================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________.
Commission File Number 0-31949
INNOFONE.COM, INCORPORATED
(Exact name of Company as specified in its charter)
NEVADA 980202313
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
600 NORTH PINE ISLAND ROAD, SUITE 450, PLANTATION, FLORIDA 33324
---------------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: 954-315-0341
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the Company was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,386,095
-----------
As of October 1, 2001 the aggregate market value of voting stock held
by non-affiliates of the Company, based on the average of the high and low sales
prices of such stock reported by the National Association of Securities Dealers,
Inc. on such date, was approximately $1,161,924.30.
There were 34,234,837 shares of Company's common stock outstanding as
of September 30, 2001.
DOCUMENTS INCORPORATED BY REFERENCE: None
================================================================================
TABLE OF CONTENTS
Item No. Description Page No.
Item 1. Description of Business 1
Item 2. Description of Property 1
Item 3. Legal Proceedings 1
Item 4. Submission of Matters to a Vote of Security Holders 1
Item 5. Market for Common Equity and Related Stockholder Matters 1
Item 6. Management's Discussion and Analysis or Plan of Operation 2
Item 7. Financial Statements 7
Item 8. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure 7
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act 8
Item 10. Executive Compensation 11
Item 11. Security Ownership of Certain Beneficial Owners and Management 14
Item 12. Certain Relationships and Related Transactions 15
Item 13. Exhibits, List and Reports on Form 8-K 16
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Innofone.com, Incorporated (the "Company") is a holding company that
does not conduct its own operations. As previously reported, our sole operating
subsidiary, Innofone Canada, Inc., has been adjudged bankrupt and is being
liquidated by a trustee. As a result, the Company suspended its business
operations on May 3, 2001. Until such date, the Company, through Innofone
Canada, offered residential and small business long distance telephone services,
calling cards, Internet access and cellular services through strategic
"partnerships" with industry leaders in the financial, retail and Internet
markets. For example, through a partnership with Visa Dejardins, the credit card
division of Quebec's largest financial institution, the Company had offered a
bundled service program of long distance, calling cards and cellular phone
services to Visa Desjardins credit card holders.
Please see Item 6, "Management's Discussion and Analysis or Plan of
Operation," for more information.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real estate. We currently lease
approximately 120 square feet of office space, which houses our executive
offices, at 600 North Pine Island Road, Plantation, Florida. The average monthly
rent is $1,100.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is currently traded on the National
Association of Securities Dealers Over the Counter Bulletin Board ("OTC Bulletin
Board"). The common stock had previously traded on the OTC Bulletin Board and
was delisted on September 1, 1999. From September 1, 1999 until the Company's
re-listing on the OTC Bulletin Board on March 27, 2001, our common stock traded
in the over-the-counter market in the United States.
For the period of June 30, 1999 through August 31, 1999, the range of
trading
prices of our common stock on the OTC Bulletin Board was a high of $1.50 and
a low of $.350.
The price ranges of trading in our common stock during the period our
common stock was delisted is as follows:
High Low
1999
----
9/1/99 - 9/30/99 $1.125 $.375
10/1/99 - 12/31/99 1.00 .125
2000
----
1/1/00 - 3/31/00 3.00 .297
4/1/00 - 6/30/00 1.797 .531
7/1/00 - 9/30/00 .703 .250
10/1/00 - 12/31/00 .516 .156
2001
----
1/1/01 - 3/26/01 .344 .047
For the period March 27, 2001 to March 31, 2001, the range of trading
prices of our common stock on the OTC Bulletin Board was a high of $.094 and a
low of $.047. For the period of April 1, 2001 through June 30, 2001, the range
of trading prices on the OTC Bulletin Board was a high of $.100 and a low of
$.010.
The closing price of our common stock on the OTC Bulletin Board on
October 2, 2001 was $0.08 per share.
Please note that quotations on the OTC Bulletin Board represent
inter-dealer prices, without mark-ups, commissions, etc., and they may not
necessarily be indicative of actual sales prices.
As of September 30, 2001, we had 98 shareholders of record.
We have not paid any cash dividends to date.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto for the year ended June 30, 2001 included
elsewhere in this Report. This Annual Report on Form 10-KSB includes
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Words such as "may," "plans," "expects," "anticipates,"
"approximates," "believes," "estimates," "intends," "hopes," "potential," or
"continue", and variations of such words and similar expressions
2
are intended to identify such forward-looking statements. The Company intends
such forward-looking statements, all of which are qualified by this
statement, to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Litigation Securities Reform Act of 1995
and is including this statement for purposes of complying with these safe
harbor provisions. The Company has based these statements on its current
expectations and projections about future events. These forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected in these statements. Forward-looking statements include but
are not limited to:
o our expectations regarding the amount of our receivable from Innofone
Canada that we expect to recover; and
o our anticipated transaction with Digital Mico Distribution Canada, Inc., as
described below.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's views only as of the date
hereof. The Company is not obligated to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of the risks, uncertainties and assumptions to
which the Company and such forward-looking statements are subject, the
forward-looking events discussed in this Annual Report on Form 10-KSB might not
occur.
OVERVIEW
As previously reported, on May 3, 2001, a court adjudged our operating
subsidiary, Innofone Canada, Inc., bankrupt under the Bankruptcy and Insolvency
Act (Canada). During the period from January 15, 2001 to May 3, 2001, Innofone
Canada was delayed in billing all of its customers for long distance, cellular
and Internet services rendered. Raymond Chabot, Inc., the court-appointed
trustee, now has processed those billings and is in the process of liquidating
the assets of Innofone Canada.
As a result of the bankruptcy of Innofone Canada, the Company has
suspended its business operations. The Company has signed an Agreement and Plan
of Reorganization to acquire all of the common shares of Digital Micro
Distribution Canada, Inc. ("DMD"), owned by Director Nominee Sumit Majumdar, in
exchange for 67,000,000 shares of its common stock. The exchanged shares would
be "restricted securities" as defined under Rule 144(a) under the Securities Act
of 1993, as amended. Completion of the transaction is subject to obtaining the
necessary regulatory and third party consents and satisfaction of customary
conditions on closing. If the transaction is completed, the Company will have
100,000,000 shares of common stock issued and DMD will become the sole operating
subsidiary of the Company. As the former shareholders of DMD would hold 67% of
the outstanding common shares of the Company immediately subsequent to the
transaction, the transaction between the two companies will be accounted for as
a recapitalization of DMD effectively as if DMD had issued common shares for
3
consideration equal to the net monetary assets of the Company.
For further information on the bankruptcy, please refer to note 1(a) to
the consolidated financial statements of the Company included with this Annual
Report on Form 10-KSB. See also the Company's Current Report on Form 8-K filed
on September 25, 2001. In addition, if the DMD transaction or another
transaction is completed, the Company will file a Current Report on Form 8-K
describing the transaction and the Company's new business and organizational
structure within 15 days after the consummation of the transaction.
In the event that the transaction with DMD is not consummated, the
Company will continue to actively pursue other business opportunities through
either an acquisition or reverse merger. There can be no assurance that the
Company would be successful in locating or negotiating another agreement with
any other business entity.
REVENUES
Revenues for the year ended June 30, 2001 increased 88% to $1,386,095
from $736,127 for the year ended June 30, 2000. The revenue increase is due to
the increase in billable long distance calling minutes by our customer base.
Revenues from the year ended June 30, 2000 were generated by our Guaranteed
Lowest Rate (GLR(TM)) program customers acquired through our direct marketing
agents, while the revenues for the year ended June 30, 2001 reflect the customer
acquisition program with Visa Desjardins. For the year ended June 30, 2001,
approximately 80% of our revenue was generated from the Visa Desjardins customer
base with the remaining 20% coming from our GLR customer base. Approximately 95%
of our revenue for the year ended June 30, 2001 was from the resale of long
distance services to residential and small and medium sized businesses. The
remaining approximately 5% of revenue was from the resale of cellular services.
COST OF SALES AND GROSS MARGIN
As a result of our increased revenues, our cost of sales increased 83%
to $966,668 for the year ended June 30, 2001 as compared to $528,603 for the
year ended June 30, 2000.
Our gross profit increased 102% from $207,524 for the year ended June
30, 2000 to a gross profit of $419,427 for the year ended June 30, 2001. Our
gross profit as a percentage of sales for the year ended June 30, 2001 increased
slightly from 29% in 2000 to 30% in 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses for the year ended
June 30, 2001 decreased 33% to $3,349,725 as compared to $5,037,653 for the year
ended June 30, 2000. Included in our selling, general and administrative
expenses, however, are stock compensation expenses of $2,728,130 in 2000 and
$24,240 in 2001. Without the stock compensation expenses, our selling, general
and administrative expenses would have
4
been 44% higher in the year ended June 30, 2001, increasing from $2,309,523
in the year ended June 30, 2000 to $3,325,485 in 2001.
