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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 2001
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT
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UNDER THE
SECURITIES ACT OF 1933
PHON-NET.COM, INC.
(Name of Small Business Issuer in Its Charter)
Florida 7372 98-0198225
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
750 West Pender Street
Suite 600
Vancouver, British Columbia V6C 2T7
(604) 437-3787
(Address and Telephone Number of Principal Executive Offices)
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Brian Collins
750 West Pender Street
Suite 600
Vancouver, British Columbia V6C 2T7
(604) 437-3787
(Name, Address and Telephone Number of Agent For Service)
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Copies of all communications to:
Steven I. Weinberger, Esq.
Atlas Pearlman, P.A.
350 East Las Olas Boulevard, Suite 1700
Fort Lauderdale, FL 33301
Telephone: (954) 763-1200
Facsimile No. (954) 766-7800
Approximate Date of Proposed Sale to the Public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Maximum Maximum
Class of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered Per Security Offering Price Registration Fee
- -------------------- ------------ ------------ -------------- ----------------
Common Stock, par value
$.001 per share 2,932,011 $.085(1) $249,221(1) $ 62.31(1)
Common Stock, par value
$.001 per share(2) 200,000 $.36(3) $72,000(3) $ 18.00(3)
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Total Registration Fee $ 80.31
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(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457. Based upon the average of the closing bid and
asked prices for the common stock on February 23, 2001.
(2) Shares issuable upon exercise of options.
(3) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457. Based upon the exercise price of the options.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
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Subject to Completion February 27, 2001
PROSPECTUS
PHON-NET.COM, INC.
3,132,011 SHARES OF COMMON STOCK
This prospectus covers the 3,132,011 shares of common stock of
Phon-Net.com, Inc. being offered for resale by certain selling security holders.
We will not receive any proceeds from the sale of the shares by the selling
security holders.
Our common stock is traded over-the-counter, on the OTC Bulletin Board,
under the trading symbol "PNET". On February 23, 2001, the closing price for our
common stock was $0.08.
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THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------------
The date of this prospectus is February ___, 2001
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PROSPECTUS SUMMARY
THE COMPANY
Phon-Net.com, Inc. develops and markets software products primarily to
benefit Internet users, persons and businesses who operate Internet web sites
and advertisers on the Internet. Our two current products incorporate Direct
Connect, our patent-pending software that enables an Internet user whose
computer modem and telephone share a single phone line to establish telephone
contact with the web site operator or advertiser without disconnecting the
computer's modem. Following completion of the call, computer contact with the
web site is seamlessly reconnected. We currently market our products through a
limited in-house sales force, as well as through distribution and license
agreements for the marketing of our products in the United States, Canada,
Australia and New Zealand. We are also in discussions with third parties
interested in marketing our products in other territories. We have not yet
generated significant revenues from product sales.
Our executive offices are located at 750 West Pender Street, Suite 600,
Vancouver, British Columbia V6C 2T7, and our telephone number is (604) 437-3787.
References throughout this prospectus to "we", "us" and "our" are to
Phon-Net.com, Inc. and its subsidiaries.
THE OFFERING
Common Stock Outstanding:
Prior to the Offering .................................... 47,481,441 shares
After the Offering ...................................... 47,681,441 shares, including 200,000 shares
covered by this prospectus that are issuable
upon exercise of options
Common Stock Reserved ......................................... 1,948,000 shares issuable upon exercise of
options that have been granted, and 1,391,010
shares issuable upon exercise of warrants
that have been issued.
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SELECTED FINANCIAL DATA
The following summary of our financial information has been derived
from our audited financial statements that are included in this prospectus.
Six Months Ended
Years Ended July 31, January 31,
--------------------------------- ---------------------------------
2000 1999 2001 2000
----------- ----------- ----------- -----------
Revenues $ 6,896 $ 43,867 $ 1,662 $ 1,771
Operating Expenses $ 4,547,738 $ 6,080,025 $ 891,724 $ 2,375,790
Net (Loss) $(4,540,842) $(6,036,158) $ (888,342) $ 2,374,019
Net (Loss) Per Share $ (0.12) $ (0.36) $ (0.02) $ (0.07)
July 31, January 31,
2000 2001
---------- -----------
Working Capital
(Deficit) $168,458 $(233,502)
Total Assets $1,084,346 $566,692
Current Liabilities $190,513 $271,543
Shareholder's Equity
(Deficit) $893,833 $295,149
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RISK FACTORS
SINCE WE ONLY BEGAN TO MARKET OUR PRODUCT DURING THE THIRD QUARTER OF 1999, OUR
OPERATING HISTORY IS LIMITED AND OUR FUTURE PERFORMANCE MAY BE DIFFICULT TO
ASSESS
We began marketing our first product during the third quarter of 1999.
Accordingly, we have a limited operating history upon which you can evaluate our
performance. Before investing in our common stock, you should consider the risks
and difficulties we may encounter as an early-stage company in the new and
rapidly evolving e-commerce market.
WE HAVE COMMENCED LIMITED REVENUE PRODUCTION, BUT TO THE EXTENT EXPENSES EXCEED
OUR CURRENT REVENUE GROWTH, CONTINUED NET LOSSES COULD HINDER OUR ABILITY TO
OBTAIN ADDITIONAL FINANCING
We have commenced limited revenue production from the sale of our
products. However, our operations, particularly product development and
marketing, are capital intensive, and our growth will consume a substantial
portion of our available working capital. Prior to our receipt of significant
fee revenues, we will be required to fund our operations through borrowings and
sales of our securities, the required amount of which will depend upon the
timing and rate at which we are able to generate revenues from operations. For
the fiscal years ended July 31, 2000 and 1999, we experienced net losses of
$(4,540,842) and $(6,036,158), respectively. For the six months ended January
31, 2001 and 2000, we incurred net losses of $(888,342) and $(2,374,019),
respectively. To the extent that additional funding is required to implement our
business plans, our net losses may make obtaining additional funding more
difficult and we may be required to accept funding on terms less favorable to us
than had we achieved profitable operations.
IF OUR MARKETING EFFORTS, INCLUDING THOSE OF THIRD PARTIES TO WHOM WE HAVE
GRANTED DISTRIBUTION RIGHTS, ARE NOT SUCCESSFUL, WE CANNOT ACHIEVE PROFITABILITY
We have a limited in-house sales force through whom we are marketing
our products. We have also granted third parties the right to license and
distribute our Direct Connect software in the United States, Canada, Australia
and New Zealand. We intend to grant additional distribution arrangements in
other parts of the world. Third party marketing arrangements enable us to take
advantage of the existing broad customer bases of our distributors, without
expending the financial and other resources we would be required to expend in
order to develop our own customer base. However, third-party distribution
arrangements require that we depend on the efforts of third party distributors
for our revenues in the territories subject to the arrangements. We only have
limited resources to devote to our in-house marketing force, and it is not
likely that our in-house marketing efforts will generate the level of revenues
required for us to sustain our existence. To the extent that third party
distributors are delayed or unsuccessful in marketing Direct Connect, we will
not achieve market penetration of our product and our financial condition will
be adversely affected.
PENDING OUR ABILITY TO SUCCESSFULLY MARKET OUR PRODUCTS, WE MAY REQUIRE
ADDITIONAL FUNDING IN ORDER TO SUSTAIN OUR OPERATIONS
We have entered into several agreements granting third parties the
right to market our Direct Connect product. There will be a time delay between
the time we signed those agreements and our receipt of fee income from the
agreements. Moreover, we are marketing our products through in-house
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marketing efforts; however, those efforts have not resulted in significant
revenue-generation. To the extent we rely upon third parties to market our
products, the development of marketing programs by our distributors, and the
timing of their marketing efforts are out of our control. We may need additional
funding prior to our receipt of sufficient revenues in order for us to sustain
our operations. We cannot predict whether additional funding, if needed, will be
available to us on favorable terms.
THE LICENSE AND DISTRIBUTION AGREEMENTS WE HAVE ENTERED INTO GENERALLY PROVIDE
FOR SHORT INITIAL TERMS, AND IF THEY ARE NOT RENEWED UPON EXPIRATION, WE WILL BE
FORCED TO EXPEND ADDITIONAL TIME AND EXPENSE IN ORDER TO DEVELOP NEW MARKETING
ALLIANCES AND CAPABILITIES
Most of the license and distribution agreements we have entered into
provide for an initial term of one year. Upon expiration of the initial term,
the other parties to the agreements generally have the ability to renew the
agreements. If one or more of the agreements is not renewed, we will be forced
to seek other parties to replace the non-renewing parties. This could delay our
penetration of the markets covered by the agreements that are not renewed, and
could serve to delay our receipt of revenues from the territories covered by
those agreements. We do not know whether any of our license and distribution
agreements will be renewed upon expiration of their initial terms.
OUR DIRECT CONNECT SOFTWARE IS DESIGNED EXCLUSIVELY FOR CONSUMERS AND BUSINESSES
THAT USE THE INTERNET, AND OUR PROSPECTS FOR SUCCESS DEPEND UPON THE CONTINUED
USE AND ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR COMMERCE
Direct Connect was developed as a tool for consumers and business who
engage in e-commerce. The e-commerce marketplace is a new and emerging market.
Revenues to be derived by us from Direct Connect license fees depends upon
continued use of the Internet and growth of e-commerce. We cannot predict
whether acceptance and use of the Internet will continue to develop, or that a
sufficiently broad base of consumers will adopt, and continue to use the
Internet as a method of commerce.
WE RELY ON A SINGLE TECHNOLOGY AND OUR LACK OF PRODUCT DIVERSIFICATION COULD
HEIGHTEN THE EFFECTS OF ANY SETBACKS WE SUFFER
Our two products rely upon the same technology. In the event of
unforeseen adverse events in the development, enhancement, marketing or
acceptance of Direct Connect, we will be unable to ameliorate its effects by
relying upon sales of other products. While we are developing a limited number
of other products, we do not currently know when they will generate revenues, or
whether they can be successfully marketed.
AS A RESULT OF OUR LIMITED OPERATING HISTORY, WE HAVE NOT YET UNDERGONE THE
SIGNIFICANT MANAGERIAL AND INTERNAL EXPANSION THAT WE EXPECT WILL OCCUR, AND OUR
INABILITY TO MANAGE GROWTH COULD HURT OUR RESULTS OF OPERATIONS
Expansion of our operations will be required to address anticipated
growth of our customer base and market opportunities. Expansion will place a
significant strain on our management, operational and financial resources.
Currently, we have only a limited number of employees, and we will need to
improve existing and implement new transaction processing, operational and
financial systems, procedures and controls, and to expand, train and manage our
employee base. We also will be required to expand our finance, administrative
and operations staff, and to enter into relationships with various
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strategic partners, web site owners and operators, product manufacturers and
distributors and other online service providers and other third parties we deem
necessary to develop our business. Our failure to manage growth effectively
could have a damaging effect on our business, results of operations and
financial condition.
RESALES UNDER THIS PROSPECTUS SIGNIFICANTLY INCREASE THE NUMBER OF SHARES IN THE
PUBLIC MARKET, RESULTING IN MARKET PRESSURE THAT MAY CAUSE THE PRICE FOR OUR
SHARES TO DROP OR REMAIN AT LOW LEVELS
Prior to this offering, approximately 12,927,000 shares of our common
stock were freely tradeable in the public market. The addition to the public
market of the 3,132,011 shares covered by this prospectus could cause the market
price of our shares to fall or remain at lower levels. On or about March 26,
2001, an additional approximately 4,000,000 previously restricted shares will
become available for public resale under Rule 144(k).
The sale, or availability for sale, of a substantial number of shares
of common stock in the public market subsequent to the offering under Rule 144
under the Securities Act or this prospectus or otherwise, could have a major
negative effect on the market price of our common stock. It could also limit our
ability to raise additional capital from the sale of our equity securities or
debt financing.
CAPITALIZATION
The following table sets forth our capitalization as of January 31,
2001. The table should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this prospectus. The table
does not give effect to:
o the issuance of up to 1,948,000 shares in the event options
that have been granted, are exercised; or
o the issuance of up to 1,391,010 shares in the event in the
event outstanding common stock purchase warrants are
exercised.
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January 31, 2001
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Short-term debt $ 173,170
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Shareholder's equity (deficit):
Common Stock, $.001 par value,
80,000,000 shares authorized,
47,481,441 shares issued and
outstanding $ 1,148,145
Preferred Stock, $.01 par value,
10,000,000 shares authorized,
no shares issued or outstanding - 0 -
Additional paid-in capital 12,897,319
Note receivable (1,211,573)
Accumulated deficit (12,454,496)
Other (84,246)
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Total shareholder's equity $ 295,149
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Total capitalization $ 468,319
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USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
security holders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our shares of common stock are traded on the OTC Electronic Bulletin
Board under the symbol "PNET". From May 24, 2000 until October 24, 2000 our
shares were traded over-the-counter, in the pink sheets. The reported high and
low bid prices for the common stock are shown below for the period from October
1, 1998 (the date of business combination between Agrosol, Inc. and Phon-Net
Corp.) through December 31, 2000. The closing price on February 1, 2001 is also
set forth. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual transactions.
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Period High Low
- ------ ---- ----
January 1, 1999 - March 31, 1999 $1.50 $.12
April 1, 1999 - June 30, 1999 $ .69 $.19
July 1, 1999 - September 30, 1999 $ .41 $.19
October 1, 1999 - December 31, 1999 $ .81 $.07
January 1, 2000 - March 31, 2000 $8.47 $.73
April 1, 2000 - June 30, 2000 $2.44 $.55
July 1, 2000 - September 30, 2000 $1.90 $.50
October 1, 2000 - December 31, 2000 $ .67 $.10
February 23, 2001 $.08
Our common stock is owned of record by approximately 200 holders. We
have never paid cash dividends on our common stock. We intend to keep future
earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable future. Our
future payment of dividends will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant factors.
The market for securities of Internet-related technology companies and
companies that participate in emerging markets historically has been more
volatile than the market for stocks in general. The price of our common stock
may be subject to wide fluctuations in response to the following and other
factors:
o quarter-to-quarter variations in our operating results;
o our announcement of material events that affect our business;
o price fluctuations in sympathy to others engaged in our
industry; and
o the effects of coverage of our business or our management by
the press.
If we do not have a substantial market for our shares, a significant
number of shares being sold could greatly affect the market and cause a decline
in the price of our common stock. Moreover, historic market prices may not be
indicative of the prices at which our shares can be bought or sold.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Depending on
market fluctuations, our common stock could be considered to be a "penny stock".
A penny stock is subject to rules that impose additional sales practice
requirements on broker/dealers who sell these securities to persons other than
established customers and accredited investors. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of these securities. In addition he must receive the purchaser's
written consent to the transaction prior to the purchase. He must also provide
certain written disclosures to the purchaser. Consequently, the "penny stock"
rules may restrict the ability of broker/dealers to sell our securities, and may
negatively affect the ability of holders of shares of our common stock to resell
them.
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus regarding matters that
are not historical facts are forward-looking statements. All statements which
address operating performance, events or developments that management expects or
anticipates to incur in the future, including statements relating to sales and
earnings growth or statements expressing general optimism about future operating
results, are forward-looking statements. Because such forward-looking statements
include risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. The forward-looking
statements are based on management's current views and assumptions regarding
future events and operating performance. Many factors could cause actual results
to differ materially from estimates contained in management's forward-looking
statements. The differences may be caused by a variety of factors, including,
but not limited to, adverse economic conditions, competitive pressures,
inadequate capital, unexpected costs, lower revenues, net income and forecasts,
the possibility of fluctuation and volatility of the Company's operating results
and financial condition, inability to carry out marketing and sales plans and
loss of key executives, among other things. These factors, as well as others,
are discussed under "Risk Factors" and elsewhere in this prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Six Months Ended January 31, 2001 Compared to Six Months Ended January 31, 2000
For the six months ended January 31, 2001, we generated revenues of
$1,662, a 6.2% decrease from revenues of $1,771 for the corresponding six month
period of 2000. This decrease was primarily caused by fluctuations due to
inconsistent sales while we develop more effective and efficient marketing
capabilities.
