United States
Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 4
to
Form 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities
Exchange Act of 1934
INTERACTIVE BUYERS NETWORK INTERNATIONAL, LTD.
(Name of Small Business Issuer in its charter)
Nevada 95-3538903
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5740 Ralston Street, Suite 110
Ventura, CA 93003
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(Address of principal executive office) Zip Code
Issuer's telephone number: (805) 677-6720
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Securities to be registered under Section 12(b) of the Act.
NONE
Securities to be registered under Section 12(g) of the Act:
Common Stock $.01 Par Value
(Title of class)
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PART I
Item 1. DESCRIPTION OF BUSINESS
GENERAL
Interactive Buyers Network International, Ltd. (the "Company") creates
and markets Internet-based applications for businesses. An Internet-based
application is best described as computer software and data that reside on a
remote server, rather than the user's computer, where that software and data are
accessed over the Internet. The Company intends to generate fees by licensing
its Internet-based applications for use by businesses. Currently, the Company
offers two such applications, Virtual Source Network and Virtual Source
Publisher. Virtual Source Network may be used by corporate clients to purchase
goods and services via the Internet. Virtual Source Publisher is a do-it-
yourself web site builder that allows a user to establish its own Internet web
site. Both of these products are described in greater detail immediately below.
On November 18, 1999, the Company's shareholders approved a change of the name
of the Company to Vsource, Inc.
VIRTUAL SOURCE NETWORK
Currently all financial, technical and marketing resources of the Company are
dedicated to Virtual Source Network. In return for initial costs and fees
totaling between $25,000 and $300,000, plus transaction fees of up to $1.00, per
electronic purchase, clients may obtain access to Virtual Source Network and use
it for corporate procurement via the Internet on a pilot program basis. Full
implementation may cost the client as much as $2,000,000 before full-scale
operation is achieved. These initial cost figures are approximate because most
of the costs result from the use of outside systems consultants (non-Company
employees) needed to integrate Virtual Source Network into a client's existing
computer systems. Management expects that these costs will vary significantly
from client to client.
By accessing a Virtual Source Network web site, the client, or buyer, uses its
customized version of Virtual Source Network to initiate a request for quotation
which is electronically distributed to vendors via the Internet. Vendors
respond, via the Internet, with price quotations for the items requested. At
that point, the buyer may select one of the vendor quotations and send an
electronic purchase order, or the buyer may communicate electronically with the
vendor regarding counter-proposals or to request additional information. This
Internet version of Virtual Source Network has just recently been made available
for use by clients. Currently five Virtual Source Network clients are at various
stages of implementation. Generally there are five stages which the Company
expects clients to proceed through:
1. Decision to select Virtual Source Network.
2. Collection of relevant client data.
3. Configuration of Virtual Source Network to meet client requirements.
4. Pilot operation of Virtual Source Network:
(a) Without integration into client systems. This pilot operation is
expected to cost approximately $25,000 including approximately
$18,000 paid to the Company and $3,000 to IBM for training, or
(b) Limited integration with selected client systems. The cost of
this pilot operation may range from $100,000 to $300,000, most of
which is expected to represent fees to PricewaterhouseCoopers or
other system integrators.
5. Full integration and operation, which may cost as much as $2,000,000
as described above.
As of August 31, 1999, two beta site clients, one a world leader in the
entertainment industry and the other a middle market apparel company, are
nearing the end of stage 2 and beginning the work of stage 3. One client, Royal
Caribbean Cruise Lines, is at stage 3. One client, Timco-Standard-Tandem, a
large aluminum processing company, is at stage 4. One client, Technicolor, is
at stage 4 and has begun the planning process for stage 5. To date no revenues
have been received from any client as a result of using the new Internet version
of Virtual Source Network.
During 1997 and early 1998, the Company offered an earlier version of Virtual
Source Network, which was a software application installed on client computers.
In return for access to the network, clients paid annual subscription fees of
$980.
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Virtual Source Network is sold through direct contact by sales people employed
by Virtual Source, Inc., a 100% owned subsidiary of the Company. The number of
sales people has varied during recent months, and currently there are two of
these employees. The Company's president also spends a significant amount of his
time on sales efforts. In addition, Virtual Source has one independent sales
representative working on a commission-only basis. In March of 1999, the Company
verbally established a strategic partnership with Analytics, Inc. of Madison,
Connecticut. The Company provides Analytics with access to Virtual Source
Network so that Analytics' strategic analysis of their clients' procurement
spending data can be displayed over the Internet in a format that the client can
edit in a secure, real time environment. Informally, Analytics and the Company
have each agreed to make their respective clients aware of the other firm's
services, where it seems appropriate for the client in question. The Company has
an informal relationship with PricewaterhouseCoopers, pursuant to which each
firm has agreed to make its clients and potential clients aware of the other
firm's services, in those instances where it seems appropriate for the client.
In certain situations, both firms will work together as a team for a particular
client. PricewaterhouseCoopers services include consulting to help clients
improve their procurement practices, and consulting to assist a client with
integration of Virtual Source Network into existing computer systems used by the
client. Neither PricewaterhouseCoopers nor the Company pay each other for
services rendered. Payments are made by the clients being served.
The Company is a paying client of IBM, who has developed the training program
for Virtual Source Network users. Clients of the Company retain the services of
IBM in order to train their staffs to use the Virtual Source Network system. In
addition, informally, IBM and the Company have each agreed to make their
respective clients aware of the other firm's services, where it seems
appropriate for the client in question.
VIRTUAL SOURCE PUBLISHER
In addition to Virtual Source Network, the Company also offers Virtual Source
Publisher, a do-it-yourself web site builder that allows a user to establish
its own Internet web site. At this time, Virtual Source Publisher is a secondary
priority of the Company. Financial, technical and marketing resources will be
dedicated to Virtual Source Publisher only after the needs of Virtual Source
Network are addressed. Use of Virtual Source Publisher requires no special
technical skills, no additional software, and does not require the services of a
consultant. These sites are offered over the Internet, and are marketed through
a variety of distributor arrangements. In addition, the Company has provided
free sites to high schools and colleges, and plans to offer free sites to
churches and other community groups. Once established, these sites will offer
other goods and services to group members, including students, church members,
and others, through commission-sharing affiliate agreements with Internet
retailers. There are existing affiliate agreements with Beyond.com, Varsity
Books, and TheGift.com. Other affiliate programs may be added in the future.
The Company will receive a portion of the commission earned from such
arrangements, and plans to offer these sites as a medium for Internet
advertisers. Advertising revenue would be shared with the schools, churches, or
community groups who agree to participate. Management does not expect
commissions received from affiliate agreements to be material through the next
eighteen months and perhaps, not even then. It is not practical at this date to
estimate potential revenues from affiliate agreements.
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The Company has a verbal arrangement with Group IV, Inc. to distribute Virtual
Source Publisher web sites to its national subscriber base of approximately
500,000 small businesses. Group IV will also be providing that subscriber base
with information about Virtual Source Network.
The Company also offers potential users the ability to set up their own Virtual
Source Publisher web sites by directly accessing one of the Company's web sites.
Those sites are: http://www.vsource.net or http://www.fillintheblanks.com. At
this point there are several hundred Virtual Source Publisher web sites up and
running in total, although many of the users have not progressed to a point
where their sites are functioning as fully operational businesses. Management
does not intend to dedicate the programming resources necessary to complete the
automatic credit card billing until the higher priority work related to Virtual
Source Network is completed. When the automatic credit card billing is
completed, if ever, and users' credit cards start to be charged, the Company
believes that a significant number of users may discontinue their Virtual Source
Publisher web sites rather than paying the monthly charges. Management does not
expect to receive revenues from Virtual Source Publisher until 2000 or 2001, if
ever. It is not practical to estimate the start date or amount of potential
revenues. No assurance can be given that the automatic credit card billing
system will be completed or that, if completed, sales of Virtual Source
Publisher will generate significant income for the Company.
Virtual Source Publisher is sold directly by the Company and through
distributors. There are approximately fifteen Virtual Source Publisher
distributors at this point, although most of them have not sold any Virtual
Source Publisher web sites. Since the Company's top priority is Virtual Source
Network, not much effort is being made, at this time, to sell Virtual Source
Publisher, or to encourage Virtual Source Publisher distributors. To date, no
Virtual Source Publisher revenue has been received, no commissions have been
earned by DX3, Inc. (see HISTORY, below) and no commission expense has been
accrued by the Company.
OTHER INFORMATION: GOVERNMENT APPROVALS, DEPENDENCE ON SUPPLIERS, TRADEMARKS,
EMPLOYEES AND INDEPENDENT CONTRACTORS
GOVERNMENT APPROVALS
While there are no governmental approvals required specifically related to the
licensing or use of Virtual Source Network or Virtual Source Publisher, and no
direct governmental regulation, that could change. In those circumstances,
competitors with larger administrative staffs and more financial resources will
be in a better position to comply with this regulation and obtain any necessary
approvals. However, management is not aware of any pending or anticipated
government regulations that will negatively impact the Company in a material
way.
DEPENDENCE ON SUPPLIERS
The Company is not dependent on suppliers of raw materials, although it is
dependent on the Internet, including the ability to communicate with its remote
servers. The Company's clients are also dependent on the Internet for this
communication, without which clients would be unable to use any of the Internet-
based services provided by the Company.
TRADEMARKS
Virtual Source Network is listed on the Supplemental Register of Trademarks
maintained by the U. S. Patent and Trademark Office. The Company has no other
trademarks or patents.
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of August 31, 1999, The Company had sixteen (16) full-time employees, four of
whom are executive officers, one part-time employee who is an executive officer,
and one active independent sales representative working on a commission-only
basis. There is one other independent sales representative that may be
re-activated in the future. In addition, the Company has engaged twelve
independent contractors who are working on a variety of technical systems and
programming projects.
HISTORY
The Company was incorporated in the state of Nevada on October 22, 1980 as
Cinema-Star Corporation, in September 1989 was re-named Dyna-Seal Corporation,
and subsequently changed its name several times prior to becoming inactive. In
July 1995, the Interactive Buyers Network International, Ltd. name was
established. Prior to becoming Interactive Buyers, the entity was a dormant
corporation with no significant business, assets or liabilities although it did
have several hundred public shareholders. The Board of Directors, subject to the
approval of the Company's shareholders, has recently approved a change of the
name of the Company to Vsource, Inc.
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In July 1995, the Company acquired all the shares of Buyer/Seller Interactive
Software, Inc., which had been incorporated July 11, 1995 in the state of
Nevada. The acquisition was accounted for as a purchase. Buyer/Seller
Interactive was a software development company, working on an interactive system
that would allow corporate buyers and sellers to conduct business
electronically. At that time the Company changed its name to Interactive
Buyers Network International, Ltd. As noted earlier, subject to shareholder
approval, the Company's board of directors has approved a name change to
Vsource, Inc. in order to be more consistent with the names of the Company's two
Internet applications. In December of 1996, control of the Company was acquired
by Joseph E. Thomure and Samuel E. Bradt through the exchange of $305,000 in
convertible notes for 3,028,900 new shares of the Company's common stock. Mr.
Thomure then became Chairman, President and Chief Executive Officer, and Mr.
Bradt became Chief Financial Officer. In early 1997, the Company raised
additional capital by issuing common stock, with the result that no one
individual or group of shareholders retained voting control of the Company.
In May of 1997, Robert C. "Jay" McShirley, founder of Buyer/Seller Interactive
and originator of the Virtual Source Network concept, replaced Mr. Thomure as
President and CEO of the Company. Mr. Thomure became inactive in the business at
that point, and did not stand for re-election to the board of directors. Mr.