The major component of the selling, general and administrative expenses
for the year ended June 30, 2001 were customer acquisition costs paid to Visa
Desjardins and Equinox Marketing Services (who had handled our customer service
as well as our outbound telemarketing program) in the amount of $616,643, which
were 245% higher than the $179,000 in customer acquisition costs for the year
ended June 30, 2000. Management fees of $632,668 for the year ended June 30,
2001 were for Larry Hunt, Ron Crowe, Rick Quinney, Douglas Burdon and Nino
Sylvestri, although approximately $284,000 was accrued but not paid to the three
founding shareholders. These management fees were approximately 86% higher than
the management fees of $340,000 paid in the year ended June 30, 2000.
Professional fees of $560,615 for the year ended June 30, 2001 were
approximately 200% higher than the professional fees of $186,900 incurred for
the year ended June 30, 2000. This increase is the result of retaining new
attorneys to prepare our Form 10-SB filing with the SEC and legal fees in
defending the bankruptcy petition against Innofone Canada Inc. Billing costs of
$348,998 for the year ended June 30, 2001 were 24% lower than the $458,310 in
billing costs reported for the year ended June 30, 2000. The principal reason
for this decrease was that included in billing costs for fiscal 2000 were
one-time costs of approximately $372,000 that were incurred to develop, manage
and launch the Visez Juste billing program for Visa Desjardins. Excluding the
one-time costs for the Visa Desjardins program in fiscal 2000, billing costs
increased from $86,010 in 2000 to $348,998 in 2001. Finally, call center costs
of $213,761 and order fulfillment costs $194,022 were incurred for the year
ended June 30, 2001, as compared to call center costs of $162,700 and order
fulfillment costs of $71,900 for the year ended June 30, 2000. The remaining
selling, general and administrative costs included salaries, rent, travel costs,
bad debt expenses and other general office expenses which all were higher in the
year ended June 30, 2001 due to the increased activity from the Visa Desjardins
program.
AMORTIZATION
Amortization expense consists of the depreciation of our capital
assets. Amortization for the year ended June 30, 2001 increased to $109,408 as
compared to $94,585 for the year ended June 30, 2000. The relative increase in
amortization was the result of our acquiring new computer equipment for our
additional staff.
ADDITIONAL INTEREST
Additional interest represents the embedded beneficial conversion
feature of notes that are convertible into common stock at prices lower than the
market value of the stock at the time the notes were granted. Additional
interest for the year ended June 30, 2001 was zero as compared to $1,312,750 for
the year ended June 30, 2000.
5
INTEREST ON LONG-TERM DEBT AND BANK CHARGES
Interest on long-term debt and bank charges include interest on
long-term debt, interest charged on overdue accounts payable, and bank charges.
Interest on long-term debt and bank charges increased 28% from $25,083 for the
year ended June 30, 2000 to $32,003 for the year ended June 30, 2001. Increased
interest charges on overdue accounts payable to Innofone Canada was the major
reason for the increase.
LOSS ON INVESTMENT
The loss on investment during the year ended June 30, 2001 reflects the
decline in the value of warrants for the purchase of common stock in Axxent
Canada. In May 2001, Axxent Canada filed for protection under the Bankruptcy and
Insolvency Act (Canada), thereby rendering the warrants valueless.
NET GAIN ON BANKRUPTCY OF CANADIAN SUBSIDIARY
The net gain on bankruptcy of our Canadian subsidiary in the amount of
$1,416,614 represents the result of eliminating the assets and liabilities of
Innofone Canada Inc., due to its bankruptcy on May 3, 2001, from the
consolidation of the Company's accounts. Included in the elimination from the
consolidation of the Company's accounts was approximately $3,584,767 that
Innofone Canada owed to the Company. Since the liabilities exceeded the total
assets, the net result of the elimination is shown as a net gain on the
bankruptcy of Innofone Canada.
NET LOSS
Due to the above factors, our net loss decreased to $1,819,095 for the
year ended June 30, 2001 as compared to $6,262,547 for the year ended June 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the
proceeds from the sale and issuance of equity securities, loans from
stockholders and from bank financing. During the year ended June 30, 2001,
460,000 options were exercised generating proceeds of $72,000. In September
2000, we raised a total of $500,002 in two separate private placements totaling
1,000,004 units consisting of one share of common stock and one warrant to
purchase common stock at $1.00 per share. In October 2000, we raised $150,000
from an interest bearing loan which has rights to convert to common stock at
$0.30 per share and a nondetachable warrant to purchase common stock at $1.00
per share. In November and December 2000, we raised $200,000 in two separate
offerings of notes convertible into common stock at $0.30 per share and a
nondetachable warrant to purchase common stock at $0.75 per share. In January
2001, we were paid a set-up fee of $500,000 by ePHONE Telecom Inc., which for
accounting purposes has been initially recognized in our financial statements as
a loan pending determination of whether or not ePHONE will convert the loan into
common stock of the Company. As a
6
result of these activities, we raised $1,422,002 during the year ended June
30, 2001 to help finance our operations.
The above sales were made pursuant to the exemption from registration
set forth in section 4(2) of the Securities Act of 1933, as a transaction not
involving a public offering, and/or pursuant to the exemption from registration
set forth in Regulation S.
During the year ended June 30, 2001, the Company invested $78,646 in
fixed assets. This investment related to web site development costs for the
BizSmart program (through which we were to offer our products to customers of
the Canadian Imperial Bank of Commerce through their bizsmart.com shopping
portal) as well as other software and systems development costs relating to the
Visa Desjardins program. This compares to $141,942 invested in fixed asset
additions primarily relating to computers for additional staff and for the
HotCaller program (through which we had planned to launch a web-based, P.C. to
phone free long distance calling program) during the year ended June 30, 2000.
Due to the bankruptcy of Innofone Canada, our sole operating
subsidiary, the Company has no operating business and no assets except for its
claim as an unsecured creditor on a portion of the liquidation proceeds of
Innofone Canada. The Company is entitled to approximately 60%-70% of the
proceeds left after the secured creditors are paid in the amount of Can.
$340,000. Depending on the balance of the liquidation proceeds after the secured
claims are paid, the Company expects to receive between Can. $300,000 and Can.
$400,000 (approximately between US$190,000 and US$255,000). However, the receipt
of this amount, or of any proceeds at all, will be dependent upon, among other
factors, the actual amounts of unsecured claims that are made on Innofone
Canada, the ultimate determination of the claims of secured creditors and the
amount for which the Trustee is able to sell the business of Innofone Canada.
There can be no assurance that the Company will receive the amount of the
proceeds it is expecting, or that it will receive any proceeds at all from the
liquidation. In addition, approximately US$113,000 has been assigned to
creditors of the Company once the recoveries from the Canadian company are
realized.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is submitted in a separate section of this
report. See Index to Financial Statements on Page F-1 below for a list of the
financial statements being filed herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
7
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the current name and ages of the directors of the
Company, and those nominated to become directors, as of June 30, 2001:
Name Age Position/Office Term of Office Period Served
---- --- --------------- -------------- -------------
Larry J. Hunt 43 Director Annual June 1998 to Current
Richard Quinney 52 Director Annual June 1998 to Current
Stephane Solis 43 Director Annual May 2001 to Current
Bruce Boyden 46 Director Annual June 2001 to Current
Walter Pickering 52 Director Annual May 2001 to Current
Ronald Crowe* 62 Chairman Annual June 1998 to May 2001
Sumit Majumdar 25 Director Annual Nominee
Janne Vilhunen 30 Director Annual Nominee
Frank Jasek 41 Director Annual Nominee
* Mr. Crowe resigned as Chairman on May 25, 2001.
The following table sets forth the name and ages of the Company's executive
officers as of June 30, 2001:
Name Age Position/Office Period Served
---- --- --------------- -------------
Larry J. Hunt 43 President & CEO June 1998 to Current
Richard Quinney 52 CFO June 1998 to Current
Ronald Crowe* 62 Vice President of June 1998 to August 2001
Operations
* Mr. Crowe resigned as Vice President of Operations on August 6, 2001.
Larry J. Hunt: From June 1995 until June 1998, Mr. Hunt was the President of
Direct Quest Inc., a U.S. based Internet service provider, providing, among
other things, web-hosting, website design, and a multilingual internet directory
for communities throughout North America. While at Direct Quest, he established
Internet service operations in
8
Canada and the United States. Mr. Hunt has served as President, Chief
Executive Officer and a director of the Company since its inception. In
addition, he served as president of Innofone Canada, the Company's Canadian
operating subsidiary, from June 1998 through October 1999. He has also served
as Innofone Canada's Chief Executive Officer since June 1998.
Richard Quinney: From 1972 through early 1998, Mr. Quinney was employed by KPMG
(and its predecessor Peat Marwick Main) in various capacities, becoming a
partner in 1981. In February 1998, Mr. Quinney resigned from KPMG, and entered
into an affiliation with Collins Barrow, Chartered Accountants, through his
company Quinney & Associates, pursuant to which Mr. Quinney is a trustee in
bankruptcy. Mr. Quinney only pursues this business through referrals from
Collins Borrow, and spends no more than 10% of his time on this business. He has
served as Chief Financial Officer and as a director of the Company since its
inception on June 26, 1998.