For the 2001 quarter, we incurred a net loss of $(888,342) or
approximately $(.02) per share, compared to a net loss of $(2,374,019) or
approximately $(.07) per share for the corresponding quarter in 2000. The
reduction in our net loss was primarily attributable to reduced research and
development expenses following completion of development of Direct Connect and
our search engine, as well as efforts to curtail operating expenses. Our primary
focus has shifted from product development to sales and marketing. As a result,
we may continue to experience a reduction in research and development expenses
in the near term, however, costs attributable to marketing activities will
likely increase.
Expenses of $891,724 for the quarter ended January 31, 2001 reflect a
decrease of 62.4% over expenses of $2,374,019 incurred during the quarter ended
January 31, 2000. This decrease in expenses results mainly from reduced research
and development and management compensation expenses.
Fiscal Year Ended July 31, 2000 Compared to Fiscal Year Ended July 31, 1999
For the fiscal year ended July 31, 2000, we generated revenues of
$6,896, an 84% decrease from revenues of $43,867 for the fiscal year ended July
31, 1999. This decrease was primarily caused by completion of beta sales on our
search engine product, lack of meaningful revenues from sales of Direct
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Connect and fluctuations due to inconsistent sales while we develop more
effective and efficient marketing capabilities.
For the 2000 fiscal year, we incurred a net loss of $(4,540,842) or
approximately $(.12) per share, compared to a net loss of $(6,036,158) or
approximately $(.36) per share for the 1999 fiscal year. The 25% decrease in our
net loss was primarily attributable to reduced research and development expenses
following completion of development of Direct Connect and our search engine, as
well as efforts to curtail operating expenses. While we may continue to
experience a reduction in research and development expenses in the near term,
costs attributable to marketing activities will likely increase.
Expenses of $4,547,738 for the year ended July 31, 2000 reflect a
decrease of 25% over expenses of $6,080,025 incurred during the fiscal year
ended July 31, 1999. This decrease in expenses results mainly from non-recurring
costs associated with the value of securities issued under management
compensation plans.
Due from related parties at July 31, 2000 consists of (i) $171,400 due
from our President, Chief Executive Officer and sole director, repayable at
$13,200 per month, including interest at the rate of 8% per annum, with any
unpaid balance payable in full on March 31, 2001; and (ii) $7,086 due from an
employee, repayable January 31, 2001, together with interest at 8% per annum.
LIQUIDITY, CAPITAL RESOURCES AND PLAN OF OPERATIONS
As of July 31, 2000 and 1999, our auditors indicated in their audit
report that our net loss and working capital deficit raised substantial doubt
that we would be able to continue as a going concern.
Our operations through fiscal 1999 were related to the interactive real
estate and professional listing service conceived by our subsidiary, and not to
our current products and services. Our historic business and results of
operations should not be viewed as indicative of future operations. While little
or no revenues are currently being generated from contracts relating to our
interactive real estate and professional listing service, the viability of the
service has been established and we are not discontinuing its operation.
However, we are currently focusing our efforts marketing Direct Connect, and we
may not devote substantial resources to our listing service until Direct Connect
marketing efforts have developed.
Our business model includes our establishing marketing agreements and
strategic alliances with companies who have access to large databases of
business directories. We believe that this strategy will enable us to reach our
target customer-web site operators and advertisers. In so doing, we will use the
database resources of a third party, without the time and expense of developing
and maintaining that resource. In furtherance of implementing our business
model, we entered into distribution agreements with various third parties
designed to generate revenues through third-party marketing of our products.
However, during the fiscal year, we terminated most of our licensing and
distribution agreements due to the inability of the third parties to
successfully market our products. Our marketing licenses for Australia and New
Zealand have not been terminated and we are discussing license and distribution
arrangements with additional parties to replace the agreements that have been
terminated. In order to be successful, we will have to develop marketing
arrangements that enable us to successfully distribute Direct Connect.
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To date, we have funded our cash requirements from limited operating
revenues and from the sale of shares of our common stock. As of January 31,
2001, we had cash reserves of approximately $4,511, and a working capital
deficit of $233,502. While we anticipated that revenues from Direct Connect
license fees would commence in mid-2000, we have not yet generated substantial
Direct Connect revenues, and termination of several of our license and
distribution agreements will likely further delay our ability to generate
meaningful revenues. The long-term success of our in-house marketing efforts
cannot yet be projected.
It is also possible that our proprietary Direct Connect software will
be of sufficient value to a third party to warrant an offer to acquire it. We
will consider all proposals designed to enhance shareholder values.
Until such time as we generate meaningful revenues, we will require
additional funds in order to fund our operations, including our payment of rent
at our Vancouver offices, and the salaries of our executive officers. If we are
unable to generate sufficient revenues from operations, we will be required
continue sales of our securities, and we may be required to borrow funds, in
order to sustain our operations. We will continue to seek out strategic partners
whose access to our target customer base can increase our sales and
profitability. We are engaged in active discussions with several lenders to
secure interim funding; however, these discussions have not yet resulted in a
financing commitment. We may not be able to secure financing on acceptable
terms.
BUSINESS
We are a Florida corporation that develops and markets software
products that primarily benefit Internet users, persons and businesses who
operate Internet web sites and advertisers on the Internet. We currently have
two products. One is our "Phon-Net Direct Connect" software. The other is our
"Phon- Net Search Engine".
PHON-NET DIRECT CONNECT
Direct Connect provides increased capability to the Internet user whose
computer and telephone share the same phone line. A visitor to an Internet web
site can establish telephone contact with the web site operator or web site
advertiser, while continuing to view the web site. Among the features of Direct
Connect are that:
o the computer's modem connection is not disconnected during a
Direct Connect telephone call;
o web site operators and advertisers can increase e-commerce
revenues by additional sales assisted by telephone
communication between the Internet consumer and the web site
retailer;
o security risks are reduced by providing personal and credit
card data by telephone, rather than transmitting it over the
Internet;
o following termination of a Direct Connect telephone call,
computer contact with the web site is seamlessly
reestablished; and
o the software is licensed by us to the web site operator or
advertiser - we retain all ownership rights - and it is free
to the consumer.
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Our experience leads us to believe that security concerns, primarily
the transmission of personal and credit card information over the Internet, have
prevented Internet commerce from achieving widespread acceptance as a method of
commerce. A significant advantage that Direct Connect provides for Internet
commerce is that credit card payment may be made during the telephone portion of
the transaction, rather than transmitting personal and credit card information
over the Internet.
Direct Connect is currently available directly from us, through our
in-house sales efforts and at our web site, as well as through distributors who
market Direct Connect along with their own Internet related products and
services. We license our Direct Connect software to businesses. At the time of
purchase, the customer is provided with a password that allows the customer to
download the information directly to its web site. Our customers license Direct
Connect for an initial one year license fee of $99. After the expiration of one
year, Direct Connect has a mechanism that makes it inoperable unless the
customer renews the license. Prior to the end of the year, an E-Mail is sent to
the customer advising that the license will terminate and that the customer can
then renew the license on a year to year basis.
A Direct Connect software function routes all telephone calls using
Direct Connect through a central computer server. This enables us to:
o activate a customer's initial use of Direct Connect;
o monitor usage to ensure that only licensed customers are using
Direct Connect;
o monitor the termination dates of customers' licenses so they
may be notified that it is time to renew; and
o gather data concerning usage of direct connect.
We currently use the services of Netcom Canada Inc. of Toronto, Canada,
to host our central server. We pay Netcom a fee for its services on an invoice
basis, however, there are numerous companies that provide server host services
and we are not dependent upon Netcom for this purpose.
PHON-NET SEARCH ENGINE
Our other product is the Phon-Net Search Engine. The Search Engine
incorporates Direct Connect and functions as a yellow pages. This product
enables the user to search the world wide web and a local interactive telephone
database for a desired business listing. Once the business is identified and its
telephone number is found, the user can command Direct Connect to contact the
party by telephone.
Our Search Engine provides a service to consumers seeking to locate a
business. It is also designed to enable businesses to expand their presence in
the marketplace and to enable them to provide desired information to consumers
seeking their services. We intend to market the Search Engine to businesses for
an annual fee, including a license fee for Direct Connect.
We have completed beta-testing of our Search Engine, and believe that
this product is currently complete, operational and ready for market
introduction. At this time, we have elected to devote our efforts and limited
financial resources toward marketing Direct Connect, and we do not intend to
roll-out our Search Engine into the marketplace until we commence generating
meaningful revenues from our marketing of Direct Connect.
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PRODUCT DEVELOPMENT
On January 6, 1999, we entered into an agreement with Quad-Linq
Software, Inc., under which Quad-Linq agreed to develop, maintain, support and
upgrade our Direct Connect software, the concept for which was created by Brian
Collins. For its services, Quad-Linq was to acquire a 49% interest in the
software, and 49% of the net revenues from sales of the software. Under a June
30, 1999 amendment to the original agreement, Quad-Linq relinquished its
ownership interest in the software, as well as its percentage of net revenues
from sales of the software, in exchange for which we issued 1,000,000 shares of
our common stock to Quad-Linq and an additional 2,000,000 shares to three of its
principals. We also granted options for an additional 1,000,000 shares to
Quad-Linq and 1,000,000 shares to the three principals. The options are
exercisable at $.40 per share, until June 30, 2001. Under the amendment,
Quad-Linq also agreed to provide on-going service and support for the software.
In late 1999, we were advised that Quad-Linq had dissolved, and as a
result, Quad-Linq would not be able to perform under the January 6, 1999
agreement, as amended. Therefore, on December 3, 1999, we entered into an
agreement with Christopher Georgelin and Roger Betterton, two of the former
principals of Quad-Linq. Under this agreement, Messrs. Georgelin and Betterton
assumed the obligations of Quad-Linq under the June 30, 1999 amendment. No
additional consideration was paid to Messrs. Georgelin and Betterton, as they
had been assigned the 1,000,000 shares and 1,000,000 options previously paid to
Quad-Linq.
On February 2, 2000, we commissioned Quad-Linq Systems Inc., a
corporation recently formed by Messrs. Georgelin and Betterton, to develop a two
telephone line version of Direct Connect. For its services, we paid Quad-Linq
Systems $54,000. The two line version of Direct Connect has been completed and
is available for marketing.
SALES AND MARKETING
We are marketing Direct Connect using several strategies to reach
Internet web site operators. The target market for Direct Connect includes:
o web site operators;
o businesses that advertise on web sites;
o businesses that create and/or host web sites for others;
o distributors and resellers who "bundle" our software with
other Internet-related software products;
o developers of Internet-related software products, for
incorporation into their products; and
o resellers who believe that Direct Connect offers a viable
alternative to e-commerce security concerns.
Over the past year, we entered into various exclusive and non-exclusive
territorial license agreements with unrelated third parties. These agreements
covered the United States, Canada, Australia and New Zealand. While the various
third parties with whom we contracted market telecommunications and
Internet-related products and services, these entities have been unable to
successfully develop marketing campaigns including our Direct Connect software.
Consequently, during the fiscal year, we
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terminated all of our third-party contractual license and distribution
arrangements, other than our licensing arrangements covering Australia and New
Zealand. Termination of these arrangements was effected by the mutual agreement
between us and the contracting third parties. We continue to discuss licensing
arrangements with third parties located domestically and internationally and may
enter into additional licensing arrangements if circumstances warrant.
Termination of these license arrangements does not preclude us from reaching new
understandings with the terminated third parties to renew use of their marketing
services upon terms and conditions to be agreed upon.
AUSTRALIA AND NEW ZEALAND: On December 9, 1999, we entered into two
License Agreements with Brocker Technology Group (NZ) Limited, a publicly-held
New Zealand corporation. One license agreement covers New Zealand and the other
covers Australia. The agreements grant Brocker the exclusive license to use,
market, distribute and sublicense our Phon-Net Direct Connect software
throughout Australia and New Zealand. We understand that Brocker has established
relationships with Telecom New Zealand and Telstra in Australia, that will
provide Brocker with access to a large segment of the New Zealand and Australian
market for Direct Connect.
We are entitled to a license fee from Brocker for each Direct Connect
license activated for Brocker. License fees from Brocker are payable quarterly.
We also share ownership with Brocker of the user database arising by reason of
our license agreement with Brocker. The term of our agreement with Brocker is
one year, upon expiration of which, Brocker may renew the agreement for one
additional year. The agreement may be terminated by either party following an
uncured breach of the agreement by the other party, or upon a party's
liquidation, bankruptcy or similar event. We have agreed to deposit a current
version of the source code for Direct Connect software with a third-party trust
company. The source code may be released to Brocker so that it can continue to
use Direct Connect in the manner provided in the agreement, in the event of our
uncured material breach of the agreement, or our bankruptcy, liquidation or
similar event. We understand that Brocker is currently a formulating marketing
plan that includes Direct Connect.
COMPETITION
The market for online commerce over the Internet is new, rapidly
evolving and intensely competitive. Competition will likely increase in the
future. Barriers to entry are relatively low, and current and new competitors
can launch new sites at a relatively low cost using commercially available
software.
There are several software and/or hardware products currently available
or under development that perform functions similar to our Direct Connect
software. We believe that the primary advantage Direct Connect has over these
other products is its ability to seamlessly reconnect to the Internet following
completion of a telephone call. To the extent that Direct Connect receives
patent protection, it is our understanding that substantially new technology
must be developed in order for a third party to market software that performs
the primary functions of Direct Connect, in substantially the same manner.
Our Phon-Net Search Engine will compete with a wide range of
interactive and printed business directories, including those published and/or
marketed by large regional telephone companies such as the Baby Bells and their
affiliates. Interactive search engine directories have become increasingly
popular, and we anticipate that continued competition for our Search Engine will
come from Internet-related and
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technology companies. These companies are substantially larger and have greater
financial and other resources that we have. We believe that we can compete
successfully with other search engine directories because the Phon-Net Search
Engine incorporates our proprietary Direct Connect software.
PATENT APPLICATION
We have filed patent applications for our Direct Connect software with
the United States Patent and Trademark Office and with the Canadian Patent and
Trademark Office. The applications are entitled "Communications Method Allowing
for Alternating Voice and Data Connections Over a Single Line". Our U.S. Patent
Application has been accorded Serial No. 09/248,200, and our Canadian
Application has been accorded Serial Number 2,313,287.
In the event our applications result in the issuance of a patent in the
United State and/or Canada, the ability of others to develop technology that
performs substantially similar functions will be limited. However, the
application and review process can take considerable time and we are unable to
predict whether a patent for Direct Connect will issue in either or both
countries.
GOVERNMENT REGULATION
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. We believe we are currently
in compliance with such laws and that they will not have a material impact on
our operations. Moreover, there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, we expect that laws and
regulations will be adopted. The enactment of any such laws or regulations in
the future may slow the growth of the Internet, which could in turn decrease the
demand for our services and increase our cost of doing business or otherwise
have an adverse effect on our business, results of operations and financial
condition.
