
required. We feel our need for capital and the ability to raise capital over the
next twelve (12) months is our major barrier to continue to expand and grow our
network. We also will need to hire and retain key technical personnel.
INTEGRATION OF VOICE INTO THE INTERNET
We believe that Internet telephony offers significant benefits to consumers
and businesses beyond long distance cost savings. The technologies that enable
Internet telephony can be applied to integrate live voice capabilities into the
Web. We believe that this integration can
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enhance the potential for the Internet to become the preferred medium for both
communications and commerce. For example, the integration of voice into the Web
could supplement existing text-based modes of Internet communication such as
e-mail and online chat by adding a live, secure, low-cost or free voice
alternative. We believe that this will be attractive both to consumers and
businesses and allow us to combine our long distance network, Internet access
and voice telephony into a single business model.
In addition, voice-enabling the Web should give Internet shoppers the
ability to speak directly with customer service representatives of online
retailers in order to ask questions and alleviate concerns about online
security. This may increase the probability that a sale is made and may give
online retailers a key competitive advantage by providing them with
opportunities to sell higher margin and additional products to these customers.
Voice-enabling a commercial Web site may also give online retailers the ability
to provide more responsive customer support and service.
Integrating live voice capabilities into the Web would also enable Internet
companies to offer enhanced communications services, such as providing Internet
users with a central source for retrieving voicemail, e-mail, faxes and pages.
We believe this would allow these companies to attract more users to their sites
and to increase the amount of time these users spend on their sites. This
increased usage will allow these Internet companies to attract advertisers and
secure higher advertising rates, thereby increasing revenue.
LIMITATIONS OF EXISTING INTERNET TELEPHONY SOLUTIONS
The growth of Internet telephony has been limited to date due to poor sound
quality attributable to technological issues such as delays in packet
transmission and network capacity limitations. However, recent improvements in
packet-switching technology, new software algorithms and improved hardware have
substantially reduced delays in packet transmissions. In addition, the use of
private networks such as our leased facilities to transmit calls as an
alternative to the public Internet is helping to alleviate network capacity
constraints. These networks are profitable due to the efficiencies obtained with
the use of IP as a method of transport.
Several large long distance carriers, including AT&T and Sprint, have
announced Internet telephony service offerings. However, to date certain of
these announced service offerings have not been deployed on a large scale. Many
also require users to purchase other telecommunications services such as voice
messaging and Internet access. Smaller Internet telephony service providers also
offer low-cost Internet telephony services from personal computers to telephones
and from telephones to telephones. These services, however, are available only
in limited geographic areas. We also believe that existing Internet telephony
service providers rely upon technologies and systems that lack large-scale
billing, network management and monitoring systems, and customer service
capabilities required for the integration of voice communication into the Web.
In addition, many companies currently provide Internet telephony software
and services that allow Internet telephone calls to be made between personal
computers. However, most of
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these companies require both the initiator and the recipient of the call to have
the same software installed on their personal computers and to be online at the
same time.
We view the competition from the large long distance carriers which can
offer Internet telephony at a lower costs as our major limitation to becoming
profitable. This competition will be in the form of lower prices, greater
technological resources and larger amounts of capital to upgrade and expand
their existing long distance networks.
OUR SOLUTION
We will deliver high-quality Internet and telephony services to consumers
and businesses. Our solution provides the following benefits to our customers:
* NATIONAL NETWORK. Currently we offer VoIP services to 25 markets and
are expanding to a nationwide network. Through our network that
includes 25 points of presence (POP's), we are able to offer dial up
Internet service in 13 major markets and full service domestic long
distance nationwide. As we expand our network our costs will continue
to significantly decrease while we continue to offer coast to coast
access.
* LOW COST. Our services allow our customers to make telephone calls,
often at a fraction of the cost of traditional long distance service.
Because the technology that enables long distance calls to be routed
over the Internet is more cost-effective than the technology by which
traditional long distance calls are made, we are able to charge lower
rates than traditional long distance carriers.
* HIGH VOICE QUALITY. We offer high voice and data transmission quality
through our packet-switching network, which reduce packet loss and
delay, route packets efficiently and perform quality-enhancing
functions, such as echo cancellation. We intend to continue to enhance
the voice quality of our services as our customer base and business
grow.
* EASE OF USE AND ACCESS. Our services are designed to be convenient
and easy to access. Access to our network for organizational and
reseller customers is 100% seamless after network initiated
implementation.
* RELIABLE SERVICE. Our network is reliable because its design is
technologically advanced. Fault tolerant design allows us to
expand our network and add capacity by adding switches and
gateways to the existing network. Our system also provides
seamless service and high-quality voice transmission through our
ability to dynamically reroute packets if problems arise. We
believe that our ability to provide reliable service is essential
to the success of the company.
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OUR STRATEGY
While a large number of VoIP companies have been formed in recent years,
most VoIP companies focus on the build out and development of international VoIP
networks, in the effort to capture an ever shrinking high margin revenue base.
Little attention has been given to domestic VoIP with bundled service offerings.
We believe that, in this very competitive landscape that offering many voice and
data transmission options, leasing time (or purchasing minutes) on VoIP networks
will quickly become a commodity business, as the various competitors whittle
margins to gain growth and market share. We feel it is imperative to not only
offer a quality, nationwide network but to also be an aggressive marketing
organization seeking to provide value added products and services. The following
points summarize our overall strategy:
NETWORK STRATEGY
* Build out POP's (points of presence) across the United States in major
cities and grow into markets dominated by the largest long distance
carriers;
* Attract large carrier customers as a means to push telephony
usage minutes through our network; and
* Focus on the domestic market through strategic relationships.
MARKETING STRATEGY
* Search for additional value added products and services in
telephony and forms of communications for our product portfolio;
* Focus on purchasing or licensing products from outside
development organizations; and
* Promote significant effort towards building brand name awareness.
WEBSITE STRATEGY
Currently we have two operational Websites:
* Netvoice.net or netvoice.com is a site devoted to marketing the
Company to the general community of potential customers, and their
employees. This site also includes limited e-commerce capabilities for
residential customers to purchase pre-paid long distance services. We
have not yet begun marketing the ability to purchase low cost, long
distance on-line.
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* CorporateLD.com, is a marketing site emphasizing NetVoice corporate
solutions. The site will eventually allow corporate customers to
access call history and use and make payments towards accounts
on-line. This site will include:
1) Agents corner - information for existing agents and
recruiting information; and
2) Account Information - full, real time access to account
information, provisioning and deactivation.
The Company expects to launch two more sites by the end of the second
quarter 2000. These sites are:
* CollegiateLD.com., a fully functional e-commerce and provisioning web
site focusing on selling Internet and telephony related products into
the college market;
* ResidentialLD.com., a fully functional e-commerce and provisioning
site focusing on selling Internet and telephony related products into
the residential market.
We are focusing on the finalization of all programming related to billing
and provisioning accounts in order to launch the sites. We have spent
approximately $50,000 to build our 4 sites and $30,000 to build an on-line
billing package. We expect to spend $500,000 to market our sites in the first
year. Currently, we have not developed any securities measures with respect
to our sales on our sites. The Company currently has no strategic
relationships associated with our websites other than the contractual
relationships described elsewhere herein.
We have acquired licenses with Call Vision.com, Inc. and Portal
Software, Inc. in order to bill and provision services on-line. Our
agreement with Call Vision.com, Inc. is for an initial one-year term and
includes a $30,000 license fee and minimal monthly fees based on the number
of customers who eventually use this service. Our agreement with Portal
Software, Inc. is for an indefinite term and includes an initial licensing
fee of $90,000.
WEBSITE TRAFFIC AND SALES
* www.netvoice.net (netvoice.com) is currently receiving approximately
14,000 individual visitors per month.
* CorporateLD.com has only been up and running since March 6, 2000, and
accordingly we do not yet have any statistics to date regarding
traffic levels on this site.
At this time, revenue generated via these two sites is insignificant as the
Company has yet to implement an all-out marketing campaign to generate traffic
for these sites.
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WEBSITE AGENTS
Agents will be used in the promotion and sales of our services. We intend
to recruit agents via our websites, where they can apply online for our agent
program, and through our direct sales force. We do not intend to use a
multi-level marketing strategy, but intend to work directly with our agents and
compensate them on a commission basis based on revenue generated.
OUR NETWORK
Voice transmission over the Internet is of very recent origin and was
initially limited to communication from one personal computer to another. The
technology enabling such communication is known as Voice over Internet Protocol
or "VoIP". This technology has become so advanced as to enable voice
communication over the Internet.
* from one personal computer to another
* from a personal computer to a conventional telephone
* from a conventional telephone instrument to another such instrument
CURRENT NETWORK
We have provided long distance services over the Internet for the past
year. We have been working on an aggressive schedule to increase the size of our
network, establish alliances with other long distance carriers with existing
networks, exploit our current installations, and generally attempt to capture a
larger portion of the long distance market. Our VoIP gateway network is
expanding in multiple geographic locations. We currently have operational
gateways in 25 markets:
Albuquerque Fort Worth New Jersey San Antonio
Atlanta Houston New Orleans Tampa
Austin Jacksonville New York Tulsa
Chicago Kansas City Oklahoma City Waco
Dallas Little Rock Omaha
Denver Los Angeles Phoenix
El Paso Miami/Ft. Lauderdale Portland
Our largest markets are in Dallas, Houston, Miami/Ft. Lauderdale, Atlanta,
Chicago, Los Angeles, Tampa and New York. These markets each have the capacity
of 7.0 to 10.0 million minutes per month. Our second tier consists of San
Antonio, Portland, Denver, Kansas City, Jacksonville and Phoenix. These markets
have the capacity of 1.0 million minutes per month. The remaining markets have
the capacity of 500,000 per month. Currently, we are only utilizing
approximately 4.0 million minutes per month for all locations which is below our
breakeven-point.
In each of the foregoing operating cities we utilize our VoIP gateways,
acquired from leading manufacturers such as Cisco Systems ("Cisco"). Our
Internet telephony services are
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provided by a combination of our own leased fiber, leased PSTN facilities and
leased Internet services from leading Internet backbone suppliers.
NETWORK EXPANSION
Our current expansion plans are as follows:
* Expand existing long distance traffic utilizing the Internet
* Establish new installation sites
* Evaluate sites for needed upgrades
* Maintain existing hardware and software
* Investigate additional applications for VoIP
We are planning to have our VoIP gateways installed in 50 cities by the end
of 2000. The bulk of the equipment costs will be financed through Cisco's
financing program for small businesses and additional private and public equity
and/or debt offering. Currently our revenues do not exceed network costs and we
experience short falls each month requiring additional infusions of capital,
which may or may not be available in the future.
NETWORK ADVANTAGES
The principal advantages of our use of the Internet and the VoIP network:
* Utilization of packet-switching technology that converts natural voice
into data packets that are transmitted over our network to our
destination gateways where the packets are returned to natural voice.
* Cost savings that we can pass on to our customers in the form of lower
long distance charges.
* Ability to transmit faxes routed over our VoIP network without
purchasing additional hardware or software.
* Delivery of high voice quality and faxes transmitted without delay
with immediate delivery confirmation.
CONTRACTUAL RELATIONSHIPS
We have entered into certain contractual relationships to provide our
customers communication products and establish a high quality VoIP network.
Each relationship is important to our continuing operations. The agreements
include:
* CISCO SYSTEMS, INC. We utilize a Cisco Systems Powered
Network-TM- that uses a technology called "packet-switching" to
break voice and fax calls into discrete data packets, route them
over the Internet or our network and reassemble them
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into their original form for delivery to the recipient. This greater
efficiency creates network cost savings that can be passed on to the
consumer in the form of lower long distance rates. Our relationship
with Cisco allows us to benefit from their newly-developed products
and services as they become available. Equipment was originally leased
from Cisco on a 2-year basis, for a monthly lease payment of
approximately $2,400. However, because of the expansion of our
network, we have entered into several amendments to our original lease
with Cisco. Through the amendments, we have incorporated additional
Cisco equipment into our network and have extended the term of our
lease. Due to our utilization of more Cisco equipment, our monthly
payments have increased to approximately $40,000 per month and will
continue to increase as we build and expand our network.
* VIRTUALPLUS, INC. Virtualplus, Inc. ("Virtualplus") is a leading
supplier of outsourced, value-added, enhanced telecommunications
service to the Internet and telecommunications industries. The
company was formed in 1995, when it designed a voicemail and fax
distribution system. This system was later migrated onto the
Internet and within this process the Internet's first unified
messaging system was created. The Virtualplus services include
Messagepoint, Messagejet and JustPhone and are available
worldwide in over 100 area codes. Pursuant to our agreement and
in return for the Company's payment of an initial set-up fee of
$10,000, NetVoice is able to distribute the Virtualplus unified
messaging products privately labeled under the NetVoice name.
The agreement is for an indefinite period of time and may be
terminated by either party on 30 days notice.
* SIGNUPSERVER. SignUpServer-TM- provides back end technical
capabilities for ISPs. Providing all server space, tunneling,
filtering, NOC facilities and technical service to end customers,
SignUpServer-TM- allows ISPs to simply manage their front end-
web development, marketing and content. The Company and
SignUpServer-TM- will jointly market Internet service with
private branding capabilities through our combined network of
agents. The agreement is for an indefinite term and includes an
initial set-up fee of $35,000 and monthly fees based on number of
users.
* LEVEL 3 COMMUNICATIONS, INC. Our contractual relationship for
co-location with Level 3 Communications. allows NetVoice to offer
high quality voice communications at a lower cost over a managed VoIP
network. In utilizing Level 3's co-location facilities and IP
CrossRoads products, we will have access to sufficient bandwidth on
demand that will allow us the ability to meet increased demand for
rapid growth and flexibility in managing the cost of our network. We
have several contracts with Level 3, representing our co-location in
various cities. Each agreement is for a one year term and ranges in
amount from approximately $700 to $3,000 per month depending on the
products utilized at each facility. Our latest monthly billing with
Level 3 was approximately $40,000.
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PRODUCTS AND SERVICES
VoIP
Currently, substantially all of our revenues come from sales of high volume
minutes to large long distance carriers transmitted over our VoIP network and
pre-paid calling companies. Revenues derived from sales over our VoIP network
constituted $967,000 in 1999 and comprised 80% of our total revenues. The
remaining 20% of our revenue was from our abandoned traditional long distance
traffic. Currently, our revenues do not exceed our costs and we have been
financing the shortfalls with outside, private financing.
Based on available funding, it is our intention to enter into the corporate
market beginning in the second quarter 2000 to deliver voice, internet, data and
video conferencing to small- and medium-size businesses. Our existing network is
capable of handling this varied traffic at its present size. We will market
these services through a to be developed, in-house sales staff and independent
agents.
INTERNET SERVICE
We offer dial up Internet access in our gateway cities and dedicated
Internet service to our corporate customers. We will also host all Internet
service back office functions to offer virtual ISP capabilities to our customers
including radius servers, filtering, e-mail, technical support and billing.
Internet service can be provided under the NetVoice name or can be private
labeled for our customers.
As previously noted, we have entered into an agreement with Virtualplus,
Inc., the world's largest provider of unified messaging with over 500,000
virtual mailboxes under their management. We will distribute this service on
a private label basis under our Company's name and logo. Unified messaging
allows the user to pick up voicemail, e-mail and fax from a single unified box.
PRE-PAID LONG DISTANCE CALLING CARDS
Currently we are focusing on selling prepaid long distance calling cards to
the college student market. To date, this market has only been tested on a small
scale. Our initial, informal investigation has indicated this market to be
viable for the following reasons:
* The cost of acquiring these customers is relatively low due to
geographical concentration.
* Campus newspapers and other media expenses are relatively low.
* Our sales personnel have easy access to students.
* The students are characteristically well acquainted with the Internet,
and, therefore, receptive to our offering of long distance calling on
the Internet.
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* These college and university students (and their parents) are also
receptive to the convenience of purchasing minutes by accessing our
website and/or calling our 800 telephone number.
THE NETVOICE COMMUNICATION APPLICATION BROWSER
We currently have under development the NetVoice CAB, an Internet browser
that allows the user to have access to a suite of communication functions such
as long distance and fax while browsing the world wide web. Access to all
functionality features of the browser will be available in the borders of the
screen while the Internet runs in the center of the screen. Functionality
features include:
* Free PC to PC calls provided both parties have our browser downloaded
onto their PC's;
* Address book with ability to import address book from Microsoft
Outlook-TM-;
* Unified messaging capabilities;
* Search engine access; and
* Access to "favorites" much like traditional Internet bookmarking
functionality.
Our browser will be distributed free of charge and downloaded via our
Company website or through marketing agreements. Our browser is currently under
beta review and we expect to launch by May 1, 2000. We believe there will be
several revenue opportunities within the browser:
* commission earned on merchandise purchased from affiliate sites
that are programmed into the browser;
* revenue earned from banner advertisement;
* revenue earned from the preprogrammed favorites within the
browser; and
* revenue earned on PC to phone calling, when available.
Our successful distribution of the browser is key to achieve these revenue
streams.
SALES, MARKETING AND DISTRIBUTION
Our strategy for building a viable position in the Internet telephony
market includes the following key elements:
* Marketing our services through multiple channels;
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* Pursuing multiple sources of revenue;
* Enhancing brand recognition;
* Expanding and enhancing our products and services; and
* Pursuing acquisitions of other telecommunications companies to expand
our revenues and technological base.
INTERNET SERVICE PROVIDERS MARKETS
We expect to offer virtual ISP services and will distribute VoIP products
to ISP's to distribute to their consumer and business customers. These
products will offer revenue-generating opportunities for the ISP's as well as
their e-commerce customers. We will become the wholesale provider to the ISP
for these services. We will attempt to seek out products that allow us to
co-brand with our NetVoice logo.
CORPORATIONS
Corporations are focused on cost cutting opportunities and communication
improvements that allow information systems to be both simplified and enhanced
as a means to stay competitive. Accordingly, we believe this segment will
readily embrace the cost savings and enhanced services that VoIP can offer over
existing LAN's/WAN's.
RESIDENTIAL
While the residential VoIP market may be difficult to penetrate due to high
customer acquisition costs vs. number of minutes purchased per customer, we
believe there are niche residential areas, such as colleges and universities,
which we can enter with relatively low competition and marketing costs, while
allowing us to build a brand name recognizable by the typical consumer. As
NetVoice Technologies grows we can use these niche segments as a launching pad
from which to enter the general residential market. The initial residential
niches may include the college market, which affords access to opinion leaders
and early adapters to new technology.
WHOLESALE MARKET
The wholesale market consists of agents, carriers and pre-pay service
providers. All entities requiring large volume of minutes at low costs are our
potential customers, including the more traditional long distance PSTN carriers
who can resell our minutes with a higher margin than PSTN minutes. We feel that
we are uniquely poised to capture clients in this segment, because of our
ability to offer lower cost minutes, due to the current lack of regulation in
our technology and consequent absence of tariffs, which many of our potential
customers in this segment cannot avoid on their own networks.
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DISTRIBUTION CHANNELS
IN-HOUSE SALES
We currently have two, full time individuals whose responsibilities are
sales and marketing. It is our intention, as funds become available, to hire
more sales personnel who will be based in our Dallas office.
AGENTS
We intend to expand our use of existing long distance and telephony agent
networks as a means to sell our low cost, high quality VoIP products to
carriers, pre-pay providers, institutional organizations and corporations.