Ronald Crowe: In 1989, Mr. Crowe formed Metrowide Communications, a company that
offered a flat rate long distance service along with a per minute long distance
service primarily in the Greater Toronto Area. In 1995 Metrowide Communications
was sold to ACC Telecommunications. (ACC Telecommunications was subsequently
acquired by AT&T Canada.) After the buyout, Mr. Crowe continued on as a
consultant to Metrowide to assist with the transition to the new owners until
the fall of 1995. As part of the sale of Metrowide, Mr. Crowe was subject to a
non-compete clause preventing him from doing business in the telecommunications
industry for a period of two years.
After leaving Metrowide, Mr. Crowe went into semi-retirement. In the
spring of 1996, he began working part-time on an Internet related worldwide
yellow page directory project referred to as Yelp. Mr. Crowe worked on the Yelp
project with two other partners until the fall of 1997 when they decided to
abandon the project. After the expiration of the non-compete clause, in April
1998, Mr. Crowe, Larry Hunt and Richard Quinney started Innofone Canada Inc. Mr.
Crowe resigned from his positions as Chairman of the Board and Vice President of
Operations on May 25, 2001 and August 6, 2001 respectively.
Stephane Solis: Mr. Solis is an independent consultant providing financial
services to emerging companies in the technology sector. Mr. Solis was
previously with Groome Capital.com Inc., leading that company's corporate
finance activities in Montreal. Prior to that, Mr. Solis co-founded GLS Capital
Inc. in 1993, an institutional research boutique specializing in the information
technology sector. Two years later, Mr. Solis sold GLS Capital to Yorkton
Securities Inc. and joined the corporate finance team heading the company's
Montreal operations. He holds a B.A in Political Sciences from the University of
Quebec and an M.A in Economics from McGill University. Mr. Solis currently
serves as Director on the board of Equilar Capital Corporation and its wholly
owned subsidiary Credit-Chip Corporation.
Bruce Boyden: Mr. Boyden is a barrister and solicitor in the Province of
Ontario, Canada, and a member of the Law Society of Upper Canada. He specializes
in corporate
9
and commercial law with an emphasis on corporate governance of public
companies. Mr. Boyden has been a director and officer of several emerging
companies. He joined the Company's board in June 2001.
Walter Pickering: Mr. Pickering joined the Innofone board with more than 23
years management experience, with the last 15 years being spent in the high tech
sector. As President of a management consulting firm in British Columbia (BC),
Canada, Mr. Pickering worked with major BC universities, companies, the National
Research Council, the Science Council of BC, and a large number of engineering
and R&D firms since 1987. For the past three years, he has also held the
position of Executive Director of the Canadian Institute for Market
Intelligence, an NRC-financed Institute. He has also had significant experience
in the past 10 years with international technology transfer in Asia and Central
Europe. Mr. Pickering has a Masters in Business, and has served on the Board of
several public companies, including Waverider (WAVC) and ePHONE (EPHO).
Sumit Majumdar: Mr. Majumdar is the founder of Digital Micro Distribution
Canada, Inc. and has extensive experience in the used and refurbished computer
distribution industry. He is a board level technician (certified in A+, MSP and
CNE) and is fully trained for assembly of PC's, software installation, network
configuration and internet connectivity. He has extensive experience in working
with Java, C++, Oracle 8.01, MS Access, HTML and XML. In August 1996, Mr.
Majumdar founded SME Technologies Inc., a high end computer retail store in
Burlington, Ontario, and sold it a year later after achieving sales in the start
up year of $480,000. In July 1997 he started a wholesale division for Burloak
Systems Inc., a computer retailer. In July 1998, Mr. Majumdar left Burloak
Systems Inc. and started Digital Micro Distribution Canada Inc.
Janne Vilhunen: Mr. Vilhunen, a native of Finland, received his BBA in May 1997
from Lander University in Greenwood SC. From August 1997 until May 1999, when he
graduated with an MBA specializing in corporate finance and international
business, he worked as a graduate assistant at SUNY Buffalo. During the summer
of 1998 Mr. Vilhunen worked as a business development intern with Outokumpu
American Brass Inc., of Buffalo, New York. After graduating, he joined Bloomberg
L.P. in Princeton, New Jersey as a research assistant to an equity analyst. Mr.
Vilhunen joined Digital Micro Distribution Canada, Inc. as CEO and General
Manager on August 1, 2001.
Frank Jasek: Mr. Jasek is a registered Chartered Accountant with over 15 years
of experience. He was instrumental in the founding of several publicly traded
companies. Mr. Jasek is currently a partner in the Prapevesis-Jasek accounting
firm. He has had extensive experience dealing with both US and Canadian based
companies, including experience in cross-border taxation and GAAP.
Richard Quinney, the Company's CFO and a director, is a brother-in-law
of Ronald Crowe, who is also the uncle of the wife of Larry Hunt, a director,
President, and CEO of the Company. All three are holders of greater than five
percent of the Company's voting stock. Other than the foregoing, there are no
family relationships
10
between any director, executive officer, or person nominated by the Company
to become a director.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Based solely upon a review of Forms 3 and 4 and amendments thereto, and
Forms 5 and amendments thereto and any written representation by a reporting
person that no Form 5 was required, furnished to the Company during its most
recent fiscal year, no person who, at any time during the fiscal year, was a
director, officer, beneficial owner of more than 10 percent of any class of
equity securities of the Company, failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during the most recent fiscal year
or prior fiscal years.
ITEM 10. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
The following table presents certain summary information regarding the
compensation of our executive officers during the year ended June 30, 2001.
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual Compensation - Other
Salary
Larry Hunt 2001 $200,000 0
President and Chief 2000 $100,000 0
Executive Officer 1999 $60,000 0
Richard Quinney 2001 $120,000 0
Chief Financial Officer 2000 $60,000 0
1999 $36,000 0
Ronald Crowe 2001 $150,000 0
Vice President, Operations 2000 $100,000 0
1999 $60,000 0
OPTION/SAR GRANTS IN LAST FISCAL YEAR
At no time during its last completed fiscal year did the Company make
any individual grants of stock options or freestanding SARs to any of its
executive officers.
11
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTIONS/SAR VALUES
At no time during the Company's last completed fiscal year did any of
its executive officers exercise any stock options (or tandem SARs) or
freestanding SARs. None of the executive officers held unexpired options as of
June 30, 2001.
EMPLOYEE STOCK COMPENSATION PLAN
We have adopted the 1997 Employee Stock Compensation Plan for
employees, officers, directors and advisors and reserved a maximum of 1,000,000
shares of common stock to be issued upon the grant of awards under the stock
compensation plan. The plan provides for stock compensation through the award
of shares of our common stock. The compensation committee, or in the absence of
such a committee the board of directors, administers the plan and has complete
discretion to determine when and to whom shares may be awarded under the plan,
and the number of shares to be awarded. A grant of shares may be made for cash,
property, services rendered or other form of payment constituting lawful
consideration under applicable law. Our stock compensation plan will
automatically terminate on January 17, 2002, unless we terminate sooner. In
addition, we may suspend or discontinue the plan at any time provided it does
not adversely affect the rights of any person granted an award under this plan
prior to that date. We have granted options to purchase 1,000,000 shares under
this plan, the maximum amount available. We do not intend to increase the
number of shares available under this plan, and therefore we will not issue any
more stock options under this plan.
COMPENSATORY STOCK OPTION PLAN
We have also adopted the 1997 Compensatory Stock Option Plan for
officers, employees, directors and advisors. We have reserved a maximum of
1,500,000 shares of common stock to be issued upon the exercise of options
granted under the stock option plan. The plan provides for the issuance of
non-statutory stock options for shares of common stock. The stock options
issued under this plan are not intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code. Options
covering 1,205,000 shares of common stock have been granted under the plan. Our
stock option plan will automatically terminate on January 7, 2007, unless we
terminate it sooner. In addition, we may amend, alter or discontinue the plan
at any time provided it does not adversely affect any option previously granted
under the plan.
The compensation committee, or in the absence of such a committee the
board of directors, administers the stock option plan and has full power and
authority to designate plan participants and determine the provisions and terms
of options granted under the plan, including the exercise price and vesting
provisions, in accordance with the terms of the plan. Under the plan, the
exercise price of each stock option shall be not less than 100% of the fair
market value of the common stock on the date of the grant. In addition, no
option shall have a term of more than ten years from the date of the grant.
12
COMPENSATION OF DIRECTORS.
Directors are reimbursed for all reasonable expenses incurred in
attending board meetings. Directors are not otherwise compensated for their
services.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
On November 22, 2000, we entered into a one-year employment agreement
with Larry Hunt to continue to serve as our President and Chief Executive
Officer. Under the terms of the agreement, Mr. Hunt receives an annual salary of
$200,000 plus bonuses in an amount determined by the board of directors in its
discretion. In addition, Mr. Hunt is entitled to insurance coverage, a monthly
car allowance of $1,000 and reimbursement of certain expenses in connection with
the performance of his duties.