Bradt continued as Chief Financial Officer, and replaced Mr. Thomure as Chairman
of the Board. In July of 1997, Buyer/Seller Interactive changed its name to
Virtual Source, Inc.
Virtual Source Publisher was acquired on June 1, 1998, when the Company acquired
all of the outstanding shares of Wpg.Net, Inc. for consideration valued at
$1,186,555. The Company issued 500,000 shares of common stock with a fair value
of $625,000 ($1.25 per share), plus stock options on 500,000 shares with a fair
value of $561,555. The options vest ratably, on a monthly basis, over the 3
years subsequent to the purchase. If Wpg.Net, Inc. division revenues reach
$500,000 before the 3 years vesting period has expired, the additional 500,000
share option vests immediately. The former shareholders of Wpg.Net, Inc. are
entitled to a commission of 50% of Virtual Source Publisher revenue generated by
the Wpg.Net, Inc. division. If the Virtual Source division sales force generates
the revenue, the former Wpg.Net, Inc. shareholders are entitled to a commission
of 25% of the revenue. In the event that the Company is sold, the former
Wpg.Net, Inc. shareholders are entitled to a one-time payment of $3,000,000, the
options vest immediately, and all commission obligations cease to accrue at
that time. The Company guaranteed a minimum stock price of $7.00 per share for
stock held by the former Wpg.Net, Inc. shareholders upon the sale of the
Company.
The above payments that may be due to the former shareholders of Wpg.Net, Inc.
will be paid to DX3, Inc. DX3, Inc. is a corporation formed by and owned by the
former shareholders of Wpg.Net, Inc., now a wholly-owned subsidiary of
the Company, and was established to receive the consideration paid by the
Company for the acquisition of Wpg.Net. The 500,000 shares of common stock and
the option to purchase another 500,000 shares granted for the acquisition of
Wpg.Net were issued in the name of DX3, Inc. To date, no Virtual Source
Publisher revenue has been received, and no commissions have been earned by DX3,
Inc.
In conjunction with the acquisition of Wpg.Net, three of Wpg.Net's executives
signed one-year employment agreements with the Company. The contracts guaranteed
the Wpg.Net executives salaries ranging from $49,500 to $77,250 per year. These
employment agreements have all expired.
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In June 1999, Mr. Robert C. "Jay" McShirley became Chairman of the Company, with
Mr. Bradt continuing as Chief Financial Officer. Also, the Company authorized
management to transfer all assets, liabilities and operations of its 100% owned
subsidiary, Wpg.Net, Inc., into Virtual Source, Inc., its other 100% owned
subsidiary, to be followed by the dissolution of the Wpg.Net, Inc. corporate
entity. Following that action, the Company will function as a holding company
with Virtual Source, Inc. as its only subsidiary.
RISK FACTORS
UNCERTAINTY OF THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN; NEED FOR
ADDITIONAL CAPITAL The Company's auditor has included a "Going Concern" comment
in the footnotes to its financial statements, indicating that operating losses
and a stockholders' deficit at January 31, 1999, create an uncertainty about the
Company's ability to continue as a going concern. The Company is pursuing
various financing alternatives. In April 1999, the Company completed an offering
of common stock under Rule 504 of Regulation D, where it raised $1,000,000, less
offering costs of approximately $5,000. The Company also raised $200,000 in the
quarter ended July 31, 1999 in private placements from an existing shareholder.
Between August 1, 1999 and November 30, 1999, an additional $1,105,973 was
raised as the result of common stock issued in private transactions. The Company
expects these proceeds to fund operations through December 1999. Since the
Company has not yet earned any significant revenues, additional funds will be
needed in the near future. Since the Company's financial position does not
support bank financing or other conventional debt financing, additional common
shares will likely be issued, thus resulting in further shareholder dilution.
Even after that, the Company may need to raise additional funds and it cannot be
certain that additional financing will be available on favorable terms, if at
all. Should the Company not be successful in raising further capital, as to
which no assurance can be given, the Company may not be able to continue its
operations.
INTANGIBLE ASSETS REPRESENT UNUSUALLY LARGE PERCENTAGE OF THE COMPANY'S
TOTAL ASSETS
The Company's financial position at July 31, 1999 includes $725,115 of
intangible assets, representing over 53% of the Company's total assets. This is
an unusually large percentage, and emphasizes the fact that the Company does not
have significant tangible assets, and does not have substantial liquid reserves,
thus making it almost totally dependent upon operating funds obtained from
investors, at this point in time. No assurance can be given that these funds
will be available upon terms acceptable to the Company.
LIMITED OPERATING HISTORY
Virtual Source Network, the Company's primary service offering, began operations
in October 1996 when the earlier version of Virtual Source Network, a software
application for personal computers rather than an Internet application, was
successfully installed and used at a private company in southern California. The
Company has had a limited operating history since then, although it did
successfully install the earlier Virtual Source Network version (personal
computer application) for several clients, and was paid the annual subscription
rate then in effect. This limited history makes an evaluation of the Company's
future prospects very difficult. The new Internet version of Virtual Source
Network has been made available for evaluation and use by five different
companies, each at various stages of the implementation process (see Item 1.
DESCRIPTION OF BUSINESS-VIRTUAL SOURCE NETWORK). The Internet version of Virtual
Source Network is a much more powerful system and, at the same time, much more
complex than the earlier version. To fully benefit from the capabilities of the
new system, it should be integrated with the existing computer systems being
used by the client, such as their inventory management, accounts payable, and
general accounting systems. This takes time, and must be fit into the work
schedules of the Information Technology Departments at client companies. At this
point in time, work on these integration projects is being delayed by many
higher priority client projects associated with Y2K issues. Focus on Y2K issues
is likely to intensify as the year 2000 approaches, and may result in further
delays in Virtual Source Network installations beyond January of the year 2000.
See YEAR 2000 RISK, below, and Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND
RESULTS OF OPERATIONS-IMPACT OF Y2K. In addition, certain systems projects
must be completed, either at client companies, or
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with respect to Virtual Source Network modifications requested by clients, in
order to meet information needs of their unique systems before Virtual Source
Network becomes fully operational for those clients. Each company is different,
and information needs as well as preferences of management differ. The Company
intends to accommodate many of these special requests. There can be no assurance
that any client will ever produce substantial revenues for the Company.
RISKS OF EARLY STAGE COMPANY; NEW, RAPIDLY CHANGING MARKET; NEED TO ATTRACT
LARGE TECHNOLOGICALLY ADVANCED CORPORATIONS The market for Internet applications
and services is at an early stage, and changing rapidly. Internet procurement
is a new market. Its rate of growth and change is unpredictable, as is the
nature of this change. The Company will encounter the risks and difficulties
often encountered by early-stage companies in new and rapidly evolving markets.
The Company's initial success will depend upon attracting several large,
technologically advanced corporations to use Virtual Source Network, and their
favorable results from this usage. Subsequent success will depend on the
Company's ability to communicate these early successes to the marketplace, thus
attracting significant numbers of other businesses and buying organizations. No
assurance can be given that the Company will be successful in the marketplace,
or if successful, that it will attract significant numbers of clients. There
can be no assurance that an adequate demand for, and usage of, the Company's
products will develop.
COMPLEX IMPLEMENTATION AND INTEGRATION OF VIRTUAL SOURCE NETWORK MAY IMPEDE
MARKET PENETRATION The installation of Virtual Source Network, and integration
with a client's systems currently in use is a complex, time consuming and
expensive process. The Company's management estimates that the installation and
integration process may take anywhere from four months to six months, depending
on the size of the client company, the complexity of its operations, the
configurations of its current computer systems, and other systems projects that
compete for the time and attention of the Information Technology departments of
the clients. Management expects that most integration projects will involve
various integrators as outside systems consultants to the client, and estimates
the combined cost (to the client) of internal and external resources applied may
be as much as $2,000,000 per installation. The Company's ability to continually
enhance the features of Virtual Source Network, in response to client's widely
differing needs, is yet to be proven. As a result, Virtual Source Network may
not achieve significant market penetration in the near future, or ever. Failure
to achieve significant market penetration would have negative consequences for
the Company.
LARGE OPERATING LOSSES EXPECTED TO CONTINUE The Company has accumulated net
losses of $6.0 million through July 31, 1999, the end of the second quarter of
fiscal 2000. Since inception, the Company has not had material revenues, and
has recognized no revenues at all from the Internet version of Virtual Source
Network. The Company expects to derive the majority of its revenues from Virtual
Source Network fees over the next five years. In addition, provided that
revenues develop more or less as expected, the Company expects to spend as much
as 10 million to 15 million dollars per year, during the next two or three
years, on marketing, sales, technology development, training and administration.
There can be no assurance that the Company will be able to fund these expenses.
Failure to fund these expenses would have materially adverse consequences for
the Company.
MARKET LIMITATIONS DUE TO APPLICATION OF PENNY STOCK RULES TO THE COMMON STOCK
OF THE COMPANY The securities of the Company are subject to a Securities and
Exchange Commission rule that imposes special sales practice requirements upon
broker-dealers who sell such securities to persons other than established
customers or accredited investors. For purposes of the rule, the phrase
"accredited investors" means, in general terms, institutions with assets in
excess of $5,000,000, or individuals having a net worth in excess of $1,000,000
or having an annual income that exceeds $200,000 (or that, when combined with a
spouse's income, exceeds $300,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, the rule may affect the ability of broker-dealers to sell
the securities of the Company and also may affect the ability of any shareholder
to sell their securities in any market that might develop for the common stock.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities Exchange Act of 1934,
as amended. Because the securities of the Company constitute "penny stocks"
within the meaning of the rules, the rules apply to the Company and to its
securities. The rules may further affect the ability of owners of shares to sell
the securities of the Company in any market that might develop for them.
Shareholders should be aware that, according to Securities and Exchange Release
No. 34-29093, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales person; and (iv) the wholesale dumping of the
same securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the resulting inevitable collapse of
those prices and with consequent investor losses.
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INCREASED OPERATING EXPENSES EFFECT ON OPERATIONS AND PRICE OF COMMON STOCK
The Company plans to increase operating expenses to expand its sales and
marketing operations, establish new strategic relationships, fund additional
systems development, and increase its business and technical staff. These
planned expenses will increase operating losses during reporting periods before
significant revenues develop. This could lead to drops in the market price of
the Company's shares.
SUBSTANTIAL COSTS OF ANY SECURITIES LITIGATION COULD DIVERT LIMITED RESOURCES OF
THE COMPANY In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price of
its securities. The Company could become a target of similar securities
litigation. Litigation of this type could result in substantial costs and divert
management's attention and resources.
DEPENDENCE ON VIRTUAL SOURCE NETWORK ANTICIPATED REVENUES The Company expects
that when revenues do develop, substantially all of those revenues will come
from Virtual Source Network clients. Although Virtual Source Network fees are
believed by management of the Company to be below those currently charged for
leading competitive systems and services, future reductions in competitive
prices could negatively impact the demand for, or usage of, Virtual Source
Network. These changes may impede Virtual Source Network's ability to achieve
broad market acceptance, thus negatively impacting the Company's opportunity to
eventually become profitable. There can be no assurance that broad and timely
acceptance of Virtual Source Network, which is critical to the Company's future
success, will be achieved. Failure to achieve anticipated revenues would have
adverse consequences for the Company.