WORLD WIDE WEB
Virtual agents will be sought, as a means to distribute VoIP minutes via
ISP's, and in turn individual e-commerce web sites. E-commerce web sites
operated by virtual agents can sell our products as revenue generating
opportunities for their site and NetVoice's.
Through targeted advertising and word of mouth, we intend to direct
customers to purchase low cost long distance services via our website. We plan
to initially drive our website sales to universities and colleges. This very
price sensitive market segment is an ideal potential revenue stream due to their
need for low cost long distance and the relatively inexpensive access to a
university population. Low cost college newspaper and radio advertising as well
as on-site visits allow us to quickly and inexpensively reach this segment with
our message. Also, across the board access and acceptance of Internet usage for
the typical college student will drive on-line registration and purchase of
products through our website. We believe this segment will find our program
attractive due to our ability to offer low prices.
TECHNOLOGY
As discussed above, we are currently developing a communications
applications browser that allows the user to have access to a suite of online
communications devices and other functionality while browsing or searching the
world wide web. Our browser will be distributed to the end user for free via our
websites. This browser will be designed to allow the NetVoice logo to appear on
users desktops which will build brand awareness while the applet will allow
NetVoice to have access to these users as we market Internet and Telephony
related products and services.
CUSTOMERS
During the fiscal year ended December 31, 1998, IXC Communications,
Inc. (formerly Coastal Telephone, Inc.) ("IXC") accounted for approximately
61% of our total revenues and for the year ended December 31, 1999, IXC
accounted for 23% of our revenues. Caprock Communications Corporation and
World Access, Inc. accounted for 11% and 30% of our
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revenues, respectively, during the fiscal year ended December 31, 1999.
Recently, we signed two new wholesale agreements with Landmark Community
News, Inc. ("Landmark") and Z-Tel, Inc. ("Z-Tel").
* Landmark is a publisher of 48 local newspapers in 12 states. Our
agreement with Landmark is to provide VoIP related products and
services, including Internet service, Internet telephony and
unified messaging for resale to Landmark customers. The
agreement is for an indefinite period of time and may be
terminated by either party with notice. NetVoice will be
compensated by Landmark customers who utilize the various
services that NetVoice may provide, and NetVoice will pay
Landmark a commission per customer.
* Our agreement with Z-Tel will allow us to provide Internet access to
their local customers for a period of two years. Z-Tel will pay the
Company a fee on graduated basis according to the number of customers
we are providing Internet access for.
We believe that the impact the loss of these customers on our revenues in
the year 2000 will be offset by our current and future marketing efforts to
other large customers.
PATENTS AND TRADEMARKS
We are the owner of a pending provisional patent application for a
communications enabled browse. Follow-up, non-provisional applications are being
prepared to cover the communications tools embedded in the browser, the ability
to display thumbnail sketches (graphic links) on the browser, and the placement
of permanent icons on the browser border that can be addressed to key retailers.
We are the owner of a pending trademark application for the mark ("CAB") as
applied to browser software.
COMPETITION
The long distance telephony market and the Internet telephony market are
highly competitive. There are several large and numerous small competitors, and
we expect to face continuing competition based on price and service offerings
from existing competitors and new market entrants in the future. The principal
competitive factors include price, quality of service, breadth of geographic
presence, customer service, reliability, network capacity and the availability
of enhanced communications services. Our competitors include AT&T, MCI WorldCom
and Sprint, as well as a number of smaller companies.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies, which could hinder our ability to market
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our Internet telephony services. We believe that our key competitive advantages
are our ability to deliver reliable, high quality voice service over the
Internet in a cost-effective manner and the size and rapid growth of our
network. We cannot assure you, however, that this advantage will enable us to
succeed against comparable service offerings from our competitors.
REGULATION
REGULATION OF INTERNET TELEPHONY
The use of the Internet to provide telephone service is a recent market
development. Currently, the Federal Communications Commission is considering
whether to impose surcharges or additional regulations upon certain providers of
Internet telephony. On April 10, 1998, the FCC issued its report to Congress
concerning the implementation of the universal service provisions of the
Telecommunications Act. In the report, the FCC indicated that it would examine
the question of whether certain forms of phone-to-phone Internet telephony are
properly classified as information services or as telecommunications services.
The FCC noted that it did not have, as of the date of the report, an adequate
record on which to make a definitive pronouncement, but that the record
suggested that certain forms of phone-to-phone Internet telephony appear to have
the same functionality as non-Internet telecommunications services and lack the
characteristics that would render them information services. If the FCC were
to determine that certain services are subject to FCC regulation as
telecommunications services, the FCC may require providers of Internet
telephony services to make universal service contributions, pay access
charges or be subject to traditional common carrier regulation. Such a
determination would have a material adverse effect on the price structure for
the Company's VoIP services. It is also possible that some services may be
regulated by the FCC differently. In addition, the FCC sets the access
charges on traditional telephony traffic, and if it reduces these access
charges, the cost of traditional long distance telephone calls will probably
be lowered, thereby decreasing some of our competitive pricing advantage.
In September 1998, two regional Bell operating companies, US WEST and
BellSouth, advised Internet telephony providers that the regional companies
would impose access charges on Internet telephony traffic. In addition, US WEST
has petitioned the FCC for a declaratory ruling that providers of interstate
Internet telephony must pay federal access charges, and has petitioned the
public utilities commissions of Nebraska and Colorado for similar rulings
concerning payment of access charges for intrastate Internet telephone calls. At
this time, it is not known whether these companies, US WEST and BellSouth, will
actually impose access charges or when such changes will become effective. If
these companies succeed in imposing access charges, such changes are expected to
reduce the cost savings afforded by Internet telephony as compared to
traditional telephone service. Access charges would materially adversely affect
the development of our Internet telephony business. In February 1999, the FCC
adopted an order concerning payment of reciprocal compensation, which provides
legislative support for a possible future finding by the FCC that providers of
Internet telephony must pay access charges for at least some subset of Internet
telephony services. If the FCC were to make such a finding, the payment of
access charges could materially adversely effect our business, results of
operations and financial condition. Many of our competitors are lobbying the FCC
for the imposition of access charges on Internet telephony traffic.
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To our knowledge, there are currently no domestic and few foreign laws
or regulations that prohibit voice communications over the Internet. State
public utility commissions may retain jurisdiction to regulate the provision
of intrastate Internet telephony services. A number of countries that
currently prohibit competition in the provision of voice telephony have also
prohibited Internet telephony. Many countries permit but regulate Internet
telephony. If Congress, the FCC, state regulatory agencies or foreign
governments begin to regulate Internet telephony, such regulation may
materially adversely affect our business, financial condition or results of
operations.
The Federal Communications Commission (the "FCC") has recently issued a
Notice of Inquiry ("NOI"), soliciting comments on whether Section 255 of the
Telecommunications Act of 1996 should apply to IP telephony. The rules and
policies released by the FCC will require manufacturers of telecommunications
equipment and providers of telecommunication services to ensure that such
equipment and services are accessible to and useable by persons with
disabilities. Management currently does not believe that these FCC rules and
policies, if applied to IP telephony, will have a significant impact on our
operations.
REGULATION OF THE INTERNET
Congress has recently adopted legislation which regulates certain
aspects of the Internet, including online content, user privacy, taxation,
access charges, liability for third-party activities and jurisdiction. The
European Union has also enacted several directives relating to the Internet,
one of which addresses online commerce. In addition, federal, state, local
and foreign governmental organizations currently are considering other
legislative and regulatory proposals which would regulate the Internet.
Increased regulation of the Internet may decrease its growth and eliminate or
reduce its competitive advantage, which may increase the cost of doing
business via the Internet or otherwise materially adversely affect our
business, results of operations and financial condition.
The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from
individuals when accessing Web sites, with particular emphasis on access by
minors. These regulations may include requirements that companies establish
certain expensive procedures to disclose and notify users of privacy and
security policies, obtain consent from users for certain collection and use
of information and to provide users with the ability to access, correct and
delete personal information stored by the company. These regulations may also
include enforcement and redress provisions. There can be no assurance that we
will adopt policies that conform with any regulations adopted by the FTC, or
that our cost will remain competitive after adopting compliance procedures.
Moreover, even in the absence of those regulations, the FTC has begun
investigations into the privacy practices of companies that collect
information on the Internet. One investigation resulted in a consent decree
pursuant to which an Internet company agreed to establish programs to
implement the principles noted above. We may become subject to a similar
investigation or the FTC's regulatory and enforcement efforts may adversely
affect the ability to collect demographic and personal information from users
which could have an adverse effect on our ability to provide highly targeted
opportunities for advertisers and electronic commerce marketers. We may
increase our regulatory risk by targeting university populations, despite the
attractiveness of this market segment. Any of the foregoing adverse
regulatory developments would materially adversely affect our business,
results of operation and financial condition.
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Recently, the European Union adopted a directive that imposes
restrictions on the collection and use of personal data. Under the directive,
citizens of the European Union are guaranteed rights to access their data,
rights to know where the data originated, rights to have inaccurate data
rectified, rights to recourse in the event of unlawful processing and rights
to withhold permission to use their data for direct marketing. The directive
could, among other things, affect United State companies that collect
information over the Internet from individuals located in European Union
member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In particular,
companies with offices located in European Union countries will not be
allowed to send personal information to countries that do not maintain
adequate standards of privacy. The directive does not, however, define what
standards of privacy are adequate. As a result, the directive may adversely
affect the activities of entities such as us that may engage in data
collection from users in European Union member countries.
EMPLOYEES
As of March 20, 2000, we had twenty two (22) full time employees,
including eight (8) technical personnel, seven (7) in sales and marketing and
seven (7) in management and finance. As noted elsewhere in this Report, a top
priority of our marketing strategy is to hire additional sales personnel in
an attempt to create additional traffic for the network.
RISK FACTORS
The risks described below are not the only ones that we face. Additional
risks that are not yet known to us or that we currently think are immaterial
could also impair our business, operating results or financial condition.
Other information set forth in this Report, including our consolidated
financial statements and the related notes detail other risks affecting our
business. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR
FUTURE SUCCESS
We only began operations in January of 1998 when we acquired NVT.
Therefore, we have only a limited operating history. As an early stage company
in the new and rapidly evolving Internet telephony market, we face numerous
risks and uncertainties. Since commencement of operations, we have primarily
been investing our capital into the expansion of our network. We will be unable
to continue the expansion of our network without the proceeds from future
private and/or public financing. Our limited operating history does not provide
meaningful historical financial or operational information upon which to make
plans or forecasts. We cannot assure you that our business strategy will be
successful or that we will successfully address these risks.
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WE HAVE A HISTORY OF OPERATING LOSSES, CURRENT LIABILITIES OF $5.4 MILLION
AND ANTICIPATE LOSSES FOR THE FORESEEABLE FUTURE
We have incurred net losses of $1,723,367 for the year ended December
31, 1998 and $5,014,853 for the year ended December 31, 1999. As of December
31, 1999, we had an accumulated deficit of $6,738,220 and current liabilities
of $5,389,141 million which includes notes due to noteholders in year 2000.
The Company has never had any profits. We expect to continue to incur
operating losses for at least the next eighteen months. We expect that
operating and marketing expenses will increase significantly during the next
several years. In order to achieve and maintain profitability, we will need
to generate significant revenue and we cannot assure you that we will
generate sufficient revenue for profitability. Even if we do achieve
profitability, we cannot assure you that we will be able to sustain or
increase profitability. If revenue grows more slowly than we anticipate or if
operating and marketing expenses exceed our expectations or cannot be managed
in proportion to revenues, our business, results of operations and financial
condition will be materially adversely affected.
WE INTEND TO PURSUE NEW MARKETS AND PRODUCTS, MANY OF WHICH ARE UNPROVEN
To date, we have generated revenue from routing minutes of use of our
services over the Internet and to a limited degree from the sale of
traditional one-plus long distance. In the future, we intend to pursue new
revenue streams by leveraging our Internet telephony network to integrate
real-time voice communication capabilities into the Web. For example, we
intend to pursue new Web-based revenue opportunities from personal computer
to phone applications, as well as offering integrated voice and data service
to corporations. We intend to market our various products as single packages
to various groups of end-users. We have no experience in the specific markets
we intend to enter and have never generated revenues from this type of
business. We intend to devote significant capital and resources to create
these new revenue streams and we cannot ensure that our investments will be
profitable. To be successful, we must, among other things, develop and market
products and services that achieve broad market acceptance by individuals,
businesses, online retailers and advertisers. We cannot assure you that the
market for our new products and services will develop or that demand for our
new products and services will emerge, grow or generate sufficient revenue to
become profitable.
WE MAY HAVE DIFFICULTIES MANAGING OUR EXPANDING OPERATIONS, AND WE MAY HAVE A
NEED TO DEVELOP AND IMPLEMENT SYSTEMS AND CONTROLS
Our expected growth will place a significant strain on our managerial,
operating, financial and other resources. We expect this rapid growth to
continue and expect these strains to continue over time. Our future
performance will depend, in part, on our ability to manage this growth
effectively. To that end, we will have to undertake the following tasks,
among others:
* develop our operating, administrative and financial and
accounting systems and controls;
* improve coordination among our engineering, accounting, finance,
marketing and operations personnel;
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* enhance our management information systems capabilities; and
* hire and train additional qualified personnel, including personnel
with technical skills and experience which we do not now have.
We cannot assure you that we will be able to accomplish these tasks, and
if we are unable to accomplish any of them, our business would be materially
adversely affected.
A FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS COULD LIMIT OUR
ABILITY TO INCREASE OUR SALES
We believe that our success depends, in part, on our ability to develop
and maintain strategic relationships with leading Internet companies and
computer hardware and software companies, as well as with key marketing
distribution partners. If any of our strategic relationships are
discontinued, sales of our products and services and our ability to maintain
or increase our customer base may be substantially diminished. We will depend
on these relationships to:
* distribute our products to potential customers;
* increase usage of our services;
* build brand awareness; and
* cooperatively market our products and services.
WE WILL NEED TO HIRE ADDITIONAL AGENTS TO MARKET AND DISTRIBUTE OUR PRODUCTS
AND SERVICES; TO PROVIDE LOCAL CUSTOMER SUPPORT; AND THE LOSS OF KEY AGENTS
COULD ADVERSELY AFFECT OUR BUSINESS
We must forge new relationships with agents in markets where our
products and services are not adequately marketed and maintain and deepen
relationships in those markets where we seek greater penetration. Agents also
typically provide local customers with front-line support. If we hire an
agent who fails to market our products and services effectively, or fails to
provide adequate front-line customer support, we could lose market share.
Additionally, if an agent provides poor customer service, we could lose brand
equity. Therefore, we must maintain and hire additional agents that are
capable of providing high-quality sales and service efforts. The loss of an
agent in a key market, or the failure of a current or future seller to
adequately provide customer support could materially adversely affect our
business, results of operations and financial condition.
COMPETITION COULD REDUCE OUR MARKET SHARE AND DECREASE OUR REVENUE
The market for our services has been extremely competitive, and is
expected to remain extremely competitive for the foreseeable future. Many
companies offer Internet telephony
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products and services, and many of these companies already have a substantial
presence in this market in which we are only a recent entrant.
In addition, a number of large telecommunications providers, such as ICG
Commun-ications, IPVoice.com, ITXC, RSL Communications (through its Delta
Three subsidiary) and ibasis, Inc., route Internet telephony traffic to
destinations on a worldwide basis, while our operations are focused on the
United States only. In addition, major long distance providers, such as AT&T,
Deutsche Telekom, Frontier, MCI WorldCom, Qwest Communications and Net2Phone,
as well as other major companies such as Motorola and Intel, have all entered
or plan to enter the Internet telephony market. Many of our competitors are
larger than us and have substantially greater financial, distribution and
marketing resources than we have. We cannot be certain that we will be able
to compete successfully in the developing Internet telephony market.
WE FACE PRICING PRESSURES, WHICH MAY LESSEN OUR COMPETITIVE PRICING ADVANTAGE
Any success of our product and service offerings must be based on our
ability to provide discounted voice communications by taking advantage of
cost savings achieved through Internet telephony. In recent years, the price
of traditional domestic and international long distance calls has been
declining. In response to these declines, we have lowered the price of our
service offerings. Should prices of traditional long distance calls decline
to a point where we no longer have a price advantage over our competitors, we
would lose our anticipated significant competitive advantage and would have
to rely on factors other than price to differentiate our product and service
offerings. If we fail to do so, our business could be materially adversely
affected.
OUR PERFORMANCE IS DEPENDENT ON THE CONTINUED EMPLOYMENT OF OUR EXECUTIVE
OFFICERS AND WE NEED TO HIRE AND RETAIN HIGHLY-SKILLED TECHNICAL AND
MANAGEMENT PERSONNEL TO SUSTAIN OUR BUSINESS
Our performance is highly dependent on the continued services of our
executive officers and other key personnel, the loss of any of whom could
materially adversely affect our business, results of operations and financial
condition.
We need to attract and retain other highly skilled technical and
managerial personnel, for whom there is intense competition. Certain of such
individuals must have skills and experience, which we do not have. We cannot
assure you that we will be able to attract and retain the personnel necessary
for the development of our business. The inability to attract and retain
qualified technical and managerial personnel would materially adversely
affect our business, results of operations and financial condition.
Currently, we do not have any employment contracts with any of our key
personnel, with the exception of our President, Jeff Rothell, and our Chief
Financial Officer, Garth Cook. In addition, we do not maintain any key man
insurance on any of these individuals.
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WE NEED TO DEVELOP BRAND RECOGNITION AND NEED TO ESTABLISH AND MAINTAIN HIGH
QUALITY PRODUCTS AND SERVICES
We believe we must establish and maintain a brand and name recognition
in order to attract and expand our targeted client base. We believe the
importance of reputation and name recognition will increase as competition
increases in the Internet telephony market. Promotion and enhancement of our
name will depend on the effectiveness of our marketing and advertising
efforts. Success in establishing brand and name recognition will also depend
upon our success in continuing to provide high-quality products and services.
We cannot assure you that our advertising, marketing or quality control
efforts will be successful. If our customers do not perceive our service to
be effective or of high quality, our brand and name recognition would be
materially adversely affected.
WE DEPEND ON LOCAL EXCHANGE TELECOMMUNICATIONS CARRIERS TO LEASE TRANSMISSION
FACILITIES AND WE ARE SUBJECT TO PRICE AND COMPETITIVE UNCERTAINTIES FROM
LOCAL CARRIERS
We do not own any local exchange transmission. All of the telephone
calls made by our customers are connected at least in part through leased
transmission facilities. In addition, national telephone companies may not be
required by law to allow us to lease necessary transmission lines and may be
unwilling to enter into such agreements on a cost-effective basis,
considering terms and price. Further, even if applicable law requires
national telephone companies to lease transmission lines to us, we expect to
encounter delays of unknown duration in negotiating leases and
interconnection agreements, and commencing operations. Additionally, disputes
may arise, relating to pricing, terms and billing, after commencing
operations.
In the United States, the providers of local exchange transmission
facilities are generally the incumbent local exchange carriers, including the
regional Bell operating companies. The permitted pricing of local exchange
facilities that we lease in the United States is subject to uncertainties.