Under the terms of the agreement, if Mr. Hunt is terminated without
Cause, as defined in the agreement, prior to a Change in Control, as defined in
the agreement, he is entitled to the remainder of his salary for the contract
term in a lump sum payment, as well as the same insurance coverage he is
entitled to under the terms of the agreement for the remainder of the contract
term and for one year thereafter.
If after a Change of Control Mr. Hunt is terminated for Cause or he
resigns for Good Reason as defined in the agreement, he is entitled to a
severance payment equal to three times the sum of his salary plus the average
bonus paid by Innofone or its affiliates to Mr. Hunt for the two fiscal years
immediately preceding the date of termination. In addition, Innofone is
obligated to pay for Mr. Hunt's insurance coverage for a period of three years
after the date of his termination.
If Mr. Hunt resigns other than for Good Reason after a Change of
Control, or his employment is terminated by reason of death or disability, or
for Cause, he is entitled only to any accrued compensation and the timely
payment of any other benefits, such as under our benefit plans, to which he is
entitled at the date of termination.
On November 22, 2000, we entered into a one-year employment agreement
with Ronald Crowe to continue to serve as Vice President. The terms of his
agreement with us are identical to the terms of the agreement with Mr. Hunt,
described above, except that his annual base salary is $150,000, plus bonuses in
an amount determined by the board of directors in its discretion. Mr. Crowe
retired as Vice President of Operation from the Company on August 6, 2001. While
Mr. Crowe is entitled to salary payments owed to him as of August 6, 2001, no
additional payments are due to Mr. Crowe pursuant to his employment agreement.
13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has two classes of voting securities, its preferred stock
and its common stock. Each share of both classes is entitled to one vote per
share on all matters submitted to a vote of the shareholders, including, without
limitation, at meetings of the Company's shareholders for the election of
members of Company's board of directors. As of June 30, 2001, there were
31,214,837 shares of Company's common stock and 1,250,000 shares of its
preferred stock issued and outstanding, entitled to an aggregate of 32,464,837
votes for the election of directors.
The following table presents information regarding the beneficial
ownership of our common stock as of June 30, 2001, by our directors,
executive officers, and those persons known to the Company to be the
beneficial owner of more than five percent of the Company's common stock.
Name Amount
And Address And Nature Of
Title Of Of Beneficial Beneficial Percent
Class Owner /1 Ownership of Class
-------- ------------- ------------- --------
Common Larry Hunt/2 4,745,100/3 13.57%
Common Ron Crowe/4 3,427,871/5 9.80%
Common Richard Quinney/6 4,737,300/7 13.55%
All directors and executive
officers, as a group 12,910,271 36.92%
----------
1/ The address for each person listed is c/o 600 North Pine Island Road, Suite
450, Plantation, Florida 33324.
2/ Includes shares held in the name of TelTech Capital Management, a
corporation owned by Mr. Hunt ("TelTech").
3/ Includes 937,500 common shares that TelTech (and thus Mr. Hunt) would
acquire upon the conversion of 312,500 preferred shares held by TelTech at
a ratio of 3 shares of common for every one share of preferred, which
conversion would occur upon the achievement of a certain economic milestone
by the Company.
4/ Includes shares held in the name of Bala Management and Merrico Personnel
Inc. ("Merrico"), both corporations owned by Mr. Crowe.
5/ Includes 673,829 common shares that Merrico (and thus Mr. Crowe) would
acquire upon the conversion of 224,610 preferred shares held by Merrico at
a ratio of 3 shares of common for every one share of preferred, which
conversion would occur upon the achievement of the economic milestone
mentioned in footnote 3 above.
6/ Includes shares held in the name of Angela Quinney (Mr. Quinney's wife) and
by GQ & Associates, a corporation owned by Mrs. Quinney ("GQ").
7/ Includes 937,500 common shares that Mr. Quinney, Mrs. Quinney, and GQ would
acquire upon the conversion of 312,500 preferred shares held by those three
persons at a ratio of 3 shares of common for every one share of preferred,
which conversion would occur upon the achievement of the same economic
milestone.
14
CHANGES IN CONTROL
Pursuant to an Agreement and Plan of Reorganization (the "Agreement")
dated August 31, 2001 by and among the Company, as purchaser, Digital Micro
Distribution Canada, Inc. ("DMD") and Sumit Majumdar as the sole shareholder of
DMD, the Company has agreed to purchase from Mr. Majumdar the sole issued and
outstanding share of the capital stock of DMD (the "DMD Share"). The
consideration to be paid by the Company to Mr. Majumdar for the DMD Share shall
be the issuance of 67,000,000 shares of the Company's common stock, which shall
upon issuance constitute sixty-seven percent (67%) of the Company's total
then-issued and outstanding shares. The Agreement also provides that upon the
closing of the transaction, all of the Company's current directors shall resign
and be replaced by persons designated by Mr. Majumdar. The result of this
acquisition of DMD and issuance of stock to Mr. Majumdar shall be a change in
control of the Company at the transaction's closing.
For more detailed and complete information concerning the Exchange,
please refer to the Current Report on Form 8-K filed by the Company on September
25, 2001, and the Agreement, filed as an exhibit thereto.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
15
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
EXHIBIT LIST
Exhibit No. Description
3.1# Certificate of Incorporation of the Registrant and all amendments
thereto (originally filed as Exhibit 2.1).
3.2* Bylaws of the Registrant, as currently in effect (originally
filed as Exhibit 3.01(i)).
3.3# Specimen Common Stock Certificate (originally filed as Exhibit
3.1)
10.1+ Agreement and Plan of Reorganization by and among the Company,
Digital Micro Distribution Canada, Inc. and Sumit Majumdar dated
August 31, 2001
10.2* 1997 Compensatory Stock Option Plan (originally filed as Exhibit
10.04)
10.3* 1997 Employee Stock Option Plan (originally filed as Exhibit
10.05)
10.4# Employment Agreement between the Company and Larry Hunt
(originally filed as Exhibit 6.12)
10.5# Employment Agreement between the Company and Ronald Crowe
(originally filed as Exhibit 6.13)
10.6# Marketing and Network Services Agreement between the Registrant
and ePHONE Telecom, Inc., dated as of January 8, 2001 (originally
filed as Exhibit 6.17)
# Filed as an exhibit to the Company's Registration Statement on Form 10-SB, as
amended, file no. 0-31949, originally filed on November 14, 2000.
* Incorporated by reference from the Company's registration statement on Form
SB-2, as amended, file no. 333-94497, originally filed January 12, 2001.
+ Incorporated by Reference from the Company's Current Report on Form 8-K, file
no. 0-31949, filed on September 25, 2001.
REPORTS FILED ON FORM 8-K
The Company filed Current Reports on Form 8-K, regarding the bankruptcy
proceedings of its subsidiary, Innofone Canada, Inc., on March 12, 2001, March
23, 2001, April 24, 2001 and May 9, 2001. In addition, on July 9, 2001 the
Company filed an amendment to the Current Report on Form 8-K filed on May 9,
2001, to include the pro forma financial information required pursuant to Item
7(b) of Form 8-K.
16
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: October 12, 2001 INNOFONE.COM, INC.
/s/ Larry J. Hunt
---------------------------
Larry J. Hunt
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
----------------------------------------------- -------------------------------------------- -----------------
/s/ Larry J. Hunt Director, President and Chief Executive
--------------------------------- Officer (Principal Executive Officer) October 12, 2001
Larry J. Hunt
/s/ Richard Quinney Chief Financial Officer and Director October 12, 2001
--------------------------------- (Principal Financial and Accounting Officer
Richard Quinney
/s/ Stephane Solis Director October 12, 2001
---------------------------------
Stephane Solis
--------------------------------- Director October __, 2001
Bruce Boyden
--------------------------------- Director October __, 2001
Walter Pickering
EXHIBIT INDEX
Exhibit No. Description
3.1# Certificate of Incorporation of the Registrant and all amendments
thereto (originally filed as Exhibit 2.1).
3.2* Bylaws of the Registrant, as currently in effect (originally
filed as Exhibit 3.01(i)).
3.3# Specimen Common Stock Certificate (originally filed as Exhibit
3.1)
10.1+ Agreement and Plan of Reorganization by and among the Company,
Digital Micro Distribution Canada, Inc. and Sumit Majumdar dated
August 31, 2001
10.2* 1997 Compensatory Stock Option Plan (originally filed as Exhibit
10.04)
10.3* 1997 Employee Stock Option Plan (originally filed as Exhibit
10.05)
10.4# Employment Agreement between the Company and Larry Hunt
(originally filed as Exhibit 6.12)
10.5# Employment Agreement between the Company and Ronald Crowe
(originally filed as Exhibit 6.13)
10.6# Marketing and Network Services Agreement between the Registrant
and ePHONE Telecom, Inc., dated as of January 8, 2001 (originally
filed as Exhibit 6.17)
# Filed as an exhibit to the Company's Registration Statement on Form 10-SB, as
amended, file no. 0-31949, originally filed on November 14, 2000.