COMPETITIVE "BUSINESS-TO-BUSINESS" INTERNET COMMERCE MARKET; EFFECT ON MARKET
SHARE AND BUSINESS The market for Virtual Source Network is very competitive,
evolving and subject to rapid technological change. Intensity of competition is
likely to increase in the future. Increased competition from new competitors is
likely to result in loss of market share, which could negatively impact
the Company's business. Competitors vary in size, and in the scope and breadth
of the products and services offered. Virtual Source Network will encounter
competition from Ariba, Clarus, Commerce One, Concur Technologies, Extricity, GE
Information Services, Intelysis, Netscape Communications, Purchase Pro, and
TRADE'ex Electronic Commerce Systems. Virtual Source Network may also encounter
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competition from several major enterprise software developers, such as Oracle,
PeopleSoft and SAP who are not presently considered to be direct competitors,
but who have announced intentions to enter into the market. In addition, because
there are relatively low barriers to entry in this market, additional
competition from other established and emerging companies may develop.
Many current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
the Company, significantly greater name recognition, and a larger installed base
of customers. In addition, many of the competitors have well-established
relationships with the Company's clients and potential clients, and have
extensive knowledge of the industry. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors, or alliances among
competitors, may emerge and rapidly acquire significant market share. Actions
taken by the Company competitors, including price cuts, new product
introductions and enhancements could have material adverse consequences for the
Company. There can be no assurance that the Company will be able to compete with
price cuts, or develop, introduce and market enhancements to its service on a
timely basis to compete successfully in this market.
VIRTUAL SOURCE NETWORK REVENUES EXPECTED FROM A LIMITED NUMBER OF CLIENTS,
MEANING INCREASED POTENTIAL IMPACT OF CUSTOMER LOSS The Company expects that
Virtual Source Network revenues, if any, during the current fiscal year will
come from a small number of clients, perhaps as few as five or less. The loss
of any single customer or change in a client's budget could have a substantial
negative impact on the business of the Company.
THIRD PARTIES IMPLEMENT/INTEGRATE VIRTUAL SOURCE NETWORK; NEGATIVE IMPACT UPON
REVENUE GOALS IF THIRD PARTIES UNAVAILABLE OR DO NOT PERFORM The Company expects
to rely, almost exclusively, on a number of third parties to propose and explain
Virtual Source Network to prospective clients, to implement Virtual Source
Network, to integrate Virtual Source Network with clients' existing systems, and
to train users. The Company's ability to support its strategic partners, in
pursuit of large numbers of buyers and suppliers, is yet to be proven. If the
Company is unable to establish and maintain effective, long-term relationships
with these third parties, or if these third parties are unable to meet the needs
and expectations of Virtual Source Network clients, the Company would have
difficulty achieving its revenue goals. The Company has established
relationships with PricewaterhouseCoopers for integration of Virtual Source
Network into the clients technology departments; with Analytics, Inc. for
analysis of client dollars spent, and potential benefits of Internet
procurement, and with IBM for training of clients in the use of Virtual Source
Network. This strategy may also require that the Company develop new
relationships with third party implementers/integrators as the number of Virtual
Source Network users increases.
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A number of potential competitors, including Oracle, SAP and PeopleSoft, have
significantly more well-established relationships with these third parties and,
as a result, these third parties may be more likely to recommend competitors'
products and services.
VENDORS ARE ESSENTIAL TO SUCCESS OF VIRTUAL SOURCE NETWORK; NEGATIVE IMPACT OF
VENDORS' FAILURE TO JOIN THE NETWORK In order to operate, Virtual Source
Network requires that vendors be able to access the network and that client
buyers be able to communicate their requirements electronically to vendors.
Currently, vendors can access Virtual Source Network even if they have not
joined the network, but it is far more efficient if a vendor does join the
network. It is necessary that a client's key vendors join the network in order
to achieve the full benefits of the system, and the Company does expect that
vendors will join. Network membership is now free for any vendor, and client
buyers joining Virtual Source Network make direct requests of their key vendors
that they join. When a large corporation requests that its vendors adapt to a
new purchasing process, and that change is free, there is a strong incentive for
those vendors to make that change, and to protect their customer relationships.
To date there has been no significant vendor resistance to joining the new
Internet version of Virtual Source Network. During 1996 and 1997, however, the
Company found significant vendor resistance to joining the Virtual Source
Network. Vendors viewed Virtual Source Network as another increase in
competitive price pressure. They also saw an increased possibility of losing
customers to lower cost vendors not previously competing for the business.
Vendors also resisted annual subscription fees of $980. Finally, the
non-Internet version was more difficult for vendors to operate. Since 1997
several important changes have occurred. First, electronic commerce and the
resultant increased competition have become more accepted by vendors. It is
management's opinion that most vendors believe that they will eventually be
required to do business electronically, if they have not already started.
Second, the Internet version of Virtual Source Network is easier for vendors to
use. Finally, the Company no longer charges subscription fees to vendors.
Despite these changes, there can be no assurance that vendor resistance will not
again develop. Should significant new vendor resistance develop, that could
slow adoption of Virtual Source Network by clients, and negatively impact
potential revenues of the Company.
SUBSTANTIAL COSTS OF ANY PRODUCT LIABILITY CLAIMS; NO PRODUCT LIABILITY
INSURANCE Errors, defects or other performance problems with Virtual Source
Network could result in financial or other damages to our clients. Management
believes that the contractual limits of liability, indemnification provisions
and disclaimers of warranties should eliminate liability of the Company in the
event of a product liability claim. A product liability claim, however, even if
not successful, would likely be time consuming and costly and could seriously
harm the Company. The Company does not maintain product liability insurance.
Although the terms and conditions in Virtual Source Network user agreements
contain disclaimers of any warranties designed to limit exposure to these
claims, existing or future laws, or unfavorable judicial decisions, could weaken
or negate these provisions and have materially adverse consequences for the
Company.
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SUCCESS DEPENDS ON KEY PERSONNEL; NO "KEY MAN" LIFE INSURANCE Future performance
depends on the continued service of key personnel, and the ability to attract,
train, and retain additional technical, marketing, customer support, and
management personnel. The loss of one or more key employees could negatively
impact the Company, and there is no "key man" life insurance in force at this
time. However, the Company does plan to obtain this insurance. Competition for
qualified personnel is intense, and there can be no assurance that the Company
will retain key employees, or attract and retain other needed personnel.
PROTECTION OF INTELLECTUAL PROPERTY; LACK OF PATENTS; POTENTIAL PIRATING
The Company's success depends to a large extent on its exclusive technology, and
relies on a combination of contractual provisions, confidentiality procedures,
trade secrets, copyrights and trademark protections. The Company has no patents
at this point, and the Company's technologies may not be patentable. Despite
efforts to protect its exclusive rights, unauthorized parties may attempt to
copy aspects of that technology, or to obtain and use our exclusive information.
Policing unauthorized use of this technology is difficult, and while the Company
is unable to determine the extent to which piracy of the Company's software may
exist, software piracy can be expected to be a persistent problem. Further,
competitors may independently develop similar technology, or duplicate the
Company's services without violating intellectual property rights.
At present, the Company's technologies are owned outright by the Company.
However, the Company may in the future have to license or otherwise obtain
access to intellectual property of third parties.
SUBSTANTIAL COSTS OF ANY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS There has
been a substantial amount of litigation in the software industry and the
Internet industry regarding intellectual property rights. It is possible that in
the future, third parties may claim that the Company's technology may infringe
their intellectual property. Management is not aware of any infringement or
claim of infringement by a third party. It is expected that software product
developers and providers of electronic commerce solutions will increasingly be
subject to infringement claims as the number of products and competitors grows
and the functionality of products in different industry segments overlaps.
Any claims, with or without merit, could be time-consuming, resulting in costly
litigation.
STRAIN ON LIMITED RESOURCES DUE TO NEED TO MANAGE GROWTH AND EXPANSION The
Company anticipates a period of significant expansion and growth, which most
likely will place significant strain upon management, systems, and resources.
Failure to properly manage that growth and expansion, if and when it occurs,
will jeopardize the future of the business.
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YEAR 2000 RISK
Although management believes that its internally developed systems and
technology are Year 2000 compliant, certain other technologies nevertheless
could be substantially impaired, or cease to operate, due to Year 2000 problems.
See Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONS-IMPACT OF Y2K. The Company relies on information technology
supplied by third parties as well, and strategic partners may also be dependent
on information technologies not Year 2000 compliant, and on their own
third-party vendor systems that may be at risk. These Year 2000 problems could
adversely affect the Company. Further, the Internet itself could face serious
disruptions arising from Year 2000 problems.
Many potential Virtual Source Network clients have implemented policies that
prohibit or strongly discourage making changes or additions to their internal
computer systems until after January 1, 2000. Further, some technology budgets
have been diverted from other projects to deal with Year 2000 issues.
The Company has already experienced delays in the new client decision-making
process for this reason, and expects delays to continue through December 31,
1999, and into 2000.
THE COMPANY'S DEPENDENCE UPON, AND RISKS RELATED TO, THE INTERNET
The use of Virtual Source Network and Virtual Source Publisher depends on the
increased acceptance and use of the Internet as a medium of commerce and
communication. While management believes that acceptance and use of the Internet
will continue to increase at very rapid rates, it is not guaranteed. If that
growth does not continue, clients may not adopt or use these new Internet
technologies at the rates management has assumed, and the Company may not be as
successful as originally thought. Further, even if acceptance and use of the
Internet does increase rapidly, but the technology underlying the Internet and
other necessary technology and related infrastructure does not effectively
support that growth, the Company's future would be negatively impacted.
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POTENTIAL BREACHES OF THE COMPANY'S SECURITY SYSTEMS A significant barrier to
electronic commerce and communications is the secure transmission of
confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments could result in compromises or breaches of the Company's security
systems or those of other web sites to protect the Company's exclusive
information. If any well-publicized compromises of security were to occur, it
could have the effect of substantially reducing the use of the web for commerce
and communications. Anyone who circumvents the Company's security measures could
misappropriate its exclusive information or cause interruptions in services or
operations. The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses, software programs that disable
or impair computers, have been distributed and have rapidly spread over the
Internet. Computer viruses could theoretically be introduced into the Company's
systems, or those of our clients or vendors, which could disrupt Virtual Source
Network or Virtual Source Publisher, or make it inaccessible to clients or
vendors. Although language in its user agreement places responsibility with
users to protect Virtual Source Network from such threats, the Company may be
required to expend significant capital and other resources to protect against
the threat of security breaches or to alleviate problems caused by breaches. To
the extent that the Company's activities may involve the storage and
transmission of exclusive information, such as credit card numbers, security
breaches could expose the Company to a risk of loss or litigation and possible
liability. Despite provisions to the contrary in its user agreements, the
Company's security measures may be inadequate to prevent security breaches, and
business could be seriously impacted if they are not prevented.
GOVERNMENT REGULATION
As Internet commerce continues to grow, the risk that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services, increases. It is possible that
legislation could expose companies involved in electronic commerce to liability,
which could limit the growth of electronic commerce generally. Legislation could
dampen the growth in Internet usage and decrease its acceptance as a
communications and commercial medium. If enacted, these laws, rules or
regulations could limit the market for the Company's services.
One or more states may seek to impose sales tax collection obligations on
out-of-state companies like the Company that engage in or facilitate electronic
commerce throughout numerous states. These proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect the Company's opportunity to derive financial benefit from these
activities.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this document constitute forward-looking statements.
These statements involve known and unknown risks, uncertainties, and other
factors that may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements.
Although management believes that the expectations reflected in the
forward-looking statements are reasonable, there is no guarantee that future
results, levels of activity, performance or achievements will be attained.
Moreover, neither management nor any other person assumes responsibility for the
accuracy and completeness of these statements.