CORPORATE HISTORY
Phon-Net.com, Inc. is a corporation organized under the laws of the
State of Florida on January 16, 1997, under the name XGA Golf International,
Inc. XGA Golf was formed for the purpose of acquiring three companies engaged in
various aspects of the golf and golf-travel industries. However, these
acquisitions were not completed. In June 1998, XGA Golf changed its name to
Agrosol, Inc. From June 1998 until October 1998, XGA Golf could be considered a
shell company seeking to acquire an operating business. Its officers and
directors during this period were Lana Bea Turner, Eric Redd and Steven Dadson.
Its principal shareholders at the time were Eric Redd, John Canavan, Dorothy A.
Cleveland and Richard Dibona.
Piedmont Technologies, Inc. was organized under the laws of British
Columbia on March 18, 1996. Phon-Net Corp. was organized under the laws of the
State of Nevada on August 28, 1998. Effective October 5, 1998, Piedmont was
reorganized to change its domicile from British Columbia to Nevada. The
reorganization was effected by Phon-Net Corp.'s acquisition of all of the
outstanding shares of Piedmont and its subsidiaries, The National-For-Sale Phone
Company and VNETT Enterprises Inc. At the time of the reorganization, Phon-Net
Corp. owned certain intellectual property developed by Brian Collins and
incorporated in various interactive voice and text products. At the time of the
reorganization, Piedmont, through its subsidiaries, had a Canadian operating
license for the technology
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that was owned by Phon-Net Corp. At that time, Brian Collins was also an officer
and directors of Piedmont, and owned approximately 20% of Piedmont common stock.
Following this transaction, Piedmont became a wholly- owned subsidiary of
Phon-Net Corp. and National and VNETT remain wholly-owned subsidiaries of
Piedmont.
On October 5, 1998, Agrosol, Inc. exchanged 11,410,000 shares of its
common stock, at an ascribed value of nil, for all of the outstanding shares of
Phon-Net Corp., and changed its name to Phon-Net Corporation. The assets we
acquired from Phon-Net Corp. at the time of the share exchange consisted of
ownership of the rights to our Phon-Net Direct Connect and Phon-Net Search
Engine, as well as the rights and assets of Piedmont including the operations of
National.
In January 1999, we changed our name to Phon-Net.com, Inc. On April 15,
1999, we increased the number of shares of common stock we are authorized to
issue to 80,000,000.
Currently, all ownership rights to our Direct Connect and Search Engine
products are owned by Phon-Net.com, Inc. Piedmont's operations are limited to
performing beta-testing of our products. National operates an interactive real
estate and professional listing service which, through an "800" telephone
number, allows users to access real estate listings, as well as providers of
related services such as real estate attorneys, surveyors and title companies.
National's operations are not currently material to our business or financial
condition. VNETT owns the rights to a search engine concept that enables users
to locate and reserve video tapes from retail video rental locations. VNETT is
not currently engaged in active operations.
EMPLOYEES
We currently employ seven people, six of whom are full-time employees,
in the following capacities: two executive officers, one administrative
employee, one sales and marketing person and two programmers. Our employees are
not represented by a collective bargaining unit. We believe relations with our
employees are good.
LEGAL PROCEEDINGS
We are not a party to any material legal proceeding, nor are any of our
officers, directors or affiliates a party adverse to us in any legal proceeding.
DESCRIPTION OF PROPERTY
On July 9, 1999, we entered into a three year lease for approximately
1,300 square feet of office space in Vancouver, British Columbia. We use this
space for our executive headquarters. The lease is for a term of three years
ending July 31, 2002, and we will pay the landlord monthly base rent of
approximately $889 (or $10,668 per year). We are also obligated to pay all
utility charges for our use of the space, as well as our proportionate share of
all operating expenses in the building. We are not permitted to assign or sublet
our lease without the landlord's prior written consent.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table includes the names, positions held and ages of our
executive officers and directors. All directors serve for one year and until
their successors are elected and qualify. Officers are elected by the Board and
their terms of office are, except as otherwise stated in employment contracts,
at the discretion of the Board.
Name Age Position
---- --- --------
Brian Collins 45 Chairman of the Board of Directors,
Chief Executive Officer, President,
Chief Operating Officer, Secretary,
Treasurer and Director
Sloan Young 31 Vice President of Technology and
Operations
Brian Collins has served as our Chief Executive Officer, President and
a Director since our acquisition of Phon-Net Corp., a Nevada corporation, in
October 1998. In 1998, Mr. Collins founded Phon-Net Corp., which owns the
intellectual property of its wholly-owned subsidiaries, Piedmont Technology,
Inc., a British Columbia corporation and National For Sale Phone, Inc., a
British Columbia corporation. Mr. Collins continues to serve as the President,
Chief Executive Officer and Chairman of Phon-Net Corp., Piedmont and National
For Sale Phone. In 1995, he founded Piedmont, which developed early versions of
our search engine product. In May 1993, Mr. Collins founded National, which
operates an interactive "1-800" real estate telephone channel coast-to-coast in
Canada.
Sloan Young has served as our Vice President of Technology and
Operations since October 1998. From 1993 until he joined us, Mr. Young was
employed as a restaurant manager for Cactus Club Cafe from November 1996 to June
1997, and Zachary's Restaurant from June 1995 to September 1996. He attended CDI
College of Business and Technology from September 1997 to November 1998 and
received a Programmer Analyst Diploma in 1998.
DIRECTOR COMPENSATION. We have not adopted a formal policy with respect
to the compensation of directors. However, we do not currently compensate our
directors for their services as such.
BOARD COMMITTEES: We do not as yet have an audit committee or a
compensation committee. We may organize these committees in the future.
EMPLOYMENT AGREEMENTS. Effective July 1, 1999, we entered into an
employment agreement with Brian Collins to serve as our President and Chief
Executive Officer for an initial three year term, with two renewal terms, each
for two years. If we decide not to renew, and we do not have cause for our
decision, we must pay Mr. Collins the equivalent of one year's compensation. For
his services, we pay Mr. Collins a salary of $150,000 each year and provide a
monthly automobile allowance of $700.
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Our original agreement with Mr. Collins included our obligation to pay
Mr. Collins stock appreciation rights. These payments were to be calculated
based upon the difference between the market price of our stock at the beginning
and end of each year of the term of the employment agreement. Each annual one
dollar change in the price of our stock during each year of the agreement could
have required us to pay Mr. Collins an aggregate of $1,600,000 during the term
of the agreement. Greater than annual one dollar market price increases could
substantially increase our obligation to Mr. Collins, and could require us to
pay Mr. Collins substantial amounts attributable to his stock appreciation
rights at a time when our stock price may not be an accurate reflection of our
financial condition or results of operations, and when such payment could have a
material adverse effect on our financial condition.
Mr. Collins is our founder, and our future success depends upon his
services. In order to induce him to serve as our President and enter into the
employment agreement, we issued him 5,000,000 shares of our stock and granted
him options to purchase 2,000,000 additional shares. The options are exercisable
at $.40 each, until May 26, 2009. On October 24, 2000, we granted Mr. Collins an
option to purchase 1,000,000 shares of our common stock, exercisable at $.40 per
share, until October 24, 2003.
In light of the uncertainty over our potential financial obligation
under the stock appreciation rights, on December 31, 1999, we agreed to issue
Mr. Collins 3,200,000 shares of our common stock, and Mr. Collins agreed to
relinquish any stock appreciation rights that were granted to him. Mr. Collins,
acting as an interested director, determined that the 3,200,000 shares was fair
to us in that:
o the 3,200,000 unregistered shares had a market value of
$1,664,000, based upon the closing price for our shares on
December 30, 1999;
o a one dollar rise in our stock price could have required us to
pay Mr. Collins $1,600,000 over the term of the stock
appreciation rights;
o our exposure for payment of stock appreciation rights to Mr.
Collins could be substantially higher than $1,600,000, to the
extent that our stock price increases; and
o the issuance of shares enables us to eliminate financial
uncertainty under the stock appreciation rights.
Effective November 1, 1999, we entered into a three year employment
agreement with Sloan Young, our Vice President of Technology and Operations. Mr.
Young's salary was $55,000 for the first year, $59,500 for the second year and
$66,000 for the last year of the term. We granted Mr. Young options to purchase
200,000 shares of our stock, exercisable at $.36 per share, which vest one-third
each year of the agreement, and expire on December 31, 2004. We also agreed to
issue Mr. Young 100,000 shares of our stock on each of November 1, 1999, 2000
and 2001. In addition, we have agreed to pay Mr. Young $1.00 for each Direct
Connect license sold, with such payment being made in the local currency of
sale. We may discontinue the payment of the $1.00 per license at any time, in
our discretion. Effective November 1, 2000, we paid Mr. Young a bonus equal to
50,000 shares of our common stock, for services rendered during the fiscal year
ended July 31, 2000.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information relating to the compensation
we paid during the past three fiscal years to our President and Chief Executive
Officer; and to each of our executive officers who earned more than $100,000
during the fiscal year ended July 31, 2000:
Fiscal Other Annual LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Options/(#) Payouts Compensation
- --------------------------- ---- ---------- ---------- ------------ ------------ ------- ------------
Brian Collins, CEO 2000 $ 166,800 $1,664,000 -- -- -- --
1999 $ 178,716 $4,484,000 -- 2,000,000 -- --
1998 $ 52,926 -- -- -- -- --
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning our grant of
options to purchase shares of our common stock and SARs during the fiscal year
ended July 31, 2000 to our President and Chief Executive Officer and to each of
our executive officers who earned more than $100,000 during the fiscal year
ended July 31, 2000.
Percent of
Number of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price
Name Granted (#) Year ($/Sh) Expiration Date
---- ------------ -------------- ----------- ---------------
Brian Collins, CEO -- -- -- --
Effective December 31, 1999, we terminated all SARs previously granted to
Mr. Collins and issued 3,200,000 shares to Mr. Collins in exchange for the
terminated SARs. Compensation attributable to the issuance of such shares is
described in the Summary Compensation Table above.
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
On May 27, 1999, the board of directors and shareholders adopted our
1999 stock option plan. On October 11, 2000, our sole director and holder of a
majority of our outstanding shares authorized an amendment to our stock option
plan to increase the number of shares reserved for issuance under the plan from
3,000,000 shares to 4,000,000 shares, and on February 5, 2001, from 4,000,000
shares to 8,000,000 shares. Accordingly, we have reserved 8,000,000 shares of
common stock for issuance upon exercise of options granted from time to time
under the 1999 stock option plan. The 1999 stock option plan is intended to
assist us in securing and retaining key employees, directors and consultants by
allowing them to participate in our ownership and growth through the grant of
incentive and non-qualified options.
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Under the stock option plan we may grant incentive stock options only
to key employees and employee directors, or we may grant non-qualified options
to our employees, officers, directors and consultants. The 1999 stock option
plan is currently administered by our board of directors.
Subject to the provisions of each of the stock option plans, the board
will determine who shall receive options, the number of shares of common stock
that may be purchased under the options, the time and manner of exercise of
options and exercise prices. The term of options granted under the stock option
plan may not exceed ten years or five years for an inventive stock option
granted to an optionee owning more than 10% of our voting stock. The exercise
price for incentive stock options will be equal to or greater than 100% of the
fair market value of the shares of the common stock at the time granted.
However, the incentive stock options granted to a 10% holder of our voting stock
are exercisable at a price equal to or greater than 110% of the fair market
value of the common stock on the date of the grant. The exercise price for
non-qualified options will be set by the board, in its discretion, but in no
event shall the exercise price be less than 75% of the fair market value of the
shares of common stock on the date of grant. The exercise price may be payable
in cash or, with the approval of the board, by delivery of shares or by a
combination of cash and shares. Shares of common stock received upon exercise of
options will be subject to restrictions on sale or transfer. As of January 31,
2001, we have granted options to purchase 3,448,000 shares under the stock
option plan, 3,000,000 of which have been exercised.
OPTION EXERCISES AND HOLDINGS
The following table contains information with respect to the exercise
of options to purchase shares of common stock during the fiscal year ended July
31, 2000 to our President and Chief Executive Officer and to each of our
executive officers who earned more than $100,000 during the fiscal year ended
July 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
On Value At FY-End (#) At FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---- -------- -------- ------------- -------------
Brian Collins, CEO -- -- 2,000,000 / $700,000 /
-0- -0-
Effective December 31, 1999, we terminated all SARs previously granted to
Mr. Collins and issued 3,200,000 shares to Mr. Collins in exchange for the
terminated SARs. Compensation attributable to the issuance of such shares is
described in the Summary Compensation Table above.
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LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
Number Performance Estimated Future Payouts Under
of Shares or Other Non-Stock Price-Based Plans
Units or Period Until --------------------------------
Other Rights Maturation Threshold Target Maximum
Name (#) or Payout ($Or #) ($Or #) ($ or #)
---- ------------ ------------ --------- ------- ----------
Brian Collins, CEO -- -- -- -- --
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the Florida Business Corporation Law, our articles of
incorporation provides that none of our directors shall be personally liable to
us or our shareholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
o any breach of the director's duty of loyalty to our company or
its shareholders;
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law
o unlawful payments of dividends or unlawful stock redemptions
or repurchases; or
o any transaction from which the director derived an improper
personal benefit.
This provision limits our rights and the rights of our shareholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any shareholder to seek injunctive relief or rescission
if a director breaches his duty of care. These provisions will not alter the
liability of directors under federal securities laws.
Our articles of incorporation further provides for the indemnification
of any and all persons who serve as our director, officer, employee or agent to
the fullest extent permitted under Florida law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC, this indemnification is against public policy as expressed
in the securities laws, and is, therefore unenforceable.
CERTAIN TRANSACTIONS
In April 1999, in connection with our acquisition of the outstanding
shares of Phon-Net Corp. and as consideration for the satisfaction of certain
product development goals provided for as part of our share exchange with
Phon-Net Corp., we issued 8,085,000 additional shares to Brian Collins, our
President and CEO.
During the years ended July 31, 2000 and 1999, we paid compensation to
Brian Collins, our President and Chief Executive Officer, aggregating $1,830,800
and $4,662,716, respectively. The amount paid during 2000 includes our issuance
to Mr. Collins of 3,200,000 shares of our common stock, in consideration for
which Mr. Collins relinquished all stock appreciation rights previously granted
to
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him. The amount paid during 1999 includes the issuance of 5,000,000 shares as an
inducement to enter into an employment agreement and 8,085,000 shares for
accomplishing certain development goals.
During the fiscal year ended July 31, 2000, we loaned an aggregate of
$183,900 to Brian Collins. The loan carried interest at the rate of 8% per
annum. As of January 31, 2001, the entire amount of the loan had been repaid.
On December 15, 2000, Brian Collins exercised options to purchase
3,000,000 shares of our common stock, and paid the exercise price for the
options by delivery of his $1,200,000 promissory note, bearing interest at the
rate of 8% per year. The note is payable on or before June 15, 2002. The shares
issued on exercise of the option are being held in escrow by our counsel, and
will be released to Mr. Collins to the extent of payments under the note.
From time-to-time during the six months ended January 31, 2001, Brian
Collins advanced $202,865 to us. As of January 31, 2001, the outstanding amounts
of these advances was $137,447. Outstanding advances are payable on demand.
We have not entered into any other material transactions with our
officers, directors or affiliates except for employment arrangements which are
described elsewhere in this prospectus. While we have not adopted any corporate
policies for entering into transactions with affiliated parties,
o we are subject to Section 617.0832 of the Florida Business
Corporation Law which requires that transactions between
Phon-Net and one or more of its directors be approved by
disinterested directors, be approved by Phon-Net's
shareholders or be fair to Phon- Net; however,
o we are not subject to Section 617.0901 of the Florida Business
Corporation Law which places additional limitations and
restrictions on certain business transactions with affiliated
parties.