* Incorporated by reference from the Company's registration statement on Form
SB-2, as amended, file no. 333-94497, originally filed January 12, 2001.
+ Incorporated by Reference from the Company's Current Report on Form 8-K, file
no. 0-31949, filed on September 25, 2001.
INNOFONE.COM, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------
Page No.
------------------------------------------------------------------------------------------
Independent Auditors' Report F-2
------------------------------------------------------------------------------------------
Balance Sheets as of June 30, 2001 and 2000 F-3
------------------------------------------------------------------------------------------
Statements of Operations - Years ended June 30, 2001 and 2000 F-4
------------------------------------------------------------------------------------------
Statements of Stockholders' Deficiency and Comprehensive Loss - Years
ended June 30, 2001 and 2000 F-5
------------------------------------------------------------------------------------------
Statements of Cash Flows - Years ended June 30, 2001 and 2000 F-6
------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-7
------------------------------------------------------------------------------------------
F-1
KPMG LLP
CHARTERED ACCOUNTANTS Telephone (416) 777-8500
Commerce Court West Telefax (416) 777-8818
PO Box 31 Stn Commerce Court www.kpmg.ca
Suite 3300
Toronto ON M5L 1B2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Innofone.com, Incorporated
We have audited the consolidated balance sheets of Innofone.com, Incorporated as
at June 30, 2001 and 2000 and the consolidated statements of operations,
stockholders' deficiency and comprehensive loss and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
With respect to the consolidated financial statements for the year ended June
30, 2001, we conducted our audit in accordance with Canadian generally accepted
auditing standards and United States generally accepted auditing standards. With
respect to the consolidated financial statements for the year ended June 30,
2000, we conducted our audit in accordance with 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 June 30, 2001 and
2000 and the results of its operations and its cash flows for the years in the
two-year period ended June 30, 2001 in accordance with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1(a), the wholly
owned and sole operating subsidiary, Innofone Canada, Inc. has been declared
bankrupt on May 3, 2001 rendering the Company inactive. As explained in note 14,
the Company has signed an Agreement and Plan of Reorganization whereby the
Company intends to acquire Digital Micro Distribution Canada Inc. that will
result in a recapitalization of the Company.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
September 27, 2001
F-2
INNOFONE.COM, INCORPORATED
Consolidated Balance Sheets
(Stated in United States dollars)
June 30, 2001 and 2000
--------------------------------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ - $ 8,257
Accounts receivable, net of allowance for doubtful accounts
of nil; 2000 - $54,000) - 352,190
Prepaid expenses and deposits 225 86,895
Investment - 165,000
--------------------------------------------------------------------------------------------------------------------
225 612,342
Fixed assets (note 3) 441 332,328
--------------------------------------------------------------------------------------------------------------------
$ 666 $ 944,670
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficiency
Current liabilities:
Bank indebtedness $ 546 $ -
Accounts payable and accrued liabilities 232,510 794,480
Due to officers and directors (note 4) 284,470 114,528
Obligation under capital lease - 2,236
Current portion of long-term debt - 40,524
Convertible debt (note 5) 1,116,000 -
Note payable (note 6) 150,000 -
--------------------------------------------------------------------------------------------------------------------
1,783,526 951,768
Advances from ultimate shareholders - 244,177
Long-term debt - 47,954
Convertible debt - 1,956,600
Stockholders' deficiency:
Capital stock (note 7):
Common stock 4,772,715 4,702,250
Preferred stock 1,250 2,500
Additional paid-in capital 7,098,052 4,818,938
--------------------------------------------------------------------------------------------------------------------
11,872,017 9,523,688
Deficit (13,654,877) (11,773,282)
Accumulated other comprehensive loss - (6,235)
--------------------------------------------------------------------------------------------------------------------
(1,782,860) (2,255,829)
Future operations (note 1(a))
Subsequent event (note 14)
--------------------------------------------------------------------------------------------------------------------
$ 666 $ 944,670
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
INNOFONE.COM, INCORPORATED
Consolidated Statements of Operations
(Stated in United States dollars)
Years ended June 30, 2001 and 2000
--------------------------------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------------------------------------
Revenues $ 1,386,095 $ 736,127
Cost of sales 966,668 528,603
--------------------------------------------------------------------------------------------------------------------
Gross profit 419,427 207,524
Expenses:
Selling, general and administrative, including stock
compensation expense of $24,240 (2000 - $2,728,130) 3,349,725 5,037,653
Loss on investment 165,000 -
Amortization 109,408 94,585
Interest on long-term debt and bank charges 32,003 25,083
Additional interest - 1,312,750
Gain on disposition of Access South Inc. (1,000) -
Net gain on bankruptcy of Canadian subsidiary
(net of foreign currency translation adjustment of $6,235) (1,416,614) -
--------------------------------------------------------------------------------------------------------------------
2,238,522 6,470,071
--------------------------------------------------------------------------------------------------------------------
Net loss $ (1,819,095) $ (6,262,547)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Basic net loss per share (note 10) $ (0.07) $ (0.50)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 24,629,538 12,542,976
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
INNOFONE.COM, INCORPORATED
Consolidated Statements of Stockholders' Deficiency and Comprehensive Loss
(Stated in United States dollars)
Years ended June 30, 2001 and 2000
---------------------------------------------------------------------------------------------------------------------------------
Additional Accumulated other
Common Preferred paid-in comprehensive
shares shares capital Deficit income (loss) Total
---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ 8,700 $ 1,570 $ 748,178 $ (823,235) $ (25,501) $ (90,288)
Net loss - - - (6,262,547) - (6,262,547)
Other comprehensive income, net of tax:
Foreign currency translation adjustment - - - - 19,266 19,266
---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - (6,262,547) 19,266 (6243,281)
Beneficial conversion feature of
convertible debt (note 8) - - 1,312,750 - - 1,312,750
Compensatory value of stock options 2,728,130 2,728,130
Stock options 120 - 29,880 - - 30,000
Conversion of preferred stock,
including deemed distribution of
$4,687,500 4,690,000 (2,500) - (4,687,500) - -
Reclassification of redeemable equity
securities 3,430 3,430 - - - 6,860
---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 4,702,250 2,500 4,818,938 (11,773,282) (6,235) (2,255,829)
Net loss - - - (1,819,095) - (1,819,095)
Other comprehensive income, net of tax:
Write-off of foreign currency
translation adjustment on bankruptcy
of Canadian subsidiary - - - 6,235 6,235
---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - (1,819,095) 6,235 (1,812,860)
Issuance of stock for marketing services 30 5,970 - - 6,000
Convertible notes converted to stock 3,852 - 1,536,748 - - 1,540,600
Stock options exercised 430 - 65,570 - - 66,000
Compensatory value of stock options
(note 8) - - 24,240 - - 24,240
Issuance of stock for legal services 1,403 - 197,584 - - 198,987
Issuance of stock by subscription
agreement, net of share issue cost
of $50,000 1,000 - 449,002 - - 450,002
Conversion of preferred stock,
including deemed distribution of
$62,500 63,750 (1,250) - (62,500) - -
---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 4,772,715 $ 1,250 $ 7,098,052 $ (13,654,877) $ - $ (1,782,860)
---------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
INNOFONE.COM, INCORPORATED
Consolidated Statements of Cash Flows
(Stated in United States dollars)
Years ended June 30, 2001 and 2000
-----------------------------------------------------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in):
Operating activities:
Net loss $ (1,819,095) $ (6,262,547)
Items not involving cash:
Amortization 109,408 94,585
Compensation cost on stock options (note 8) 24,240 2,728,130
Amortization of beneficial conversion feature
of convertible debt - 1,312,750
Issuance of stock as consideration for
legal and marketing services 204,987 -
Loss on investment 165,000 -
Management fees 284,000 -
Net gain on bankruptcy of Canadian subsidiary (1,416,614) -
Gain on disposition of Access South Inc. (1,000) -
Change in non-cash operating working capital:
Accounts receivable (228,588) (279,893)
Prepaid expenses and deposits 30,441 (68,323)
Accounts payable and accrued liabilities 1,262,586 543,822
-----------------------------------------------------------------------------------------------------------------------
(1,384,635) (1,931,476)
Financing activities:
Increase (decrease) in bank indebtedness 50,008 (28,816)
Increase in due to officers and directors 38,028 49,519
Increase in note payable 150,000 -
Decrease in long-term debt (22,289) (40,524)
Decrease in obligation under capital lease (1,192) (1,416)
Issuance of capital stock 450,002 -
Increase in convertible debt 700,000 1,956,600
Proceeds from options exercised 66,000 30,000
-----------------------------------------------------------------------------------------------------------------------
1,430,557 1,965,363
Investing activities:
Increase in fixed assets (78,646) (141,942)
Proceeds from term deposit - 102,477
-----------------------------------------------------------------------------------------------------------------------
(78,646) (39,465)
Effect of exchange rate changes on cash 24,467 13,835
-----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,257) 8,257
Cash and cash equivalents, beginning of year 8,257 -
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ 8,257
-----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Cash interest paid for the periods ended June 30, 2001 and 2000 was $32,003 and
$25,083, respectively. See note 12 for other non-cash financing and investing
activities.