INDUSTRY OVERVIEW
The Internet has emerged as the fastest growing communication medium in history.
Management estimates there were approximately 100 million users at the end of
1998, with projected growth to more than 300 million users by 2002. The Internet
is dramatically changing how businesses and individuals communicate and share
information. The Internet has created new opportunities for conducting commerce,
such as business-to-consumer and person-to-person electronic commerce. Recently,
the widespread adoption of intranets and the acceptance of the Internet as a
business communications medium has created a foundation for business-to-business
electronic commerce that will enable organizations to streamline complex
processes, lower costs and improve productivity.
With this foundation, management believes that Internet-based, business-
to-business electronic commerce is poised for rapid and substantial growth and
represents a significantly larger opportunity than business-to-consumer or
person-to-person electronic commerce. Management expects that this market will
create a substantial demand for Internet-based electronic commerce applications.
Today, most organizations buy goods and services through paper-based or
semi-automated processes. These processes are costly, time consuming and complex
and often include the re-keying of information, lengthy approval cycles and
significant involvement of financial and administrative personnel. Management
estimates that the cost of each corporate purchasing transaction ranges from $75
to $175, often exceeding the cost of the items being purchased. Beyond the time
and expense associated with manual processing costs, organizations suffer even
greater costs when they cannot fully exploit procurement economies of scale.
Most organizations lack the systems that enable them to monitor purchases and
compile data necessary to negotiate better volume discounts with preferred
suppliers. When preferred suppliers are not used, the cost of items purchased
tends to be higher.
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With the increasingly widespread use of the Internet, businesses are now in a
position to further automate purchasing activities. The availability of this
technology creates a significant market opportunity for Internet-based
business-to-business electronic commerce solutions.
COMPETITION
The market for Virtual Source Network is very competitive and likely to become
more so, and is subject to rapid technological change. Increased competition is
likely to result in price reductions, to some extent caused by Virtual Source
Network pricing which management believes is below current industry averages.
See COMPETITIVE "BUSINESS-TO-BUSINESS" INTERNET COMMERCE MARKET; EFFECT ON
MARKET SHARE AND BUSINESS, above. Although management believes that Virtual
Source Network compares favorably with respect to most competitive offerings,
and favorably with respect to overall cost, Virtual Source Network does not yet
have a large referral base, nor large numbers of buyers or vendors using the
network, and its performance has yet to be proven with regard to the new
Internet version of Virtual Source Network. As a result, it is yet to be seen
whether Virtual Source Network can compete successfully.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1998:
The Company's business is at an early stage, and is in transition from a firm
primarily engaged in technology development and refinement, to a firm that
is marketing and selling its services. During the last two fiscal years,
expenditures have been made primarily for the purpose of developing, testing and
improving the Company's two Internet applications, Virtual Source Network and
Virtual Source Publisher. A modest amount of revenue has been received from
Virtual Source Network users paying annual subscription fees, but that revenue
ceased when efforts turned to the development of the Internet version of Virtual
Source Network, and a decision was made to charge transaction fees for usage of
Virtual Source Network rather than subscription fees. Substantially all the cash
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required for operations during fiscal years ended January 31, 1998 and 1999 has
come from investors. Other than convertible demand notes of $857,200 at January
31, 1999, and normal accounts payable, the Company has no outstanding debts.
REVENUE
Revenue in fiscal 1999 was $61,387, down $10,628 (14.8%) from $72,015 in fiscal
1998. Both figures consisted primarily of subscription revenues and, as stated
above, the Company's policy of charging subscription fees has been discontinued,
so revenues from this source will cease.
GENERAL & ADMINISTRATIVE EXPENSES
Expenses in fiscal 1999 were $651,007 up $299,295 (85.1%) from $351,712 in
fiscal 1998. The increase was primarily due to the added payroll and operating
expenses associated with Wpg.Net, Inc., which was acquired in June of 1998.
The Company, from time to time, issues shares of its common stock to employees
as bonuses and to outside consultants in lieu of fees. 403,722 shares were
issued for the fiscal year ended January 31, 1998, at an expense of $168,556 to
the Company. 318,500 shares were issued for the fiscal year ended January 31,
1999 at an expense of $149,695.
RESEARCH AND DEVELOPMENT
Expenses in fiscal year 1999 were $1,263,720 up $580,984 (85.1%) from $682,736
in fiscal 1998, primarily due to the addition of technical personnel in the
Wpg.Net, Inc. office near Seattle, Washington. The work performed in fiscal 1999
was related to Virtual Source Network, and Virtual Source Publisher, whereas in
1998, the work was exclusively on Virtual Source Network. The Company does no
work that would be considered pure research, or basic research.
NET LOSS FROM OPERATIONS
The Net Loss from Operations during fiscal year 1999 was $1,853,340, up $890,907
(92.6%) from a loss of $962,433 in fiscal 1998, primarily because of the
increase in general and administrative expense noted above.
LOSS ON ABANDONMENT OF EQUIPMENT
Loss on Abandonment of Equipment was zero in fiscal 1999, down 100% from a loss
of $27,856 in fiscal 1998. In the fiscal year ended January 31, 1998, laptop
computers valued at $27,856 were written off. There was no similar write-off in
fiscal 1999. The laptops in question were provided to an eighteen person sales
force in early 1997. The sales approach used at that time proved particularly
unsuccessful, and was terminated. By that time, the laptop computers had become
partially obsolete and their value had decreased significantly. The Company
elected not to upgrade them, nor to attempt collection from the terminated sales
people.
LITIGATION SETTLEMENT
The litigation settlement in fiscal 1999 was $91,110, up from zero in fiscal
1998. During fiscal 1999, a mutual compromise settlement between the Company
and its landlord resulted in a $30,000 cash payment to the Company and free rent
for one year beginning December 1, 1998. The $91,110 settlement included that
cash payment, the free rent, and reimbursement of legal fees and costs
associated with the move. There was no similar litigation or settlement in the
prior year.
NET LOSS
The Net Loss for fiscal 1999 was $1,762,230, up $771,941 (78.0%) from $990,289
in fiscal 1998. The largest factor contributing to the increase in fiscal 1999
net loss, compared to the prior year, was the increased payroll and operating
expense associated with the June 1998 acquisition of Wpg.Net, Inc.
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Weighted Average Common Shares Outstanding were 10,529,147 during fiscal 1999,
up 1,336,336 (14.5%) from 9,192,811 in fiscal 1998. During fiscal 1999, 500,000
shares were issued as consideration in the acquisition of Wpg.Net, Inc., 778,656
shares were issued upon conversion of certain convertible demand notes, and
318,500 shares were issued for services rendered. These issuances were partially
offset by the surrender of 1,000,000 shares from two shareholders.
NET LOSS PER COMMON SHARE
The Net Loss per Common Share was $0.17 in fiscal 1999, up $.06 (54.6%) from
$0.11 in fiscal 1998. The percentage increase in loss per share was less than
the percentage increase in Net Loss, because of the increase in Weighted Average
Common Shares Outstanding.
CASH
Cash at January 31, 1999 was $59,937, up $4,531 (8.2%) from $55,406 at January
31, 1998. The change reflects normal fluctuations in operating cash balances.
ACCOUNTS RECEIVABLE
Accounts Receivable were $3,590 at January 31, 1999, down $23,973 (86.9%) from
$27,563 at January 31, 1998. The decrease in accounts receivable from year to
year is a direct result of the Company's change in pricing structure of the new
Internet version of Virtual Source Network from a subscription basis to a
transaction usage fee basis. During the transition period the subscription fees
were discontinued and the transactional fees had not yet developed.
TOTAL CURRENT ASSETS
Current Assets were $63,527, down $19,442 (23.4%) from $82,969 at January 31,
1998. The decrease in Current Assets is due to the reduction in Accounts
Receivable.
FURNITURE AND FIXTURES
Furniture and Fixtures were $64,588 at January 31, 1999, unchanged from January
31, 1998.
SOFTWARE
Software was $8,899 at January 31, 1999, unchanged from January 31, 1998.
ACCUMULATED DEPRECIATION
Accumulated Depreciation was $50,920 at January 31, 1999, up $21,660 (74.0%)
from $29,260 at January 31, 1998. The increase resulted from normal depreciation
expense during fiscal 1999.
PROPERTY AND EQUIPMENT, NET
Property and Equipment, Net was $22,567 at January 31, 1999, down $21,660
(49.0%) from $44,227 at January 31, 1998. The year to year reduction is the
result of a comparable increase in accumulated depreciation. There was no other
change.
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PREPAID RENT
Prepaid Rent was $37,500 at January 31, 1999, up from zero at January 31, 1998.
The $37,500 of prepaid rent at January 31, 1999 represents the remaining ten
months of free rent (at $3,750 per month) available to the Company as a result
of the litigation settlement discussed earlier. There was no similar settlement
in effect at January 31, 1998.
EMPLOYEE RECEIVABLES
Employee Receivables were $68,027, up $9,400 (16.0%) from $58,627 at January 31,
1998. This increase was primarily due to expense advances.
INTANGIBLE ASSETS
Intangible Assets were $922,875 at January 31, 1999, up from zero at January 31,
1998. This amount represents the unamortized portion of the goodwill, or excess
of price paid over book value of assets acquired, booked as a result of the
Wpg.Net, Inc. acquisition in June 1998. There was no comparable item at January
31, 1998.
ORGANIZATIONAL COSTS, NET OF ACCUMULATED AMORTIZATION
Net Organizational Costs were $1,757 at January 31, 1999, down $876 (33.3%) from
$2,633 at January 31, 1998. The reduction represents normal amortization during
the year.
TOTAL OTHER ASSETS
Total Other Assets were $1,030,159 at January 31, 1999, up $968,899 (1,581.6%)
from $61,260 at January 31, 1998, primarily due to the large increase in
Intangible Assets described above.
TOTAL ASSETS
Total Assets were $1,116,253 at January 31, 1999, up $927,727 (492.3%) from
$188,456 at January 31, 1998, primarily due to the large increase in Intangible
Assets described above.
ACCOUNTS PAYABLE
Accounts Payable were $49,222 at January 31, 1999, up $16,735 (51.5%) from
$32,487 at January 31, 1998. This increase represents increases in normal
business activity.
ACCRUED LIABILITIES
Accrued Liabilities were $77,785 at January 31, 1999, up $47,597 (157.7%) from
$30,188 at January 31, 1998. Most of this increase represents interest expense
accrued on the Company's $857,200 of convertible demand notes outstanding at
January 31, 1999. This interest is payable in cash at the option of the Company.
If not paid in cash, the holders have the right to convert any of this accrued
interest into the Company's common stock.
CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Convertible Notes payable were $857,200 at January 31, 1999, up $659,525
(333.6%) from $197,675 at January 31, 1998. This increase represents the
principal amount of new notes issued during the period, less the principal
amount of notes converted into common shares during the same period.
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TOTAL CURRENT LIABILITIES
On January 31, 1999 Total Current Liabilities were $984,207 up $723,857 (278.0%)
from $260,350 on January 31, 1998. This change resulted primarily from the
increase in Convertible Notes payable, as described above.
DEFERRED REVENUE
On January 31, 1999 Deferred Revenue was $3,250 down $25,469 (88.7%) from
$28,719 on January 31, 1998. This change represents deferred subscription
revenue recognized as income during the period. It also reflects the fact that
the Company no longer sells subscriptions to the earlier version of Virtual
Source Network, meaning that no new deferred subscription amounts were added
during the period.
TOTAL LIABILITIES
On January 31, 1999 Total Liabilities were $987,457 up $698,388 (241.6%) from
$289,069 on January 31, 1998. This change resulted primarily from the increase
in Convertible Notes payable, as described above.