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us, as of the date
of this prospectus, relating to the beneficial ownership of shares of common
stock by:
o each person who is known by us to be the beneficial owner of
more than five percent of our outstanding common stock;
o each director;
o each executive officer; and
o all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of Phon-Net.com, Inc., 750 West Pender Street,
Suite 600, Vancouver, British Columbia V6C 2T7.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as being owned
by them.
Under securities laws, a person is considered to be the beneficial
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owner of securities owned by him (or certain persons whose ownership is
attributed to him) and that can be acquired by him within 60 days from the date
of this Report, including upon the exercise of options, warrants or convertible
securities. We determine a beneficial owner's percentage ownership by assuming
that options, warrants or convertible securities that are held by him, but not
those held by any other person, and which are exercisable within 60 days of the
date of this prospectus, have been exercised or converted.
The table does not give effect to:
o except with respect to beneficial ownership of shares
attributed to the named person, the issuance of up to
1,948,000 shares in the event options that have been granted,
are exercised; and
o the issuance of up to 1,391,010 shares in the event in the
event outstanding common stock purchase warrants are
exercised.
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
- ------------------- -------------------- ----------
Brian Collins 24,600,050 51.8%
Sloan Young 411,331 0.9%
Roger L. Betterton 2,342,044 4.9%
R.R. 3, Box 142
Pana, Illinois 62557
Executive Officers and
Directors (as a group of 2) 25,011,381 52.5%
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 80,000,000 shares of common
stock, $.001 par value per share and 10,000,000 shares of preferred stock, $.01
par value per share. As of the date of this prospectus, there are 47,481,441
shares of common stock issued and outstanding, which are held of record by
approximately 200 holders. As of the date of this prospectus, there are no
shares of preferred stock outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on
all matters submitted to a shareholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In the event of our liquidation, dissolution or winding up, each
outstanding share entitles its holder to participate in all assets that remain
after payment of liabilities and after providing for each class of stock, if
any, having preference over the common stock.
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Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions for the common
stock. The rights of the holders of common stock are subject to any rights that
may be fixed for holders of preferred stock, when and if any preferred stock is
authorized and issued. All outstanding shares of common stock are, and the
shares underlying all option and warrants will be, duly authorized, validly
issued, fully paid an non-assessable upon our issuance of these shares.
PREFERRED STOCK
We may issue preferred stock from time to time, with such designations,
preferences, conversion rights, cumulative, relative, participating, optional or
other rights, including voting rights, qualifications, limitations or
restrictions as are determined by our Board of Directors. We have no present
intention of issuing shares of preferred stock.
COMMON STOCK PURCHASE WARRANTS
In connection with the conversion into equity of our promissory notes
in the aggregate principal amount of $600,250, plus accrued interest thereon, we
issued 1,782,011 shares of common stock and common stock purchase warrants to
purchase a total of 891,010 additional shares. Each warrant, which is not freely
transferable, entitles the owner to purchase one share, until not later than
June 30, 2001, for an exercise price of $.50. To date, none of the warrants have
been exercised.
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is Florida Atlantic Stock
Transfer, Inc. Its address is 7130 Nob Hill Road, Tamarac, Florida 33321, and
its telephone number is (954) 726-4954.
SELLING SECURITYHOLDERS
The following table sets forth the name of each selling security
holder, the number or shares of common stock beneficially owned by each selling
security holder as of the date of this prospectus, giving effect to the exercise
of the selling security holders' options, if any, into shares of common stock,
and the number of shares being offered by each selling security holder. The
shares of common stock being offered are being registered to permit public sales
and the selling security holders may offer all or part of the shares for resale
from time to time. All expenses of the registration of the common stock on
behalf of the selling security holder are being borne by us. We will receive
none of the proceeds of this offering.
The following table is derived from our books and records, as well as
from those of our transfer agent. No selling security holder is affiliated with
us except Brian Collins, our President and CEO, and Sloan Young, our Vice
President. All shares listed for resale reflect currently outstanding shares of
our common stock, except that 200,000 of the shares listed for Sloan Young are
issuable upon exercise of options granted to Mr. Young.
24
27
The beneficial owner of 525560 BC Ltd. is Robert Shull. The beneficial
owner of Strath Allan Investments is Robert Montgomery. The beneficial owners of
Alliance Corporate Services, Inc. are Peter Laipnieks and Randy Hayward. The
beneficial owner of iBanc Group, Inc. is Bernard Essers.
An "*" indicates less than one percent.
Shares Owned Shares
Beneficially Shares Available Beneficially Percent of
Prior to this Pursuant to Owned after Class
Selling Security Holder Offering This Prospectus Offering After Offering
- ----------------------- ------------- ----------------- ------------ --------------
Brian Collins 24,600,050 250,000 24,350,050 51.1%
Sloan Young 411,331 450,000 0 *
Adam Krietchfer 150,000 150,000 0 *
Barry Dinning 23,501 15,667 7,834 *
Gary Jackson 23,501 15,667 7,834 *
Buck Perrin 31,308 20,872 10,436 *
Ian Sutherland 31,308 20,872 10,436 *
Chris Hope MacPherson 109,580 73,053 36,527 *
Robert Evans 23,481 15,654 7,827 *
John & Valerie Kuehne 62,604 41,736 20,868 *
Steve McCarthy 31,296 20,864 10,432 *
Sheldon Goulet 23,472 15,648 7,824 *
Brent Kitzke 31,296 20,864 10,432 *
Ilio Bertolami 46,933 31,289 15,644 *
Avalon Productions 93,867 62,578 31,289 *
Tone Paterson 109,511 73,007 36,504 *
Albany Holdings 124,787 83,191 41,596 *
525560 BC Ltd. 109,188 72,792 36,396 *
Craig Christy 15,599 10,399 5,200 *
Jim Money 46,746 31,164 15,582 *
Rick Suggitt 31,164 20,776 10,388 *
Neil Zaharichuk 31,158 20,772 10,386 *
John Primrose 124,629 83,086 41,543 *
Jim Mitchell 684,050 72,700 611,350 1.2%
Gladys Jenks 124,602 83,068 41,534 *
Strath Allan Investments 31,125 20,750 10,375 *
Gary Freeman 124,419 82,946 41,473 *
Curtis Klone 31,112 20,741 10,371 *
Randy Hayward 168,704 103,704 116,852 *
Alliance Corporate Services 1,362,227 648,151 714,076 1.5%
iBank Group, Inc. 1,000,000 500,000 500,000 *
--------- ------------ -------
Total 29,812,549 3,132,011 26,771,059
========== ========= ==========
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be distributed from time to
time by the selling security holders in one or more transactions that may take
place on the over-the-counter market. These
25
28
include ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of these shares as
principals, at market prices existing at the time of sale, at prices related to
existing market prices, through Rule 144 transactions or at negotiated prices.
Usual and customary or specifically negotiated brokerage fees or commissions may
be paid by the selling security holders in connection with sales of securities.
The selling security holders may sell the securities in one or more of
the following methods, which may include crosses or block transactions:
o through the "pink sheets", on the over-the-counter Bulletin
Board, or on such exchanges or over-the-counter markets on
which our shares may be listed from time-to-time, in
transactions which may include special offerings, exchange
distributions and/or secondary distributions, pursuant to and
in accordance with the rules of such exchanges, including
sales to underwriters who acquire the shares for their own
account and resell them in one or more transactions or through
brokers, acting as principal or agent;
o in transactions other than on such exchanges or in the
over-the-counter market, or a combination of such
transactions, including sales through brokers, acting as
principal or agent, sales in privately negotiated
transactions, or dispositions for value by any selling
security holder to its partners or members, subject to rules
relating to sales by affiliates;
o through the issuance of securities by issuers other than us,
convertible into, exchangeable for, or payable in our shares;
or
o through the writing of options on our shares, whether or not
such options are listed on an exchange, or other transactions
requiring delivery of our shares, or the delivery of our
shares to close out a short position.
Any such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices.
In making sales, brokers or dealers used by the selling security
holders may arrange for other brokers or dealers to participate. The selling
security holders and others through whom such securities are sold may be
"underwriters" within the meaning of the Securities Act for the securities
offered, and any profits realized or commission received may be considered
underwriting compensation.
At the time a particular offer of the securities is made by or on
behalf of a selling security holder, to the extent required, a prospectus is to
be delivered. The prospectus will include the number of shares of common stock
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, the purchase price paid by any underwriter for
the shares of common stock purchased from the selling security holder, and any
discounts, commissions or concessions allowed or reallowed or paid to dealers,
and the proposed selling price to the public.
We have told the selling security holders that the anti-manipulative
rules under the Securities Exchange Act of 1934, including Regulation M, may
apply to their sales in the market. We have also told the selling security
holders of the need for delivery of copies of this prospectus in connection with
any sale of securities that are registered by this prospectus.
26
29
Sales of securities by us and the selling security holders or even the
potential of these sales may have a negative effect on the market price for
shares of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
On the date of this prospectus, we have 47,481,441 shares of common
stock issued and outstanding. Of those shares, 15,859,011 shares, including the
2,932,011 currently outstanding shares covered by this prospectus, are freely
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by an affiliate of ours. This does not include
shares that may be issued upon exercise of options or warrants. An additional
approximately 4,000,000 shares will become available for public resale under
Rule 144(k) on March 26, 2001.
The remaining 27,622,430 shares of common stock currently outstanding
are restricted securities, and will become eligible for public sale at various
times, provided the requirements of Rule 144 are complied with. In general, Rule
144 permits a shareholder who has owned restricted shares for at least one year,
to sell without registration, within a three month period, up to one percent of
our then outstanding common stock. We must be current in our reporting
obligations in order for a shareholder to sell shares under Rule 144. In
addition, shareholders other than our officers, directors or 5% or greater
shareholders who have owned their shares for at least two years, may sell them
without volume limitation or the need for our reports to be current.
We cannot predict the effect, if any, that market sales of common stock
or the availability of these shares for sale will have on the market price of
our shares from time to time. Nevertheless, the possibility that substantial
amounts of common stock may be sold in the public market could negatively damage
affect market prices for the common stock and could damage our ability to raise
capital through the sale of our equity securities.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Atlas Pearlman, P.A., 350 East Las Olas Boulevard, Suite
1700, Fort Lauderdale, FL 33301. Affiliates of that firm own an aggregate of
100,000 shares of our common stock.
EXPERTS
The consolidated financial statements as of July 31, 2000 and July 31,
1999, and for each of the three years in the period ended July 31, 2000,
appearing in this prospectus and registration statement have been audited by
Morgan & Company, independent auditors, as set forth in their report thereon
appearing elsewhere in this prospectus, and are included in reliance upon this
report given on the authority of Morgan & Company as experts in auditing and
accounting.
27
30
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2
under the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement, and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be inspected
without charge at the SEC's Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549, and at the SEC's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials
may also be obtained from the SEC's Public Reference at 450 Fifth Street, N.W.,
Room 1024, Washington D.C. 20549, upon the payment of prescribed fees. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.
The registration statement, including all exhibits and schedules and
amendments, has been filed with the SEC through the Electronic Data Gathering,
Analysis and Retrieval system, and are publicly available through the SEC's Web
site located at http://www.sec.gov. Following the effective date of the
registration statement relating to this prospectus, we will become subject to
the reporting requirements of the Exchange Act and in accordance with these
requirements, will file quarterly and annual financial reports and other
information with the SEC.
28
31
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
32
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Phon-net.com, Inc.
(A development stage company)
We have audited the consolidated balance sheets of Phon-net.com, Inc. (a
development stage company) as at July 31, 2000 and 1999, and the consolidated
statements of operations and deficit, cash flows, and stockholders' equity for
the years ended July 31, 2000, 1999, and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with United States and Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 2000 and
1999 and the results of its operations and its cash flows for the years ended
July 31, 2000, 1999, and 1998 in accordance with United States generally
accepted accounting principles.
Without qualifying our opinion, we draw attention to Note 1 to the consolidated
financial statements. The Company incurred a net loss of $4,540,842 during the
year ended July 31, 2000, and as at that date, has not attained profitable
operations and is dependent upon obtaining adequate financing to fulfil its
development activities. These factors raise substantial doubt that the Company
will be able to continue as a going concern.
Vancouver, Canada /s/ Morgan & Company
October 4, 2000 Chartered Accountants
COMMENTS BY AUDITORS ON UNITED STATES - CANADA DIFFERENCE
In Canada, reporting standards for auditors do not permit the addition of an
explanatory paragraph when the financial statements account for, disclose and
present in accordance with generally accepted accounting principles conditions
and events that cast substantial doubt on the Company's ability to continue as a
going concern. Although our audit was conducted in accordance with both United
States and Canadian generally accepted auditing standards, our report to the
shareholders, dated October 4, 2000, is expressed in accordance with United
States reporting standards which require a reference to such conditions and
events in the Auditors' Report.