See accompanying notes to consolidated financial statements.
F-6
INNOFONE.COM, INCORPORATED
Notes to Consolidated Financial Statements
(Stated in United States dollars)
Years ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
Innofone.com, Incorporated (the "Company") is incorporated under the laws of the
State of Nevada. The Company's legal subsidiary Innofone Canada, Inc. ("Innofone
Canada") that operated in Canada, was engaged in the business of long distance
telephone and internet telephony until being declared bankrupt on May 3, 2001.
Innofone Canada's assets are under the control of a Canadian Trustee in
Bankruptcy. In addition, the Company has another wholly owned subsidiary,
Hotcaller.com Inc. which is dormant and has no operating assets. During the
year, the Company disposed of its other wholly owned subsidiary, Access South
Inc. which had no assets and was inactive at the date of disposition.
1. BASIS OF PRESENTATION:
(a) Bankruptcy of Innofone Canada and future operations:
On February 26, 2001, a Petition for a Receiving Order ("Petition")
under the Bankruptcy and Insolvency Act (Canada) was filed by
9024-9574 Quebec Inc. against Innofone Canada. On April 11, 2001,
Innofone Canada filed a Notice of Intent to File a Proposal ("NOI")
to its creditors, and subsequently filed a cash flow statement with
the bankruptcy authorities. On May 2, 2001, the Company attended a
hearing at which a creditor was filing a motion to have the stay of
the NOI lifted and have Innofone Canada declared bankrupt. The
Company was unsuccessful in defeating the motion and on May 3, 2001,
Innofone Canada was declared bankrupt with a deemed bankruptcy date
of February 26, 2001, being the date of the Petition. The trustee,
Raymond Chabot Inc., is in the process of liquidating the assets of
Innofone Canada.
As a result of the bankruptcy of Innofone Canada, the Company has
lost control of the assets of its legal subsidiary. Since the Company
no longer controls Innofone Canada, the consolidated financial
statements effectively reflect the disposition of Innofone Canada
effective May 3, 2001 as a result of it being deemed bankrupt. The
excess of the liabilities of Innofone Canada over its assets at the
date of discontinuance of control and consolidation of $1,416,614 is
shown as a gain on bankruptcy in the consolidated statements of
operations. The Company is the major unsecured creditor and has
submitted a claim in the amount of CDN $5,481,467 representing
approximately two thirds of the total unsecured claims against
Innofone Canada. As at this time, it cannot be determined the extent
of recoveries, if any, that may be available to the Company from the
realization of the trustee's disposition of the assets of Innofone
Canada Inc., the unsecured claim has been fully provided against. Any
amounts received will be recognized when determinable.
(b) Bulletin Board Listing:
In January 2001, the Company completed a Registration Statement that
has been filed with the United States Securities and Exchange
Commission in order for the Company's shares to be eligible for
trading in the United States on the National Association of
Securities Dealings over-the-counter Bulletin Board.
F-7
2. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in the United
States, the more significant of which are outlined below.
(a) Basis of presentation:
These consolidated financial statements include the accounts of the
parent Company and its wholly owned subsidiaries while they were
under the control of the Company. All material intercompany balances
and transactions have been eliminated.
(b) Cash and cash equivalents:
Cash and cash equivalents are nil as at June 30, 2001 and 2000. For
purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original terms to
maturities of three months or less when acquired to be cash
equivalents.
(c) Fixed assets:
Fixed assets are recorded at cost and are depreciated over the
estimated useful life of the asset using the following methods and
annual rates:
------------------------------------------------------------------------------------------------------------------------------------
Asset Basis Rate
------------------------------------------------------------------------------------------------------------------------------------
Computer equipment Declining balance 30%
Computer software and website
development costs Straight line 2 years
Furniture and fixtures Declining balance 20%
Leasehold improvements Straight line Over the lease term
Telephone Declining balance 30%
Technical equipment Declining balance 30%
------------------------------------------------------------------------------------------------------------------------------------
Computer software and website development costs are expensed as
incurred unless they meet generally accepted criteria for deferral
and depreciation. The development costs incurred in the conceptual
formulations of alternatives and prior to the establishment of
technological feasibility do not meet the accepted criteria for
development and are expensed as incurred. Capitalized computer
software and website development is evaluated in each reporting
period prior to determine whether it continues to meet criteria for
continued deferral and depreciation.
F-8
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Use of estimates:
The preparation of financial statements in conformity with United
States generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
(e) Income taxes:
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
To the extent that the recoverability of deferred tax assets is not
considered to be more likely than not, a valuation allowance is
provided.
(f) Foreign currency translation:
For the years ended June 30, 2001 and 2000, the Company's functional
currency is the Canadian dollar. This reflects the primary economic
environment for the Company being the Canadian dollar the primary
currency in which Innofone Canada business was conducted.
The Company's reporting currency is the United States dollar because
the Company is a United States corporation and it is trading publicly
in the United States. The consolidated statements of operations are
translated into United States dollars using the average exchange rate
for the year. The consolidated balance sheets are translated into
United States dollars using the year-end exchange rate. The
translation gains or losses are included in the consolidated
statement of stockholders' deficiency and comprehensive loss as
accumulated other comprehensive income or loss.
F-9
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Comprehensive income (loss):
Comprehensive income (loss) consists of net loss and foreign currency
translation adjustments and is presented in the consolidated
statements of stockholders' deficiency and comprehensive loss. The
consolidated statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's
financial position or results of operations.
(h) Stock option plans:
The Company applies the fair value based method of accounting
prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
in accounting for its stock options granted to both employees and non
employees. As such, compensation expense is recorded on the date of
grant based on the fair value of the award and is recognized over the
service period.
(i) Impairment of long-lived assets and long-lived assets to be disposed
of:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
F-10
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Revenue recognition:
Through Innofone Canada, the Company generated revenue from the
resale of long distance services when the services were rendered. The
Company earned a commission based on the monthly cellular revenues
billed as these services were rendered and this commission was
recognized as revenue when the services were rendered. There would be
no impact on the Company's consolidated financial statements by
adopting the revenue recognition principles of SAB 101.
(k) Development costs of bundled services:
The costs of developing bundled services programs include software
development and systems integration costs, marketing costs, and call
center development costs. The software development costs are paid to
the Company's external billing partner in order to modify the billing
engine and customer support services program to meet the needs of
each bundled services program. Costs incurred during the preliminary
project stage are expensed. Costs incurred during the application
development stage are capitalized and costs during the
post-implementation stage such as training costs are expensed.
Upgrades and enhancements to the billing software are capitalized
where additional functionality is probable. Systems integration costs
include costs paid to our external billing partner to ensure accurate
transfers of files between call centers and suppliers and our billing
company and these costs are expensed as incurred. Marketing costs
consist of the creative design costs for artwork as well as the costs
of all printed materials. Call center development costs are paid to
external suppliers of call center services and include the costs of
training their staff and preparing for the launch of a bundled
services program. All costs for development of marketing materials
and training for call centers are expensed as incurred.
F-11
3. FIXED ASSETS:
---------------------------------------------------------------------------------------------------
Accumulated Net book
2001 Cost depreciation value
---------------------------------------------------------------------------------------------------
Furniture and fixtures $ 441 $ - $ 441
===================================================================================================
---------------------------------------------------------------------------------------------------
Accumulated Net book
2000 Cost depreciation value
---------------------------------------------------------------------------------------------------
Computer equipment $ 296,860 $ 53,422 $ 243,438
Computer software and
website development costs 106,666 35,908 70,758
Furniture and fixtures 16,955 4,179 12,776
Leasehold improvements 6,214 2,263 3,951
Telephone 1,688 1,006 682
Technical equipment 1,215 492 723
---------------------------------------------------------------------------------------------------
$ 429,598 $ 97,270 $ 332,328
===================================================================================================
4. DUE TO OFFICERS AND DIRECTORS:
Amounts due to officers and directors represent unpaid wages, and are
unsecured, non-interest bearing and due on demand.
5. CONVERTIBLE DEBT:
(a) On November 16, 2000, the Company raised $100,000 through a
subscription of 8% unsecured promissory notes which are due November
15, 2001. On December 16, 2000, the Company raised $100,000 through a
subscription of 8% unsecured promissory notes which are due November
15, 2001. Both subscriptions for notes are convertible into shares of
common stock of the Company with a par value of $0.001 at a price of
$0.30 per share. The notes also include a non-detachable warrant to
purchase one share of common stock of the Company with a par value of
$0.001 at a price of $0.75 per share. The fair value of the warrants
at the issuance date was nominal. The market value of the Company's
shares of common stock at the subscription date was less than the
conversion price. Therefore, there was no embedded beneficial
conversion option.