COMMON STOCK, $.01 PAR VALUE
Common Stock increased $5,971 or 5.5%, from $108,043 on January 31, 1998, to
$114,014 on January 31, 1999. This increase represents the sum of the par value
of 778,656 shares issued upon conversion of convertible demand notes, 500,000
common shares issued in connection with the acquisition of Wpg.Net, Inc., and
318,500 shares issued in return for services rendered, less the par value of
1,000,000 shares surrendered by certain shareholders.
PAID-IN-CAPITAL IN EXCESS OF PAR
Paid-in-Capital increased $1,985,668, or 86.0%, from $2,310,724 on January 31,
1998 to $4,296,392 on January 31, 1999. This increase represents the transaction
value per share, in excess of par, for each of the shares issued during the
fiscal year ended January 31, 1999. See "COMMON STOCK, $.01 PAR VALUE" above.
ACCUMULATED DEFICIT
On January 31, 1999 the Accumulated Deficit was $4,281,610 up $1,762,230 (70.0%)
from $2,519,380 on January 31, 1998. This increase represents the Net Loss
recorded for the year ended January 31, 1999.
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS - SIX MONTHS ENDED
JULY 31, 1999, COMPARED TO THE SIX MONTHS ENDED JULY 31, 1998:
REVENUE
For the six months ended July 31, 1999 revenue was $7,985, down $33,717 (80.9%)
from $41,702 during the six months ended July 31, 1998. This decrease results
from the Company's decision, early in the 1999 fiscal period, to discontinue the
annual subscription program relative to the previous version of Virtual Source
Network. It also reflects the fact that the new Internet version of Virtual
Source Network has not yet begun to generate revenue.
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GENERAL AND ADMINISTRATIVE EXPENSES
For the six months ended July 31, 1999, General and Administrative Expenses were
$576,996, up $273,256 (90.0%) from $303,740 during the six months ended July 31,
1998. This increase was caused primarily by the added payroll and other
expenses associated with the operation of Wpg.Net, Inc., acquired in June of
1998, and by additional payroll and systems development expense associated with
continuing work on the Internet version of Virtual Source Network.
RESEARCH and DEVELOPMENT
For the six months ended July 31, 1999, Research and Development expenses
increased $530,438 (89.9%) to $1,120,052, up from $589,614 for the six months
ended July 31, 1998. The increase was due to the addition of technical personnel
in the Seattle office, as well as the addition of independent contractors
working as systems analysts and programmers in the Seattle office. During the
six months ended July 31, 1999, the work was almost exclusively on the Virtual
Source Network, as was also true in the six months ended July 31, 1998. The
Company does no work that would be considered pure research, or basic research.
NET LOSS FROM OPERATIONS/NET LOSS
For the six months ended July 31, 1999, Net Loss from Operations and Net Loss
were identical line items and were each $1,689,063, up $837,411 (98.3%) from
$851,652 during the six months ended July 31, 1998. The largest factor
contributing to the increased loss is the increase in General and Administrative
Expenses, which, in turn, results primarily from the Wpg.Net, Inc. acquisition
and the increase in system development efforts, as discussed above.
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC
For the six months ended July 31, 1999, the Weighted Average of Common Shares
Outstanding was 12,231,402, up 1,474,782 (13.7%) from 10,756,620 during the six
months ended July 31, 1998. This increase reflects the issuance of 887,869
shares in connection with a private placement financing, 636,100 shares upon
exercise of employee stock options, and 135,932 shares for other purposes,
including conversion of convertible demand notes and consideration for services
rendered.
NET LOSS PER COMMON SHARE - BASIC
For the six months ended July 31, 1999, the Net Loss per Common Share was $0.14,
up $0.06 (75.0%) from $0.08 during the six months ended July 31, 1998. The
increased per share loss reflects the $443,996 increase in Net Loss, partially
offset by the 1,474,782 share increase in Weighted Average Common Shares
Outstanding during the same period.
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION - AT JULY 31, 1999,
COMPARED TO JANUARY 31, 1999:
CASH
On July 31, 1999 Cash totaled $438,300, up $378,363 (631.3%) from $59,937 on
January 31, 1999. This increase reflects the remaining proceeds of the private
placement financing completed in April 1999, plus a $100,000 investment from an
existing shareholder in July 1999.
ACCOUNTS RECEIVABLE
On July 31, 1999 Accounts Receivable were zero, down $3,590 (100.0%) from $3,590
on January 31, 1999. This decline resulted from the Company's decision, early in
fiscal 1999, to discontinue marketing the previous version of Virtual Source
Network while the new Internet version was in development. In addition, the new
Internet version has not yet begun to generate revenue, and therefore no new
accounts receivable.
TOTAL CURRENT ASSETS
On July 31, 1999 Total Current Assets were $438,300, up $374,773 (589.9%) from
$63,527 on January 31, 1999. This increase reflects the remaining proceeds of
the private placement financing completed in April 1999 plus the additional
$100,000 investment in July 1999 as described above.
FURNITURE AND FIXTURES
On July 31, 1999 Furniture and Fixtures totaled $155,547, up $90,959 (140.8%)
from $64,588 on January 31, 1999. This increase represents additional computer
hardware purchased, as well as office furniture.
SOFTWARE
On July 31, 1999 Software totaled $8,899, unchanged from January 31, 1999.
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ACCUMULATED DEPRECIATION
On July 31, 1999 Accumulated Depreciation totaled $72,170, up $21,250 (41.7%)
from $50,920 on January 31, 1999. This increase represents depreciation expense
for the six months ended July 31, 1999.
PROPERTY AND EQUIPMENT, NET
On July 31, 1999 Property and Equipment, Net totaled $92,276, up $69,709
(308.9%) from $22,567 on January 31, 1999. This change resulted primarily from
the acquisition of computer hardware and office furniture mentioned above.
PREPAID RENT
On July 31, 1999 Prepaid Rent was $15,000, down $22,500 (60.0%) from $37,500 on
January 31, 1999. This asset represents the free rent negotiated in the
Company's settlement agreement with its landlord. The decrease represents six
months rent value at $3,750 per month.
EMPLOYEE RECEIVABLES
On July 31, 1999 Employee Receivables totaled $102,597, up $34,570 (50.8%) from
$68,027 on January 31, 1999. This change resulted primarily from expense
advances to officers and other employees who travel extensively on behalf of
the Company. During the first six months of this fiscal year, travel has
increased significantly as a result of the Company's greatly increased marketing
activities.
INTANGIBLE ASSETS, NET OF AMORTIZATION
On July 31, 1999 Intangible Assets, net, were $725,115, down $197,760 (21.4%)
from $922,875 on January 31, 1999. This change resulted primarily from
amortization during the six month period. The intangible asset represents
Goodwill associated with the June 1998 acquisition of Wpg.Net, Inc.
OTHER ASSETS
On July 31, 1999 Other Assets totaled $1,319, down $438 (24.9%) from $1,757 on
January 31, 1999. This was not a material change.
TOTAL ASSETS
On July 31, 1999 Total Assets totaled $1,374,607, up $258,354 (23.0%) from
$1,116,253 on January 31, 1999. This change resulted primarily from the increase
in cash (remaining proceeds of private placement), and furniture & fixtures
(computer hardware & office furniture).
ACCOUNTS PAYABLE
On July 31, 1999 Accounts Payable totaled $120,487, up $71,265 (144.8%) from
$49,222 on January 31, 1999. This change resulted primarily from contract
programming expenses associated with development work on Virtual Source Network.
Most of these invoices were paid subsequent to July 31, 1999.
ACCRUED LIABILITIES
On July 31, 1999 Accrued Liabilities totaled $87,727, up $9,942 (12.8%) from
$77,785 on January 31, 1999. This increase resulted primarily from the accrual
of interest due on the Company's outstanding convertible demand notes.
NOTES PAYABLE-RELATED PARTIES
On July 31, 1999 the Company's outstanding convertible demand notes totaled
$777,206, down $79,994 (9.3%) from $857,200 on January 31, 1999. This change
reflects the net result of new notes issued less notes converted to shares of
common stock of the Company.
20
<PAGE>
DEFERRED REVENUE
On July 31, 1999 Deferred Revenue was $933, down $2,317 (71.3%) from $3,250 on
January 31, 1999. This change represents deferred subscription revenue
recognized as income during the period.
TOTAL LIABILITIES
On July 31, 1999 Total Liabilities were $986,353, down $1,104 (0.1%) from
$987,457 on January 31, 1999. This change resulted primarily from the increase
in accounts payable and accrued liabilities offset by a reduction in notes
payable, all as described above.
COMMON STOCK
On July 31, 1999 the par value of outstanding common shares was $130,614, up
$16,600 (14.6%) from $114,014 on January 31, 1999. This change represents the
par value of new shares issued during the quarter.
ADDITIONAL PAID-IN-CAPITAL
On July 31, 1999 Paid-in-Capital totaled $6,407,111, up $2,110,719 (49.1%) from
$4,296,392 on January 31, 1999. This increase represents the value (in excess of
par) of new shares issued in connection with the private placement financing
completed in April 1999, the additional $100,000 investment in July 1999,
options exercised during the period, convertible demand notes converted during
the period, and the issuance of stock for services.
ACCUMULATED DEFICIT
On July 31, 1999 the Accumulated Deficit was $5,970,673, up $1,689,063 (39.5%)
from $4,281,610 on January 31, 1999. This increase represents the Net Loss
recorded for the six months ended July 31, 1999.
NOTES RECEIVABLE - RELATED PARTIES
On July 31, 1999 Notes Receivable-Related Parties was $178,798. There was no
comparable item at January 31, 1999. These notes are receivable from employees
who exercised stock options in May 1999. The Company's stock option program
provides several alternative methods of paying for shares acquired through
exercise of options. One of those alternatives is to provide a demand note in
the amount of the purchase, payable to the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no revenue at this time, other than small amounts of interest
income, and certain non-recurring items. While the Company expects to generate
revenue in the future, it is entirely dependent on investor funds at this point
in time. At July 31, 1999, the Company had cash balances totaling $438,300,
primarily as a result of its private placement of common stock in April 1999. An
additional $200,000 was invested by an existing shareholder who purchased
additional shares of the Company common stock in July 1999. Between August 1,
1999 and November 30, 1999, an additional $1,105,973 has been raised as the
result of common stock issued to nine individuals, four of whom are existing
shareholders, in private transactions. Management expects those funds to last
through December 1999. The Company has prepared a private placement memorandum
offering up to 2 million shares of common stock at $2.50 per share in order to
raise up to $5 million. The Company is having conversations with several
funding sources but, at this time, no firm commitments have been received, and
there can be no assurances that funding commitments will result from these
discussions.
The Consolidated Statements of Cash Flows for fiscal years ended January 31,
1999 and 1998 show that net losses ($1,762,230 and $990,289 respectively)
represent the primary use of funds in each fiscal year. In fiscal 1999, $153,000
of convertible notes were issued for services, expense reimbursements, and
accrual of interest, thus reducing the extent to which cash was required to
cover those obligations. Common stock valued at $149,695 was issued for
services, similarly reducing the requirement for cash. The $825,000 proceeds
from convertible note issuance during the fiscal year provided almost all of the
cash required to support the remaining operational expenditures.