Vancouver, Canada /s/ Morgan & Company
October 4, 2000 Chartered Accountants
F-1
33
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(STATED IN U.S. DOLLARS)
July 31
-----------------------------------
2000 1999
------------ ------------
ASSETS
CURRENT
Cash $ 154,421 $ 203,161
Accounts receivable (Note 7(b)) 23,927 13,829
Due from related parties 178,490 --
Prepaid expenses 2,133 --
------------ ------------
358,971 216,990
CAPITAL ASSETS (Note 3) 89,688 96,297
INTANGIBLES (Note 4) 635,687 977,967
------------ ------------
$ 1,084,346 $ 1,291,254
============ ============
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 143,787 $ 146,376
Due to related parties (Note 7(c)) 10,691 66,031
Notes payable (Note 5) 36,035 35,486
------------ ------------
190,513 247,893
------------ ------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (Note 6)
Authorized:
80,000,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.01
Issued and outstanding
43,153,941 common shares at July 31, 2000 and
36,027,430 common shares at July 31, 1999 1,143,817 1,136,690
Additional paid in capital 11,330,697 7,051,970
DEFICIT (11,566,154) (7,025,312)
OTHER (14,527) (119,987)
------------ ------------
893,833 1,043,361
------------ ------------
$ 1,084,346 $ 1,291,254
============ ============
Approved by the Sole Director:
- --------------------------------------------------
F-2
34
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(STATED IN U.S. DOLLARS)
Inception
March 19, 1996
Year Ended July 31 to July 31
2000 1999 1998 2000
------------ ------------ ------------ ------------
REVENUE $ 6,896 $ 43,867 $ 120,904 $ 448,385
------------ ------------ ------------ ------------
EXPENSES
Advertising and promotion 299,117 506,329 28,777 688,807
Amortization of intangibles 342,280 43,448 16,281 433,550
Amortization of capital assets 66,635 80,041 54,295 232,500
Amortization of convertible note discount
471,525 315,857 -- 787,382
Bank charges and interest 33,395 18,497 2,544 58,123
Contract cancellation 762,000 -- -- 762,000
Office and sundry 29,935 55,295 84,351 200,445
Professional fees 159,340 87,015 8,532 297,761
Rent and utilities 23,792 34,439 31,292 108,385
Software development 81,311 -- -- 81,311
Software support 121,000 11,000 -- 132,000
Telephone 40,145 52,130 85,662 280,175
Transfer agent and filing fees 18,858 6,500 -- 25,358
Travel 57,452 18,608 88,319 184,364
Salaries and benefits 2,040,953 4,850,866 308,936 7,471,364
------------ ------------ ------------ ------------
4,547,738 6,080,025 708,989 11,743,525
------------ ------------ ------------ ------------
LOSS BEFORE THE FOLLOWING 4,540,842 6,036,158 588,085 11,295,140
Forgiveness of debt -- -- -- (230,961)
Write-down of investments -- -- -- 99,028
------------ ------------ ------------ ------------
NET LOSS FOR THE YEAR 4,540,842 6,036,158 588,085 $ 11,163,207
============
ACCUMULATED DEFICIT, BEGINNING OF YEAR 7,025,312 989,154 401,069
ACCUMULATED DEFICIT, END OF YEAR $ 11,566,154 $ 7,025,312 $ 989,154
============ ============ ============
LOSS PER SHARE $ 0.12 $ 0.36 $ 0.06
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 38,770,300 16,923,300 9,422,000
============ ============ ============
COMPREHENSIVE INCOME
Net loss for the year $ (4,540,842) $ (6,036,158) $ (588,085)
Foreign currency translation adjustment (15,540) (2,949) 987
------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (4,556,382) $ (6,039,107) $ (587,098)
============ ============ ============
F-3
35
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN U.S. DOLLARS)
Inception
March 19, 1996
Year Ended July 31 to July 31
2000 1999 1998 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the year $ (4,540,842) $ (6,036,158) $ (588,085) $(11,312,874)
------------ ------------ ------------ ------------
ADJUSTMENTS TO RECONCILE LOSS TO NET CASH USED BY
OPERATING ACTIVITIES
Stock issued for other than cash 2,579,079 4,918,000 -- 7,497,079
Amortization 1,001,440 450,346 70,576 1,575,599
Write-down of investments -- -- -- 99,028
Forgiveness of debt -- -- -- (230,961)
Change in accounts receivable (10,098) (8,886) (3,826) (23,927)
Change in due from related parties (178,490) 29,932 (4,427) (178,490)
Change in prepaid expenses (2,133) 7,950 (7,950) (2,133)
Change in accounts payable and accrued
liabilities (2,589) (33,318) 112,421 143,787
Change in due to related parties (55,340) 39,373 15,938 10,691
------------ ------------ ------------ ------------
TOTAL ADJUSTMENTS 3,331,869 5,403,397 182,732 8,890,673
------------ ------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,208,973) (632,761) (405,353) (2,422,201)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital assets (60,026) (15,613) (174,225) (322,190)
Intangibles -- -- -- (81,404)
Excess of purchase price over net assets of
subsidiaries acquired -- -- -- (253,278)
Investments -- -- -- (160,068)
Proceeds on sale of investments -- -- -- 61,040
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (60,026) (15,613) (174,225) (755,900)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued 635,000 232,365 618,259 1,900,723
Stock issue costs -- (157,920) -- (157,920)
Convertible notes 600,250 737,000 -- 1,337,250
Notes payable 549 -- (3,343) 266,996
------------ ------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 1,235,799 811,445 614,916 3,347,049
------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15,540) (2,949) 987 (14,527)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (48,740) 160,122 36,325 154,421
CASH, BEGINNING OF YEAR 203,161 43,039 6,714 --
------------ ------------ ------------ ------------
CASH, END OF YEAR $ 154,421 $ 203,161 $ 43,039 $ 154,421
============ ============ ============ ============
F-4
36
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN U.S. DOLLARS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
JULY 31, 2000
The Company issued 200,000 common shares at a value of $762,000 for the
termination of an investor relations contract.
The Company issued 1,782,011 common shares on the conversion of promissory
notes and accrued interest totalling $623,704.
The Company issued 3,200,000 common shares at a value of $1,644,000 to a
director for consideration of the relinquishment of all the rights to a
stock appreciation rights agreement.
The Company issued 357,000 common shares at a value of $129,625 for
consulting services and salary compensation.
JULY 31, 1999
Effective October 5, 1998, the Company acquired 100% of the issued and
outstanding shares of Phon-net Corp. by issuing 11,410,000 common shares at
an ascribed value of $Nil.
The Company issued 8,085,000 common shares at an ascribed value of
$3,234,000 to a director for accomplishing certain development goals, and
issued 5,000,000 common shares to the same director at an ascribed value of
$1,250,000 pursuant to an employment agreement commencing July 1, 1999.
The Company issued 3,000,000 common shares at an ascribed value of
$1,110,000 for the acquisition of technology at an ascribed value of
$978,000, and for deferred compensation expense of $132,000.
The Company issued 1,715,000 common shares for advertising, promotion
services, stock issue costs and for legal services at an ascribed value of
$509,000.
The Company issued 2,707,430 common shares on the conversion of promissory
notes totalling $737,000.
F-5
37
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(STATED IN U.S. DOLLARS)
Common Stock
-------------------------------------------------
Additional
Number Paid-in Accumulated
of Shares Amount Capital Other Deficit Total
---------- --------- -------- ---------- ----------- -------
BALANCE, JULY 31, 1997 7,455,676 415,099 -- 2,975 (401,069) 17,005
ISSUANCE OF COMMON STOCK 1,966,324 618,259 -- -- -- 618,259
TRANSLATION ADJUSTMENT -- -- -- 987 -- 987
LOSS FOR THE YEAR -- -- -- -- (588,085) (588,085)
---------- --------- -------- ----- -------- -------
BALANCE, JULY 31, 1998 9,422,000 1,033,358 -- 3,962 (989,154) 48,166
ISSUANCE OF COMMON STOCK 578,000 77,365 -- -- -- 77,365
---------- --------- -------- ----- -------- -------
10,000,000 1,110,723 -- 3,962 (989,154) 125,531
CONSOLIDATION OF STOCK ON 1 FOR 2 BASIS (5,000,000) -- -- -- -- --
---------- --------- -------- ----- -------- -------
5,000,000 1,110,723 -- 3,962 (989,154) 125,531
ADJUSTMENT TO NUMBER OF SHARES ISSUED AND
OUTSTANDING AS A RESULT OF THE REVERSE TAKE-OVER
TRANSACTION
Piedmont Technologies Inc. (5,000,000) -- -- -- -- --
Phon-net Corp. 7,000,000 -- -- -- -- --
---------- --------- -------- ----- -------- -------
7,000,000 -- -- -- -- 125,531
ASCRIBED VALUE OF THE SHARES ISSUED IN CONNECTION
WITH THE ACQUISITION OF PIEDMONT TECHNOLOGIES INC 5,000,000 5,000 2,000 -- -- 7,000
---------- --------- -------- ----- -------- -------
12,000,000 1,115,723 2,000 3,962 (989,154) 132,531
F-6
38
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(STATED IN U.S. DOLLARS)
Common Stock
---------------------------------------
Additional
Number Paid-in Accumulated
of Shares Amount Capital Other Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
BALANCES CARRIED FORWARD 12,000,000 1,115,723 2,000 3,962 (989,154) 132,531
ADJUSTMENT TO NUMBER OF SHARES ISSUED AND
OUTSTANDING AS A RESULT OF THE REVERSE
TAKE-OVER TRANSACTION
Phon-net Corp. (12,000,000) -- -- -- -- --
Phon-net.com, Inc. 3,650,000 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
3,650,000 1,115,723 2,000 3,962 (989,154) 132,531
ASCRIBED VALUE OF THE SHARES ISSUED
IN CONNECTION WITH THE
ACQUISITION OF PHON-NET CORP 11,410,000 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
15,060,000 1,115,723 2,000 3,962 (989,154) 132,531
ISSUANCE OF COMMON STOCK
For cash 460,000 460 154,540 -- -- 155,000
For services 1,715,000 1,715 480,285 -- -- 482,000
For technology 2,643,244 2,643 975,357 -- -- 978,000
For compensation expense 13,085,000 13,085 4,470,915 -- -- 4,484,000
On conversion of promissory notes 2,707,430 2,707 1,050,150 -- -- 1,052,857
For deferred compensation expense 356,756 357 131,643 (132,000) -- --
STOCK ISSUE COSTS -- -- (212,920) -- -- (212,920)
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- 11,000 -- 11,000
TRANSLATION ADJUSTMENT -- -- -- (2,949) -- (2,949)
LOSS FOR THE YEAR -- -- -- -- (6,036,158) (6,036,158)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1999 36,027,430 1,136,690 7,051 (119,987) (7,025,312) 1,043,361
F-7
39
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(STATED IN U.S. DOLLARS)
Common Stock
---------------------------------------
Additional
Number Paid-in Accumulated
of Shares Amount Capital Other Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
BALANCES CARRIED FORWARD 36,027,430 1,136,690 7,051,970 (119,987) (7,025,312) 1,043,361
ISSUANCE OF COMMON STOCK
For compensation expense 3,200,000 3,20 1,660,800 -- -- 1,664,000
For services 357,000 357 129,268 -- -- 129,625
For contract cancellation 200,000 200 761,800 -- -- 762,000
For conversion of promissory notes 1,782,011 1,782 621,922 -- -- 623,704
Options exercised 1,587,500 1,588 633,412 -- -- 635,000
DISCOUNT ON CONVERTIBLE NOTES -- -- 471,525 -- -- 471,525
AMORTIZATION OF DEFERRED COMPENSATION -- -- -- 121,000 -- 121,000
LOSS FOR THE PERIOD -- -- -- -- (4,540,842) (4,540,842)
TRANSLATION ADJUSTMENT -- -- -- (15,540) -- (15,540)
----------- ----------- ----------- ----------- ------------ -----------
BALANCE, JULY 31, 2000 43,153,941 $ 1,143,817 $11,330,697 $ (14,527) $(11,566,154) $ 893,833
=========== =========== =========== =========== ============ ===========
F-8
40
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
1. NATURE OF OPERATIONS
Development Stage Activities
Phon-net.com Inc., through its Direct-Connect software allows consumers to
voice connect to businesses from the Internet while viewing that business'
web page, using a single phone line connection and no special hardware. The
Company also provides consumers with quick and easy access through any
touch tone telephone, cellular/PCS phone, screenphone and the Internet to
instantly access interactive information on area business and their current
product and services, special promotions and other source information.
Phon-net.com, Inc. provides information services in a published directory
format or through telephone information input to locate a business, product
or service, by either a generic category search, or by entering a specific
ad number listed in the Company's director.
Phon-net.com, Inc. is in the development stage; therefore recovery of its
assets is dependent upon future events, the outcome of which is
indeterminable. In addition, successful completion of Phon-net.com, Inc.'s
development program and its transition, ultimately to the attainment of
profitable operations is dependent upon obtaining adequate financing to
fulfil its development activities and achieve a level of sales adequate to
support its cost structure.
Management is of the opinion that sufficient short-term funding will be
obtained and that current negotiations with potential users of its products
will be successful.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles in the United States. Because
a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period
necessarily involves the use of estimates which have been made using
careful judgement.
The financial statements have, in management's opinion, been properly
prepared within reasonable limits of materiality and within the framework
of the significant accounting policies summarized below:
a) Consolidation
These financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Phon-net Corp., (incorporated in Nevada,
U.S.A.), Piedmont Technologies Inc., The National For Sale Phone
Company Inc., and V NETT Enterprises Inc., all incorporated in Canada.
F-9
41
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Revenue Recognition
The Company's revenue arises from contracts entered into to facilitate
beta-testing of its various products and is recognized over the term of
the contract. The Company's revenues through July 31, 2000 were
generated from contracts relating to its interactive real estate and
professional listing service which was the initial product under
development, as well as the search engine product. No revenue has been
generated to July 31, 2000 from the Direct Connect product. Once
revenue is generated by the Direct Connect or Search Engine products,
the revenue allocated to post contract support will be recognized
rateably over the term of the support and revenue allocated to service
elements will be recognized as the services are performed.
c) Capital Assets
Capital assets are recorded at cost and amortized as follows:
Computer equipment 3 years straight line basis
Computer software 3 years straight line basis
Telephone and equipment 2 and 3 years straight line basis
d) Intangibles
Intangibles are recorded at cost and amortized as follows:
Goodwill 5 years straight line basis
Technology costs 3 years straight line basis
Management reviews goodwill and technology costs for impairment
whenever events or changes in circumstances indicate that the carrying
amounts may not be recoverable.
e) Capitalized Costs
Costs for developing computer software will be capitalized when
technological feasibility has been established for the computer
software product. Capitalization of computer software costs will be
discontinued when the product is available for general release to
customers and such costs are amortized on a product-by-product basis
over the estimated lives of the products. At each balance sheet date,
the unamortized capitalized costs of a computer software product shall
be compared to the net realizable value of that product. The amount by
which the unamortized capitalized costs of a computer software product
exceed the net realizable value of that asset shall be written off. To
date, the Company has not capitalized any costs related to the
development of computer software.
F-10
42
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Capitalized Costs (Continued)
Purchased computer software, which includes programs used for company
management and software development are capitalized and amortized as
disclosed in the capital assets significant accounting policy note.
f) Income Taxes
The Company has adopted Statement of Financial Accounting Standards No.
109 - "Accounting for Income Taxes" (SFAS 109). This standard requires
the use of an asset and liability approach for financial accounting and
reporting on income taxes. If it is more likely than not that some
portion of all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
g) Foreign Currency Translation
The Company's subsidiary's operations are located in Canada, and its
functional currency is the Canadian dollar. The financial statements of
the subsidiary have been translated using the current method whereby
the assets and liabilities are translated at the year end exchange
rate, capital accounts at the historical exchange rate, and revenues
and expenses at the average exchange rate for the period. Adjustments
arising from the translation of the Company's subsidiary's financial
statements are included as a separate component of shareholders'
equity.
h) Financial Instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable, notes payable, and amounts due to and
from related parties.
Unless otherwise noted, it is management's opinion that this Company is
not exposed to significant interest or credit risks arising from these
financial instruments. The fair value of these financial instruments
approximate their carrying values, unless otherwise noted.
i) Loss Per Share
The loss per share is calculated using the weighted average number of
common shares outstanding during the year. Fully diluted loss per share
is not presented, as the impact of the exercise of options is
anti-dilutive.
F-11
43
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1998
(STATED IN U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
j) Deferred Compensation
Deferred compensation arising from the issue of capital stock is shown
as a reduction of stockholders' equity.
Amortization of the deferred amount is provided for over the term of
the contract for which the services are provided.
3. CAPITAL ASSETS
2000 1999
----------------------------------------- --------
Accumulated Net Book Net Book
Cost Depreciation Value Value
-------- ------------ -------- --------
Computer equipment $127,839 $ 65,562 $ 62,277 $ 27,495
Telephone and equipment 35,132 28,891 6,241 13,125
Computer software 157,703 136,533 21,170 55,677
-------- -------- -------- --------
$320,674 $230,986 $ 89,688 $ 96,297
======== ======== ======== ========
4. INTANGIBLES
2000 1999
---------- -----------
Goodwill, at cost $ 81,404 $ 81,404
Technology, at cost 978,000 978,000
---------- -----------
1,059,404 1,059,404
Less: Accumulated amortization (423,717) (81,437)
---------- -----------
$ 635,687 $ 977,967
============== ===========
Technology cost was determined as follows:
Consideration paid pursuant to an amended agreement dated June 30, 1999
F-12
44
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
4. INTANGIBLES (Continued)
Number of Stated
Shares Value
----------- -----------
Common shares issued at a fair market value of $0.27 per share 3,000,000 $ 810,000
Fair market value of the option to purchase 2,000,000 common shares at $0.40
per share to June 30, 2001 (based on the Black-Scholes model) -- 300,000
----------- -----------
3,000,000 1,110,000
Less: Portion of the consideration attributable to deferred compensation
expense (356,756) (132,000)
----------- -----------
2,643,244 $ 978,000
=========== ===========
5. NOTES PAYABLE
2000 1999
----------- -----------
Unsecured with interest at 5% per annum $ 36,035 $ 35,486
=========== ===========
6. CAPITAL STOCK
a) During the year ended July 31, 2000, the Company issued 8% promissory
notes in the amount of $600,250, convertible, including accrued
interest, into common stock and non-transferable share purchase
warrants at a price of $0.35 per share. Each share purchase warrant
entitles the holder to purchase one additional share at a price of
$0.50 per share for a period of twelve months from the conversion date.