The Federal Communications Commission issued an order requiring local
exchange carriers to establish a pricing standard for those facilities that
may be charged to competitors and the United States Supreme Court recently
upheld the FCC's jurisdiction in this regard. However, the incumbent local
exchange carriers can be expected to bring further legal challenges to the
FCC's decision. If they succeed, the result may be to increase our cost to
obtain incumbent local exchange carrier facilities.
Local exchange carriers from which we intend to lease facilities are
also our competitors, such as the regional Bell operating companies. We
generally lease lines on a fixed-cost basis. These include leases of
transmission capacity for point-to-point circuits on a monthly or longer-term
fixed-cost basis. There is every reason to expect that our local telephone
operating company competitors will have advantages, including a lower
internal price and greater transmission capacity than that expected to be
available to us.
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OUR SYSTEMS MAY NOT ACCOMMODATE SIGNIFICANT GROWTH IN THE NUMBER OF USERS
Our success depends on our ability to handle a large number of
simultaneous calls. We expect that the volume of simultaneous calls will
increase significantly as we expand our operations. If this occurs,
additional stress will be placed upon the network hardware and software that
manages our traffic. We cannot assure you of our ability to efficiently
manage a large number of simultaneous calls. If we are not able to maintain
an appropriate level of operating performance, or if our service is
disrupted, then we may develop a negative reputation and our business,
results of operations and financial condition would be materially adversely
affected.
BECAUSE WE ARE UNABLE TO PREDICT THE VOLUME OF USAGE AND OUR CAPACITY NEEDS,
WE MAY ENTER INTO DISADVANTAGEOUS CONTRACTS
Our business plan projects that the number of calls that we handle over
our network will continue to grow in the future. If our plans are realized,
we may be required to enter into additional long-term agreements for leased
capacity. To the extent that we over-estimate the anticipated volume of
calls, we may become obligated to pay for more transmission capacity than we
actually use, resulting in our incurring costs without achieving
corresponding revenue. Conversely, if we underestimate our capacity needs, we
may be required to obtain additional transmission capacity through more
expensive means because the capacity is added prior to our expected delivery
time. We cannot assume that such capacity will be available either on a
planned or emergency basis. The occurrence of either over-estimation or
under-estimation of capacity needs could significantly reduce our operating
margins.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FUNDS NECESSARY TO TAKE ADVANTAGE OF
NEW OPPORTUNITIES AND MEET OUR OBLIGATIONS
Due to our limited operating history, current liabilities of $5.4
million including notes due to our existing noteholders and the rapid
evolution of the Internet telephony market, our future capital needs are
difficult to predict. We currently have approximately $3.65 million due on
the Notes in the calendar year 2000. All of the Notes will be due and payable
through September, 2000, unless extended for nine (9) months at the option of
the noteholder. At this time, we have the ability to repay all the notes as
such obligations come due. Repayment of the Notes will be at the expense of
our efforts to become profitable due to our need for additional funds. We
will require additional capital in order to take advantage of increasing the
size of our network, unanticipated opportunities, including strategic
alliances and potential acquisitions, or to respond to changing business
conditions and unanticipated competitive pressures. Additionally, funds from
operations may be less than anticipated. Should these circumstances arise, we
will need to raise additional funds, either by borrowing money or issuing
additional equity. We cannot assure you that we will be able to raise such
funds on favorable terms or at all. If we are unable to obtain additional
funds as needed, then we may be unable to take advantage of new opportunities
or take other actions that otherwise might be important to our business,
results of operations and financial condition.
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WE ARE SUBJECT TO RISKS ASSOCIATED WITH SYSTEM FAILURES, DELAYS AND
INADEQUACIES
Our success depends on our ability to provide efficient and
uninterrupted, high-quality Internet telephony services. Any damage to or
failure of our systems or operations could result in reductions in, or
terminations of, our services. In addition, in the case of frequent or
persistent system failures, our brand and reputation could be materially
adversely affected. Our systems and operations are vulnerable to damage or
interruption from natural disasters, power loss, telecommunication system
failures, physical or electronic break-ins, sabotage, intentional acts of
vandalism and similar events that are expected to be generally beyond our
control. The occurrence of any or all of these events could materially
adversely affect our business, results of operations and financial condition.
AT THIS POINT WE HAVE NOT OBTAINED DIRECTORS AND OFFICERS INSURANCE
We have investigated the cost of insurance against liabilities arising
out of the negligence of Officers and Director(s). The Company has not
obtained such insurance, because the availability thereof is extremely
limited and, where available, the cost is excessive. The Company is required
to indemnify certain costs and liabilities for negligence of its officers and
directors. Therefore, the Company will have to satisfy any such liabilities
out of its assets. Any such liabilities which might arise could be
substantial and may exceed the assets of the Company.
WE HAVE A LIMITED NUMBER OF SHAREHOLDERS AND A LIMITED NUMBER OF SHARES
AVAILABLE FOR TRADING
To our knowledge, there are 1,100 record holders of our Common Stock
although we believe the actual number of shareholders who hold our stock in
their brokerage accounts or "street name" accounts to be higher. The public
float or shares available for sale at any given time is extremely limited
which can cause significant price swings when large blocks of our Common
Stock are bought or sold in the market. Also, our daily trading volume is
limited with a small number of brokerage firms making a market in our stock.
Accordingly, the price you pay or receive when you buy and sell your shares
may not be reflective of an active, arms-length trading market.
THE MARKET PRICE OF OUR SHARES MAY EXPERIENCE EXTREME PRICE AND VOLUME
FLUCTUATIONS FOR REASONS OVER WHICH WE HAVE LITTLE CONTROL
The stock market has, from time to time, experienced extreme price and
volume fluctuations. Prices of securities of Internet-related companies have
been especially volatile and have often fluctuated for reasons that are
unrelated to the operating performance of the affected companies. The market
price of shares of our Common Stock could fluctuate greatly due to a variety
of factors. In the past, companies that have experienced volatility in the
market price of their stock have been the objects of securities, class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of our management's
attention and resources.
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OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A MAJORITY
OF OUR VOTING STOCK AND WILL BE ABLE TO EXERT SIGNIFICANT INFLUENCE OVER
DECISIONS REQUIRING A STOCKHOLDER VOTE
Our Executive Officers, Directors, employees and principal stockholders
and their affiliates own in the aggregate, beneficially approximately 61% of
our outstanding Common Stock. This does not include 2,582,000 outstanding
options with exercise prices that range from $1 to $18 exercisable over the
next five years. As a result, our Executive Officers, Directors and principal
stockholders are able to exercise significant control over all matters
requiring approval by our stockholders, including the election of directors
and approval of mergers and other significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing
a change in control that might otherwise benefit our stockholders.
STOCKHOLDERS MAY SELL SHARES OF OUR COMMON STOCK IN A MANNER THAT NEGATIVELY
AFFECTS THE PRICE OF COMMON STOCK
If any of our principal stockholders sell a substantial number of their
shares of Common Stock, those sales could adversely affect the market price
of our Common Stock and could impair our future ability to raise capital
through the sale of equity securities. We currently have 13,416,600 shares of
Common Stock outstanding. In addition, as of March 20, 2000, we had reserved
for issuance 2,582,000 shares of Common Stock issuable upon exercise of stock
options. All of our outstanding shares of Common Stock are freely
transferable without restriction under the Securities Act, unless they are
held by our "affiliates" or sold in an offering of restricted common stock.
RISKS RELATED TO OUR INDUSTRY
OUR FUTURE GROWTH DEPENDS UPON AN INCREASE IN THE USE OF THE INTERNET AS A
MEDIUM FOR VOICE COMMUNICATIONS
The Internet telephony market is new and rapidly evolving, and the
technology is still in the early stages of development. Historically, the
audible sound quality of Internet telephony calls was poor. As the industry
has grown, substantial improvements to sound quality have been made but
technological hurdles still need to be resolved. Additionally, the capacity
constraints of the public Internet network may, if not resolved, impede
further development of Internet telephony to the extent that callers
experience delays, errors in transmissions or other difficulties. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for our services are subject to a high level of uncertainty and
risk. In particular, the Internet must be accepted by business and
residential users as a viable alternative to traditional telephone service.
Customers who have already invested substantial resources in integrating
traditional telephony service with their operations may be particularly
reluctant or slow to adopt a new technology which makes their existing
infrastructure obsolete. Because the Internet telephony market is new and
evolving, it is difficult to predict the size of this market or its growth
rate. If the Internet telephony market fails to develop, develops more slowly
than we expect or becomes saturated with competitors, then our business,
results of operations and financial condition will be materially adversely
affected.
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OUR FUTURE SUCCESS DEPENDS UPON THE INCREASED USE OF THE INTERNET
The use of the Internet as a commercial marketplace is at an early stage
of development. Demand and market acceptance for recently introduced products
and services over the Internet are still uncertain. We cannot predict whether
customers will be willing to shift their traditional activities online. For
example, we do not know if people will increase their usage of online
directories or make online purchases. The Internet may not grow as a viable
commercial marketplace for a number of reasons, including:
* concerns about security;
* Internet network congestion;
* inconsistent quality of service; and
* lack of cost-effective, high-speed access.
If the use of the Internet as a commercial marketplace does not continue to
grow, then our business, results of operations and financial condition will
be materially adversely affected.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO KEEP PACE WITH RAPID
TECHNOLOGICAL CHANGE
Our continued success depends, in part, on our ability to keep pace with
rapid technological change, new product development and evolving industry
standards and practices. Technological advancements have allowed the use of
packet-switching technology for the transmission of calls. The development of
voice applications for the Internet is part of a larger trend of convergence
of standard voice and data networks. We believe that the providers of
packet-switching technology will be able to offer quality communications
services at rates that are significantly less than the rates currently
charged for long distance calls. However, our failure to respond quickly and
cost-effectively to these developments would materially adversely affect our
business, results of operations and financial condition.
GOVERNMENTAL REGULATIONS REGARDING THE INTERNET MAY BE ENACTED, WHICH COULD
IMPEDE OUR BUSINESS
To date, governmental regulations have not materially restricted use of
the Internet in our markets. Nevertheless, the FCC has engaged in substantial
regulation of the traditional telephony markets. Accordingly, the legal and
regulatory environment that pertains to the Internet in which our business
would operate is uncertain and may change. Uncertainty regarding the
regulatory environment and new regulations could increase our costs of doing
business and may even prevent us from delivering our products and services
over the Internet. The growth of the Internet may also be significantly
slowed by industry specific or more general regulation of the Internet. Such
regulation could delay growth in demand for our products and services and
limit the growth of our revenue.
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In addition to new regulations being adopted, existing laws may be
applied to the Internet. New and existing laws may cover issues which include:
* sales and other taxes;
* access charges;
* user privacy;
* pricing controls;
* characteristics and quality of products and services;
* consumer protection;
* cross-border commerce;
* copyright, trademark and patent infringement; and
* other claims based on the nature and content of Internet materials.
WE MAY BE THE VICTIM OF FRAUD OR THEFT OF SERVICE.
From time to time, callers have obtained our services without rendering
payment by unlawfully using our access numbers and personal identification
numbers. At this time, due to our limited operating history, such instances
of theft have been insignificant. Theft of service is a widespread issue for
the telephony market. As Internet telephony services are more heavily used,
theft of service is expected to be a problem in the Internet telephony
market, which will require industry action to protect consumers. We attempt
to manage these theft and fraud risks through our internal controls and our
monitoring and blocking systems. To date, we have not experienced material
losses from the unauthorized use of access numbers and personal
identification numbers. However, we can provide no assurance that our risk
management practices will be sufficient to protect us in the future from
unauthorized transactions or thefts of services that could materially
adversely affect our business.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "intends," "potential" or
"continue" or the negative of such terms or other comparable terminology.
These statements are only predictions. In evaluating these statements, you
should specifically consider various factors, including the risks outlined
within. These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, our
ability to repay noteholders and other debt, levels of activity, performance
or achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date
of this report
OVERVIEW
We currently provide long distance services via our Internet Protocol
network in 25 markets throughout the United States, wholesale dedicated and
dial-up internet services in 13 markets and in the past to a very limited
degree, provided traditional long distance. Our current VoIP business consists
primarily of wholesale services marketed to other long distance carriers and
prepaid calling card companies. In 1999, approximately 80% of our revenue came
from our VoIP network and currently all of our revenues are derived from our IP
network. We currently market our services directly and through agents.
During 1998 we began operations in our present form. NVT was a Texas
limited liability company that was formed in December 1997, which was
reincorporated as a Nevada corporation (NVT, Inc.) and then reorganized as a
wholly-owned subsidiary of the Company, which prior to the merger was an
inactive public company. In September of 1998 our first VoIP gateway was
installed in Dallas, Texas. The initial focus was to build out our Texas
network and move into other areas of the United States. Accordingly, during
1999, we continued to expand our domestic network with the greatest amount of
traffic terminating or originating in Jacksonville, Tampa, Portland and
Dallas. We currently have our VoIP network operational in 6 cities in Texas
and a total of 25 markets throughout the U.S.
The Company is the successor company to NetVoice Technologies, LLC, a
Texas limited liability company that began operations on January 7, 1998.
NetVoice Technologies, LLC was formed for the purpose of developing,
acquiring and operating telephone communication facilities and networks that
were intended to transmit voice over the Internet utilizing conventional and
Internet technologies. NetVoice Technologies, LLC was reincorporated in
Nevada on June 30, 1998, as NetVoice Technologies, Inc.
On August 13, 1998, NVT, Inc. concluded a reverse acquisition of
Blue Pines, Inc. in which Blue Pines, Inc. issued 6,000,000 shares of
common stock in exchange for all of the outstanding shares of common stock
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of NVT, Inc., the surviving accounting acquirer. As a result of the reverse
acquisition, NVT, Inc. became a wholly owned subsidiary of Blue Pines, Inc.,
and the six former stockholders of NVT, Inc. became the holders of
approximately 75% of the outstanding shares of common stock of the Company.
The remaining 25% of the shares were owned by the original non-affiliated
stockholders of Blue Pines, Inc. On August 11, 1998, Blue Pines, Inc.
changed its name to NetVoice Technologies Corporation. The value of assets
that NVT, Inc. acquired as a result of the reverse acquisition was negligible
because Blue Pines, Inc. was an inactive shell at the time of the reverse
acquisition. There was no prior affiliation between the parties. Shares
outstanding prior to the reverse acquisition have been restated to reflect
the exchange ratio with Blue Pines, Inc. See "Principal Shareholders" and
"Certain Transactions."
NetLD.com, Inc. was incorporated in the State of Nevada as a
wholly-owned subsidiary of the Company on October 14, 1999. This corporation
was initially formed for the purpose of conducting the traditional long
distance telephone services of the Company. Currently, we have had no
activity in this subsidiary and it is not anticipated traditional long
distance will be pursued as part of our business model. We may disband this
entity or use it for other corporate purposes as yet to be determined, and in
December 1999, we closed an Agreement to dispose of our long distance bases
for $175,000. We currently have had no activity in this subsidiary. See
"Management's Discussion and Analysis -Financing Sources" and "Certain
Relationships and Related Transactions" for a more detailed description of
the transaction.
FINANCING SOURCES
In February 2000, we entered into a letter of intent with Cisco
Systems Capital Corporation ("Cisco") that provides $28 million in funding.
This is only a letter of intent and not a definitive Agreement. At this time
the funding is contingent and if obtained will be used primarily to fund
equipment purchases in order to expand our network. The funding, in the form
of a loan, is to be used for equipment purchases from Cisco, soft costs to
install that equipment and for working capital. The Company will receive the
funding from Cisco over a period of 5 years and will be required to repay the
principal plus interest at an adjustable rate.
In February 2000, we sold to all accredited investors 1,200,000 shares
of our Common Stock through a Private Placement Memorandum for $5.1 million.
The average bid price of our common stock during the February 2000 private
placement was $6.78 to $9.18. The costs of the offering were $20,000 for
printing costs and related fees. The net proceeds will primarily be used for
marketing, network expansion and working capital.
From March 1999 through April 1999, we privately placed 986,500 shares
of our Common Stock at $1.00 per share for a total of $986,500. Net proceeds
of the offering after expenses was approximately $960,000. Expenses of the
offering included the payment of fees to broker-dealers ($25,000) and costs
of the offering including legal, accounting, printing, marketing-related
expenses, due diligence expenses, travel related expenses, and preparation
and distribution of sales literature. The net proceeds were primarily used by
our subsidiary, NVT, Inc., to repay short-term loans and for working capital
($310,000), provide marketing funds ($150,000), and to begin the building of
our Internet VoIP telephony network ($500,000).
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Since January of 1998 NVT, Inc. has privately issued a series of
promissory notes. These funds were used primarily to continue the build-out
of our VoIP network, which included equipment purchases, and for working
capital. The terms of these notes are nine-months with an interest rate of
13.35%. The notes are secured by revenues from contracts, equipment and a 10%
cash reserve. At December 31, 1999 the Company was not in compliance with the
10% cash reserve. The Company received a waiver from the paymaster of the
Trustee, and as of February 23, 2000 the Company has now complied with the
cash reserve requirement.
At January 31, 2000, we had approximately $4.0 million outstanding in
such notes. During 1999, we repaid $2.5 million together with all accrued
interest due. Approximately $4.0 million falls due throughout the calendar
year 2000. All of the Notes will be due and payable in or before September,
2000, unless extended for nine (9) months at the option of the noteholder. At
this time, we intend to offer conversion of these notes or to repay them in
accordance with the terms of the notes with proceeds from existing funds or
future public or private offerings. Currently, there are no conversion rights
on behalf of the note holders.
In October 1998 we purchased a customer list from Quantum Network
Services, Inc. ("Quantum") a company owned by Mr. William Yotty, one of our
former Directors, for cash. Quantum's historical cost basis in the customer
list was $110,000. In June 1999, we purchased an additional customer list for
$60,000 in cash from Quantum. Quantum had no historical cost basis in this
customer list. New management, brought on in August, determined that these
customer bases did not fit well with our current VoIP network. In December of
1999 the Company sold these bases to a related party for $175,000 in the form
of the partial forgiveness of a note to Jim Chambas, a then Director. The
customer bases were sold because the bases were dispersed in areas not
serviced by our network and it was determined that expanding our network to
service these customer bases would not be in the Company's best interest. The
majority of the customer bases were located throughout California and to
service them would have required an extensive build out of our then existing
network. As of February 2000, the Company still owes the former Director
approximately $139,000. The note is non-interest bearing and the original
cash proceeds were used to fund working capital needs of the Company. The
Company did not obtain a fairness opinion with respect to any of the above
transactions or look for non-affiliated purchasers.
Subsequent to the issuance of the Company's consolidated financial
statements as of and for the year ended December 31, 1999, the Company's
management determined that the cost for the purchase of a customer list from
a company owned by a shareholder in June 1999 should have been accounted for
as a capital distribution, and the proceeds from the sale of such customer
list and the excess of the proceeds from the sale of another customer list
over its amortized carrying cost, both having been sold to another
shareholder in December 1999, should have been accounted for as capital
contribution. These transactions are more fully discussed in Note 8.
Previously, the purchase was accounted for as an asset acquisition with
amortization of the cost charge to expense, and the sale was accounted for as
an asset disposition with a gain recognized. Additionally, subsequent to the
issuance of the Company's consolidated financial statements as of and for the
period ended December 31, 1998, the Company's management determined that
certain leases entered into in December 1998 should have been accounted for
as operating leases. Previously, such leases had been accounted for as
capital leases. As a result, the 1999 and 1998 financial statements have been
restated from amounts previously reported to appropriately account for these
transactions. The effects of the restatement are summarized in Note 12 to the
consolidated financial statements.