21
<PAGE>
The Consolidated Statements of Cash Flows for the six months ended July 31,
1999, and six months ended July 31, 1998, show a similar pattern. Net losses
were ($1,689,063) and ($851,652), respectively, with the issuance of stock for
cash ($1,199,942) and notes for cash ($29,700) in the six months ended July 31,
1999, partially offsetting the cash requirement. A non-cash accounting entry
of $324,093 offsetting a similar entry for compensation expense, required by
Statement of Financial Accounting Standards #123, Accounting for Stock-Based
Compensation, as issued by the Financial Accounting Standards Board, is shown as
an increase in Paid-in-Capital. This did not offset any cash requirement
directly or indirectly, and there was no such cash or other consideration paid
as compensation in the period. These entries in compliance with Statement of
Financial Accounting Standards #123 had no impact on cash flows for any period.
See Item 1. DESCRIPTION OF BUSINESS - RISK FACTORS-NEED FOR ADDITIONAL
FINANCING.
RESEARCH AND DEVELOPMENT FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
During the fiscal year ended January 31, 2000, it is expected that approximately
$1,000,000 will be spent on product development. The Company does not expect to
expend any resources in basic research. The Internet version of the Virtual
Source Network has just become technologically feasible. Additional work is
being done to enhance the present system. Enhancements will make the system
more flexible, and allow for additional options for the user to modify portions
of the system to better meet the unique needs of each particular user's
business. Other enhancements will add new capabilities to the system in the
future. No assurance can be given that the Company will have the resources
necessary to conduct this product development.
IMPACT OF Y2K
GENERAL DESCRIPTION OF THE Y2K ISSUE
The Y2K issue is the result of computer hardware and software language which
utilizes two digits rather than four digits to define the applicable year. As a
result, some of the Company's software and hardware may have software or
embedded chips which fail to distinguish between 1900 and 2000 or do not
recognize the year at all. This could disrupt the Company's operations,
including a temporary inability to process transactions or engage in normal
business activities. Failure of customer and supplier computer systems could
impact revenues and deliveries of key supplies or services. The Company cannot
predict with certainty the nature or likelihood of such impacts.
22
<PAGE>
STATE OF READINESS
Management believes that all of the Company's internally used computers are Y2K
compliant and does not anticipate that it will experience a material adverse
impact to its operations, liquidity or financial condition related to systems
under its control. Virtual Source Network and Virtual Source Publisher were
developed to be Y2K compliant, and do not represent a risk for users. The
Company's servers are housed in a facility especially designed for mission-
critical computers, and the managers of that facility have assured the Company
that all systems and services under the control of the facility managers are
Y2K compliant. Each of the Company's business partners, including Analytics,
PricewaterhouseCoopers, and IBM, are Y2K compliant. The Company and its business
partners use Microsoft software that is Y2K compliant. The Company cannot be
sure that all outside organizations, beyond its control, which may impact the
Company's operations, will be Y2K compliant by December 31, 1999. If outside
organizations beyond the control of the Company are not compliant on time, or if
the Company or its business partners or clients experience unanticipated Y2K
problems of their own, the Y2K issue could have a material impact on the
operations of the Company. The material impact could include delay of the
receipt of revenue by the Company and increase the need for additional
financing. There can be no assurance that the Company's efforts will be adequate
to address unanticipated Y2K problems. Failure to adequately address Y2K
problems may have materially adverse consequences for the Company.
WORST CASE SCENARIO
The worst case scenario for the Company would be the shutting down of the
Internet. Neither Virtual Source Network nor Virtual Source Publisher could
operate and communications for the Company would be severely disrupted. Under
these circumstances, the Company would have no financially feasible alternative
to resume its operations but to wait for the Internet to function again.
Item 3. DESCRIPTION OF PROPERTY
The Company leases approximately 2,500 square feet of standard office space at
its principal location in Ventura, California. This space is rent free, as a
result of the litigation settlement discussed earlier, until the December 31,
1999 end of the lease term. The Company has exercised its option to extend its
lease until December 31, 2000 at a monthly rental of $3,750. The Company's
subsidiary, Wpg.Net, Inc., rents approximately 2,100 square feet of standard
office space near Seattle, Washington, at a current rate of $2,485 per month.
23
<PAGE>
The lease agreement is month-to-month. Wpg.Net, Inc. is in negotiations to
lease approximately 6,500 square feet of standard office space at a monthly
rental of approximately $8,000. This expanded space would be necessary to
support increased technical personnel requirements related to Virtual Source
Network. The lease term would be 36 months. The Company's main servers are
housed in a Seattle facility especially designed for mission-critical computers.
The cost is $3,200 per month, and is available on a month-to-month basis. This
facility maintains back-up electrical power, fire protection, and other security
features. Data communications connections available within this facility provide
direct access to the Internet, without the need to connect through T-1, T-2, or
T-3 high volume telephone lines.
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 31, 1999, information regarding
ownership of the Company's common stock, by each person known by the Company to
be the beneficial owner of more than 5% of its outstanding common stock, by each
director, by certain related shareholders, and by all executive officers and
directors of the Company as a group. All persons named below have sole voting
and investment power over their shares except as otherwise noted. The Company
common stock is the only class of voting securities outstanding. There are no
existing arrangements which may, or are expected to, result in a change in
control of the Company.
<TABLE>
<CAPTION>
SHARES
SHARES UNDERLYING
HELD DEMAND NOTES TOTAL
DIRECTLY % BEING CONVERTED SHARES
<S> <C> <C> <C> <C> <C>
NAME & ADDRESS
Robert C. McShirley . . . . . . . . (1) 880,325 12.6% 245,317 1,125,642
4536 Falkirk Bay
Oxnard, CA 93035
Joseph E. Thomure . . . . . . . . . (2) 785,343 (included in none 785,343
12543 Conway Road. . . . . . . . . . 12.6% above)
Creve Coeur, MO 63141
Richard S. McShirley . . . . . . . . (3) 801,418 6.0% 188,116 989,534
794 Hot Springs Road
Santa Barbara, CA 93108
Samuel E. Bradt . . . . . . . . . . (4) 678,818 5.1% none 678,818
6925 N. Wildwood Point
Chenequa, WI 53029
Jawsh Corporation . . . . . . . . . . (5) 655,487 4.9% 112,969 768,456
William Bates, President
258 Lansbrooke Drive
Chesterfield, MO 63005
DX3,Inc.. . . . . . . . . . . . . . . (6) 733,338 5.5% none 733,338
Dennis W. McQuilliams
16623 N.E. 145th Street
Woodinville, WA 98072
Jeri D. Sessler . . . . . . . . . . . (7) none 0.0% none 0
3410 Penensula Road
Oxnard, CA 93035
P. Scott Turner . . . . . . . . . . . (8) 29,408 0.2% none 29,408
30452 Winchester Road
Castaic, CA 91384
Scott T. Behan . . . . . . . . . . . (8) 10,000 0.1% none 10,000
P.O. Box 1244
Somis, CA 91384
Robert N. Schwartz . . . . . . . . . (8) 19,647 0.1% none 19,647
Hughes Research Laboratories
3011 Malibu Canyon Road
Malibu, CA 90265
All Executive Officers and Directors. 3,152,954 23.8% 433,433 3,586,387
as a group (eight individuals) . . . (9)
<FN>
(1) Includes 180,000 shares acquired by option exercise May 15, 1999, but which shares were physically
issued after July 31, 1999, plus 275,520 shares in street name. Mr. McShirley also has an unvested
option to purchase 100,000 shares at $0.75 per share. These shares were not included in the total.
(2) Includes 267,000 in Jelaine Ltd. partnership, 80,000 held by four family members, and 100,816 in street
name. Under an August 1998 agreement, Mr. Thomure has given Robert C. McShirley a continuing proxy
to vote all shares owned directly or beneficially by Mr. Thomure until August 2000. The percentages above
reflect the shares subject to this proxy.
(3) Includes 22,000 held jointly with his wife Marjorie McShirley. Richard S. McShirley also has an unvested
option to purchase 50,000 shares at $0.75 per share. These shares were not included in the total.
(4) Includes 20,768 held by Merganser Corporation, where Mr. Bradt is President and sole owner. Mr. Bradt
also has an unvested option to purchase 25,000 shares at $0.75 per share. These shares were not included
in the total.
(5) Includes 62,500 shares held by William Bates, President of Jawsh Corporation, and his family. Mr. Bates
has voting and investment control over the shares of the Company that are owned by Jawsh Corporation.
(6) Includes 208,338 shares which, after September 30, 1999, could be purchased at $0.59 per share under a
500,000 share option granted to DX3, Inc. in connection with the June 1998 acquisition of Wpg.Net,
Inc. Also included are 25,000 shares held in the name of Wpg.Net, Inc., now being transferred
to DX3, Inc. Dennis W. McQuilliams is President of DX3, Inc., and has shared investment control
over the shares and option held by DX3, Inc. In addition, Mr. McQuilliams has an unvested option to purchase
75,000 shares at $0.75 per share. These shares are not included.
(7) Jeri D. Sessler joined the Company as Chief Operating Officer. She will be granted an option to purchase
500,000 shares at a price of $.95 per share. None of these shares are included in the total.
(8) Outside Director.
(9) Includes eight of the holdings listed here, including the DX3, Inc. holdings as shown. Although Jeri D.
Sessler is one of the eight individuals counted, she owns no shares.
</TABLE>
24
<PAGE>
Item 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors are elected at each annual shareholder meeting or through interim
board action when required, to serve until his or her successor is qualified,
elected, and begins to serve a new term. Officers are elected at each annual
board of directors meeting or through interim board action when required, to
serve until his or her successor is qualified, elected and begins to serve,
unless the board takes other action relative to the officer.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- --- --------------------------
<S> <C> <C>
Robert C. McShirley 44 President, CEO
Director since Jan. 1998
and Chairman since June 1999
Jeri D. Sessler 45 Chief Operating Officer
Samuel E. Bradt 61 Chief Financial Officer,
Secretary, Treasurer
Director since Dec. 1996
P. Scott Turner 45 Director since Jan. 1998
Scott T. Behan 37 Director since Jan. 1998
Robert N. Schwartz 59 Director since Jan. 1998
Richard S. McShirley 43 Vice President
Dennis W. McQuilliams 58 Vice President & Chief
Technical Officer
Daniel J. Jinguji 43 Vice President
Ronald J. Sanderson 52 Vice President
</TABLE>
BUSINESS EXPERIENCE OF KEY MANAGEMENT PERSONNEL
Robert C. "Jay" McShirley, Chairman, President, and Chief Executive Officer -
Mr. McShirley originated the Virtual Source concept in 1994, and began
development work on the system at that time. In 1995, when the Company acquired
Buyer/Seller Interactive, which was subsequently re-named Virtual Source, Inc.,
and began to commercialize the concept, Mr. McShirley became inactive. Prior
to rejoining the Company in May of 1997, he worked as a manufacturing consultant
with his most recent assignment being with AML Communications, Inc., a
communications products company. While on assignment
25
<PAGE>
with AML, he reorganized their manufacturing processes, and moved operations to
a new, more efficient facility, thus allowing production to expand and allowing
revenues to increase from approximately $2 million annual rate to a $14 million
annual rate. This was accomplished in a one-year period. Prior to 1995, Mr.
McShirley was employed in several manufacturing positions. Prior to that, he
worked with McShirley Products, Inc., a manufacturing firm established by his
father. Robert C. McShirley and Richard S. McShirley are brothers.
Jeri D. Sessler, Chief Operating Officer effective August 1, 1999 - Ms. Sessler
was with PricewaterhouseCoopers from 1996 to 1999 in their Center of Excellence,
Full Value Procurement Practice, Western Region. Her responsibilities included
leading edge procurement practices and technologies, working with Fortune 1000
companies. Prior to 1996, she spent fifteen years with A.T. Kearney, Inc. where
she was Director, Practice Development, Supply Chain Integration Practice. Ms.