An amount of $471,525 has been charged to operations arising from the
discount from fair market value of the shares at the date of issue of
the promissory notes.
The Company issued 1,782,011 common shares and 891,010 share purchase
warrants on the conversion of the promissory notes, including accrued
interest of $23,454. As at July 31, 2000, no share purchase warrants
have been exercised.
F-13
45
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
6. CAPITAL STOCK (Continued)
b) During the year ended July 31, 2000, the Company issued 3,200,000
common shares to the director of the Company at an ascribed value of
$1,664,000, and for which the director relinquished all rights to the
stock appreciation rights referred to in Note 8(a).
c) During the year ended July 31, 2000, the Company issued 200,000 common
shares at an ascribed value of $762,000 for the termination of an
investor relations contract.
d) During the year ended July 31, 2000, the Company issued 357,000 common
shares for consulting services and salary at an ascribed value of
$129,625.
e) In accordance with the terms of an employment agreement, the Company's
vice president of technology is to be issued 100,000 common shares on
each of November 1, 1999, 2000 and 2001. The initial 100,000 has been
issued at an ascribed value of $9,375.
f) Pursuant to an investor relations agreement dated December 3, 1999, the
Company has agreed to issue a total of 500,000 common shares for
consulting services to be performed over a one year period. The 500,000
common shares are issuable in quarterly increments of 125,000 common
shares until November 28, 2000. The Company has issued 250,000 common
shares at an ascribed value of $102,500 to July 31, 2000. In addition,
the Company granted an option to acquire 100,000 common shares at $0.40
per share until February 15, 2000, and a further 100,000 common shares
at $0.50 per share until May 15, 2000. The fair value consideration of
these options is $8,365 and $10,140 respectively. During fiscal 2000,
the Company issued 100,000 common shares for cash consideration of
$40,000 on the exercise of the initial option. The remaining option
expired.
g) By an investor relations agreement dated December 1, 1999, the Company
granted an option to purchase 1,000,000 common shares at a price of
$0.40 per share until July 30, 2000, and 1,000,000 common shares at a
price of $1.00 per share until December 31, 2000. The fair value
consideration of these options is $163,397 and $112,929 respectively.
During fiscal 2000, the Company issued 1,000,000 common shares for cash
consideration of $400,000 on the exercise of the initial option.
F-14
46
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
6. CAPITAL STOCK (Continued)
h) On January 6, 1999, the Company entered into an agreement with
Quad-Linq Software, Inc. ("Quad-Linq"), under which Quad-Linq agreed to
develop, maintain, support and upgrade the Company's Direct Connect
software. As consideration, Quad-Linq was to acquire a 49% interest in
the software, and 49% of the net revenues from sales of the software.
Under a June 30, 1999 amendment to the original agreement, Quad-Linq
relinquished its ownership interest in the software, as well as its
percentage of net revenues from sales of the software in consideration
of the issuance of 3,000,000 common shares, and the granting of options
to purchase an additional 2,000,000 common shares at $0.40 per share to
June 30, 2001.
As a result of the subsequent dissolution of Quad-Linq, the Company
entered into an agreement, dated December 3, 1999, with two former
principals of Quad-Linq, who agreed to assume Quad-Linq's obligations
under the June 30, 1999 amended agreement in consideration of the
assignment of the stock options previously granted to Quad-Linq.
During fiscal 2000, the Company issued 487,500 common shares for cash
consideration of $195,000 pursuant to the exercise of options.
i) During the year ended July 31, 1999 the Company issued promissory notes
in the amount of $737,000 convertible into common stock at the lesser
of $0.50 per share and 70% of the market price of the shares. The notes
bear interest at a rate of 10% per annum.
An amount of $315,857 was charged to operations in fiscal 1999 arising
from the 30% discount from fair market value of the shares at the date
of issue of the promissory notes.
The Company issued 2,707,430 common shares on conversion of the
promissory notes.
j) On May 29, 1999 the Company adopted a Stock Option Plan that provides
for the granting to employees of stock options designed to qualify as
"incentive stock options" under the Internal Revenue Code. An option
gives the participant the right to purchase from the company as
specified number of shares of common stock for a specified price during
a specified period not exceeding 10 years. A total of 3,000,000 shares
of common stock have been reserved for issuance under the Stock Option
Plan.
F-15
47
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
6. CAPITAL STOCK (Continued)
j) (Continued)
Options issued as follows:
Weighted Average
Number of Exercise Price Exercise Price Number
Shares Per Share Per Share Exercisable
--------- -------------- -------------- ---------
Outstanding August 1, 1998 0 -- -- 0
Granted 2,200,000 $ 0.36-0.40 $ 0.39 2,100,000
--------- ---------
Outstanding July 31, 1999 2,200,000 $ 0.36-0.40 $ 0.39 2,100,000
Granted 248,000 $ 0.36-1.25 $ 0.42 114,666
--------- ---------
Outstanding July 31, 2000 2,448,000 $ 0.36-1.25 $ 0.40 2,214,666
============================ ========================
At July 31, 2000, the weighted average contractual life of options is
7.9 years.
The weighted-average grant-date fair value of options granted in 2000
was $0.40. The fair value of the options is estimated using the
Black-Scholes options pricing model with the following assumptions:
dividend yield, Nil percent for all years; expected volatility of 205%;
risk free interest rate of 5.25%; and expected life ranging from three
to five years.
The Company has elected not to adopt the fair value method of
accounting for employee stock compensation plans as prescribed by
Statement of Financial Accounting Standards (SFAS) No. 123 issued by
the Financial Accounting Standards Board. Instead, as permitted by SFAS
No. 123, the Company has elected to continue to apply the intrinsic
value method of accounting prescribed by Accounting Principles Board
Opinion No. 24. If the fair value method of accounting under SFAS No.
123 had been followed, net income and earnings per share of the Company
would have been reduced by amortization of the grant-date fair value of
the options over the vesting period.
F-16
48
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
6. CAPITAL STOCK (Continued)
j) (Continued)
The pro forma net loss and earnings per share for 2000, 1999 and 1998
as if the fair value method had been used is as follows:
2000 1999 1998
---------- ---------- --------
Net loss $4,595,055 $6,781,648 $588,085
---------- ---------- --------
Per share: $ 0.12 $ 0.40 $ 0.06
========== ========== ========
Under the Stock Option Plan the Company may grant non -qualifying stock
options at an exercisable price of not less than 75% of fair market
value at the date the option is granted. Compensation expense will be
recognized at the date of grant of any non-qualifying options at the
difference between the fair market value and the exercise price. No
non-qualifying stock options are granted as at July 31, 2000.
7. RELATED PARTY TRANSACTIONS
a) During the year ended July 31, 2000, the Company paid $1,830,800 (1999
$4,662,716; 1998- $52,926) to a director for salaries. The amount paid
in fiscal 2000 includes the issue of 3,200,000 common shares of the
Company, at a value of $0.52 per share, for relinquishments of certain
rights under the stock appreciation rights agreement. The amount paid
in 1999 includes the issue of 5,000,000 common shares of the Company,
at a value of $0.25 per share issued pursuant to an employment
agreement, and 8,085,000 common shares at a value of $0.40 per share
for accomplishing certain development goals.
b) Due From Related Parties
i) Amount due from a director totalling $171,400 is repayable at
$13,200 per month including interest at 8% per annum, with the
unpaid balance repayable in full on March 31, 2001.
ii) Amount due of $7,086 from an employee is repayable January 31,
2001, together with interest at 8% per annum.
c) Due To Related Parties
Amounts due to related parties are due to a director of a subsidiary
company.
F-17
49
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
8. COMMITMENTS
a) The Company entered into an employment agreement dated July 1, 1999
with a director for a period of three years at an annual remuneration
of $150,000. In addition, and as an inducement to enter into the
employment contract, the Company has agreed to issue to the director,
5,000,000 common shares. The employment agreement also grants the
director an annual Stock Appreciation Right ("SAR"), pursuant to which,
on (i) February 15, 2000, the director shall be entitled to receive a
sum of money in an amount equal to four hundred thousand (400,000)
times the difference between the "fair market value" of the Company's
common stock at the close of trading on June 30, 1999 and February 1,
2000, (ii) on February 15, 2001, the director shall be entitled to
receive a sum of money in an amount equal to six hundred thousand
(600,000) times the difference between the "fair market value" of the
Company's common stock at the close of trading on February 1, 2000 and
February 1, 2001 and (iii) on February 15, 2002, the director shall be
entitled to receive a sum of money in an amount equal to six hundred
thousand (600,000) times the difference between the "fair market value"
of the Company's common stock at the close on February 1, 2001 and
February 1, 2002.
During the fiscal 2000, the Company entered into an agreement with a
director to issue 3,200,000 common shares of the Company to the
director in consideration of the relinquishment of all entitlements
under the Stock Appreciation Rights referred to above.
b) On December 9, 1999, the Company entered into two licence agreements
with Brocker Technology Group (NZ) Limited, a publicly-held New Zealand
corporation. One licence agreement covers New Zealand and the other
covers Australia. The agreements grant Brocker the exclusive licence to
use, market, distribute and sublicense the Direct Connect software
throughout Australia and New Zealand.
The Company will be entitled to a licence fee from Brocker for each
Direct Connect licence activated for Brocker. Licence fees from Brocker
are payable quarterly. The term of the agreement with Brocker is one
year, upon expiration of which, Brocker may renew the agreement for one
additional year. The agreement may be terminated by either party
following an uncured breach of the agreement by the other parties, or
upon a party's liquidation, bankruptcy or similar event.
The agreement does not result in any significant funding obligations or
contingent liabilities for the Company.
c) The Company leases premises at an annual minimum rental of $10,840
until July 31, 2002.
F-18
50
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(STATED IN U.S. DOLLARS)
9. SUBSEQUENT EVENT
Subsequent to July 31, 2000, the Company issued 12,500 common shares on
the exercise of options for total proceeds of $5,000.
10. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
current year's presentation.
F-19
51
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001
(STATED IN U.S. DOLLARS)
F-20
52
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(STATED IN U.S. DOLLARS)
January 31 July 31
2001 2000
------------ ------------
ASSETS
CURRENT
Cash $ 4,511 $ 154,421
Accounts receivable 29,174 23,927
Prepaid expenses 4,356 2,133
Due from director -- 178,490
------------ ------------
38,041 358,971
CAPITAL ASSETS 64,106 89,688
INTANGIBLES 464,545 635,687
------------ ------------
$ 566,692 $ 1,084,346
============ ============
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 97,746 $ 143,787
Due to director 137,447 10,691
Notes payable 35,723 36,035
Deferred revenue 627 --
------------ ------------
271,543 190,513
------------ ------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK
Authorized:
80,000,000 common shares, par value $0.001
10,000,000 preferred shares, par value $0.01
Issued and outstanding:
47,481,441 common shares at January 31, 2001
43,153,941 common shares at July 31, 2000 1,148,145 1,143,817
Additional paid in capital 12,897,319 11,330,697
NOTE RECEIVABLE (Note 2) (1,211,573) --
DEFICIT (12,454,496) (11,566,154)
OTHER (84,246) (14,527)
------------ ------------
295,149 893,833
------------ ------------
$ 566,692 $ 1,084,346
============ ============
F-21
53
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(STATED IN U.S. DOLLARS)
Inception
Three Months Ended Six Months Ended March 19
January 31 January 31 1996 to
------------------------------ ------------------------------ January 31
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
REVENUE $ 685 $ 1,720 $ 1,662 $ 1,771 $ 450,047
------------ ------------ ------------ ------------ ------------
EXPENSES
Advertising and promotion 150,376 36,211 185,629 49,812 874,436
Amortization of intangibles 85,571 85,570 171,142 171,140 604,692
Amortization of capital assets 18,801 16,807 37,498 32,606 269,998
Amortization of convertible note
discount -- 86,211 -- 86,211 787,382
Bank charges and interest 600 754 1,847 4,263 59,970
Contract cancellation 80,500 -- 80,500 -- 842,500
Loss on disposal of capital assets -- -- 774 -- 774
Office and sundry 10,477 6,057 25,789 16,972 226,234
Professional fees 31,442 28,915 59,501 84,805 357,262
Rent and utilities 5,433 5,320 10,793 12,908 119,178
Software development 460 -- 5,860 -- 87,171
Software support -- 66,000 -- 66,000 132,000
Telephone 12,734 7,843 26,104 12,535 306,279
Transfer agent and filing fees 745 1,000 6,354 4,000 31,712
Travel 7,210 12,681 14,606 24,464 198,970
Salaries and benefits 155,302 1,739,977 265,327 1,810,074 7,736,691
------------ ------------ ------------ ------------ ------------
559,651 2,060,346 891,724 2,375,790 12,635,249
------------ ------------ ------------ ------------ ------------
LOSS BEFORE THE FOLLOWING 558,966 2,058,626 890,062 2,374,019 12,185,202
Forgiveness of debt -- -- -- -- (230,961)
Write-down of investments -- -- -- -- 99,028
Interest income -- -- (1,720) -- (1,720)
------------ ------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD 558,966 2,058,626 888,342 2,374,019 $ 12,051,549
============
ACCUMULATED DEFICIT, BEGINNING OF PERIOD 11,895,530 7,340,705 11,566,154 7,025,312
------------ ------------ ------------ ------------
ACCUMULATED DEFICIT, END OF PERIOD $ 12,454,496 $ 9,399,331 $ 12,454,496 $ 9,399,331
============ ============ ============ ============
LOSS PER SHARE $ (0.01) $ (0.06) $ (0.02) $ (0.07)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 45,431,441 36,294,096 44,987,692 36,294,096
============ ============ ============ ============
COMPREHENSIVE INCOME
Net loss for the period $ (558,966) $ (2,058,626) $ (888,342) $ (2,374,019)
Foreign currency translation
adjustment (9,598) (5,277) (8,375) (12,758)
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (568,564) $ (2,063,903) $ (896,717) $ (2,386,777)
============ ============ ============ ============
F-22
54
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN U.S. DOLLARS)
Inception
Three Months Ended Six Months Ended March 19
January 31 January 31 1996 to
---------------------------- ---------------------------- January 31
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Loss for the period $ (558,966) $ (2,058,626) $ (888,342) $ (2,374,019) $(12,201,216)
------------ ------------ ------------ ------------ ------------
ADJUSTMENTS TO RECONCILE LOSS TO NET CASH USED BY
OPERATING ACTIVITIES
Stock issued for other than cash 235,083 1,816,211 243,033 1,816,211 7,740,112
Amortization 104,372 69,377 208,640 203,746 1,784,239
Loss on disposal of capital assets -- -- 774 -- 774
Write-down of investments -- -- -- -- 99,028
Forgiveness of debt -- -- -- -- (230,961)
Change in accounts receivable (123) 8,836 (5,247) 7,346 (29,174)
Change in due from director 94,370 -- 178,490 -- --
Change in prepaid expenses 10,115 (26) (2,223) (1,857) (4,356)
Change in accounts payable and accrued
liabilities (12,779) (56,599) (46,041) (45,482) 97,746
Change in due to director 136,550 34,077 126,756 (41,590) 137,447
Change in deferred revenue (279) -- 627 -- 627
------------ ------------ ------------ ------------ ------------
TOTAL ADJUSTMENTS 567,309 1,803,722 704,809 1,938,374 9,595,482
------------ ------------ ------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES 8,343 (254,904) (183,533) (435,645) (2,605,734)
------------ ------------ ------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Capital assets (2,562) (8,417) (13,799) (15,410) (335,989)
Intangibles -- -- -- -- (81,404)
Excess of purchase price over net assets of
subsidiaries acquired -- -- -- -- (253,278)
Investments -- -- -- -- (160,068)
Proceeds on disposal of capital assets -- -- 1,109 -- 1,109
Proceeds on sale of investments -- -- -- -- 61,040
------------ ------------ ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,562) (8,417) (12,690) (15,410) (768,590)
------------ ------------ ------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Common stock issued -- -- 55,000 -- 1,797,803
Convertible notes -- 600,250 -- 600,250 1,337,250
Notes payable 528 502 (312) 1,468 216,684
------------ ------------ ------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 528 600,752 54,688 601,718 3,401,737
------------ ------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (9,598) (5,277) (8,375) (12,758) (22,902)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (3,289) 332,154 (149,910) 137,905 4,511
CASH, BEGINNING OF PERIOD 7,800 8,912 154,421 203,161 --
------------ ------------ ------------ ------------ ------------
CASH, END OF PERIOD $ 4,511 $ 341,066 $ 4,511 $ 341,066 $ 4,511
============ ============ ============ ============ ============
F-23
55
PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN U.S. DOLLARS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
The Company issued 3,000,000 common shares at a value of $1,200,000 on the
exercise of stock options by the sole director. Consideration was in the form of
an 8% note receivable (Note 2).