As of December 31, 1999, the Company currently has an accumulated
deficit of $6.7 million.
REVENUE FROM OPERATIONS
Currently, all of our revenues are derived from long distance services
sold over our IP network. One of the Company's initial strategies is to
continue to acquire existing customer bases concentrated in specific
geographical areas which complement our current markets and convert them to
our VoIP network. We also anticipate deriving revenues through direct sales
by our existing employees, independent agents and selling through ISPs to
their existing customer base. In the future, in order to diversify, we plan
to introduce a variety of value added services utilizing our VoIP network
including:
* dial-up Internet access;
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* unified messaging;
* revenue through our browser;
* prepaid calling;
* wholesale internet services; and
* video services.
Revenues from operations for the year ended December 31, 1999 derived
80% from sales to wholesale customers and 20% from sales to our retail
customers. Almost the entire retail base was sold in December 1999 to a
related party as described under "Management Discussions and Analysis of
Operations - Financing Sources". Margins from both wholesale and retail sales
are not currently sufficient to cover our network costs which include leased
bandwidth, connection to the Internet, and local lines within a local calling
area. Expansion of our network and the addition of services will have to be
financed by an increase in traffic and additional financings. We expect this
trend to continue for a period of time as we continue to concentrate on the
expansion of our VoIP network and customer traffic. In the second quarter of
2000, we plan to offer Internet services and voice over the same facilities
to corporate customers.
The Company will continue to expand its network to handle projected
volume. The Company's cost drops by approximately 30% by converting the
network from a DS-1 level to DS-3 level. This coupled with converging various
products (voice, video, data, internet) over the same network are the key
ingredients to approach profitability. The Company, as it continues to grow
and build network, is not expected to be profitable in the foreseeable future.
There are little or no seasonal changes in the revenue stream of the
business.
COST STRUCTURE
Our costs and expenses include:
* network costs;
* selling and marketing;
* general and administrative; and
* interest and depreciation.
Network costs primarily consist of costs associated with the routing and
termination of our customers' traffic. The costs include:
* leased bandwidth and connection to the Internet;
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* leased network equipment;
* local lines used to carry calls to and from our network
locations; and
* our network facilities.
We expect these costs to increase into the future as we further expand
our network in the United States and throughout the world. The majority of
these costs are fixed. The Company will continue to add fixed cost network in
order to continue to grow revenue. The network will have to be expanded to
handle additional volume in excess of 50,000,000 minutes per month.
Sales and marketing expenses include the expenses anticipated to be
associated with acquiring customers, establishing brand recognition,
commissions paid to our sales personnel, advertising costs and customer
referral fees. We expect sales and marketing expenses to increase over time
as we aggressively market our products and services.
During 1998 and 1999, sales and marketing expenses were relatively fixed
costs. Sales and marketing expenses are expected to increase both in terms of
absolute dollars and as a percentage of revenue as our revenue grows. We
expect to spend significant capital to build brand recognition to the extent
possible due to our relatively small size. Much of our sales and marketing
expenses are anticipated to be expanded to obtain strategic relationships
with a variety of agents, portals, content providers, and other key customer
destinations on the Web.
General and administrative expenses consist of the salaries of our
employees and associated benefits, and the cost of travel, business
entertainment, rent and utilities. A large portion of our general and
administrative expenses is allocated to operations and customer support.
Customer support expenses include the costs associated with customer service
and technical support, and consist primarily of the salaries and employment
costs of the employees responsible for those efforts. We expect operations
and customer support expenses to increase over time to support new and
existing customers. We expect general and administrative costs to increase to
support our growth, particularly as we establish a larger organization to
implement our business plan. Historically, we have included our development
and start-up costs, comprised primarily of payroll expenses for our technical
team of engineers and developers, in general and administrative expenses. We
plan to incur additional costs for research and development, though they are
not expected to increase as a percentage of revenue. Over time, we expect
these relatively fixed general and administrative expenses to decrease as a
percentage of revenue, primarily as a consequence of increased revenues.
Interest consists of the cost incurred including commission (recognized
over the life of the notes) on the issuance of the short-term notes and
interest on the notes. The notes have a term of nine-months with an interest
rate of 13.35%. During the fiscal years 1998 and 1999, we had net interest
expense in the aggregate amount of $369,000 and $675,000, respectively.
Interest payable on the Notes in 2000 will be approximately $445,000,
assuming the Notes are repaid in full on their respective due dates, and not
extended by the option of the several payees for nine (9) months.
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Depreciation primarily relates to our hardware infrastructure. We
depreciate our infrastructure over its estimated five-year useful life using
the straight-line method. In addition, we will be adding more originating and
terminating VoIP Gateways as traffic volumes justify. We expect depreciation
to increase in absolute terms as we grow our networks to support new and
acquired customers, but to decrease as a percentage of total revenue. In
February of 2000, we have entered into a letter of intent with Cisco for $28
million in funding with the majority to be used for equipment purchases over
the next two years. See "Management's Discussion and analysis or Plan of
Operation - Financing Sources" for a more detailed discussion of the letter
of intent.
RESULTS OF OPERATIONS
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<TABLE>
<CAPTION>
===========================================================================
Period from
Year January 7, 1998
Ending (date of inception)
December 31, to December 31,
1999 as restated 1998,
===========================================================================
<S> <C> <C>
Revenues $ 1,212,363 $ 120,737
----------- -----------
Expenses:
Direct Costs 2,043,399 252,194
General and Admin. Expenses 3,477,104 983,549
----------- -----------
Total Expenses 5,520,503 1,235,743
----------- -----------
Operating Loss (4,308,140) (1,115,006)
----------- -----------
Other Income (Expenses):
Net Interest (675,195) (368,561)
Gain (Loss) on Investment (31,518) (239,800)
----------- -----------
Total Other Expenses (706,713) (608,361)
----------- -----------
Net Loss $(5,014,853) $(1,723,367)
=========== ===========
===========================================================================
</TABLE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO THE PERIOD FROM JANUARY 7, 1998
(DATE OF INCEPTION) TO DECEMBER 31, 1998
Revenue increased from $120,737 for the period ended December 31, 1998
to $1,212,363 for the year ended December 31, 1999. The increase is a result
of our business moving from the start-up phase into an operational entity. Of
revenue generated in 1999, revenue from wholesale sales over our VoIP network
accounted for 80%. Additionally, as we expanded our network, we had more
locations to offer existing customers. We expect our wholesale revenue to
continue to grow, as we continue to expand our network into additional
locations. Currently, we are expanding our "points of presence" in major
markets to handle DS-3 traffic and above. The focus on the wholesale revenue
is expected to give us the ability to grow our network and eventually begin
to offer more on net locations when we enter the retail sector. This retail
sector will primarily consist of corporate customers and various target and
niche markets.
To date all of our revenue has been earned in our voice telephony
business. However, in November of 1999, we entered into several contractual
agreements to provide Internet services over our network. See "Overview" and
"Product and Services" section for a more detailed
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explanation of these services. We expect to continue to offer other value-added
services utilizing our network in the future.
Total direct costs increased from $252,194 for the period ended December
31, 1998 to $2,043,399 for the year ended December 31, 1999. The increase of
costs in the year ended December 31, 1999 over the period ending December 31,
1998 is a result of our business moving from the start-up phase into an
operational entity. As we expand our network to DS-3 level service in each of
our major markets, we expect network cost to increase by $50,000 per month. We
have continued to purchase additional equipment to expand our VoIP network and
direct costs have increased as a result. As we implement several of the new
wholesale contracts, in the first quarter of fiscal year 2000, direct costs as
a percentage of revenue are expected to decrease with J.D. Services, Inc., IDS
Long Distance, Inc., Caprock Communication and General Communication
Corporation.
General and Administrative expenses increased from $983,549 for the
period ended December 31, 1998 to $3,477,104 for the year ended December 31,
1999. As we continue to grow our network, expand our product offering and
execute our business plan, we expect these expenses to continue to grow. The
primary reason for this increase is the expense for marketing and costs of
additional personnel. Also, the Company has hired several key individuals
since August 1999 and incurred stock compensation expense in the amount of
approximately $1,237,000 as a result. General and administrative expenses will
increase as a percentage of revenue for a period, until all necessary
personnel and systems are in place to handle future revenue and support future
products. Thereafter, we anticipate that general and administrative costs will
decrease as a proportion of revenues.
Depreciation and Amortization costs increased from $36,627 for the period
ended December 31, 1998 to $151,787 for the year ended December 31, 1999. It
is anticipated depreciation for currently owned equipment in 2000 will be
$200,000. Depreciation consists primarily of the depreciation of our VoIP
gateways. We depreciate this network equipment over five years on a
straight-line basis. It can be expected that depreciation will continue to
increase as we continue to expand our network. Amortization consists of the
amortization of the cost of two customer bases. In December of 1999, we sold
these two bases to an affiliated company for forgiveness of a note and cash.
We intend to acquire customer bases in the future that have synergies with our
network and business plan. These synergies include profitability, location and
type of customer.
Net Interest expense increased from $368,561 for the period ended
December 31, 1998 to $675,195 for the year ended December 31, 1999. This
increase is the result of the increase in the issuance of short-term notes,
the commissions paid to broker-dealers for the sale of these notes and the
cost of our financing for capital equipment.
Loss on Investment changed from $(239,800) for the period ended December
31, 1998 to $(31,518) for the year ended December 31, 1999. In 1998 we
incurred a loss of $239,800 of a write-down of an investment in Mezzanine
Capital to $200. In 1999, these costs represent a loss of $31,518 incurred
with a potential acquisition. We expect these gains (losses) to vary based on
changes in the Company's business.
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Our Net Loss increased from $(1,723,367) for the period ended December
31, 1998 to $(5,030,734) for the year ended December 31, 1999. This increase
is due primarily to the continued expansion of our network and an increase in
personnel and overhead. We expect continued and increasing losses as we
continue to pursue our growth strategy.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in January of 1998, we have financed our operations
through a series of private placements of our Common Stock for $960,000 in net
proceeds, and from the sale of $5.4 million, nine-month notes beginning in
January 1998 through December 1999. As of December 31, 1999, we have a total
of $3.7 million outstanding in these notes. In February of 2000 we completed a
private placement from the sale of 1,200,000 shares of our restricted common
stock for $5.1 million. Most of our equipment has been leased with our
equipment vendors primarily through Cisco Systems, Inc.
As of December 31, 1999 we had approximately $20,000 in cash and cash
equivalents. Our operating activities used cash of approximately $2,840,000
for the year ended December 31, 1999, compared to approximately $1,146,000,
for the period ended December 31, 1998. Cash used in investing activities was
approximately $330,000 and $691,000 for the year ended December 31, 1999 and
the period ended December 31, 1998, respectively. Our cash used in investing
activities was principally for the purchase of telecommunications and Internet
equipment. Our financing activities provided cash of approximately $3,182,000
and $1,844,000 for the year ended December 31, 1999 and the period ended
December 31, 1998, respectively. The principal sources of the cash provided
were additional funding from the sale of notes and a common stock offering in
1999.
Our future capital requirements will depend on numerous factors,
including:
* market acceptance of our services;
* brand promotions;
* the amount of resources we devote to the development of our
current and future products; and
* the expansion of our in-house sales force and marketing our services.
We may experience a substantial increase in our capital expenditures and
lease arrangements consistent with the growth in our operations and adding
additional Personnel. Our current cash flow from operations is not sufficient
to meet our working capital and capital expenditure needs for at least the
next 12 months and accordingly, we have obtained and will continue to seek
additional financing. Accordingly, there can be no assurance that we will have
sufficient capital to finance potential acquisitions or other growth oriented
activities, and may issue additional equity securities, incur debt or obtain
other financing.
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In 1998 and 1999, we entered into various contracts for the purchase of
network facilities. Our currently outstanding network costs will require us to
expend approximately $220,000 per month in 2000, but we expect to increase
network costs as we continue to expand.
Additional commitments for the year 2000 are as follows:
* repayment of indebtedness on the nine-month notes in the
aggregated amount of $3.7 million;
* leases on existing corporate offices, equipment and network
facilities in the aggregate amount of $105,000;
* leases on new corporate offices in the aggregate amount of $72,000;
* operating leases on existing equipment in the aggregate amount of
$436,000;
* operating leases on new equipment purchased in January 2000 of
$372,000; and
* network expenditures in the aggregate amount of $2,600,000.
The Company expects to fund these year 2000 commitments from the funds
raised in future private and public offerings. As of December 31, 1999, our
working capital deficit is $5.1 million.
In February 2000, the Company sold 1,200,000 shares of its Common Stock
at $4.25 to 79 investors for a total of $5,100,000. The shares of Common Stock
issued by the Company in connection with this offering are deemed "restricted
securities" within the meaning of that term as defined in Rule 144 of the
Securities Act of 1933, as amended ("Act") and were issued pursuant to certain
"private placement" exemptions under Section 4(2) and Rule 506 of Regulation D
of the Act, as promulgated by the Securities and Exchange Commission.
In March of 2000 the Company entered into a letter of intent with Cisco
Systems, Inc. for $28 million of financing. This is only a letter of intent
and not a definitive Agreement. The funding would be used for the purchase of
equipment and working capital and would be repaid over 5 years.
The Company has no material capital commitments.
COMMITMENTS AND CONTINGENCIES
We have entered into various Agreements with Service Providers, on an
order by order basis, to lease bandwidth, purchase dedicated Internet access,
lease local lines, and to rent space to locate our network equipment. These
service orders range in term from month to month to five year agreements.
Below is a schedule that details the significant terms of these commitments:
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<PAGE>
<TABLE>
<CAPTION>
MONTHLY
PAYMENTS TERM CANCELLATION PENALTY INITIAL ORDER
-------- ---- -------------------- -------------
<S> <C> <C> <C> <C>
Sprint-TM- $45,000 3 yr. 100% of year 1; 50% of October 1998
Commercial Year 2; 50% of year 3
Global $35,000 2 yr. $25,000 per month August 1999
Crossing commitment
E.Spire $35,000 1-3 yr. Commitment for the total August 1998
period for value of orders
Cox $9,000 5 yr. Commitment for full January 1999
amount for entire period
Electric $21,000 1 yr. Commitment for full July 1999
Lightwave amount for the entire period
MCI $11,000 1 yr. Commitment for 50% of Sept 1999
WorldCom the remaining due
Level 3 $40,000 1 yr. Commitment for total August 1999
Communications, Inc. amount for the full term
Caprock $5,000 1 yr. Take or Pay Commitment July 1999
Communications
</TABLE>
In December of 1999, we terminated services with Sprint. Management
believes that the Company will be able to cancel the existing contracts
without material adverse effect on the Company's consolidated financial
statements. We are currently trying to negotiate a final settlement. We are in
good standing with respect to all of our other commitments.
ITEM 3. DESCRIPTION OF PROPERTY.
Our address is 13747 Montfort Drive, Suite 250, Dallas, Texas 75240. The
Company's telephone number is (972) 788-2988. The Company leases approximately
5,640 square feet at $8,695 per month for a period of three (3) years which
will expire March 31, 2001. The Company believes this space is adequate for
its current needs.
At each of our points of presence we co-located with other competitive
local exchange carriers or other telecommunications providers for rack space
for our Cisco gateways. We typically enter into one (1) year lease agreements
which range from $450 to $700 per month per rack.
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<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding Common Stock as of March 20, 2000 and as adjusted
for the stock split:
* each person who is the beneficial owner of more than 5% of our
common stock;
* each of our Directors;
* each of our named Executive Officers in the summary compensation
table;
* all of our named Executive Officers and Directors as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Shareholder Beneficial Ownership(1) Percent of Class
------------------------------- ----------------------- ----------------
<S> <C> <C>
William Bedri(2) 1,400,000 6.00%
13747 Montfort Dr., Suite 250
Dallas, Texas 75240
Jeff Rothell(3) 600,000 4.50%
13747 Montfort Dr., Suite 250
Dallas, Texas 75240
Garth Cook(4) 600,000 4.50%
13747 Montfort Dr., Suite 250
Dallas, Texas 75240
Maya Crothers(5) 120,000 0.90%
13747 Montfort Dr., Suite 250
Dallas, Texas 75240
Dave McEvilly 100,000 0.70%
13747 Montfort Dr., Suite 250
Dallas, Texas 75240
Ron Howard 900,000 6.70%
13747 Montfort Dr., Suite 250
Dallas, Texas 75240
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<PAGE>
Amount and Nature of
Name and Address of Shareholder Beneficial Ownership(1) Percent of Class
------------------------------- ----------------------- ----------------
William D. Yotty(6) 3,810,000 23.9%
13747 Montfort Dr., Suite 250
Dallas, Texas 75240
Jim Chambas(7) 1,700,000 8.20%
13747 Montfort Dr., Suite 250
Dallas, TX 75240
All Officers and Directors as a 2,600,000 14.90%
group (3 persons)
</TABLE>
------------------------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting
and investment power with respect to all such shares. Under Rule 13d-
3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage
owned by such person, but are not deemed outstanding for the purpose
of calculating the percentage owned by each other person listed.
(2) Mr. Bedri is the beneficial owner of options to purchase 600,000
shares of Common Stock.
(3) Mr. Rothell may be deemed the beneficial owner of 600,000 shares of Common
Stock although pursuant to his employment agreement he receives his shares
over the next year and a half.
(4) Mr. Cook may be deemed the beneficial owner of 600,000 shares of Common
Stock although pursuant to his employment agreement he receives his shares
over the next year and a half.
(5) Ms. Crothers may be deemed the beneficial owner of 120,000 shares of
Common Stock.
(6) Mr. Yotty, a former Director, is the beneficial owner of options to
purchase 600,000 shares of Common Stock.
(7) Mr. Chambas, a former Director, is the beneficial owner of options to
purchase 600,000 shares of Common Stock.
CHANGES IN CONTROL
There are no understandings, arrangements or agreements known by
management at this time which would result in a change in control of the
Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following persons are our Executive Officers and Directors:
Name Age Position
---- --- --------
William Bedri 60 Director and Secretary
Jeff Rothell 37 President, Chief Executive Officer and Director
Garth Cook 34 Chief Financial Officer, Treasurer and Director
Maya Crothers 32 Director of Business Development of NVT
Dave McEvilly 38 Vice-President of Information Technology of NVT
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<PAGE>
WILLIAM BEDRI, DIRECTOR, SECRETARY Mr. Bedri has been a Director of the
Company since August 13, 1998 and the Secretary since January 2000. Mr. Bedri
has 25 years of experience in sales and marketing management in the
telecommunications and computer industries. From January 1995 to August 1998,
Mr. Bedri was with Brooks Fiber Communication as Director of National Accounts
for Resale Services in their Western Region. From 1988 to 1995, Mr. Bedri was
with ComSystems as Branch Manager of the Los Angeles and San Fernando Valley
offices. In 1984, Mr. Bedri was with Digital Computer Graphic (DCG) as
partner and Vice President of Sales and Marketing. DCG sold graphic design
computers to the architectural and building industries in the United States.