Sessler received her MBA from the Lake Forest Graduate School of Management,
and her B.A from Northern Illinois University.
Samuel E. Bradt, Chief Financial Officer, Corporate Secretary, Treasurer,
Director - Since 1984, Mr. Bradt has worked with a number of successful
entrepreneurial businesses as an officer, director and shareholder. Mr. Bradt
devotes approximately fifty (50%) percent of his time to the affairs of
the Company during an average month. He is currently a director of six private
companies, two public companies, Lunar Corporation of Madison, Wisconsin, and
the Company, and one private foundation. He serves as an officer in all but two
of those organizations. Prior to 1984, Mr. Bradt served as a financial officer
with Abbott Laboratories, and with Federal Signal Corporation, and was a
commercial lending officer with the American National Bank in Chicago. Mr.
Bradt received his B.S. at Stanford University, and MBA at the University of
Chicago Graduate School of Business.
Richard S. McShirley, Vice President - Richard McShirley has more than fifteen
Years experience developing and implementing marketing and sales programs. He
worked closely with the creators of King World Productions, and the creators of
the successful television series "Wild America". He led the development of a
complete merchandising and licensing program related to that television series.
Prior to that, he worked with McShirley Products, Inc., a manufacturing business
established by his father. Robert C. McShirley and Richard S. McShirley are
brothers.
Dennis W. McQuilliams, Vice President and Chief Technology Officer - Mr.
McQuilliams has a background in finance, and over fifteen years experience in
design, development and implementation of business application software for mini
and microcomputers. He has developed multi-user programs for municipal entities,
and the vision health industry, as well as accounting systems, payroll systems
and other custom applications. Mr. McQuilliams is an officer and a former
shareholder of Wpg.Net, Inc., now wholly-owned subsidiary of the Company Buyers.
See Item 1. DESCRIPTION OF BUSINESS - HISTORY.
26
<PAGE>
Daniel J. Jinguji, Vice President, Product Development - Mr. Jinguji spent
fifteen years with Microsoft, where he co-authored "Learn Microsoft Visual J++
6.0" to help explain the Microsoft version of the Java programming language. He
attended the University of Washington in Seattle where he received his B.A. in
mathematics, B.S. in biology and M.S. in computer science.
Ronald J. Sanderson, Vice President, - From June 1998 to September 1999, Mr.
Sanderson was principle consultant at Netsource Management, Inc., specializing
in supply chain management and strategic sourcing. Previously he was with A.T.
Kearney, Inc. for 12 years. He has expertise in marketing, process reengineering
and business strategy. He received an MBA in Marketing and Finance from
Northwestern University in 1971.
Item 6. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation;
Shares Subject to
Name Position Annual Stock Options
Salary (a) Granted (b)
- ----------------------------- -------------------------- -------------- ------------------
<S> <C> <C> <C>
Robert C. McShirley Chmn., Pres., $ 114,000 100,000(c)
CEO & Director
Jeri D. Sessler Chief Operating $ 180,000 500,000(f)
Officer
Richard S. McShirley Vice President $ 114,000 50,000(d)
Dennis W. McQuilliams Vice Pres., Chief $ 74,500 75,000(e)
Technical Officer
Samuel E. Bradt CFO, Secy, $ 84,000 25,000(g)
Treas, Director
Daniel J. Jinguji Vice Pres., $ 60,000 50,000(h)
Product Development
Ronald J. Sanderson Vice President $ 85,000 125,000(i)
27
<PAGE>
<FN>
(a) Salary figures shown represent current monthly pay rates, multiplied by
twelve. Compensation is limited to salary and stock options; there are
currently no other forms of compensation for executives.
(b) Underlying shares of the common stock of the Company as of July 31, 1999.
(c) May 15, 1999 option to purchase 100,000 shares at $0.75 per share.
(d) May 15, 1999 option to purchase 50,000 shares at $0.75 per share.
(e) May 15, 1999 option to purchase 75,000 shares at $0.75 per share.
(f) Ms. Sessler joined the Company effective August 1, 1999. She will receive
an option to purchase 500,000 shares at $.95 per share.
(g) May 15, 1999 option to purchase 25,000 shares at $0.75 per share.
(h) April 16, 1999 stock option for 50,000 shares at $0.75 per share.
(i) September 20, 1999 stock option for 125,000 shares at $1.07 per share.
</TABLE>
OPTIONS GRANTED DURING FISCAL YEAR ENDED JANUARY 31, 1999
The following table sets forth, information for the fiscal year ended January
31, 1999, regarding the granting of options to executive officers of the Company
to purchase the Company's common stock. All persons named below have sole
exercise, voting and investment power over the options and the underlying shares
except as otherwise noted.
<TABLE>
<CAPTION>
OPTIONS GRANTED DURING FISCAL YEAR ENDED JANUARY 31, 1999:
NAME SHARES Exercise Price EXPIRATION PERCENT
- -------------------- ------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Robert C. McShirley 80,000 $.625 8-4-2008 (a) 61.5%
Richard S. McShirley 35,000 $.625 8-4-2008 (a) 26.9%
Samuel E. Bradt 15,000 $.625 8-4-2008 (a) 11.5%
------- --------
Total 130,000 100.0%
------- --------
<FN>
(a) These options were subsequently amended to provide for immediate vesting on
the condition that all shares would be purchased. All these options were
exercised and shares purchased on May 15, 1999.
</TABLE>
OPTIONS GRANTED DURING THE SIX MONTHS ENDED JULY 31, 1999
The following table sets forth, information for the six months ended July
31, 1999, regarding the granting of options to purchase the Company's common
stock. All persons named below have sole exercise, voting and investment power
over the options and the underlying shares except as otherwise noted.
<TABLE>
<CAPTION>
OPTIONS GRANTED DURING THE SIX MONTHS ENDED JULY 31, 1999:
NAME SHARES Exercise Price EXPIRATION PERCENT
- -------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Robert C. McShirley 100,000 $.75 5-15-2009 33.3%
Richard S. McShirley 50,000 $.75 5-15-2009 16.7%
Dennis W. McQuilliams 75,000 $.75 5-15-2009 25%
Samuel E. Bradt 25,000 $.75 5-15-2009 8.3%
Daniel J. Jinguji 50,000 $.75 4-16-2009 16.7%
--------- ---------
Total 300,000 100.0%
--------- ---------
</TABLE>
28
<PAGE>
OPTIONS EXERCISED DURING THE SIX MONTHS ENDED JULY 31, 1999
The following table sets forth, information for the six months ended July 31,
1999, regarding the exercise of options to purchase the Company's common stock
and the value of unexercised options. No options were exercised during the
fiscal year ended January 31, 1999. All persons named below have sole exercise,
voting and investment power over the options and the underlying shares except as
otherwise noted.
<TABLE>
<CAPTION>
OPTIONS EXERCISED DURING THE SIX MONTHS ENDED JULY 31, 1999:
SHARES OPTION MARKET VALUE OF
ACQUIRED SHARES VALUE PER UNEXERCISED
AFTER UNEXERCISED SHARE AT OPTIONS
JANUARY AT JANUARY EXERCISE JANUARY AT JANUARY 31,
NAME 31, 1999 31, 1999 PRICE 31, 1999 1999
- -------------------- -------- ------------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Robert C. McShirley 180,000 100,000 $ 0.18 $ 2.00 $182,000
80,000 $ 0.63 $ 2.00 $110,000
Richard S. McShirley 441,100 306,100 $ 0.20 $ 2.00 $550,980
100,000 $ 0.18 $ 2.00 $182,000
35,000 $ 0.63 $ 2.00 $ 48,125
Samuel E. Bradt 15,000 15,000 $ 0.63 $ 2.00 $ 20,625
<FN>
Value is based on closing price at January 31, 1999 of $2.00 per share for
unrestricted shares. All these options were exercised May 15, 1999.
</TABLE>
Item 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has issued convertible demand notes, from time to time, each in a
private transaction. The proceeds of these notes have been used to fund
operations. At July 31, 1999 there were $777,206 principal amount of these notes
outstanding, payable to twenty-two different investors, most of whom are also
the Company shareholders. Among the note holders is Jawsh Corporation, with
$55,000 principal amount. The principal amount plus accrued interest is
convertible into 112,969 shares of the Company's common stock. Jawsh
Corporation is one of the Company's largest shareholders with 655,487 shares at
July 31, 1999 (including shares owned by William Bates, president of Jawsh
Corporation, and his family). Also, Robert C. McShirley, chairman, president
and chief executive officer of the Company owns $95,600 principal amount of the
notes convertible along with accrued interest into 245,317 shares of common
stock. Richard S. McShirley, vice president of the Company owns $33,100
principal amount of the notes convertible along with accrued interest into
188,116 shares of common stock.
29
<PAGE>
Malcolm Powell and his family, through various trusts, are beneficial owners of
$55,000 principal amount of the notes. The principal amount plus accrued
interest is convertible into 232,757 shares of common stock. Dr. Powell also
owns 150,000 shares of the Company common stock, and is a first cousin of Samuel
Bradt, chief financial officer, secretary, treasurer and a director of the
Company. The largest principal amount of the Notes held by any one holder, are
held by Daniel Bunn who owns $266,000 principal amount. The principal amount
plus accrued interest is convertible into 673,348 shares of common stock. Mr.
Bunn is a business associate of Robert C. McShirley. Each remaining note holder
has less than $55,000 principal amount of the notes.
Item 8. DESCRIPTION OF SECURITIES
COMMON STOCK. The Company has 50 million shares of its $0.01 par common stock
authorized. As of July 31, 1999 there were 13,061,352 shares outstanding. Each
share is entitled to one vote. There are no pre-emptive rights, and the Company
has never paid a cash dividend. There are approximately 1,000 shareholders of
record. CEDE & Co. is listed as one shareholder "of record", with 6,514,409
shares, but represents shares held in numerous brokerage accounts, for an even
larger number of beneficial holders, and is otherwise known as "street name"
stock.
PREFERRED STOCK
The Company has 5 million shares of $0.01 preferred stock authorized, but none
outstanding. The Company has no plans to issue preferred shares.
DEBT SECURITIES
At July 31, 1999 there were $777,206 principal amount of convertible demand
notes outstanding. In return for converting their notes as of July 31, 1999,
note holders were offered an additional three months of interest in shares of
common stock to avoid the ninety-day notice period and lengthy "forced-
conversion" process. Management expects all note holders to accept this offer
and voluntarily convert. All these notes accrue interest at 10% per annum, and
are payable on demand after various dates, but none later than December 31,
1999. Interest is payable in cash at the option of the Company. Interest
accrued but not paid, at the option of the holder, at any time after thirty days
advance notice, could have been converted into the Company common shares at the
conversion rate specified in each note, whether or not the principal was also
converted. The conversion rates of the notes varied based upon negotiations with
the note holder, the date of issuance and the market price of the common stock
of the Company on that date. The conversion rate represented a discount from
the common stock's market price. The notes were convertible at rates ranging
from $0.20 per share to $1.30 per share. There were no sinking fund provisions.
After December 31, 1999 , the Company could have, at its option forced
conversion of the entire principal amount, or repaid the principal amount, with
ninety days advance notice. During the ninety-day notice period, the note
holders could have converted into the Company common stock. However, if they
failed to do so they could have been prevented from ever doing so if the Company
paid them in cash. Since the Company will convert all of the notes into its
common stock, no note holder will be forced to accept cash. The terms of the
notes do not provide for trustees or other persons or entities to act on behalf
of note holders. Set forth below is a summary of the total principal amounts of
the convertible demand notes, the conversion rate and the total number of shares
of common stock into which the notes may be converted.