F-12
5. CONVERTIBLE DEBT (CONTINUED):
(b) On January 12, 2001, the Company signed a Marketing and Network
Services Agreement with ePhone Telecom Inc. ("ePhone") whereby the
Company agreed to provide ePhone with a first right of refusal until
December 31, 2010 to carry its long distance traffic using the ePhone
internet network. The agreement also provides for assessing the
feasibility of developing new products together and generally
developing the business of each company. As part of the agreement,
ePhone paid the Company a set-up fee of $500,000, which is due for
repayment on April 19, 2001. This repayment date was subsequently
extended to January 19, 2002. If the set-up fee is not repaid, ePhone
has the right to convert into an equivalent amount of shares of the
Company based on a price of $0.25 per share. For accounting purposes,
the set-up fee was recognized in the consolidated financial
statements as a loan. The market value of the Company's shares of
common stock at the date of signing the marketing agreement was less
than the conversion price. Therefore, there was no embedded
beneficial conversion option. Each share would also have a
non-detachable warrant to convert into common stock at a price of
$0.75.
(c) On June 1, 2000, the Company raised $416,000 through the subscription
of 8% unsecured convertible promissory notes which were due on June
1, 2001. The subscribers have requested that the notes be converted
into shares of common stock and as at September 27, 2001, the notes
are in process of being converted. The notes are convertible into
shares of common stock of the Company with a par value of $0.001 per
share at a price of $0.80 per share. The notes also include a warrant
to purchase one share of common stock of the Company with a par value
of $0.001 at a price of $0.80 (amended from the initial price of
$1.50) per share for each $0.80 of notes purchased on or before June
30, 2002 (amended from the initial date of June 30, 2001). The fair
value of the warrants at the issuance date was nominal. The total
market value of the Company's shares of common stock at the dates
when the notes were signed was less than the total conversion price.
Therefore, there was no embedded beneficial conversion feature.
(d) On August 5 and 6, 1999, the Company raised $501,100 through a
subscription of 8% unsecured convertible promissory notes (amended on
October 5, 1999) which were due on July 31, 2000. During the year
ended June 30, 2001, all the promissory notes have been converted
into 1,252,750 shares of common stock. The notes were converted into
shares of common stock of the Company with a par value of $0.001 per
share at a price of $0.40 per share. The total market value of the
Company's shares of common stock on August 5 and 6, 1999 was $438,000
higher than the total conversion price. Therefore, these convertible
promissory notes have an embedded beneficial conversion feature that
has been charged to interest expense and additional paid-in capital
on the dates the notes were issued.
F-13
5. CONVERTIBLE DEBT (CONTINUED):
(e) During the period from December 1999 to February 2000, the Company
raised $1,039,500 through the subscription of 8% unsecured
convertible promissory notes which were due on December 31, 2000.
During the year ended June 30, 2001, all the promissory notes have
been converted into 2,598,750 shares of common stock. The notes were
converted into shares of common stock of the Company with a par value
of $0.001 per share at a price of $0.40 per share. The total market
value of the Company's shares of common stock at the dates when the
notes were signed was $874,750 higher than the total conversion
price. The embedded beneficial conversion feature has been charged to
interest expense and added to additional paid-in capital.
6. NOTE PAYABLE:
On October 4, 2000, the Company raised $150,000 through a subscription of
10% unsecured promissory notes which are due October 4, 2001. The capital
amount of the notes shall be payable on demand in whole or in part in the
event that the Company makes a distribution of its securities worth at
least $500,000 by private placement or otherwise. The notes are
convertible into shares of common stock of the Company with a par value
of $0.001 at a price of $0.50 per share. The notes also include a
non-detachable warrant to purchase one share of common stock of the
Company with a par value of $0.001 at a price of $1.00 per share. The
fair value of the warrants at the issuance date was nominal. The market
value of the Company's shares of common stock at the subscription date
was less than the conversion price. Therefore, there was no embedded
beneficial conversion option.
F-14
7. CAPITAL STOCK:
The number of outstanding shares of the Company as at June 30, 2001 is
computed as follows:
------------------------------------------------------------------------------------------------------------------------------------
Common Preferred
stock stock
------------------------------------------------------------------------------------------------------------------------------------
Outstanding shares as at June 30, 1999 13,130,000 5,000,000
Preferred stock converted to common stock 7,500,000 (2,500,000)
Options exercised 120,000 -
------------------------------------------------------------------------------------------------------------------------------------
Outstanding shares as at June 30, 2000 20,750,000 2,500,000
Shares issued in exchange for legal fees 1,403,333 -
Options exercised in exchange for marketing costs 30,000
Options exercised 430,000 -
Promissory notes converted to common stock 3,851,500 -
Common stock subscribed 1,000,004 -
Preferred stock to be converted to common stock 3,750,000 (1,250,000)
------------------------------------------------------------------------------------------------------------------------------------
Outstanding shares as at June 30, 2001 31,214,837 1,250,000
====================================================================================================================================
The Company's authorized capital stock consists of 100,000,000 shares of
common stock and 25,000,000 shares of preferred stock each with a par
value of $0.001 per share. The 1,250,000 shares of issued preferred stock
are voting, convertible as described further below to shares of common
stock on a 3 for 1 basis at the option of the holder based on certain
revenue targets being met and participate equally as to dividends with
each share of common stock. If after five years the performance criteria
have not been met, the remaining shares of preferred stock are
convertible into one half of a share of common stock. Any dividends
declared and paid by the Company would be declared and paid in United
States dollars.
F-15
7. CAPITAL STOCK (CONTINUED):
During the year ended June 30, 2001, the Company raised a total of
$500,002 in two separate private placements totaling 1,000,004 units
consisting of one share of common stock and one warrant to purchase
shares of common stock at $1.00 per share and expiring in March 2002.
During the year ended June 30, 2001, 1,250,000 shares of preferred stock
were converted into 3,750,000 shares of common stock as the Company has
generated $2,000,000 Canadian in cumulative revenue, the performance
criteria for their release. The remaining 1,250,000 shares of preferred
stock can be converted into 3,750,000 shares of common stock when the
Company reaches $7,000,000 Canadian in cumulative revenue. For accounting
purposes, the conversion of the shares of preferred stock includes both a
non-performance element (equal to one half of the share of preferred
stock converted) and a performance element (equal to the balance). If and
when additional shares of common stock are issued based upon meeting the
performance criteria, the fair value of any such additional shares of
common stock will be recognized as a deemed distribution against equity
in the period when the performance criteria is met. Until these targets
are met, the shares of preferred stock remain outstanding with all rights
and restrictions continuing.
The Company had the right, until June 26, 2000, to redeem, at a price of
$0.01 per share of common stock, 3,429,688 shares of common stock issued
to the founders ("Founder Shares") of Innofone Canada who are now
officers, directors and significant shareholders of the Company (the
"Executives") and shares issued to an affiliate of the founders of
Innofone Canada, to effect the business combination with Innofone Canada,
in the event that any Executives employment with the Company or its
affiliates is terminated. The Founder Shares were classified as
redeemable equity securities and excluded from the weighted average
number of common stock used in the basic net loss per share calculation
until June 26, 2000 (note 11). As of June 26, 2000, no Founder Shares
were redeemed, and consequently, they were reclassified to common stock
and preferred stock.
As at June 30, 2001, all of the Company's outstanding shares of common
stock is restricted from resale. However, approximately 13,023,512 shares
of outstanding common stock has been held for more than 2 years by
non-affiliates, and therefore, may be freely sold in reliance on Rule 144
of the Securities Act. An additional 18,191,324 shares of common stock
may be sold in compliance with certain volume restrictions and manner of
sale limitations under Rule 144, and 3,971,500 of these may be sold
without these restrictions within the next year. These figures do not
take into account stock that may be issued pursuant to outstanding
warrants and options and upon the conversion of convertible promissory
notes into common stock.
F-16
7. SHARE CAPITAL (CONTINUED):
Assuming the issuance of 3,486,667 shares of common stock pursuant to
conversion rights granted under subscription agreements, the Company will
have a total of 34,701,504 shares of common stock outstanding. All the
shares of common stock received from conversion of the preferred stock
may be resold immediately in the public market, subject to limitations on
such resales by persons considered company affiliates under federal
securities laws.
8. STOCK OPTIONS:
At June 30, 2001, the Company has two stock-based compensation plans
which are described below. The Company accounts for the fair value of its
grants under these plans in accordance with FASB Statement 123. The
compensation cost that has been charged against income for those plans
was $24,240 and $2,728,130 for 2001 and 2000, respectively. The full
amount was assigned as additional paid-in capital.
In 1997, the Company adopted a Compensatory Stock Option Plan (the "CSO
Plan") and an Employee Stock Compensation Plan (the "ESC Plan") pursuant
to which the Company's Board of Directors may grant stock options to
employees, consultants, advisors or directors of the Company. The CSO
Plan authorizes grants of options to purchase up to 1,500,000 shares of
authorized but unissued common stock and the ECS Plan authorizes grants
of options to purchase up to 1,000,000 shares of authorized but unissued
common stock. Stock options are granted under the CSO Plan with an
exercise price equal to or greater than 100% of the stock's fair market
value at the date of grant and the vesting period is limited to no more
than 10 years.