Mr. Bedri spent 10 years with Western Union in marketing and sales management
for Telex and TWX services. Mr. Bedri received a Bachelor of Science Degree
from Rutgers University in 1976. Mr. Bedri holds 800,000 shares of Common
Stock and options to acquire 600,000 additional shares. Mr. Bedri devotes
approximately 50% of his time to the Company.
JEFFREY ROTHELL, PRESIDENT, CEO AND DIRECTOR Mr. Rothell has been NVT's
President and the Chief Executive Officer since August 1, 1999 and the
Company's President since January 2000 and a Director since March 2000. Mr.
Rothell has 15 years of operations and marketing experience in
telecommunications companies. From 1989 to 1997, Mr. Rothell served as
president of Security Telecom Corp. (a $20 million corporation). In 1997 he
partnered in the sale of Security Telecom to Evercom Inc., which became the
largest inmate telephone provider in the United States with $225 million in
annual revenue in 1998, retaining Security Telecom as the corporate hub for a
venture capital roll-up of the correctional institution telecommunications
business. Mr. Rothell's experience encompasses planning, design, development
and management, operations management, operational integration of merger &
acquisitions, sales and marketing, product management and software design and
development. Several of the companies to which Mr. Rothell is an affiliate may
also compete with the Company now, or in the future, in the Internet telephony
business. Mr. Rothell holds 600,000 shares of Common Stock and no options to
acquire any additional shares. Mr. Rothell devotes 100% of his time to the
Company.
GARTH COOK, CFO, TREASURER AND DIRECTOR Mr. Cook has been the Chief
Financial Officer and Treasurer since August 1, 1999 and a Director since
March 2000. Mr. Cook is a Certified Public Accountant with separate bachelor's
degrees in finance and accounting from University of New Orleans, awarded in
1988. He previously worked for Deloitte & Touche LLP where he specialized in
the audits of publicly traded companies. In 1993, he left Deloitte & Touche to
become regional controller for Chemfix Technologies Inc. where he was
responsible for the completion of public filings and budgets. In 1994, Cook
joined the telecommunications industry as CFO of a company focusing on
international arbitrage and prepaid calling services which was sold in 1998.
He has extensive experience in the telecommunications industry from financial,
sales and operational perspectives, and extensive experience in the public
markets. Several of the companies to which Mr. Cook is an affiliate may also
compete with the Company now, or in the future, in the Internet telephony
business. Mr. Cook beneficially owns 600,000 shares of Common Stock and no
options. Mr. Cook devotes 100% of his time to the Company.
MAYA CROTHERS, VICE PRESIDENT OF MARKETING AND DIRECTOR OF BUSINESS
DEVELOPMENT OF NVT Ms. Crothers has been Director of Business Development of
our subsidiary NVT since August 15, 1999. Ms. Crothers earned her
undergraduate degree in Mechanical Engineering and
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<PAGE>
International Studies from the University of Michigan and went on to join
Westinghouse Electric's Power Generation Business Unit. In 1993 she became
the Regional Sales Engineer for the Houston office where she negotiated over
$100 million in power equipment sales and was awarded the Westinghouse Market
Leader Award for Sales & Marketing efforts. She completed her masters in
business administration at the Wharton Business School in 1996, when she began
work as a consultant to Bain & Company until becoming a full time employee of
the Company. Ms. Crothers has experience in several industries and a variety
of initiatives including marketing and sales strategies, engineering and
process design, acquisition feasibility, and due diligence, complexity
reduction, customer loyalty and supplier management. Several of the companies
to which Ms. Crothers is an affiliate may also compete with the Company now,
or in the future, in the Internet telephony business. Ms. Crothers holds
120,000 shares of Common Stock and no options to acquire additional shares.
DAVE MCEVILLY, VICE-PRESIDENT OF INFORMATION TECHNOLOGY OF NVT. Mr.
McEvilly has been Vice-President of Information Technology of our subsidiary
NVT since August 15, 1999. Mr. McEvilly has numerous certificates in Computer
Science and has an extensive background in network and data. From 1989-1991,
Mr. McEvilly served as the Software Configuration Manager for Intellicall's
Vending Department where he oversaw all service installation and support and
configuration management for call routing and billing. In 1991, he became the
Director of Software for ATMC. In 1993 Mr. McEvilly joined Security Telecom as
Director of Information Services to develop the LEMS (Law Enforcement
Management Systems) product and was responsible for product development, video
imaging and digital solutions for the Corrections Industry. In 1997, when
Security Telcom was purchased by Evercom, Inc., Mr. McEvilly was responsible
for all corporate infrastructure, WAN connectivity, data management,
application and development management for back office systems, integrating
technologies across 14 acquisitions and management of 150 local areas of LEMS.
Several of the companies to which Mr. McEvilly is an affiliate may also
compete with the Company now, or in the future, in the Internet telephony
business. Mr. McEvilly holds 100,000 shares of Common Stock and no options to
acquire additional shares.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Our Articles of Incorporation, as amended, provide that the number of
members of our Board of Directors shall be not less than one and not more than
nine. Our current number of Directors is three. At each annual meeting of
stockholders, all Directors' terms expire and successors are elected to hold
office for a term of one year, until their respective successors are elected
and qualified. All of our Directors are up for re-election at our Annual
Meeting. All of the officers of the Company serve at the discretion of our
Board of Directors.
We intend to establish an audit committee, a compensation committee and a
technology committee. It is anticipated the initial members will be Messrs.
Bedri and Cook. The audit committee will be initially composed of Mr. Rothell,
assisted by Mr. Garth Cook, our Chief Financial Officer, and the members of
the technology committee will be Messrs. Bedri, Jeff Rothell and David
McEvilly. The audit committee will oversee the retention, performance and
compensation of the independent public accountants, and the establishment and
oversight of such systems of internal accounting and auditing control as it
deems appropriate. The compensation
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<PAGE>
committee will review and approve the compensation of our executive officers,
including payment of salaries, bonuses and incentive compensation, determine
our compensation policies and programs, and administer our stock option plans.
The technology committee will review and evaluate current technology as it
relates to the Company's business. We anticipate that we will add two
additional independent members to our Board and the committees during the
upcoming fiscal year.
RESIGNATION OF DIRECTORS
On March 13, 2000, the Company was notified that the state of
Pennsylvania had entered a Cease and Desist Order on December 7, 1999 against
William D. Yotty and indirectly against James Chambas as a Director of Paystar
Communications, Inc. The Cease and Desist Order alleged that these individuals
and others were selling unregistered securities in the state of Pennsylvania
and elsewhere. Although Messrs. Yotty and Chambas intend to vigorously defend
this action, they deemed it to be in the best interests of the Company to
resign as Directors of the Company and discontinue any direct relationship
with the Company except as shareholders as of March 20, 2000.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our Articles of Incorporation contain a provision designed to limit
directors' liability to the extent permitted by the Nevada General Corporation
Law. Specifically, directors will not be held liable to us or our stockholders
for monetary damages for any breach of fiduciary duty as a director, except
for liability as a result of:
* any breach of the duty of loyalty to us or our stockholders;
* actions or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
* payment of an improper dividend or improper repurchase of our
stock under the Nevada General Corporation law; or
* actions or omissions pursuant to which the director received an
improper personal benefit.
The principal effect of the limitation of liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of ours, unless the stockholder can demonstrate one of the specified
bases for liability. The provision, however, does not eliminate or limit
director liability arising in connection with causes of action brought under
the federal or state securities laws. Further, the articles of incorporation
do not eliminate a director's duty of care. The inclusion of this provision in
the certificate of incorporation may discourage or deter stockholders or
management from bringing a lawsuit against directors for a breach of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefited us and our stockholders. This provision should not affect the
availability of equitable remedies such as injunction or rescission based upon
a director's breach of the duties of care.
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<PAGE>
The bylaws also provide that we will indemnify our directors and
officers, and may indemnify any of our employees and agents, to the fullest
extent permitted by Nevada law. We are generally required to indemnify our
directors and officers for all judgments, fines, penalties, settlements, legal
fees and other expenses incurred in connection with pending, threatened or
completed legal proceedings because of the director's or officer's position
with us or another entity that the director or officer serves at our request,
subject to certain conditions, and to advance funds to its directors and
officers to enable them to defend against such proceedings. The Board of
Directors must affirmatively vote to invoke the indemnification of an officer
or director, but the bylaw provisions may constitute a custodial obligation of
the Company regardless of such vote. Currently, the Company has no insurance
to fund its indemnification obligation.
At present, there is no pending or threatened litigation or proceeding
involving any Director or Officer, employee or agent of ours where such
indemnification will be required or permitted.
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid to
our Chief Executive Officer and those other individuals who serve as executive
officers at the end of fiscal 1999 who earned in excess of $100,000 as
compensation for services rendered on our behalf.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
--------------------------------------------------------------
Name Restricted All
And Stock Options/ Other
Principal Salary Bonus Award(s) SARs Compensation
Position Year(1) ($) ($) ($) (#) ($)(2)
--------- ------- ------- ----- ------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey W. Rothell, 1999 $78,000 $ 0 $50,000 -0- $1,200
President and Chief 1998 $ 0 $ 0 -0- -0- $ 0
Executive Officer 1997 $ 0 $ 0 -0- -0- $ 0
Garth Cook, 1999 $78,000 $ 0 $50,000 -0- $1,200
Chief Financial 1998 $ 0 $ 0 -0- -0- $ 0
Officer 1997 $ 0 $ 0 -0- -0- $ 0
</TABLE>
------------------------
(1) Messrs. Rothell and Cook commenced their employment in August 1999.
Pursuant to their employment agreements each received 600,000 shares of
Common Stock valued at $1.00 per share. Initially, they received 100,000
shares valued at $.50 with the remainder vesting over the next year
through January 1, 2001.
(2) The Company pays Messrs. Rothell and Cook's health insurance of
approximately $100 per month.
(3) No other Company executive officer will earn in excess of $100,000,
considering all forms of compensation, in the upcoming fiscal year ending
December 31, 2000.
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<PAGE>
STOCK OPTIONS
OPTIONS GRANTED
The following table sets forth the options that have been granted to
those persons listed in the Summary Compensation Table as of December 31, 1999.
Option/SAR Grants
-----------------
Individual Grants
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal Year ($/Share) Date
---- ------- -------------- -------- ----
<S> <C> <C> <C> <C>
Jeffrey W. Rothell 0 0% $0 0
Garth Cook 0 0% $0 0
</TABLE>
------------------------------
COMPENSATION OF DIRECTORS
The Company had no arrangements pursuant to which any director of the
Company was compensated during the year ended December 31, 1999, for services
as a Director. All Directors are reimbursed for reasonable expenses incurred
in connection with their attendance at Board meetings. Members of the Board of
Directors have been granted options and have received shares of our Common
Stock as described elsewhere.
EMPLOYMENT CONTRACTS
In August 1999, the Company entered into one (1) year employment
agreements with Mr. Jeffrey Rothell, our President and Chief Executive Officer
and Mr. Garth Cook, our Chief Financial Officer and Treasurer. Each individual
receives $78,000 per year in salary. In addition, each received 100,000 shares
of Common Stock upon signing of their agreements and will each receive an
additional 350,000 shares of Common Stock on January 1, 2000 with three (3)
quarterly bonuses of 50,000 shares in March 2000, June 2000 and January 2001.
The Company also pays each individual's health insurance.
-47-
<PAGE>
STOCK OPTIONS
DIRECTOR OPTIONS
In January 1999, our Board of Directors issued to Mr. Bedri 600,000
options to purchase our Common Stock exercisable at $1.00 per share. All
currently outstanding options are exercisable for five years. At that time,
two former Directors also each received 600,000 options to purchase Common
Stock exercisable at $1.00 per share.
2000 STOCK OPTION PLAN
On January 20, 2000, we adopted the 2000 Stock Plan (the "Plan") which
provides the issuance of options to purchase up to 2,000,000 shares of Common
Stock to our employees, officers, directors and consultants. The Plan is
subject to shareholder approval at our Annual Meeting of Shareholders on May
19, 2000. After shareholder approval and as of March 23, 2000, 700,000
options have been awarded to our employees which vest ranging from one to two
years. Unless sooner terminated, the Plan will expire on January 20, 2010.
The purpose of the Plan is to encourage stock ownership by our employees,
officers, directors and consultants so that they may acquire or increase their
proprietary interest in the Company, to (i) induce qualified persons to become
our employees, officers or consultants; (ii) compensate our employees
officers, directors and consultants for past services to the Company; and
(iii) encourage such persons to become employed by or remain in the employ of
or otherwise continue their association with the Company and to put forth
maximum efforts for the success of our business.
The Plan states that it is not intended to be the exclusive means by
which the Company may issue options or warrants to acquire its Common Stock,
stock awards or any other type of award. To the extent permitted by applicable
law, we may issue any other options, warrants or awards other than pursuant to
the Plan without shareholder approval.
The Plan is administered by a Committee consisting of not less than two
members of the Board of Directors. At its discretion, the Committee may
determine the persons to whom options may be granted and the terms thereof.
The terms of any options granted under the Plan are not required to be
identical as long as they are not inconsistent with the express provisions of
the Plan. In addition, the Committee may interpret the Plan and may adopt,
amend and rescind rules and regulations for the administration of the Plan.
Options may be granted as incentive stock options ("Incentive Options")
intended to qualify for special treatment under the Internal Revenue Code of
1986, as amended (the "Code"), or as non-qualified stock options
("Non-Qualified Options") which are not intended to so qualify. Only employees
of the Company are eligible to receive Incentive Options. The period during
which options may be exercised may not exceed ten years. The exercise price
for Incentive Options may not be less than 100% of the fair market value of
the Common Stock on the date of
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<PAGE>
grant; except that the exercise price for Incentive Options granted to persons
owning more than 10% of the total combined voting power of the Common Stock
may not be less than 110% of the fair market value of the Common Stock on the
date of grant and may not be exercisable for more than 5 years. The exercise
price for Non-Qualified Options may not be less than 85% of the fair market
value of the Common Stock on the date of grant. The Plan defines "fair market
value" as the value of the stock on a given date as determined by the
Committee in accordance with the Treasury department regulations applicable to
"incentive stock options" within the meaning of Section 422 of the Code.
The Plan contains provisions for proportionate adjustment of the number
of shares issuable upon the exercise of outstanding options and the exercise
price per share in the event of stock dividends, recapitalization resulting in
stock splits or combinations or exchange of shares.
If the Company is subject to a Change in Control as a result of its sale,
transfer or other disposition of all or substantially all of its assets, the
Company may elect to cancel all outstanding Options, pursuant to 15 days
notice, upon consummation of the sale, transfer or other disposition. If the
Company merges or consolidates with another corporation, whether or not the
Company is the surviving corporation, outstanding Options shall be subject to
the agreement of merger or consolidation which without participant's consent
may provide for: (i) the continuation of outstanding Options by the Company
(if it is the surviving corporation), (ii) the assumption of the Plan and
outstanding Options by the surviving corporation or its parent, (iii) the
substitution by the surviving corporation or its parent of options with
substantially the same terms for the outstanding Options, or (iv) if a change
in control is involved, the termination of the outstanding Options as
described above.
Except as otherwise provided under the Plan, an option may not be
exercised unless the recipient then is an employee, officer or director of or
consultant to the Company, and unless the recipient has remained continuously
as an employee, officer or director of or consultant to the Company since the
grant of the option.
If an optionholder ceases to be an employee, officer or director of, or
consultant to the Company (other than by reason of death or permanent
disability), other than for cause, the holder may exercise any options or
Stock Appreciation Rights ("SARs") that are vested but unexercised on the date
his or her service is terminated until earlier of (i) 30 days after the date
of termination of service, or (ii) the expiration date of the options or SARs.
However, termination of employment at any time for cause immediately
terminates all options or SARs held by the terminated employee. If termination
is by reason of disability, however, the holder may exercise his or her
options or SARs until the earlier of (i) 12 months after the termination of
service, or (ii) the expiration of the term of the option or SAR. If the
holder dies while in service to the Company, the holder's estate or successor
by bequest or inheritance may exercise any options or SARs that the holder was
entitled to exercise on the date of his or her death at any time until the
earlier of (i) the period ending one year after the holder's death, or (ii)
the expiration of the term of the option or SAR.
Options granted under the Plan are not transferable other than by will or
by the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the
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<PAGE>
Code or Title I of the Employee Retirement Income Security Act of 1974, or the
rules thereunder. Options may be exercised, during the lifetime of the
recipient, only by the recipient and thereafter only by his legal
representative.
The Board of Directors may suspend, terminate, modify or amend the Plan
but no amendment, modification, extension, assumption, cancellation or
discontinuation shall be made (except those specifically permitted under other
provisions of the Plan) (I) which would impair the rights of an optionee or
participant under a Stock Option theretofore granted or which would cause an
optionee's or participant's existing Incentive Stock Option to no longer
qualify as an Incentive Stock Option, without the optionee's or participant's
consent, or (ii) which, without approval of the shareholders of the Company,
would cause the Plan to no longer comply with (A) the rules promulgated by the
Securities and Exchange Commission under authority granted in Section 16 of
the Securities Exchange Act of 1934, as amended, if the Company is then a
Reporting Company, (B) Section 422 of the Code or (C) any other statutory or
regulatory requirements.
SARs will entitle the recipient to receive a payment equal to the
appreciation in market value of a stated number of shares of Common Stock from
the price on the date the SAR was granted or became effective to the market
value of the Common Stock on the date first exercised or surrendered. The
Committee or the Board may determine such other terms, conditions or
limitations, if any, on any Awards granted pursuant to the Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We believe that all of the transactions set forth below were made on an
arms-length basis. All future transactions between us and our Officers,
Directors, Principal Stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of outside Directors,
and will continue to be on terms no less favorable to us than could be
obtained from unaffiliated.
In August 1998, we entered into a Merger and Plan of Reorganization with
NVT, Inc. wherein we issued 3,000,000 shares of our Common Stock to Messrs.
Bedri, Chambas, Yotty and other shareholders of NVT, Inc. After the merger,
these individuals became Officers and Directors of the Company and
collectively own 2,555,000 shares of Common Stock.
In October 1998, we purchased a long distance customer base from Quantum
Network Services, Inc. ("Quantum"), a company owned by Mr. William Yotty, one
of our former Directors, for $110,000. Quantum's historical cost basis in the
customer list was $110,000. In June 1999, we purchased an additional customer
list for $60,000 in cash from Quantum. Quantum had no historical cost basis in
this customer list. Mr. Yotty was a Director at the time of the transactions,
however, the Board of Directors believed the transactions to be favorable at
the time based upon a review of the multiples of revenues generated by the
bases to the respective purchase prices. Mr. Yotty did not vote with respect
to the transactions. Because of the geographical location of the customer
bases compared to our then existing network, we sold these bases to Nationwide
Hospitality, Inc. ("Nationwide") in December 1999 for a total of $175,000 in
the form of the partial forgiveness of a note to Jim Chambas, a former
Director. As of February 2000, the Company still owes the former Director
approximately $139,000. The note is non-interest bearing and the original cash
proceeds from the loan were used to fund the working capital needs of the
Company. Nationwide is owned by Jim Chambas and as such, the sale to
Nationwide may be deemed to be an affiliate transaction. No other purchasers
were sought, however, despite the related nature of this transaction,
management believes it
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<PAGE>
to be as favorable as might have been obtained in a non-related party
transaction. It was believed that the value of the base had diminished due to
customer attrition. We also were not in a cash position to repay Mr. Chambas
his note and by selling the base to Nationwide we were able to substantially
reduce this obligation. Mr. Chambas, who was then a member of the Company's
Board of Directors, did not vote with respect to this transaction. See Note
#8 to the consolidated financial statements for an additional description of
the transaction.