The Company issued 150,000 common shares at a value of $45,000 for salary
compensation.
The Company issued 250,000 common shares at a value of $57,500 for consulting
services under an investor relations agreement.
The Company issued 500,000 common shares at a value of $125,000 for consulting
services under an investor relations contract for a six month period commencing
November 16, 2000.
The Company issued 350,000 common shares at a value of $80,500 for the
termination of an investor relations contract.
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PHON-NET.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001
(STATED IN U.S. DOLLARS)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements as of January 31, 2001
included herein have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with United States generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
It is suggested that these consolidated financial statements be read in
conjunction with the July 31, 2000 audited consolidated financial
statements and notes thereto.
2. NOTE RECEIVABLE
On December 15, 2000, the Company issued 3,000,000 common shares pursuant
to the exercise of stock options by the sole director at a price of $0.40
per share. Consideration was received in the form of an 8% promissory note
with the principal and interest due and payable on June 15, 2002.
All of the common shares issued pursuant to the exercise of the options are
held in escrow, releasable upon payment of the promissory note.
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
Page
----
Available Information........................
Prospectus Summary...........................
Risk Factors.................................
Capitalization...............................
Use of Proceeds..............................
Price Range of Common Stock
and Dividend Policy.......................
Forward-Looking Statements...................
Management's Discussion and
Analysis or Plan of Operation..............
Business.....................................
Management...................................
Executive Compensation.......................
Certain Transactions.........................
Principal Shareholders.......................
Description of Securities....................
Selling Security Holders.....................
Plan of Distribution ........................
Shares Eligible for Future Sale..............
Legal Matters................................
Experts......................................
Additional Information.......................
Financial Statements.........................
3,132,011 SHARES
PHON-NET.COM, INC.
PROSPECTUS
________________, 2001
58
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act (the "Corporation Act") permits
the indemnification of directors, employees, officers and agents of Florida
corporations. The Company's Articles of Incorporation (the "Articles") and
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by the Corporation Act.
The provisions of the Corporation Act that authorize indemnification do
not eliminate the duty of care of a director, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Florida law. In addition, each director will continue to
be subject to liability for (a) violations of criminal laws, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (b) deriving an improper personal
benefit from a transaction, (c) voting for or assenting to an unlawful
distribution and (d) willful misconduct or conscious disregard for the best
interests of the Company in a proceeding by or in the right of a shareholder.
The statute does not affect a director's responsibilities under any other law,
such as the Federal securities laws.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the act and is therefore unenforceable.
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ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
distribution of the securities being registered are as follows:
SEC Registration and Filing Fee.................................. $ 106
Legal Fees and Expenses*......................................... 20,000
Accounting Fees and Expenses*.................................... 7,500
Financial Printing*.............................................. 3,000
Transfer Agent Fees*............................................. 1,250
Blue Sky Fees and Expenses*...................................... 750
Miscellaneous*................................................... 2,394
----------
TOTAL.................................................. $35,000
========
* Estimated
None of the foregoing expenses are being paid by the selling security holders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Effective October 5, 1998, Phon-Net Corp., a Nevada corporation,
acquired all of the issued and outstanding shares of Piedmont Technologies, Inc.
and its subsidiaries, The National-For-Sale Phone Company and VNETT Enterprises
Inc., in a reorganization changing the domicile of Piedmont from British
Columbia to Nevada. In connection with the reorganization, Phon-Net Corp. issued
5,000,000 shares of its common stock to the 46 former shareholders of Piedmont
Technologies Inc. The reorganization of Piedmont and the issuance of shares of
Phon-Net Corp. in connection therewith did not involve a sale of securities and
was, therefore, exempt from the registration requirements of the Securities Act
of 1933, as amended (the "Act") since the transaction was one of form and not
substance. Moreover, this was an extraterritorial transaction, effected outside
the United States, to non-U.S. persons, and by placing a legend on the
certificates, restricting transferability of the shares absent registration
under the Act or, in the opinion of counsel, the availability of an applicable
exemption therefrom, the Company took reasonable precautions to assure that the
securities came to rest abroad. The Company, therefore, also claims exemptions
from the registration requirements of the Act under Regulation S and/or the
SEC's position announced in Interpretive Release 4708, dated July 9, 1964
("Release 4708").
Effective October 5, 1998, the Company acquired all of the outstanding
shares of Phon-Net Corp., a Nevada corporation, and issued an aggregate of
11,410,000 shares of our common stock to the 48 former shareholders of Phon-Net
Corp. Pursuant to the Share Exchange Agreement governing the acquisition, (a)
each shareholder of Phon-Net Corp. represented that he or she was acquiring the
Company's shares for his or her own account, for investment purposes only and
not with a view to the resale or distribution thereof, and (b) the Company made
available to Phon-Net Corp. and its shareholders, specified information
concerning the Company, including corporate and shareholder records and audited
financial statements. In addition, all but two of the purchasers was a former
shareholder of Phon-Net Corp. and was fully familiar with the business of
Phon-Net (with such two shareholders being attorneys who, from time to time, had
represented Phon-Net and were familiar with its operations). Therefore, each of
such persons was "sophisticated" within the meaning of regulations promulgated
under Federal securities laws. As a result, the transaction was exempt from the
registration requirements of the Act, by reason of Section 4(2) of the Act and
the rules and regulations thereunder, including, without limitation, Rule 506.
Moreover, this was an extraterritorial transaction, effected outside the United
States, to non-U.S. persons, and by placing a legend on the certificates,
restricting transferability of the shares absent registration under the Act or,
in the opinion of counsel, the
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availability of an applicable exemption therefrom, the Company took reasonable
precautions to assure that the securities came to rest abroad. The Company,
therefore, also claims exemptions from the registration requirements of the Act
under Regulation S and/or the SEC's position announced in Release 4708.
On or about November 1, 1998, the Company issued 200,000 shares of
common stock, valued at $20,000 or $.10 per share, to RCS Financial Group
("RCS"), as consideration for services provided to the Company. The services
provided by RCS consisted of identifying and introducing the Company to
prospective reverse acquisition candidates and providing guidance in connection
with structuring such an acquisition. RCS provides no on-going services to the
Company. The issuance of these shares was exempt from the registration
requirements of the Act by reason of Rule 504 of Regulation D under the Act.
On or about November 1, 1998, the Company issued 350,000 shares of
common stock, valued at $35,000 or $.10 per share, to New Iberian Equity
Managers Ltd. ("New Iberian"). The shares were issued to replace 350,000
registered shares that were delivered by New Iberian to Schenstead, Woytkiw $
Associates ("SWA"), in payment of a debt of the Company. The debt was incurred
by the Company for services rendered to it by SWA in preparing a profile of the
Company for dissemination to brokers, market-makers, other interested members of
the investment community and those interested in the Company's products and
technology, its handling of telephone inquiries including those in response
thereto, as well as for providing introductions to market-makers and funding
sources. Neither New Iberia nor SWA provides on-going services to the Company.
The issuance of these shares was exempt from the registration requirements of
the Act by reason of Rule 504 of Regulation D under the Act.
On or about January 15, 1999, the Company issued an aggregate of
115,000 shares of common stock to Patrick Braid (as to 45,000 shares), James
Kyle (as to 45,000 shares) and Todd Violet (as to 25,000 shares), valued in the
aggregate at $25,000 or approximately $.217 per share. Messrs. Kyle and Braid
are principals of Kason, Inc., a former provider of product marketing and
business and financial consulting services to the Company. The shares were
issued, at the request of Messrs. Kyle and Braid, as an inducement for them to
cause Kason, Inc. to enter into agreements with the Company. Neither Kason, Inc.
nor Messrs. Kyle or Braid provides any continuing services to the Company. The
issuance of these shares was exempt from the registration requirements of the
Act by reason of Rule 504 of Regulation D under the Act. The shares were issued
to Mr. Violet as partial consideration for a $21,000 loan to the Company, as
well as for identifying and introducing the Company to prospective market-makers
and sources of funding. He provides no continuing services to the Company.
On or about January 15, 1999, the Company issued 10,000 shares of
common stock to L. J. Hassey for a purchase price of $5,000 or $.50 per share.
The issuance of these shares was exempt from the registration requirements of
the Act by reason of Rule 504 of Regulation D under the Act.
Between February 9 and 12, 1999, the Company issued 230,000 shares of
common stock to J. Prince, Inc., for a purchase price of $100,000 or
approximately $.435 per share. The issuance of these shares was exempt from the
registration requirements of the Act by reason of Rule 504 of Regulation D under
the Act.
On or about March 5, 1999, the Company issued 220,000 shares of common
stock to Roger Betterton for a purchase price of $50,000 or approximately $.23
per share. Mr. Betterton, individually
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and through Quad-Linq Systems, Inc., a corporation owned by Mr. Betterton and
Christopher Georgelin, provides software development services to the Company.
Accordingly, the issuance of these shares was exempt from the registration
requirements of the Act by reason of Rule 504 under Regulation D of the Act.
On or about March 5, 1999, the Company issued 40,000 shares of common
stock to Bryce Boucher as consideration for printing services provided to the
Company valued at $20,000 or $.50 per share. The issuance of these shares was
exempt from the registration requirements of the Act by reason of Rule 504 of
Regulation D under the Act.
On or about March 24, 1999, the Company issued convertible promissory
notes in the aggregate principal amount of $737,000 to five accredited
investors, pursuant to Rule 504 of Regulation D of the Act. The notes bear
interest at the rate of 10% per annum and are convertible into shares of the
Company's common stock at the lower of $.50 per share or 70% of the average
closing price for the common stock over the five trading days immediately
preceding the conversion date. As of April 30, 1999 all of the notes had been
converted into an aggregate of 2,707,430 shares of common stock. Cash interest
payments of $4,278.91 have been made on the notes, and an additional $315,857 in
interest expense has been recorded as a result of the discount from fair market
value of the shares issued on conversion of the notes.
On or about May 1, 1999, the Company issued 8,085,000 shares of common
stock to Brian Collins, the Company's President, CEO and sole director, an
accredited investor. The shares were issued pursuant to the Company's
acquisition of Phon-Net Corp., as consideration for the satisfaction of certain
obligations contained in the acquisition agreement. In addition, the shares
issued contained a legend restricting their transferability absent registration
under the Act or an available exemption therefrom. The shares were issued in
reliance upon exemptions under Sections 4(2) and/or 4(6) of the Act and the
rules and regulations thereunder, including, without limitation, Rule 506.
Moreover, this was an extraterritorial transaction, effected outside the United
States, to a non-U.S. person, and by placing a legend on the certificates,
restricting transferability of the shares absent registration under the Act or,
in the opinion of counsel, the availability of an applicable exemption
therefrom, the Company took reasonable precautions to assure that the securities
came to rest abroad. The Company, therefore, also claims exemptions from the
registration requirements of the Act under Regulation S and/or the SEC's
position announced in Release 4708.
On or about May 19, 1999, the Company issued 400,000 shares of common
stock, having a market value of $164,000, to Market Survey's International,
Inc., as consideration for public relations services to be provided to the
Company. Market Survey's International, Inc., whose beneficial owner is Mark
Vinci, no longer provides services to the Company. It had access to information
concerning the Company, has such experience in financial and business matters to
enable it to evaluate the risks and merits of acquiring such shares, and was,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. In addition, the shares issued contained a legend
restricting their transferability absent registration under the Act or an
available exemption therefrom. Accordingly, this transaction was exempt from the
registration requirements of the Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, including, without limitation, Rule 506.
On or about May 28, 1999, the Company issued 60,000 shares, having a
market value of $20,500, to 1st Net Technologies, Inc. (OTCBB:FNTT), which,
along with a $2,000 fee, were paid as
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consideration for public relations, marketing and database services to be
provided for the Company. 1st Net Technologies, Inc. no longer provides services
to the Company. It had access to information concerning the Company, has such
experience in financial and business matters to enable it to evaluate the risks
and merits of acquiring such shares, and was, therefore, "sophisticated" within
the meaning of regulations promulgated under Federal securities laws. In
addition, the shares issued contained a legend restricting their transferability
absent registration under the Act or an available exemption therefrom.
Accordingly, this transaction was exempt from the registration requirements of
the Act by reason of Section 4(2) of the Act and the rules and regulations
thereunder, including, without limitation, Rule 506.
On or about March 5, 1999 the Company issued 250,000 shares of common
stock, having a market value of $102,500, to Kason, Inc., as consideration for
product distribution and financial and business consulting services to be
rendered to the Company. The beneficial owners of Kason, Inc. are James Kyle and
Patrick Braid. In February 2000, we issued an additional 200,000 shares, having
a market value of $762,500, to Kason, Inc. and its affiliate in consideration of
termination of the distribution agreement. The Company paid a fee of 5,000
shares, having a market value of $18,313, to Bryce Boucher, a third-party
intermediary, for his services in negotiating the terms of the termination
agreement. Kason, Inc., its affiliate and Mr. Boucher had access to information
concerning the Company, have such knowledge and experience in financial and
business matters to enable it to evaluate the risks and merits of acquiring such
shares, and were, therefore, "sophisticated" within the meaning of regulations
promulgated under Federal securities laws. In addition, the shares issued
contained a legend restricting their transferability absent registration under
the Act or an available exemption therefrom. Accordingly, the issuance of these
shares is exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder, including,
without limitation, Rule 506.
On or about May 28, 1999, the Company issued an aggregate of 200,000
shares of common stock, valued at $68,000, to Charles Jarvis and Karen Argone,
its principals, in consideration of market development and sales and promotion
of the Company's products. BCD Online and its principals had access to
information concerning the Company, has such knowledge and experience in
financial and business matters to enable it to evaluate the risks and merits of
acquiring such shares, and were, therefore, "sophisticated" within the meaning
of regulations promulgated under Federal securities laws. In addition, the
shares issued contained a legend restricting their transferability absent
registration under the Act or an available exemption therefrom. Accordingly, the
issuance of these shares is exempt from the registration requirements of the Act
by reason of Section 4(2) of the Act and the rules and regulations thereunder,
including, without limitation, Rule 506.
On or about July 1, 1999, the Company issued 5,000,000 shares of common
stock, valued at $1,250,000, to Brian Collins, as an inducement to provide his
employment services to the Company. Mr. Collins is an executive officer and
director of the Company and is fully familiar with the business of the Company.