Pursuant to the Company's CSO Plan, the Company has outstanding 492,000
stock options to directors and employees for the purchase of shares of
common stock ranging from $0.001 to $0.73 per share, expiring from August
13, 2001 to January 15, 2003 and vesting either on the date of grant or
periods up to 12 months after the date of grant.
Pursuant to the Company's ESC Plan, the Company has outstanding 475,000
stock options to an employee for the purchase of shares of common stock
at $0.0001 per share, expiring between March 27, 2002 and January 15,
2003 and vested upon achieving certain business targets.
F-17
8. STOCK OPTIONS (CONTINUED):
The Company has also granted stock options, which are not part of the ESC
Plan and the CSO Plan. These options were approved by the Company's Board
of Directors and were granted to a key consultant of the Company. The
Company has outstanding 2,750,000 stock options to purchase shares of
common stock for $0.50 per share, expiring April 6, 2002, and vesting at
the time of grant. These options are subject to being released on a
quarterly basis over an 18-month period.
The following table summarizes the activity for stock options granted,
exercised and expired during the year:
-------------------------------------------------------------------------------------------------------------------
Number of Weighted-average
options exercise price
-------------------------------------------------------------------------------------------------------------------
Outstanding as at June 30, 1999 1,380,000 $ 0.64
Granted - employees vested 255,000 0.29
Granted - non employees vested 2,750,000 0.50
Granted - employees not vested 1,150,000 0.11
Granted - non employees not vested 3,207,000 0.46
Exercised (120,000) 0.25
Forfeited - n/a
Expired - n/a
-------------------------------------------------------------------------------------------------------------------
Outstanding (held by 13 optionees) as at June 30, 2000 8,622,000 0.45
(2,097,000 exercisable at an average price of $0.47)
Granted - employees 160,000 0.41
Exercised (460,000) 0.15
Expired or forfeited (4,605,000) 0.50
-------------------------------------------------------------------------------------------------------------------
Outstanding (held by 9 optionees) as at June 30, 2001
(3,411,444 exercisable at an average price of $0.42) 3,717,000 $ 0.42
===================================================================================================================
The weighted average grant date fair value of options granted to
employees during the year is summarized in the following table:
-------------------------------------------------------------------------------------------------------------------
Weighted-average
Weighted-average grant date
exercise price fair value of options
-------------------------------------------------------------------------------------------------------------------
Options whose exercise price is at market value $ 0.41 $ 0.03
-------------------------------------------------------------------------------------------------------------------
Total weighted-average grant date fair value of options $ 0.41 $ 0.03
===================================================================================================================
F-18
8. STOCK OPTIONS (CONTINUED):
The weighted average remaining contractual life for all outstanding
options is approximately one year.
The fair value of each option was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions
used for 2001: dividend yield of 0%, expected volatility of 100%,
risk-free interest rate of approximately 6% and expected life of two
years.
9. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
(a) Financial instruments:
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at June 30, 2001 and
2000. The estimated fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than a forced or
liquidation sale. These estimates, although based on the relevant
market information about the financial instrument, are subjective in
nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
---------------------------------------------------------------------------------------------------------------------
2001 2001
---------------------------------------------------------------------------------------------------------------------
Carrying Fair
amount value
---------------------------------------------------------------------------------------------------------------------
Financial assets:
Deposits $ 225 $ 225
Financial liabilities:
Bank indebtedness 546 546
Accounts payable and accrued liabilities 232,510 232,510
Due to officers and directors 284,470 284,470
Note payable 150,000 150,000
Convertible debt 1,116,000 1,116,000
---------------------------------------------------------------------------------------------------------------------
F-19
9. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED):
---------------------------------------------------------------------------------------------------------------------
2000 2000
---------------------------------------------------------------------------------------------------------------------
Carrying Fair
amount value
---------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 8,257 $ 8,257
Accounts receivable 352,190 352,190
Deposits 86,895 86,895
Investment 165,000 165,000
Financial liabilities:
Accounts payable and accrued liabilities 794,480 794,480
Due to officers and directors 114,528 114,528
Long-term debt 88,478 88,478
Obligation under capital lease 2,236 2,236
Advances from ultimate shareholders 244,177 244,177
Convertible debt 1,956,600 1,956,600
---------------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
(i) Cash and cash equivalents, accounts receivable, deposits, accounts
payable and accrued liabilities and obligation under capital lease:
The carrying amounts approximate fair value because of the short term
to maturity of these instruments.
(ii) Long-term debt:
The fair value is estimated by discounting the future cash flows at
rates currently offered to the Company for similar debt instruments
of comparable maturity by the Company's bankers.
(iii) Due to officers and directors and advances from ultimate
shareholders:
Imputed interest computed at comparable market rates on the interest
free advances from ultimate shareholders is not considered to be
material to the consolidated financial statements. Consequently, the
consolidated financial statements do not include a charge for imputed
interest on the interest free advances and the fair value is
considered to be comparable to the carrying value.
F-20
9. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED):
(b) Currency rate risk:
The Company's current operations are headquartered in Canada and all
sales are generated in Canada. Since the financial results are
reported in United States dollars, fluctuations in the value of the
United States dollar relative to the Canadian dollar could materially
affect the Company's results.
10. BASIC NET LOSS PER SHARE:
Basic net loss per share figures are calculated using the weighted
average number of common shares outstanding computed on a daily basis.
The Founder Shares are excluded from the weighted average number of
common shares until June 26, 2000 (note 7) and are included for the
period effective June 27, 2000. The effect of the conversion of the
preferred shares on an if-converted basis and stock options has an
anti-dilutive effect.
11. INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at June 30, 2001 and 2000 are
presented below:
---------------------------------------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 451,000 $ 1,226,000
Net capital loss carryforwards - 30,000
Capital assets, principally due to differences
in amortization - 75,000
---------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 451,000 1,331,000
Less valuation allowance (451,000) (1,331,000)
---------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
=====================================================================================================================
F-21
11. INCOME TAXES (CONTINUED):
The valuation allowance for deferred tax assets as of June 30, 2001 and
2000 was $451,000 and $1,331,000, respectively. The net change in the
total valuation allowance for the year ended June 30, 2001 was a decrease
of $880,000 and an increase of $951,000 for the year ended June 30, 2000.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable
income of approximately $20,000, $31,000, $52,000 and $900,000 prior to
the expiration of the net operating loss carryforwards in 2018, 2019,
2020 and 2021, respectively. Based upon the level of historical taxable
income it cannot be reasonably estimated at this time if its more likely
than not the Company will realize the benefits of the deferred tax
assets. Consequently, the deferred tax assets have been reduced by an
equivalent valuation allowance. The valuation allowance will be adjusted
in the period that is determined with reasonable certainty that it is
more likely than not that some portion or all of the deferred tax assets
will be realized.
At June 30, 2001, the Company has net operating loss carryforwards for
income tax purposes of approximately $1,003,000 which are available to
offset future taxable income, if any, through 2018 to 2021, respectively.
All the losses in the Canadian subsidiary expired upon the declaration of
bankruptcy on May 3, 2001.
12. NON-CASH FINANCING AND INVESTING ACTIVITIES:
During the year, the Company issued 3,851,500 common shares in exchange
of $1,540,600 convertible debt. In addition, the Company issued 1,433,333
common shares in exchange for legal fees in the amount of $198,987 and
$6,000 for marketing costs which had been incurred.
During the year, the Company disposed of its interest in Access South
Inc. to an officer of the Company. The proceeds of $1,000 were settled by
way of reducing the amounts otherwise payable to that officer.
F-22
13. SEGMENTED INFORMATION:
(a) Reportable segment:
Prior to May 3, 2001, when Innofone Canada was declared bankrupt, the
Company had one reportable segment; resale of long distance services.
The resale of long distance services was provided to residential and
small to medium sized businesses. This segment represents the results
of operations for the Company.
(b) Geographic information:
The Company derives all of its revenue from Canada and all of its
fixed assets were physically located in Canada prior to May 3, 2001
when Innofone Canada was declared bankrupt.
14. SUBSEQUENT EVENT:
Reverse takeover of Digital Micro Distribution Inc.:
On September 10, 2001, the Company signed an Agreement and Plan of
Reorganization to acquire all of the common shares of Digital Micro
Distribution Canada Inc. ("DMD") in exchange for 67,000,000 shares of its
common stock. The exchanged shares would be "restricted securities" as
defined under Rule 144(A) under the Securities Act of 1993, as amended.
Completion of the transaction is subject to obtaining the necessary
regulatory and third party consents and satisfaction of customary
conditions on closing. If the transaction is completed, the Company will
have 100,000,000 common shares issued and DMD will become the sole
operating subsidiary of the Company. As the former shareholders of DMD
would hold 67% of the outstanding common shares of the Company
immediately subsequent to the transaction, the transaction between the
two companies will be accounted for as a recapitalization by DMD
effectively as if DMD had issued common shares for consideration equal to
the net monetary assets of the Company.
F-23