ITEM 8. DESCRIPTION OF SECURITIES.
AUTHORIZED CAPITAL STOCK
Our Articles of Incorporation, as amended, authorize shares of capital
stock consisting of:
* 50,000,000 shares of Preferred Stock, $0.001 par value; and
* 100,000,000 shares of Common Stock, $0.001 par value.
COMMON STOCK
The Company is authorized to issue up to 100,000,000 shares of Common
Stock, $0.001 par value. There are presently 13,416,600 shares of Common Stock
issued and outstanding or reserved to be issued to officers, directors and
employees. Additionally, there are 2,582,000 options to purchase the Company's
common stock at $1 to $18 per share. All shares of Common Stock have equal
voting rights and, when validly issued and outstanding, have one vote per
share in all matters to be voted upon by shareholders. We believe there are
approximately 1,100 holders of record of the Company's Common Stock.
The shares of Common Stock have no preemptive, subscription, conversion
or redemption rights and may be issued only as fully paid and non-assessable
shares. Cumulative voting in the election of directors is not allowed, which
means that the holders of a majority of the outstanding shares represented at
any meeting at which a quorum is present will be able to elect all of the
directors if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any directors. On liquidation of
the Company, each common shareholder is entitled to receive a pro rata share
of the Company's assets available for distribution to common stockholders.
-51-
<PAGE>
PREFERRED STOCK
Our Articles of Incorporation provides that we may issue up to 50,000,00
shares of Preferred Stock in one or more series as may be determined by our
Board of Directors who may establish the number of shares to be included in
each such series, fix the designation, powers, preferences and relative rights
of the shares of each such series and any qualifications, limitations, or
restrictions thereof, and increase or decrease the number of shares of any
such series without any vote or action by the stockholders. The Board of
Directors may authorize, without stockholder approval, the issuance of
preferred stock with voting and conversion rights that could adversely affect
the voting power and other rights of holders of common stock. Preferred Stock
could be issued quickly with terms designated to delay or prevent a change in
our control or to make the removal of management more difficult. This could
have the effect of decreasing the market price of the Common Stock.
We believe that the ability of our Board to issue one or more series of
preferred stock will provide us with flexibility in structuring possible
future financings and acquisitions, and in meeting other corporate needs that
might arise. The authorized shares of Preferred Stock, as well as shares of
Common stock, will be available for issuance without action by our
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated system on which our securities may be listed
or traded.
The Board could issue a series of preferred stock that could, depending
on the terms of such series, impede the completion of a merger, tender offer
or other takeover attempt. The Board will make any determination to issue such
shares based on its judgment as to our best interests and the best interests
of our stockholders. The Board could issue preferred stock having terms that
could discourage an acquisition attempt through which an acquirer may be able
to change the composition of the Board, including a tender offer or other
transaction that some, or a majority, of our stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over the then current market price.
DIVIDEND POLICY
Dividends are payable on Common Stock when, as, and if declared by the
Board of Directors out of funds legally available to pay dividends, subject to
any preferences which may be given to holders of preferred stock. The Company
has paid no cash dividends on its Common Stock to date and it does not
anticipate payment of cash dividends in the foreseeable future.
REPORTS TO SHAREHOLDERS
The Company is a publicly held company which, upon the effectiveness of
the Registration Statement, will file periodic reports, including Annual
Reports containing consolidated financial statements of the Company audited by
independent public accountants, and quarterly reports, which contain unaudited
financial statements, with the Securities and Exchange Commission.
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<PAGE>
STOCK TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Company's Common Stock is Interwest Transfer
Company, P.O. Box 17316, Salt Lake City, Utah 84117.
-53-
<PAGE>
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
Our Common Stock began trading on the Over the Counter Bulletin Board
beginning in February 1999 and the National Quotation Bureau "Pink Sheets" as
of February 2000. Accordingly, there is insufficient market history to
establish or identify any trend in the market for the Common Stock.
The following table sets forth the high and low bid prices for our Common
Stock for the past year. The quotations reflect inter-dealer prices, with
retail mark-up, mark-down or commissions, and may not represent actual
transactions. The information presented was obtained from the OTCBB.com, a
website maintained by OTC Bulletin Board(R) (OTCBB) and the National Quotation
Bureau "Pink Sheets" as of March 2000.
In February, 2000, the Company declared a 2-for-1 stock split of all
outstanding shares for all record holders as of that date March 1, 2000.
THE BELOW MARKET PRICES REFLECT THAT STOCK SPLIT AS IF IT HAD OCCURRED AS OF
THE DATES IDENTIFIED.
<TABLE>
<CAPTION>
High Low
1999 Fiscal Year Bid Bid
---------------- --- ---
<S> <C> <C>
First Quarter. . . . . . . . . . . $2.75 $0.50
Second Quarter . . . . . . . . . . $2.25 $1.25
Third Quarter. . . . . . . . . . . $1.38 $1.25
Fourth Quarter . . . . . . . . . . $4.44 $1.63
</TABLE>
On April 3, 2000, the last reported bid and asked prices for the Common Stock
were $16.00 and $20.00, respectively.
As referenced above, our shares are currently traded on the "Pink Sheets"
of the National Quotation Bureau. Our shares were de-listed from the OTCBB in
February 2000 as our shares were not then registered under Section 12(g) of
the Securities Exchange Act of 1934. On January 17, 2000, we filed with the
Securities Exchange Commission ("SEC") a Form 10SB to register our shares with
the Securities and Exchange Commission and as required by the OTCBB for
further listing. We intend to re-apply to OTCBB or the Nasdaq National Markets
at such time as we have received and responded to all comments of the staff of
the SEC with respect to the Form 10SB.
-54-
<PAGE>
HOLDERS
As of March 22, 2000, the Company believes it had approximately 1,100
beneficial owners of record of the Company's Common Stock based on reports of
the Depository Trust Corporation. Although there is a trading market for our
stock, it is lightly traded, there is no substantial public float at the
present time.
ITEM 2. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings, nor are we aware
of pending or threatened litigation.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
In December 1999, we engaged Deloitte & Touche LLP as our auditors for
the fiscal year ending December 1999. Previously, Schvanevedt & Company were
the Company's auditors until their dismissal in December 1999. Schvanevedt &
Company's report on the financial statements for the period ended December 31,
1998 did not contain an adverse opinion or disclaimer of opinion, nor were
they modified as to uncertainty, audit scope, or accounting principles except
that their report included an explanatory paragraph concerning our ability to
continue as a going concern. The decision to change auditors was unanimously
approved by the Company's Board of Directors in December 1999. There were no
disagreements with Schvanevedt & Company on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which if not resolved to Schvanevedt & Company's satisfaction,
would have caused it to make reference to the subject matter of the
disagreement in connection with their reports.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant and its subsidiary NVT, Inc.
have issued their securities to the following persons for the cash or other
consideration indicated in transactions that were not registered under the
Securities Act of 1933 (the "1933 Act"). As of March 14, 2000, we have
13,416,600 shares outstanding of which 9,440,000 shares is restricted stock
subject to Rule 144. Of the restricted shares, 1,475,000 are shares reserved
to be issued to officers and employees over a vesting period.
I.
In August 1998, the Registrant entered into a Merger and Plan of
Reorganization where it acquired all of the issued and outstanding shares of
NVT, Inc. and issued a total of 6,000,000 shares of Common Stock to six (6)
individuals, three (3) of which are current Officers and Directors. The share
exchange was made pursuant to the exemption provided by Section 4(2) of the
1933 Act and Rule 506 of Regulation D promulgated thereunder.
-55-
<PAGE>
II.
In August 1998, the Company issued 400,000 shares of its "restricted"
Common Stock to Mezzanine Capital Limited ("Mezzanine") for 40,000 of their
shares and certain financial advisory services valued at $240,000 which
included locating the public "shell" into which NVT, Inc. was ultimately
merged and structuring the transaction. The shares received have recently been
written off as worthless. Further, in August 1998, Mezzanine was issued an
additional 600,000 shares of Common Stock for continuing investment banking
and advisory services valued at $.125 per share. This issuance was pursuant to
the exemption from registration provided by Section 4(2) of the 1933 Act.
Mezzanine represented that it purchased the securities for investment, and all
certificates issued were impressed with a restrictive legend advising that the
shares represented by the certificates may not be sold, transferred, pledged
or hypothecated without having first been registered or the availability of an
exemption from registration established. No commissions were paid and no
broker/dealer was involved in this transaction.
III.
In January 1999, the Company issued 740,000 shares of stock to two
employees and four officers and directors. At the time the shares were issued
there was no market in the Company's stock. The Company valued the shares at
$.195 per share and compensation expense of $145,000 was recorded in during
the year ended December 31, 1999. The stock vested immediately and these
shares reflect the split on March 14, 2000. The Company offered these
employees their shares pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. All employees took their shares
for investment purposes without a view to distribution and had access to
information concerning the Company. All certificates bear "restricted" legends
prohibiting their transfer.
IV.
In February of 1999, one of the original shareholders returned 145,000
shares to the Company. The shares were forfeited because of the lack of effort
the individual could devote to Company matters. The Company cancelled the
shares upon receipt.
V.
In March and April 1999, the Registrant issued 986,500 shares of Common
Stock at $1.00 to forty-one (41) individuals primarily through certain
Officers and Directors at the time without the payment of commissions. The
purchasers consisted primarily of friends and associates of these individuals
The Registrant claims the exemption from registration provided by Section 3(b)
and 4(2) of the Securities Act of 1933, as amended (the "1933 Act") and Rule
504 pursuant to Regulation D adopted thereunder. A cash finders fee of 3% or
approximately $30,000 in total was paid in connection with the sale of the
shares to three finders. They were
-56-
<PAGE>
Diana Costain, Andres Montgomery and Inter Mountain Marketing Associates; all
non-affiliates of the Company.
VI.
From January 1998 to December 1999, the Registrant's subsidiary NVT, Inc.
has issued from time to time, a series of promissory notes to certain
"accredited investors" and non-accredited investors. The issuance of NVT,
Inc.'s notes to sixty-four (64) noteholders was made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. A total of 16 noteholders are
non-accredited and forty-eight are accredited as defined pursuant to Rule 501
of regulation D. A finders fee of 10% was paid in connection with the sale of
the notes, to the same three finders as described above. All purchasers
represented by way of Subscription Agreements, that they had access to
information regarding the Company and purchased the securities for investment
and not with a view to distribution. All notes issued to the purchasers were
impressed with a restrictive legend advising that the shares represented by
the certificates were "restricted" securities and may not be sold,
transferred, pledged or hypothecated without having first been registered or
the availability of an exemption from registration established. These
purchasers who have renewed their notes have received updated information from
the Company and executed amended subscription agreements.
VII.
From August to November 1999, the Company issued 315,000 shares of stock
to directors and certain employees. The Company valued the shares at a range
of $.73 to $1.62 per share and compensation expense of $257,150 was recorded
during the year ending December 31, 1999. The stock vested immediately . These
numbers reflect the split on March 14, 2000. The Company offered these
employees their shares pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. All employees took their shares
for investment purposes without a view to distribution and had access to
information concerning the Company. All certificates bear "restricted" legends
prohibiting their transfer.
VIII.
From August to November 1999, the Company reserved to be issued 1,475,000
shares of stock to officers and certain employees. The Company valued the
shares between $.73 and $1.73 per share depending on the date of grant. The
stock vests based upon continued employment over a period of approximately 18
months. These numbers reflect the split on March 14, 2000. The Company
recorded $1,201,200 as unearned compensation on the date of the grants of
which $834,386 was amortized as compensation expense during the year ended
December 31, 1999. The remaining $366,814 will be amortized as compensation
expense on a straight-line basis over the vesting period. The Company offered
these employees their shares pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. All employees took
their shares for investment purposes without a view to distribution and had
-57-
<PAGE>
access to information concerning the Company. All certificates bear
"restricted" legends prohibiting their transfer.
IX.
In February 2000, the Company sold 1,200,000 shares of its Common Stock at
$4.25 to seventy-nine (79) investors for a total of $5,100,000. No commissions
or fees were paid to any individual or entity in connection with the sales. The
shares of Common Stock issued by the Company in connection with this offering
are deemed "restricted securities" within the meaning of that term as defined in
Rule 144 of the Securities Act of 1933, as amended ("Act") and were issued
pursuant to certain "private placement" exemptions under Section 4(2) and rule
506 of Regulation D of the Act, as promulgated by the Securities and Exchange
Commission. The sales of the Common Stock were to "accredited" investors, as
that term is defined in rule 501 of Regulation D of the Act, and were
transactions by the Company not involving any public offering. Although not
required, all such accredited investors had access to information on the Company
necessary to make an informed investment decision. All of the aforesaid
purchasers were fully informed and advised concerning the Company, its business,
financial and other matters by way of a Private Placement Memorandum. All of
the aforesaid securities have been appropriately marked with a restricted
legend and are "restricted securities," as defined in Rule 144 of the rules
and regulations of the Securities and Exchange Commission. The Company's
transfer agent has been instructed to mark "stop transfer" on its ledgers to
assure that these securities will not be transferred absent registration or
until the availability of an exemption therefrom is determined.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and the Bylaws of the Company, filed as
Exhibits 3.1 and 3.2, respectively, provide that the Company will indemnify its
Officers and Directors for costs and expenses incurred in connection with the
defense of actions, suits, or proceedings where the Officer or Director acted in
good faith and in a manner he reasonably believed to be in the Company's best
interest and is a party by reason of his status as an Officer or Director,
absent a finding of negligence or misconduct in the performance of duty.
-58-
<PAGE>
GLOSSARY
APPLET - A small application that performs a specific task within an operating
system such as the calculator or calendar in a Microsoft Windows 97(TM) program.
BRAND EQUITY - The long-term value of a marketers brand in the marketplace
(which usually occurs when customers see the brand as more than the sum of
elements in the package).
CIRCUIT SWITCHING - The process of setting up and keeping a circuit open between
two or more users, such that the users have exclusive and full use of the
circuit until the connection is released.
COMMUNICATIONS APPLICATIONS BROWSER ("CAB") - A software application, loaded
onto a computer that allows users to locate and retrieve data over the
Internet and to make phone calls and send and retrieve voice, text and fax
messages while browsing the World Wide Web.
DATA PACKETS - The method which information is transferred through electronic
media. Information is transformed into data packets, traversed across the
electronic medium and at the destination is reassembled into the original
information.
DS-3 - Digital Service, level 3 is a high-speed equivalent of 28 T-1 channels
and operating at 44.736 Mbps. Also called T-3.
FILTERING - The ability to limit the type of information available via the World
Wide Web. A filtering device is typically used to filter objectionable
information, profanity or pornography.
INTEGRATED VOICE AND DATA is the combination of voice and data signals
transmitted via a single channel.
INTERNET - Several large computer networks containing information on a variety
of subjects joined together over high speed data links allowing the free flow of
information across the data links.
ISP - Internet Service Provider is an entity which provides Internet access to
its customers typically for a fee.
LAN/WAN - Local Area Network/Wide Area Network. is a short distance data
communications network used to link together computers and peripheral devices
under some form of standard control. A Wide Area Network uses common-carrier
provided lines that cover an extended geographical area. In contrast with LAN,
this network uses links provided by local telephone companies and usually
connects disparate sites.
LATAS AND INTERLATA SERVICES - Local Access and Transport Area is one of 161
local geographical areas in the US within which a local telephone company may
offer telecommunications services - local or long distance. Inter LATA -
Telecommunications services that originate in one and terminate in another Local
Area Transport Area.
-59-
<PAGE>
LEMs - Law Enforcement Management Systems are proprietary software application
developed and maintained by Security Telcom used to manage systems and
information for jails and correctional facilities.
NOC - Networks Operation Centers are organization and systems responsible for
the day-to-day care and management of a network.
NTVT - The Company's bulletin board trading symbol.
POINTS OF PRESENCE ("POPs") - are physical places within a LATA where a long
distance carrier, ISP or other provider interfaces with the network of the local
exchange carrier.
PSTN - Public Switched Telephone Network is a name which refers to a public
phone company.
RBOCs - The Regional Bell Operating companies are seven RBOCs which split out of
the old AT&T/Bell System by the FCC upon divestiture of the Bell Operating
Companies.
REAL-TIME is a term used to describe no perceived delay in transmission of
information between the actual event and the transmission of the event or
information related to the event.
ROUTING is the process of selecting the correct circuit path for a message
throughout a network to specific geographical locations.
SWITCHED CARRIERS are the traditional long distance carriers using the PSTN like
AT&T, MCI, etc.
TELEPHONY is the science of transmitting voice, data, video or image signals
over a distance via a network of a communication conduit, typically copper or
fiber and hardware used to route signals.
TUNNELING is to temporarily change the destination of a packet in order to
traverse one or more routers that are incapable of routing to the real
destination.
UNIFIED MESSAGING is a telecommunications application that allows the user to
retrieve a variety of messaging mediums, i.e. Voicemail, e-mail and fax from one
unified box. Messages can be retrieved via phone or e-mail.
VoIP NETWORK is the Voice over Internet Protocol Network. It is a communications
network utilizing Internet Protocol technology in the delivery of voice and data
transmissions. Internet Protocol technology uses packet switching to deliver
voice and rata rather than the traditional method of circuit switching.
www.NetVoice.net is the NetVoice Technologies Corporation URL.
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<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . F-2
Predecessor Auditor's Report . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets for December 31, 1999 (Restated)
and 1998 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Operations for the year ended
December 31, 1999 (Restated) and the period from January 7, 1998
(date of inception) to December 31, 1998. . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Deficit for the
year ended December 31, 1999 (Restated) and the period from
January 7, 1998 (date of inception) to December 31, 1998. . . . . . F-6
Consolidated Statements of Cash Flow for the year ended
December 31, 1999 (Restated) and the period from January 7, 1998
(date of inception) to December 31, 1998 (Restated) . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-8 - F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NetVoice Technologies Corporation:
We have audited the accompanying consolidated balance sheet of NetVoice
Technologies Corporation and subsidiary (the "Company") as of December 31, 1999,
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the year then ended. 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 audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999,
and the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 12, the accompanying consolidated financial statements have
been restated.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 14, 2000, except for Note 12, as to which the date is
August 2, 2000
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
NetVoice Technologies Corporation
(A Development Stage Company)
I have audited the accompanying consolidated balance sheets of NetVoice
Technologies Corporation, (a development stage company), as of December 31,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the period January 7, 1998 (Inception) to December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit. As described in Note #12, to the financial
statements, subsequent to the issuance of the report the financial statements of
the Company for the period January 7, 1998 (date of inception) to December 31,
1998, were restated.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and the
significant estimates made by management, as well as evaluating the overall
consolidated financial statements presentation. I believe that my audit provides
a reasonable basis for my opinion.