In addition, the shares issued contained a legend restricting their
transferability absent registration under the Act or an available exemption
therefrom. Accordingly, the issuance of these shares is exempt from the
registration requirements of the Act by reason of Sections 4(2) and 4(6) of the
Act and the rules and regulations thereunder, including, without limitation,
Rule 506. Moreover, this was an extraterritorial transaction, effected outside
the United States, to a non-U.S. person, and by placing a legend on the
certificates, restricting transferability of the shares absent registration
under the Act or, in the opinion of counsel, the availability of an applicable
exemption therefrom, the Company took reasonable precautions to assure that the
securities came to rest abroad. The Company, therefore, also
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claims exemptions from the registration requirements of the Act under Regulation
S and/or the SEC's position announced in Release 4708.
On or about July 1, 1999, the Company issued an aggregate of 3,000,000
shares of common stock and options to purchase 2,000,000 shares of common stock,
valued in the aggregate at $1,110,000, to Quad-Linq Software, Inc. and Roger
Betterton, Christopher Georgelin and Seidmehdi Seidbagherzadeh, its three
principals, in consideration of the relinquishment of ownership of and net
revenue rights to the Company's Direct Connect software. The investors had
access to information concerning the Company, have such knowledge and experience
in financial and business matters to enable them to evaluate the risks and
merits of acquiring such shares, and were, therefore, "sophisticated" within the
meaning of regulations promulgated under Federal securities laws. In addition,
the shares issued contained a legend restricting their transferability absent
registration under the Act or an available exemption therefrom. Accordingly, the
issuance of these shares is exempt from the registration requirements of the Act
by reason of Section 4(2) of the Act and the rules and regulations thereunder,
including, without limitation, Rule 506. Moreover, this was an extraterritorial
transaction, effected outside the United States, to non-U.S. persons, and by
placing a legend on the certificates, restricting transferability of the shares
absent registration under the Act or, in the opinion of counsel, the
availability of an applicable exemption therefrom, the Company took reasonable
precautions to assure that the securities came to rest abroad. The Company,
therefore, also claims exemptions from the registration requirements of the Act
under Regulation S and/or the SEC's position announced in Release 4708. On
August 21, 2000, the Company issued 500,000 shares to Roger Betterton upon the
exercise of a portion of his option. The shares that were issued contained a
legend restricting their transferability absent registration under the Act or an
available exemption therefrom.
On or about July 1, 1999, the Company issued 100,000 shares of common
stock, valued at $27,000, to attorneys with Atlas Pearlman, P.A. ("AP"), counsel
to the Company. The investors had access to information concerning the Company
and has such knowledge and experience in financial and business matters to
enable it to evaluate the risks and merits of acquiring such shares, and were,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. In addition, the shares issued contained a legend
restricting their transferability absent registration under the Act or an
available exemption therefrom. Accordingly, the issuance of these shares is
exempt from the registration requirements of the Act by reason of Section 4(2)
of the Act and the rules and regulations thereunder, including, without
limitation, Rule 506.
On or about November 1, 1999, the Company agreed to issue 300,000
shares of common stock, to Sloan Young, pursuant to the terms of his employment
agreement with the Company. Pursuant to the agreement, 100,000 shares, valued at
$9,375, were issued on November 1, 1999, 100,000 shares, valued at $30,000, were
issued on November 1, 2000 and 100,000 shares are to be issued on November 1,
2001. In addition, on October 11, 2000, the Company issued 50,000 shares ,
valued at $15,000, to Mr. Young as a bonus for services rendered during the
fiscal year ended July 31, 2000. Mr. Young is an executive officer of the
Company and is fully familiar with the business of the Company. In addition, the
shares issued contained a legend restricting their transferability absent
registration under the Act or an available exemption therefrom. Accordingly, the
issuance of these shares is exempt from the registration requirements of the Act
by reason of Sections 4(2) and 4(6) of the Act and the rules and regulations
thereunder, including, without limitation, Rule 506. Moreover, this was an
extraterritorial transaction, effected outside the United States, to a non-U.S.
person, and by placing a legend on the certificates, restricting transferability
of the shares absent registration under the Act or, in the opinion of counsel,
the
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availability of an applicable exemption therefrom, the Company took reasonable
precautions to assure that the securities came to rest abroad. The Company,
therefore, also claims exemptions from the registration requirements of the Act
under Regulation S and/or the SEC's position announced in Release 4708.
On December 1, 1999, the Company granted an option to AMYX Corporation
to purchase 1,000,000 shares of common stock at an exercise price of $.40 per
share until July 31, 2000. Subject to exercise of such option, the Company
granted AMYX Corporation a second option to purchase 1,000,000 shares at an
exercise price of $1.00 per share until December 31, 2000. The options were
valued, in the aggregate, at $276,326. The beneficial owner of AMYX Corporation
is Jim Mitchell. The options were granted as consideration for investor
relations services to be provided to European investors, including providing
introductions to members of the European investment community, disseminating
corporate promotional materials, drafting corporate promotional materials
including press releases and assisting in capital raising, if so requested by
the Company. AMYX Corporation had access to information concerning the Company,
has such knowledge and experience in financial and business matters to enable it
to evaluate the risks and merits of investing in the Company, and was,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. On February 11, 2000, AMYX Corporation exercised and
paid for the initial option to purchase 1,000,000 shares, and in October 2000,
AMYX exercised 50,000 shares of the second option and paid the $50,000 exercise
price therefor. The 950,000 share balance of the second option has expired
unexercised. The shares that were issued contained a legend restricting their
transferability absent registration under the Act or an available exemption
therefrom. Accordingly, the grant of options and issuance of shares is exempt
from the registration requirements of the Act by reason of Section 4(2) of the
Act and the rules and regulations thereunder, including, without limitation,
Rule 506. Moreover, this was an extraterritorial transaction, effected outside
the United States, to non-U.S. persons, and by placing a legend on the
certificates, restricting transferability of the shares absent registration
under the Act or, in the opinion of counsel, the availability of an applicable
exemption therefrom, the Company took reasonable precautions to assure that the
securities came to rest abroad. The Company, therefore, also claims exemptions
from the registration requirements of the Act under Regulation S and/or the
SEC's position announced in Release 4708
In December 1999, the Company agreed to issue an aggregate of 500,000
shares of common stock, and granted an option to purchase 200,000 shares of
common stock to Alliance Corporate Services, Inc. The shares are issuable at the
rate of 125,000 per quarter, the first installment of which was issued on
February 17, 2000 and the second on June 20, 2000. The balance of 250,000 shares
were issued on December 14, 2000. Options to purchase 100,000 shares carry an
exercise price of $.40 per share and may be exercised until February 15, 2000.
Options to purchase the remaining 100,000 shares carry an exercise price of $.50
per share and may be exercised until May 15, 2000. The shares and options were
valued, in the aggregate, at $69,755. The shares were issued and options were
granted as consideration for investor relations and marketing consulting
services to be provided to Canadian investors, including providing introductions
to members of the Canadian investment community, disseminating corporate
promotional materials, drafting corporate promotional materials including press
releases and assisting in capital raising, if so requested by the Company.
Alliance Corporate Services, Inc. had access to information concerning the
Company, has such knowledge and experience in financial and business matters to
enable it to evaluate the risks and merits of investing in the Company, and was,
therefore, "sophisticated" within the meaning of regulations promulgated under
Federal securities laws. On February 15, 2000, Alliance Corporate Services, Inc.
exercised and paid for the option to purchase
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100,000 shares, on behalf of its principals Peter Laipnieks and Randy Hayward.
The second option was not exercised and has expired. On October 11, 2000, the
Company issued 15,000 shares to Bryce Boucher, in consideration for assistance
provided to Alliance Corporate Services, Inc. with respect to investor relations
in the United States. All of the shares that were issued contained a legend
restricting their transferability absent registration under the Act or an
available exemption therefrom. Accordingly, the grant of options and issuance of
shares is exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder, including,
without limitation, Rule 506. Moreover, this was an extraterritorial
transaction, effected outside the United States, to non- U.S. persons, and by
placing a legend on the certificates, restricting transferability of the shares
absent registration under the Act or, in the opinion of counsel, the
availability of an applicable exemption therefrom, the Company took reasonable
precautions to assure that the securities came to rest abroad. The Company,
therefore, also claims exemptions from the registration requirements of the Act
under Regulation S and/or the SEC's position announced in Release 4708.
On December 31, 1999, the Company issued 3,200,000 shares of its common
stock, valued at $1,664,000, to Brian Collins, and Mr. Collins surrendered all
stock appreciation rights previously granted to him under his employment
agreement. Mr. Collins is an executive officer of the Company and the shares
that were issued contained a legend restricting their transferability absent
registration under the Act or an available exemption therefrom. Accordingly, the
issuance of these shares is exempt from the registration provisions of the Act
by reason of Sections 4(2) and 4(6) of the Act and the rules and regulations
thereunder, including, without limitation, Rule 506. Moreover, this was an
extraterritorial transaction, effected outside the United States, to a non-U.S.
person, and by placing a legend on the certificates, restricting transferability
of the shares absent registration under the Act or, in the opinion of counsel,
the availability of an applicable exemption therefrom, the Company took
reasonable precautions to assure that the securities came to rest abroad. The
Company, therefore, also claims exemptions from the registration requirements of
the Act under Regulation S and/or the SEC's position announced in Release 4708.
In December 1999 and January 2000, we issued an aggregate of $600,250
principal amount of our 8% convertible promissory notes, for an aggregate
purchase price of $600,250. The securities were sold to 27 non-U.S. persons.
This was an extraterritorial transaction, effected outside the United States, to
non-U.S. persons, and was (a) not subject to the registration provisions of
Federal securities laws and (b) was exempt from the registration requirements
thereof pursuant to the provisions of Regulation S. The purchasers had access to
financial and other information about us and was afforded the opportunity to ask
questions of us concerning our operations and the terms of the offering. The
notes that were issued contained a legend restricting their transferability
absent registration under the Act or an available exemption therefrom. Each
purchaser represented that he was acquiring the notes for investment purposes
and the documentation evidencing the transaction contained the disclosure
required by Regulation S. Effective June 30, 2000, the principal amount of the
promissory notes, and accrued interest thereon, was converted into an aggregate
of 1,782,011 shares of common stock and warrants to purchase 891,010 shares of
common stock. The shares and warrants that were issued contained a legend
restricting their transferability absent registration under the Act or an
available exemption therefrom.
On December 14, 2000, the Company issued 500,000 shares of common stock
valued at $125,000 and warrants to purchase 500,000 shares of common stock,
valued at nil, to iBanc Group, Inc. The beneficial owner of iBanc Group, Inc. is
Bernard Essers. The shares and warrants were issued as consideration for
financial advisory services to be provided. iBanc Group, Inc. had access to
information
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concerning the Company, has such knowledge and experience in financial and
business matters to enable it to evaluate the risks and merits of investing in
the Company, and was, therefore, "sophisticated" within the meaning of
regulations promulgated under Federal securities laws. The shares that were
issued contained a legend restricting their transferability absent registration
under the Act or an available exemption therefrom. Accordingly, the issuance of
the shares and warrants are exempt from the registration requirements of the Act
by reason of Section 4(2) of the Act and the rules and regulations thereunder.
On December 14, 2000, the Company issued an aggregate of 350,000 shares
of common stock to Adam Kriftcher and two of his designees, in connection with
the settlement of a claim arising out of a service agreement between the Company
and an entity controlled by Mr. Kriftcher. Mr. Kriftcher had access to
information concerning the Company, has such knowledge and experience in
financial and business matters to enable it to evaluate the risks and merits of
investing in the Company, and was, therefore, "sophisticated" within the meaning
of regulations promulgated under Federal securities laws. The shares that were
issued contained a legend restricting their transferability absent registration
under the Act or an available exemption therefrom. Accordingly, the issuance of
the shares is exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder.
On December 18, 2000, the Company issued 3,000,000 shares to Brian
Collins, upon exercise of a stock option granted to Mr. Collins in connection
with his employment by the Company. The $1,200,000 exercise price was paid to
the Company by delivery of a promissory note, the maturity date of which is June
15, 2001. The shares are being held in escrow and will be released to Mr.
Collins as and when note payments are made. Mr. Collins is an executive officer
of the Company and is fully familiar with the business of the Company. In
addition, the shares issued contained a legend restricting their transferability
absent registration under the Act or an available exemption therefrom.
Accordingly, the issuance of these shares is exempt from the registration
requirements of the Act by reason of Sections 4(2) and 4(6) of the Act and the
rules and regulations thereunder. Moreover, this was an extraterritorial
transaction, effected outside the United States, to a non-U.S. person, and by
placing a legend on the certificates, restricting transferability of the shares
absent registration under the Act or, in the opinion of counsel, the
availability of an applicable exemption therefrom, the Company took reasonable
precautions to assure that the securities came to rest abroad. The Company,
therefore, also claims exemptions from the registration requirements of the Act
under Regulation S and/or the SEC's position announced in Release 4708.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
- ----------- -----------------------
2 Agreement of Share Exchange between XGA Golf International, Inc.
and Phon-Net Corp.(1)
3.1(a) Articles of Incorporation of XGA Golf International, Inc.(1)
3.1(b) Articles of Amendment changing name to Agrosol, Inc.(1)
3.1(c) Articles of Amendment changing name to Phon-Net Corporation(1)
3.1(d) Articles of Amendment changing name to Phon-Net.com, Inc.(1)
3.1(e) Articles of Amendment increasing authorized capital(1)
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3.2 Bylaws(1)
5 Opinion and Consent of Atlas Pearlman, P.A.(2)
10.1 Stock Option Plan(1)
10.2 Employment Agreement with Brian Collins(1)
10.3 Office Lease for 750 Pender Street(1)
10.4 Agreement, as amended, with Quad-Linq Software, Inc.(1)
10.5 Employment Agreement with Sloan Young(1)
10.6 License Agreement with Transcontinental Group(1)
10.7 Agreement with Wazzu Corporation(1)
10.8 Agreements with Brian Collins re: SARs(1)
10.9 License Agreement with Brocker Technology Group (NZ)
Ltd.(Australia)(1)
10.10 License Agreement with Brocker Technology Group (NZ) Ltd.(New
Zealand)(1)
10.11 License Distribution Agreement with Volt Information Sciences,
Inc.(1)
10.12 Form of 8% Convertible Promissory Note, including Form of Common
Stock Purchase Warrant(1)
10.13 Amendment to License Agreement with Transcontinental Group(1)
10.14 Agreements with Alliance Corporate Services(1)
10.15 Agreements with AMYX Corporation(1)
10.16 Letter of clarification with Roger L. Betterton and Christopher
E. Georgelin(1)
10.17 Termination Agreement with Volt Information Sciences, Inc.(1)
23(i) Consent of Atlas Pearlman, P.A. (see Exhibit 5)(2)
23(ii) Consent of Morgan & Company(2)
21 Subsidiaries of Registrant(1)
- ------------------
(1) Incorporated by reference to exhibits with the corresponding numbers
filed with our registration statement on Form SB-2 (File No.
333-86031).
(2) Filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
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Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Vancouver, British Columbia on February 27, 2001.
PHON-NET.COM, INC.
By: /s/ Brian Collins
-----------------------------------
Brian Collins
Chairman, Chief Executive
Officer, Principal Financial
and Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this Form
SB-2 registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Brian Collins Chairman of the Board, Chief February 27, 2001
- ------------------------------------ Executive Officer, President and
Brian Collins Sole Director (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Sloan Young Vice President of Technology February 27, 2001
- --------------------------- and Operations
Sloan Young
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