In my opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of NetVoice
Technologies Corporation, (a development stage company), as of December 31,
1998, and the results of its operations and its cash flows for the period
January 7, 1998 (Inception) to December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
NetVoice Technologies Corporation, (a development stage company), will continue
as a going concern. As discussed in Note #10 to the consolidated financial
statements, the Company has an accumulated deficit and a negative net worth at
December 31, 1998. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note #10. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ SCHVANEVELDT & COMPANY
Salt Lake City, Utah
December 15, 1999
Except Note #12 to which the date is March 14, 2000
F-3
<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
(AS RESTATED, (AS RESTATED,
ASSETS NOTE 12) NOTE 12)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,085 $ 7,990
Restricted cash and cash equivalents 167,100
Accounts receivable - trade 190,733 75,068
Prepaid expenses 86,505 6,063
----------- -----------
Total current assets 297,323 256,221
PROPERTY AND EQUIPMENT, NET 860,534 495,376
OTHER ASSETS 300,787 174,074
----------- -----------
TOTAL $ 1,458,644 $ 925,671
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,519,154 $ 426,161
Accrued expenses 180,082 63,568
Current portion of notes payable and capital lease obligations 3,659,905 1,834,309
Unearned revenue 30,000
----------- -----------
Total current liabilities 5,389,141 2,324,038
LONG-TERM DEBT, LESS CURRENT PORTION 223,056
----------- -----------
Total liabilities 5,612,197 2,324,038
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIT:
Preferred stock; 50,000,000 shares authorized at $0.001 par value,
none issued
Common stock, 200,000,000 shares authorized at $0.0005 par value;
10,741,600 and 8,990,100 shares issued and outstanding,
respectively 5,371 4,495
Paid-in capital 2,946,110 320,505
Unearned compensation (366,814)
Accumulated deficit (6,738,220) (1,723,367)
----------- -----------
Total stockholders' deficit (4,153,553) (1,398,367)
----------- -----------
TOTAL $ 1,458,644 $ 925,671
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999, AND
PERIOD FROM JANUARY 7, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
(AS RESTATED,
NOTE 12)
<S> <C> <C>
REVENUES $ 1,212,363 $ 120,737
EXPENSES:
Direct expenses 2,043,399 252,194
General and administrative expenses 3,477,104 983,549
----------- -----------
Total expenses 5,520,503 1,235,743
----------- -----------
NET OPERATING LOSS (4,308,140) (1,115,006)
OTHER INCOME (EXPENSE):
Interest income 4,316 3,540
Interest expense (679,511) (372,101)
Loss on investments (31,518) (239,800)
----------- -----------
Total other expense (706,713) (608,361)
----------- -----------
NET LOSS $(5,014,853) $(1,723,367)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.48) $ (0.24)
=========== ===========
WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING 10,404,446 7,246,064
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1999 (RESTATED), AND
PERIOD FROM JANUARY 7, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
--------------------------------------------------------------------------------------------------------------------
COMMON STOCK
----------------------
PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 7, 1998 (DATE OF
INCEPTION) $ - $ - $ - $ - $ - $ -
Shares issued to incorporators 6,000,000 3,000 7,000 10,000
Shares issued for "reverse acquisition"
of Blue Pine, Inc. 1,990,100 995 (995) -
Shares issued for investment in Mezzanine
Capital, Ltd. at $.60 per share 400,000 200 239,800 240,000
Shares issued for services 600,000 300 74,700 75,000
Net loss (1,723,367) (1,723,367)
---------- --------- ---------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1998 8,990,100 4,495 320,505 - (1,723,367) (1,398,367)
Restricted shares issued (1,055,000
shares) and granted (1,475,000 shares)
to officers, directors and employees 1,055,000 528 1,602,882 (1,603,350) -
Shares sold as part of private placement
memorandum at $1.00 per share, net of
issuance costs 986,500 493 958,007 958,500
Purchase of customer list from stockholder (60,000) (60,000)
Sale of customer list to stockholder in
exchange for the forgiveness of debt 124,631 124,631
Canceled stock (290,000) (145) 145 -
Amortization of unearned compensation 1,236,536 1,236,536
Net loss (5,014,853) (5,014,853)
----------- ---------- ----------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1999 $10,741,600 $ 5,371 $2,946,110 $ (366,814) $(6,738,220) $(4,153,553)
=========== ========== =========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999, AND
PERIOD FROM JANUARY 7, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------
1999 1998
(AS RESTATED, (AS RESTATED,
NOTE 12) NOTE 12)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,014,853) $(1,723,367)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on investments 31,518 239,800
Depreciation and amortization 151,787 36,627
Expenses paid by stock in lieu of cash 75,000
Stock issued to employees, officers and directors 1,236,536
Changes in operating assets and liabilities:
Accounts receivable (115,665) (75,068)
Prepaid expenses (80,442) (6,063)
Accounts payable 1,092,993 426,161
Accrued expenses 116,514 63,568
Unearned revenue 30,000
Other assets (288,380) (182,208)
----------- -----------
Net cash used in operating activities (2,839,992) (1,145,550)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (462,129) (523,669)
Decrease (increase) in restricted cash and cash equivalents 167,100 (167,100)
Purchase of investments (35,036)
----------- -----------
Net cash used in investing activities (330,065) (690,769)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the sale of common stock 958,500 10,000
Proceeds from long-term debt 3,892,989 2,039,309
Payments on long-term debt (1,669,337) (205,000)
----------- -----------
Net cash provided by financial activities 3,182,152 1,844,309
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 12,095 7,990
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 7,990
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 20,085 $ 7,990
=========== ===========
SUPPLEMENTAL DISCLOSURES - Interest paid $ 368,774 $ 372,101
=========== ===========
NONCASH TRANSACTIONS:
Issued 400,000 shares of common stock to acquire 40,000 shares
of Mezzanine Capital, Ltd. $ - $ 240,000
=========== ===========
Issued 600,000 shares of common stock for services $ - $ 75,000
=========== ===========
Issued 1,055,000 compensatory shares to officers, directors
and employees $ 1,602,822 $ -
=========== ===========
Assets acquired through capital leases $ 31,631 $ -
=========== ===========
Forgiveness of debt in exchange for customer lists $ 175,000 $ -
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 (RESTATED), AND
PERIOD FROM JANUARY 7, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998 (RESTATED)
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - NetVoice Technologies Corporation (the "Company") is the
successor company to NetVoice Technologies, LLC ("NVT, LLC"), a Texas limited
liability company that began operations on January 7, 1998. NVT, LLC was formed
for the purpose of developing, acquiring and operating telephone communication
facilities and networks that were intended to transmit voice over the Internet
utilizing conventional and Internet technologies. NVT, LLC was reincorporated in
Nevada on June 30, 1998, as NetVoice Technologies, Inc. ("NVT, Inc.").
On August 13, 1998, NVT, Inc. concluded a reverse acquisition of Blue Pines,
Inc. in which Blue Pines, Inc. issued 6,000,000 shares of common stock in
exchange for all of the outstanding shares of common stock of NVT, Inc., the
surviving accounting acquirer. As a result of the reverse acquisition, NVT,
Inc. became a wholly owned subsidiary of Blue Pines, Inc., and the six former
stockholders of NVT, Inc. became the holders of approximately 75% of the
outstanding shares of common stock of the Company. The remaining 25% of the
shares were owned by the original non-affiliated stockholders of Blue Pines,
Inc. On August 11, 1998, Blue Pines, Inc. changed its name to NetVoice
Technologies Corporation. The value of assets that NVT, Inc. acquired as a
result of the reverse acquisition was negligible because Blue Pines, Inc. was
an inactive shell at the time of the reverse acquisition. There was no prior
affiliation between the parties. Shares outstanding prior to the reverse
acquisition have been restated to reflect the exchange ratio with Blue Pines,
Inc.
NetLD.com, Inc. was incorporated in the State of Nevada as a wholly owned
subsidiary of the Company on October 14, 1999. This corporation was initially
formed for the purpose of conducting the traditional long distance telephone
services of the Company. Currently, there has been no activity in this
subsidiary, and it is not anticipated that traditional long distance will be
pursued as part of the business model. The Company may disband this entity or
use it for other corporate purposes.
RISKS AND UNCERTAINTIES - The Company has experienced cumulative operating
losses, and its operations are subject to certain risks and uncertainties,
including, among others, risks associated with technology and regulatory trends,
evolving industry standards, growth and acquisitions, actual and prospective
competition by entities with greater financial and other resources, the
development of the Internet market and the need for additional capital.
The Company has incurred net losses of $5,014,853 and $1,723,367 in 1999 and
1998, respectively. The Company has also had negative cash flows from operating
activities of $2,839,992 and $1,145,550 in 1999 and 1998, respectively. The
Company must obtain additional debt or equity capital to continue its current
operations and to meet debt service requirements. As described in Note 11, the
Company has entered into a letter of intent for $28.0 million credit facility
with Cisco Systems. Management has also completed a private placement of
1,200,000 shares of its common stock for $5.1 million. The Company believes that
this additional financing and private placement will be sufficient to support
the Company's liquidity requirements through December 31, 2000. Management
also believes there can be no assurances that additional financing can be
obtained from conventional sources. Therefore, management is exploring
alternative sources of financing support that include seeking strategic
investors and/or technology partners. There can be no assurance that the
Company will be successful in obtaining any of the necessary financing on
reasonable terms or at all.
REVENUES FROM TRADITIONAL LONG DISTANCE SERVICES RECOGNITION POLICY -
Traditional long distance services provided to consumers and long distance
services sold in bulk to other carriers are recognized in the period the
minutes are used. Any amounts prepaid are deferred until the period service
are provided.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
transactions and balances between the Company and its subsidiaries have been
eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS - The Company considers all short-term, highly liquid
investments purchased with an initial maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT - The cost of property and equipment is depreciated over
the estimated useful lives of the related assets. Depreciation and amortization
are computed on the straight-line method. The following is a summary of useful
lives of the major categories of property and equipment:
Furniture and equipment 3 to 10 years
Computer and telephone equipment 3 to 10 years
ACCOUNTS RECEIVABLE - The Company does not have an allowance for doubtful
accounts at December 31, 1999 and 1998. It is management's belief that all
accounts receivable balances at December 31, 1999 are probable of collection.
INCOME TAXES - The Company and its subsidiaries file a consolidated tax return.
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company annually evaluates the recoverability of the
deferred tax asset and adjusts the valuation allowance for the portion of such
asset not considered more likely than not to be realized.
EARNINGS PER SHARE - Basic earnings per share are computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share are computed by
including contingently issuable shares with the weighted average shares
outstanding during the period. Contingently issuable shares would have an
antidilutive effect upon earnings per share. At December 31, 1999 and 1998, the
Company had 3,347,500 and 1,872,500, respectively, of contingently issuable
shares of common stock that were not included in the Company's earnings per
share calculation.
COMPREHENSIVE INCOME - The Company has no elements of other comprehensive
income.
F-9
<PAGE>
SEGMENTS - The Company is in a single-market segment.
LONG-LIVED ASSETS - Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," requires that they be stated at the lower of the
expected net realizable value or cost. The carrying value of long-lived assets
is periodically reviewed to determine whether impairment exists. The review is
based on comparing the carrying amount of the assets to the undiscounted
estimated cash flows over the remaining useful lives. No impairment is indicated
as of December 31, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and
establishes standards for accounting and reporting for derivative
instruments. It requires entities to record all derivative instruments on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and on the type of hedge transaction. The portion of all hedges not effective
in achieving offsetting changes in fair value is recognized in earnings. SFAS
No. 133, as amended, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Management has not completed an evaluation of
the impact of the provisions of this statement on the Company's financial
statements.
RECLASSIFICATIONS - Certain reclassifications have been made in the prior year's
financial statements in order to conform to the classifications used in the
current year.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Furniture and equipment $ 10,033 $ 8,160
Computer and telephone equipment 975,765 515,509
----------- -----------
Total cost 985,798 523,669
Less accumulated depreciation (125,264) (28,293)
----------- -----------
$ 806,534 $ 495,376
=========== ===========
</TABLE>
F-10
<PAGE>
3. OTHER ASSETS
Other assets at December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Vendor security deposits $ 300,587 $ 72,208
Investments 200 200
Customer lists, net 101,666
----------- -----------
$ 300,787 $ 174,074
=========== ===========
</TABLE>
The customer list was amortized on a straight-line basis over two years. For the
year ended December 31, 1999, and the period from January 7, 1998 (date of
inception) to December 31, 1998, amortization expense was $70,696 and $8,529,
respectively (see Note 8).
Investments consist of 40,000 shares of common stock of Mezzanine Capital, Ltd.
("Mezzanine"), a Bermuda corporation. The stock of Mezzanine is traded on the
Bermuda exchange. The Company considered its investment in Mezzanine strategic
in nature to facilitate its consulting services. At the time the transaction was
entered into, the market value of Mezzanine stock was approximately $6.00 per
share. At December 31, 1998, the Company wrote the investment down because there
had been no trading activity in the stock and its market value is believed to be
permanently impaired.
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Notes payable $ 3,651,932 $ 1,669,337
Loans from stockholders, no interest rate, maturing
from October 2004 to December 2004 206,672
Loans from stockholders, no interest rate, due on demand 164,972
Capital lease obligations, with interest rates of 15%
to 15.3%, maturing August 2003 24,357
----------- -----------
3,882,961 1,834,309
Less current portion of long-term debt (3,659,905) (1,834,309)
----------- -----------
$ 223,056 $ -
=========== ===========
</TABLE>
F-11
<PAGE>
Future minimum lease payments for capital lease obligations at December 31,
1999, are as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000 $11,127
2001 11,127
2002 5,615
2003 2,256
-------
Total 30,125
Less interest of capital lease obligations (5,768)
-------
Present value of net minimum capital lease payments $24,357
=======
</TABLE>
The aggregate future maturities of long-term debt, excluding capital lease
obligations, are as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000 $3,651,932
2001
2002
2003
2004 206,672
----------
$3,858,604
==========
</TABLE>
Notes payable are secured by a security interest in revenues from contracts,
equipment and a cash reserve equal to 10% of total notes payable. The notes bear
a fixed rate of interest at a rate of 13.35% per annum, payable on the first day
of each quarter during the term. All principal and unpaid accrued interest is
due and payable nine months from issuance. The notes are due from January 2000
to September 2000. The note holder has the right to extend the terms of the
notes for an additional nine months at the same terms.
The aggregated principal amount of the notes that may be delivered under the
Indenture Agreement is limited to $5,000,000, of which $3,651,932 has been
issued through December 31, 1999. At December 31, 1999, the Company was not in
compliance with its debt covenant, that requires the Company to maintain
approximately 10% of its outstanding debt on deposit with an escrow agent,
however, subsequently, the Company received a waiver for its noncompliance.
5. INCOME TAXES
From January 7, 1998 (date of inception) to June 30, 1998, the Company operated
as an LLC. On June 30, 1998, the Company filed Articles of Incorporation in the
State of Nevada and continued its business activities as a corporation. For
income tax purposes, the Company has filed a partnership return for the period
when it operated as an LLC and a corporate tax return will be filed thereafter.
F-12
<PAGE>
The Company has net operating losses to carry forward for future tax purposes,
as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT EXPIRATION
OF LOSS OF LOSS DATE
<S> <C> <C>
1998 $1,156,628 2018
1999 4,022,882 2019
</TABLE>
Net deferred taxes in the accompanying consolidated balance sheets include the
following components as of December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforward $ 1,968,213 $ 439,519
Miscellaneous tax asset items 91,124 93,668
----------- -----------
Total deferred tax asset 2,059,337 533,187
Valuation allowance (2,059,337) (533,187)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
The Company annually evaluates the recoverability of the deferred tax asset and
adjusts the valuation allowance for the portion of such asset not considered
more likely than not to be realized.
A reconciliation of income taxes computed at the U.S. federal statutory tax rate
to the provision for income tax is as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------- ----------------------
<S> <C> <C> <C> <C>
Income tax benefit at U.S. federal
statutory rates $(1,559,846) (34.00)% $(585,945) (34.00)%
State tax benefit (183,511) (4.00) (68,935) 0.04
Other, primarily permanent differences 217,206 4.70 121,692 7.06
Valuation allowance 1,526,151 33.30 533,187 26.98
----------- ------ --------- ------
$ - 0.00 % $ - 0.00 %
=========== ====== ========= ======
</TABLE>
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK - The Company is authorized to issue 50,000,000 shares of
preferred stock with a par value of $0.001 per share in one or more series as
may be determined by the Board of Directors. The Board of Directors may fix the
designation, power, preference and relative rights of the shares of each series
and any qualifications, limitations or restrictions thereof, and increase or
decrease the number of shares of any series without stockholders' approval or
action by the stockholders. The Board of Directors may authorize, without
stockholders' approval, the issuance of preferred stock with voting rights and
conversion rights that could adversely affect the voting power and other rights
of the common stock.
COMMON STOCK - The total authorized stock of the Company is 200,000,000
shares of common stock, with a par value of $.0005. All stocks when
issued shall be deemed fully paid and nonassessable. No
F-13
<PAGE>
cumulative voting on any matter to which stockholders shall be entitled to vote
shall be allowed for any purpose. Stockholders have no preemptive rights to
acquire unissued shares of stock of the Company.
During 1998, the Company issued 400,000 shares of common stock to acquire 40,000
shares of Mezzanine, a Bermuda corporation (see Note 3).
During 1998, the Company issued 600,000 shares of common stock to two providers
of promotional services. The value of the services provided was $75,000, which
was expensed.
STOCK SPLIT - In February 2000, the Company declared a 2-for-1 stock split of
all outstanding shares for all stockholders of record as of March 14, 2000.
Retroactive effect has been given to the stock split in stockholders' equity
accounts as of December 31, 1999 and 1998, and in all share and per-share data
in the accompanying financial statements.
CANCELED STOCK - In February 1999, one of the original stockholders of the
Company returned 290,000 shares to the Company. The shares were forfeited
because of the lack of effort the individual could devote to Company matters.
The Company canceled the shares upon receipt.
PRIVATE PLACEMENT - In March and April 1999, the Company issued 986,500 shares
of common stock at $1.00 in a private placement.
7. STOCK-BASED COMPENSATION
STOCK-GRANTS - In January 1999, the Company issued 740,000 shares of stock to
directors and certain employees. At the time the shares were issued, there was
no market in the Company's stock. The Company valued the shares at $.195 per
share, and compensation expense of $145,000 was recorded in the Company's
financial statements. The stock vested immediately. All certificates bear
"restricted" legends prohibiting their transfer.
From August to November 1999, the Company issued 315,500 shares of stock to
officers and certain employees. The Company valued the shares between $.73 and
$1.62 per share, and compensation expense of $257,150 was recorded in the
Company's financial statements. The stock vested immediately. All certificates
bear "restricted" legends prohibiting their transfer.
From August to November 1999, the Company granted and reserved to be issued
1,475,000 shares of stock to officers and certain employees. The Company valued
the shares between $.73 and $1.73 per share, depending on the date of grant. The
stock vests based upon continued employment over a period of approximately 18
months. The Company recorded $1,201,200 as unearned compensation on date of
grant, of which $834,386 was amortized as compensation expense in the year ended
December 31, 1999, and the remainder is to be recognized on a straight-line
basis over the vesting period. All certificates bear "restricted" legends
prohibiting their transfer.
The following is the vesting schedule for the granted shares:
882,500 shares to vest in the first calendar quarter of 2000
177,500 shares to vest in the second calendar quarter of 2000
177,500 shares to vest in the third calendar quarter of 2000
42,500 shares to vest in the fourth calendar quarter of 2000
195,000 shares to vest in the first calendar quarter of 2001
The grant of options with no exercise price is accounted for as a grant of
restricted shares.
F-14
<PAGE>
Effective January 25, 1999, the Board approved the adoption of a stock option
plan to be administered by a committee. Each option is exercisable in accordance
with certain price restrictions and were vested on the date of grant. During
1999, 1,872,500 options were granted at an exercise price of $.50 per share, the
estimated fair value of the underlying stock at the date of grant was $.20 per
share. As of December 1999, all 1,872,500 options were vested and exercisable.
The Company applies the provisions of APB No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for its stock option plan, since the exercise price of the Company's
stock option grants was greater than the estimated fair market value of the
underlying stock on the date of the grant. Had compensation costs for the stock
option plan been determined based on the fair value at the grant date consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
loss for 1999 would have been the same. In determining the calculation for SFAS
No. 123, the Company used a weighted average remaining life of these options of
four years, a risk free interest rate of 6.35%, no dividend rate and volatility
of 1%.
8. RELATED PARTY TRANSACTIONS
In October 1998, the Company purchased a customer list from Quantum Network
Services, Inc. ("Quantum") for $110,000 in cash. Quantum's historical cost basis
in the customer list was $110,000. The list was used by the Company in its long
distance and other marketing efforts, and the Company estimated its useful life
as two years. The Company recognized $8,334 as amortization expense in 1998 and
$51,297 in 1999. In June 1999, the Company purchased an additional customer list
for $60,000 in cash from Quantum. Quantum had no historical cost basis in this
customer list. The President of Quantum was at the time as member of the Board
of Directors of the Company and is a shareholder of 23.9% of the Company's
common stock. The $60,000 that was paid to Quantum was accounted for a
distribution to the shareholder by the Company. In December 1999, the Company
sold the customer lists to Nationwide Hospitality, a company also owned by a
then member of the Board of Directors of the Company and shareholder of 8.2% the
Company's common stock, for $175,000 in the form of a partial settlement of a
note payable. The $124,631 that was in excess of the Company's basis was
accounted for as a contribution of capital.
As of December 31, 1999 and 1998, the Company had loans payable to stockholders
in the amounts of $206,672 and $164,972, respectively. These notes include no
interest rate and have maturity dates from October through December 2004.
9. COMMITMENTS AND CONTINGENCIES
LEGAL - The Company is not currently subject to any legal proceedings that
management believes will have a material impact on the Company's financial
position or results of operations.
The legal acquirer was involved in the gold mining industry; the extent of its
mining activity was to acquire a mineral lease, which was subsequently abandoned
due to lack of lease payments and exploration activity. The applicable statute
of limitations has not expired, and no claims have been made against Blue Pines,
Inc. The Company believes it is unlikely that any claims will be made against
the Company relating to this matter.
AGREEMENTS AND COMMITMENTS - The Company has entered into various agreements
with service providers, on an order-by-order basis, to lease bandwidth, purchase
dedicated Internet access, lease local lines and rent space to locate its
network equipment. These service orders range in term from month-to-month to
five-year agreements. Below is a schedule that details the significant terms of
these commitments:
F-15
<PAGE>
<TABLE>
<CAPTION>
MONTHLY CANCELLATION INITIAL
PAYMENTS TERM PENALTY ORDER
<S> <C> <C> <C> <C>
Sprint-TM- Commercial $45,000 3 years 100% of year 1; 50% of October 1998
("Sprint") Year 2; 50% of year 3
Global Crossing 35,000 2 years $25,000-per-month of the August 1999
remaining commitment
E.Spire 35,000 1-3 years Commitment for the total August 1998
period for value of orders
Cox 9,000 5 years Commitment for full January 1999
amount for entire period
Electric Lightwave 21,000 1 year Commitment for full July 1999
amount for the entire period
MCI WorldCom 11,000 1 year Commitment for 50% of September 1999
the remaining amount due
Level 3 Communications 40,000 1 year Commitment for total August 1999
Inc. amount for the full term
Caprock Communications 5,000 1 year Take-or-pay Commitment July 1999
</TABLE>
In December 1999, the Company terminated services with Sprint. Management
believes that the Company will be able to cancel the existing contracts without
material adverse effect on the Company's consolidated financial statements. The
Company is currently trying to negotiate a final settlement. The Company is in
good standing with respect to all of its other commitments.
OPERATING LEASES - The Company conducts its operations in leased facilities and
has entered into leases for office space and equipment. The future minimum lease
payments under these operating leases as of December 31, 1999, are as follows:
<TABLE>
<S> <C>
Years ending December 31:
2000 $536,590
2001 204,314
2002 40,281
--------
Total $781,185
========
</TABLE>
The Company recorded operating lease expense of $44,035 and $27,372 in 1999 and
1998, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The
F-16
<PAGE>
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 20,085 $ 20,085 $ 7,990 $ 7,990
Accounts receivable - trade 190,733 190,733 75,068 75,068
Liabilities:
Accounts payable 1,519,154 1,519,154 426,161 426,161
Long-term debt 3,858,604 3,382,233 1,834,309 1,607,851
</TABLE>
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS
PAYABLE - The carrying amounts of these items are a reasonable estimate of
their fair value.
LONG-TERM DEBT - The fair values of long-term debt are estimated based on
interest rates that are currently available to the Company for the issuance of
debt with similar terms and remaining maturities.
The fair value estimates are based on pertinent information available to
management as of December 31, 1999. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented.
11. SUBSEQUENT EVENTS
PRIVATE PLACEMENT MEMORANDUM - In February 2000, the Company effected a private
placement of 1,200,000 shares of its common stock for $5,100,000. Subscribers
may not sell, transfer or otherwise dispose of the shares unless it is in
compliance with Rule 144 of the Securities Act of 1933.
FACILITY WITH CISCO SYSTEMS CAPITAL CORPORATION - In February 2000, the Company
entered into a letter of intent for a $28 million credit facility with Cisco
Systems, divided into three tranches. Tranche A provides $20 million for the
purchase of Cisco Systems networking hardware; Tranche B provides $5 million for
the soft costs associated with the network; and Tranche C provides $3 million to
be used for working capital purposes exclusive of acquisitions. The applicable
interest rate is London Interbank Offered Rate ("LIBOR") plus 5.50% per annum,
calculated on a 360-day year for actual days elapsed, and accrued from the date
of initial funding. After two consecutive quarters of positive earnings before
income taxes, depreciation and amortization ("EBITDA"), the interest rate will
be based on a sliding scale over LIBOR with a margin range from 4.00% to 5.25%.
The final maturity date for all debt is five years from the closing date of the
facility agreement, or February 25, 2005. The agreement also gives Cisco Systems
warrants to purchase 2.5% of the Company's common stock for $11.25 per share.
The warrants will be exercisable for five years from the date of issuance.
12. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial statements as
of and for the year ended December 31, 1999, the Company's management determined
that the cost for the purchase of a customer list from a company owned by a
shareholder in June 1999 should have been accounted for as a capital
F-17
<PAGE>
distribution, and the proceeds from the sale of such customer list and the
excess of the proceeds from the sale of another customer list over its amortized
carrying cost, both having been sold to another minority shareholder in December
1999, should have been accounted for as capital contribution. These
transactions are more fully discussed in Note 8. Previously, the purchase was
accounted for as an asset acquisition with amortization of the cost charged
to expense, and the sale was accounted for as an asset disposition with a
gain recognized. Additionally, subsequent to the issuance of the Company's
consolidated financial statements as of and for the period ended December 31,
1998, the Company's management determined that certain leases entered into in
December 1998 should have been accounted for as operating leases. Previously,
such leases had been accounted for as capital leases. As a result, the 1999
and 1998 financial statements have been restated from amounts previously
reported to appropriately account for these transactions. The effects of the
restatement are summarized as follows:
A summary of the significant effects of the restatement on the 1999 financial
statements is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED RESTATED
<S> <C> <C>
Balance sheet
Paid-in Capital $ 2,881,479 $ 2,946,110
Accumulated Deficit (6,673,589) (6,738,220)
Statement of operations
General and Administrative Expenses 3,412,473 3,477,104
Total Expenses 5,455,872 5,520,503
Operating Loss (4,243,509) (4,308,140)
Net Loss (4,950,222) (5,014,853)
</TABLE>
A summary of the significant effects of the restatement on the 1998 financial
statements is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED RESTATED
<S> <C> <C>
Property and equipment, net $ 681,856 $ 495,376
Total assets 1,112,151 925,671
Notes payable and current portion of capital lease
obligations 1,951,390 1,834,309
Total current liabilities 2,441,119 2,324,038
Long-term debt 69,399
Total liabilities and stockholders' deficit 1,112,151 925,671
</TABLE>
F-18
<PAGE>
13. REVISED CISCO AGREEMENT (unaudited)
On May 25, 2000, the letter of intent with Cisco System, as disclosed in Note
11, was revised to reflect a $25.0 million credit facility. The revision to the
credit facility excludes Tranche C. Therefore, no warrants will be issued in
connection with the proposed financing.
******
F-19
<PAGE>
PART III
ITEMS 1 AND 2. INDEX AND DESCRIPTION TO EXHIBITS
The Exhibits listed below are filed as part of this Registration
Statement.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Articles of Incorporation of Eastco, Inc. dated June 16, 1977(1)
3.2 Certificate of Amendment of Articles of Incorporation of
Eastco, Inc. dated December 8, 1997(1)
3.3 Certificate of Amendment of Articles of Incorporation of
Blue Pines, Inc. dated August 11, 1998(1)
3.4 Bylaws of NetVoice Technologies Corporation(1)
3.5 Amendments to Bylaws of NetVoice Technologies Corporation(1)
3.6 Certificate of Correction(1)
10.1 Agreement and Plan of Reorganization(1)
10.2 Memorandum of Understanding between NetVoice Technologies, Inc.
and MultiCom Services(1)
10.3 Memorandum of Understanding between NetVoice Technologies, Inc.
and Diversified Data Distributors(1)
10.4 Agreement between NetVoice Technologies, Inc. and Interwest
Transfer Co., Inc.(1)
10.5 Broker Agreement between NetVoice Technologies, Inc. and
Unlimited Tech, Inc.(1)
10.6 Carrier Service Agreement between NetVoice Technologies, Inc.
and IDT Corporation(1)
10.7 Carrier Service Agreement between NetVoice Technologies, Inc.
and IDS Long Distance, Inc.(1)
10.8 Carrier Service Agreement between NetVoice Technologies, Inc.
and Intercomm Americas, Inc.(1)
10.9 Internet Telephony Service Agreement between NetVoice
Technologies, Inc. and Intercomm Americas, Inc.(1)
10.10 Carrier Service Agreement between NetVoice Technologies, Inc.
and JD Services, Incorporated(1)
10.11 Carrier Service Agreement between NetVoice Technologies, Inc.
and SuperNet(1)
<PAGE>
10.12 Carrier Service Agreement between NetVoice Technologies, Inc.
and ValuLine, Inc.(1)
10.13 Telecommunications Service Agreement between NetVoice
Technologies, Inc. and Brooks Fiber Communications(1)
10.14 Carrier Service Agreement between NetVoice Technologies, Inc.
and CapRock Communications(1)
10.15 Letter of Agreement between NetVoice Technologies
Corporation and Duncan & Hill, LLC(1)
10.16 Agreement between NetVoice Technologies, Inc. and Frontier
Communications(1)
10.17 Agreement between NetVoice Technologies, Inc. and Electric
Lightwave, Inc.(1)
10.18 Agreement between NetVoice Technologies, Inc. and GTE
Internetworking(1)
10.19 Software License and Support Agreement between NetVoice
Technologies, Inc. and Portal Software, Inc.(1)
10.20 Master Lease Agreement between NetVoice Technologies, Inc.
and Sunrise Leasing Corporation (Cisco Systems)(1)
10.21 Addendum to Master Lease Agreement (AA) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.22 Addendum to Master Lease Agreement (AB) between NetVoice
Technologies, Inc. and Cisco Systems Capital Corporation(1)
10.23 Addendum to Master Lease Agreement (AC) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.24 Addendum to Master Lease Agreement (AD) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.25 Addendum to Master Lease Agreement (AE) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.26 Addendum to Master Lease Agreement (AF) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.27 Lease Agreement between NetVoice Technologies, LLC and
Inter-Tel Leasing, Inc.(1)
10.28 Network Agreement between NetVoice Technologies, Inc. and
Inter-Tel.net, Inc.(1)
10.29 Master Services Agreement with Signup Server, Inc.(1)
10.30 Office Lease and First Amendment thereto(1)
10.31 Employment Agreement with Jeff Rothell(1)
10.32 Employment Agreement with Garth Cook(1)
<PAGE>
10.33 Agreement with Z-Tel Communications, Inc. and NetVoice
Technologies Corporation(2)
10.34 Agreement with Landmark Community Newspapers, Inc. and
NetVoice Technologies Corporation(2)
10.35 Agreement with Level 3 Communications and NetVoice
Technologies Corporation (Dallas)(2)
10.36 Agreement with Virtualplus and NetVoice Technologies
Corporation(2)
10.37 NetVoice Technologies Corporation 2000 Stock Option Plan(2)
16 Letter on Change on Certifying Accountant(3)
21 Subsidiaries of the Company(1)
27.1 Financial Data Schedule(1)
27.2 Financial Data Schedule(2)
27.3 Financial Data Schedule(3)
27.4 Financial Data Schedule
</TABLE>
---------------
(1) Filed as an Exhibit of the same number to the Registrant's Form 10SB and
incorporated herein by reference.
(2) Filed as an Exhibit of the same number to the Registrant's Amendment No. 1
to Form 10SB and incorporated herein by reference.
(3) Filed as an Exhibit of the same number to the Registrant's Amendment No. 2
to Form 10SB and incorporated herein by reference.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
NETVOICE TECHNOLOGIES CORPORATION
By: /s/ JEFFREY ROTHELL
----------------------------------
Jeffrey Rothell, President, Chief
Executive Officer
In accordance with the requirements of the Securities Exchange Act of
1933, this registration statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ JEFFREY ROTHELL President, Chief Executive Officer August 25, 2000
--------------------- (Principal Executive Officer)
Jeffrey Rothell
/s/ GARTH COOK Chief Financial Officer August 25, 2000
--------------------- (Principal Financial and
Garth Cook Accounting Officer)
/s/ WILLIAM BEDRI Director and Secretary August 25, 2000
---------------------
William Bedri
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page Number in
No. Document Sequentially Numbered System
------- -------- ----------------------------
<S> <C> <C>
3.1 Articles of Incorporation of Eastco, Inc. dated June 16, 1977(1)
3.2 Certificate of Amendment of Articles of Incorporation of
Eastco, Inc. dated December 8, 1997(1)
3.3 Certificate of Amendment of Articles of Incorporation of
Blue Pines, Inc. dated August 11, 1998(1)
3.4 Bylaws of NetVoice Technologies Corporation(1)
3.5 Amendments to Bylaws of NetVoice Technologies Corporation(1)
3.6 Certificate of Correction(1)
10.1 Agreement and Plan of Reorganization(1)
<PAGE>
10.2 Memorandum of Understanding between NetVoice Technologies, Inc.
and MultiCom Services(1)
10.3 Memorandum of Understanding between NetVoice Technologies, Inc.
and Diversified Data Distributors(1)
10.4 Agreement between NetVoice Technologies, Inc. and Interwest
Transfer Co., Inc.(1)
10.5 Broker Agreement between NetVoice Technologies, Inc. and
Unlimited Tech, Inc.(1)
10.6 Carrier Service Agreement between NetVoice Technologies, Inc.
and IDT Corporation(1)
10.7 Carrier Service Agreement between NetVoice Technologies, Inc.
and IDS Long Distance, Inc.(1)
10.8 Carrier Service Agreement between NetVoice Technologies, Inc.
and Intercomm Americas, Inc.(1)
10.9 Internet Telephony Service Agreement between NetVoice
Technologies, Inc. and Intercomm Americas, Inc.(1)
10.10 Carrier Service Agreement between NetVoice Technologies, Inc.
and JD Services, Incorporated(1)
10.11 Carrier Service Agreement between NetVoice Technologies, Inc.
and SuperNet(1)
10.12 Carrier Service Agreement between NetVoice Technologies, Inc.
and ValuLine, Inc.(1)
10.13 Telecommunications Service Agreement between NetVoice
Technologies, Inc. and Brooks Fiber Communications(1)
10.14 Carrier Service Agreement between NetVoice Technologies, Inc.
and CapRock Communications(1)
10.15 Letter of Agreement between NetVoice Technologies
Corporation and Duncan & Hill, LLC(1)
10.16 Agreement between NetVoice Technologies, Inc. and Frontier
Communications(1)
10.17 Agreement between NetVoice Technologies, Inc. and Electric
Lightwave, Inc.(1)
10.18 Agreement between NetVoice Technologies, Inc. and GTE
Internetworking(1)
10.19 Software License and Support Agreement between NetVoice
Technologies, Inc. and Portal Software, Inc.(1)
10.20 Master Lease Agreement between NetVoice Technologies, Inc.
and Sunrise Leasing Corporation (Cisco Systems)(1)
<PAGE>
10.21 Addendum to Master Lease Agreement (AA) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.22 Addendum to Master Lease Agreement (AB) between NetVoice
Technologies, Inc. and Cisco Systems Capital Corporation(1)
10.23 Addendum to Master Lease Agreement (AC) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.24 Addendum to Master Lease Agreement (AD) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.25 Addendum to Master Lease Agreement (AE) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.26 Addendum to Master Lease Agreement (AF) between NetVoice
Technologies, Inc. and Sunrise Leasing Corporation (Cisco
Systems)(1)
10.27 Lease Agreement between NetVoice Technologies, LLC and
Inter-Tel Leasing, Inc.(1)
10.28 Network Agreement between NetVoice Technologies, Inc. and
Inter-Tel.net, Inc.(1)
10.29 Master Services Agreement with Signup Server, Inc.(1)
10.30 Office Lease and First Amendment thereto(1)
10.31 Employment Agreement with Jeff Rothell(1)
10.32 Employment Agreement with Garth Cook(1)
10.33 Agreement with Z-Tel Communications, Inc. and NetVoice
Technologies Corporation(2)
10.34 Agreement with Landmark Community Newspapers, Inc. and
NetVoice Technologies Corporation(2)
10.35 Agreement with Level 3 Communications and NetVoice
Technologies Corporation (Dallas)(2)
10.36 Agreement with Virtualplus and NetVoice Technologies
Corporation(2)
10.37 NetVoice Technologies Corporation 2000 Stock Option Plan(2)
16 Letter on Change on Certifying Accountant(3)
21 Subsidiaries of the Company(1)
27.1 Financial Data Schedule(1)
27.2 Financial Data Schedule(2)
27.3 Financial Data Schedule(3)
27.4 Financial Data Schedule(3)
</TABLE>
---------------
(1) Filed as an Exhibit of the same number to the Registrant's Form 10SB and
incorporated herein by reference.
<PAGE>
(2) Filed as an Exhibit of the same number to the Registrant's Amendment No. 1
to Form 10SB and incorporated herein by reference.
(3) Filed as an Exhibit of the same number to the Registrant's Amendment No. 2
to Form 10SB and incorporated herein by reference.