<TABLE>
<CAPTION>
CONVERTIBLE DEMAND NOTE REGISTER
--------------------------------
INTERACTIVE BUYERS NETWORK INTERNATIONAL, LTD.
JULY 31, 1999
INTEREST SHARES TO BE ISSUED
CONVERSION PRINCIPAL FROM INCEPTION UPON CONVERSION OF:
RATE AMOUNT THROUGH ------------------------------
7/31/99(A) INTEREST PRINCIPAL TOTAL
- ----------- ---------- ---------------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
0.20 $ 135,000 $ 28,466 142,329 675,000 817,329
0.35 $ 150,006 $ 21,830 62,373 428,589 490,961
0.45 $ 55,000 $ 5,118 11,373 122,222 133,596
0.53 $ 55,000 $ 6,279 11,847 103,774 115,621
0.55 $ 85,000 $ 8,858 16,106 154,545 170,652
0.60 $ 10,000 $ 1,056 1,759 16,667 18,426
0.65 $ 10,000 $ 1,072 1,650 15,385 17,034
0.80 $ 140,000 $ 17,490 21,863 175,000 196,863
0.85 $ 5,000 $ 456 536 5,882 6,418
0.95 $ 35,000 $ 2,951 3,107 36,842 39,949
1.00 $ 5,000 $ 299 299 5,000 5,299
1.10 $ 5,000 $ 440 400 4,545 4,946
1.20 $ 19,700 $ 1,138 949 16,417 17,365
1.25 $ 62,500 $ 9,002 7,201 50,000 57,201
1.30 $ 5,000 $ 365 281 3,846 4,127
---------- ---------------- -------- --------- ---------
$ 777,206 $ 104,821 282,073 1,813,714 2,095,787
<FN>
(a) Including three months "bonus interest", to be credited in shares, in
return for converting effective 7-31-99, and excluding interest previously
converted to shares.
</TABLE>
30
<PAGE>
PART II
Item 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded on the National Association of
Securities Dealers Inc. Automated Quotation System's Bulletin Board, using the
stock symbol "IBNL". Only a limited public trading market exists for the
Company outstanding stock, and there can be no assurance that an active public
market will develop. The highest and lowest prices for the Company common stock
during the calendar quarter preceding the dates below, and the closing bid price
on each date, are as follows:
Quarters ended:
<TABLE>
<CAPTION>
1997 High Low Close
- ------------------ ------ ------ --------
<S> <C> <C> <C>
March 31, 1997 $0.875 $0.250 $ 0.313
June 30, 1997 $0.500 $0.188 $ 0.260
September 30, 1997 $0.320 $0.160 $ 0.313
December 31, 1997 $1.063 $0.290 $ 0.438
1998
- ------------------
March 31, 1998 $0.813 $0.313 $ 0.688
June 30, 1998 $3.250 $0.400 $ 1.563
September 30, 1998 $1.625 $0.625 $ 0.875
December 31, 1998 $2.875 $0.688 $ 1.625
31
<PAGE>
1999
- ------------------
March 31, 1999 $3.000 $1.500 $ 1.688
June 30, 1999 $2.000 $1.375 $ 1.875
September 30, 1999 $2.875 $1.600 $ 1.600
Month of
October, 1999 $1.950 $1.500 $ 1.950
Month of
November, 1999 $6.500 $2.050 $ 4.400
<FN>
* Source: National Association of Securities Dealers, Inc. Automated Quotation
System, OTC Bulletin Board.
</TABLE>
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
As of July 31, 1999, there were 932 holders of record of the Company's
outstanding shares of common stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its common stock and has no
present intention of changing this policy. The Company currently intends to
retain future earnings, if any, to fund the development and growth of its
business. Any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon the Company's
financial condition, operating results, capital requirements, applicable
contractual restrictions and other factors as the board of directors deems
relevant.
VOLATILITY AND LIMITED MARKET
The market price of the Company common stock has in the past been highly
volatile and is expected to continue to be subject to significant price and
volume fluctuations in the future based on a number of factors, including market
uncertainty about the Company's financial condition or business prospects;
shortfalls in the revenues or results of operations expected by securities
analysts; analyst's reports or recommendations; quarterly fluctuations in
the Company's financial results or in the results of other similar companies,
including competitors of the Company; the introduction of new services or
enhancements by the Company or its competitors; general conditions in the
industry; changes in prices for the Company's or competitors' products or
services; and changes in general economic conditions.
In addition, the stock market may from time to time experience extreme price and
volume fluctuations, which particularly affect the market for the securities of
many Internet-related companies and which have often been unrelated to the
operating performance of the specific companies. There can be no assurance that
the market price of the Company common stock will not experience significant
fluctuations in the future.
32
<PAGE>
Item 2. LEGAL PROCEEDINGS
There are currently no legal proceedings involving the Company, and none
threatened. However, because of the rapidly changing environment surrounding the
Internet, and the rapid pace with which new businesses enter or attempt to enter
Internet related businesses, it is possible that disagreements will develop
regarding business names, relationships, markets, technologies, and other
subjects. Any future disagreement could lead to legal action.
Item 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There are and have been no substantive disagreements with the Company's outside
accounting firm, and there have been no changes in accounting firms during the
last three years.
Item 4. RECENT SALES OF UNREGISTERED SECURITIES
During January and February of 1997, the Company sold 2,918,653 shares of
restricted common stock and received proceeds of $583,731 before expenses. Since
no underwriters were used and no commissions were paid, expenses were limited to
legal fees approximating $10,000. This offering was a private placement made in
accordance with Regulation D, and in the opinion of legal counsel for
the Company, was exempt from registration under the Exchange Act. There were
less than 25 offerees. The recipients of these shares, except one who was a
senior sales executive of the Company, were accredited investors. The investors,
approximately ten in total, were primarily existing the Company investors, or
friends, relatives and business associates of the Company officers, directors or
investors. The chief executive officer and the chief financial officer were
included as investors. The investors represented their intention to acquire the
shares for investment purposes only, and not with a view to resale or
distribution, and appropriate restrictive legends were placed on each stock
certificate issued pursuant to this offering. Each investor had ample access to
the kind of information from the Company that a registration statement would
include.
From August through November of 1997, the Company sold 1,487,763 shares of
unrestricted common stock, and received $346,721 before offering costs. As
before, no underwriters were used, and no commissions paid. Offering costs were
limited to approximately $4,000 for legal fees. This offering was a private
placement and in the opinion of legal counsel for the Company, was exempt from
registration under the Exchange Act and made in accordance with Regulation D.
Further, the Company was
33
<PAGE>
eligible under Securities and Exchange Commission Rule 504, which allowed the
shares sold in this private placement to be issued without restrictive legend.
The recipients of these shares, primarily being existing the Company investors,
or friends, relatives and business associates of the Company officers, directors
and investors, represented their intention to acquire the shares for investment
purposes only, and not with a view to resale or distribution.
During March and April of 1999, the Company sold 737,493 shares of unrestricted
common stock, and received $999,942 less offering costs. As before, no
underwriters were used and no commissions were paid. Legal fees approximated
$5,000. This offering was a private placement and, in the opinion of counsel,
was exempt from registration under the Exchange Act and made in accordance with
Regulation D. the Company was again eligible under Securities and Exchange
Commission Rule 504, which allowed the shares sold in this private placement to
be issued without restrictive legend. Because Rule 504 was changed effective
April 7, 1999, the last sale of shares under this offering was made on April 6,
1999. The recipients of these shares, primarily being existing the Company
investors, or friends, relatives and business associates of the Company
officers, directors and investors, represented their intention to acquire the
shares for investment purposes only, and not with a view to resale or
distribution.
During the period July 1, 1999 through November 30 1999, the Company sold
823,997 shares of restricted common stock, and received $1,305,973. As before no
underwriters were used and no commissions were paid. The sales were a private
placement and, in the opinion of counsel, exempt from registration under Section
4(2) of the Securities Exchange Act of 1934. The transactions did not involve a
public offering. There were eleven offerees and nine purchasers, each of whom
were accredited investors, familiar with the Company and four of whom are
existing shareholders. The investors represented their intention to acquire the
shares for investment purposes only, and not with a view to resale or
distribution, and appropriate stop transfer instructions and restrictive
legends indicating the transfer restrictions will be placed on each stock
certificate when issued. Each individual had ample access to the kind of
information from the Company that a registration statement would include.
Item 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Officers and directors of the Company, and officers and directors of its 100%
owned subsidiary, Virtual Source, Inc., are indemnified to the greatest extent
allowed by Nevada law.
PART F/S
FINANCIAL STATEMENTS AND EXHIBITS
The Company's financial statements are presented in the following exhibits.
*****
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INTERACTIVE BUYERS NETWORK INTERNATIONAL LTD. AND SUBSIDIARIES
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Financial Statements:
Proforma Explanatory Headnote F-2
For the Year Ended January 31, 1999 (Unaudited)
Unaudited Proforma Consolidated Statement of Operations F-3
Notes to Unaudited Proforma Consolidated Financial Statements F-4
INTERACTIVE BUYERS NETWORK INTERNATIONAL LTD. AND SUBSIDIARIES
Independent Auditors' Report F-5
Financial Statements:
Consolidated Balance Sheets F-6
Consolidated Statements of Operations F-7
Consolidated Statement of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-10
WPG.NET, INC. (A Development Stage Company)
Independent Auditors' Report F-20
Financial Statements:
Balance Sheets F-21
Statements of Operations F-22
Statement of Stockholder's Equity (Deficit) F-23
Statements of Cash Flows F-24
Notes to Financial Statements F-25
================================================================================
<PAGE>
INTERACTIVE BUYERS NETWORK INTERNATIONAL LTD AND SUBSIDIARIES
PROFORMA EXPLANATORY HEADNOTE
The following unaudited proforma consolidated financial statements give effect
to the acquisition by Interactive Buyers Network International Ltd (the
"Company") of Wpg.net, Inc. ("Wpg.net") and are based on the estimates and
assumptions set forth herein and in the notes to such statements. This proforma
information has been prepared utilizing the historical financial statements of
the Company and notes thereto, and the historical financial statements of
Wpg.net and notes thereto, which are included in this registration statement.
The proforma financial data does not purport to be indicative of the results
which actually would have been obtained had the acquisitions been effected on
the dates indicated or the results which may be obtained in the future.
The proforma consolidated statement of operations for the year ended January 31,
1999 includes the operations of Wpg.Net for the period February 1, 1998 to May
31, 1998, because the acquisition was consummated on June 1, 1998.
Effective June 1, 1998, the Company acquired all of the issued and outstanding
common stock of Wpg.net. The purchase price for Wpg.net for $1,186,555. IBNL
issued 500,000 shares of common stock with a fair value of $625,000 ($1.25 per
share), plus stock options on 500,000 shares with a fair value of $561,555.
The purchase price for Wpg.net of $1,186,555 was allocated to Goodwill.
F-2
<PAGE>
INTERACTIVE BUYERS NETWORK INTERNATIONAL LTD AND SUBSIDIARIES
PROFORMA EXPLANATORY HEADNOTE
<TABLE>
<CAPTION>
INTERACTIVE
BUYERS NETWORK
INTERNATIONAL AND
SUBSIDIARIES WPG.NET, INC.
FOR THE YEAR FOR THE FOUR-MONTHS
ENDED ENDED PROFORMA CONSOLIDATED
JANUARY 31, 1999 MAY 31, 1998 ADJUSTMENTS PROFORMA
------------------- ------------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE: $ 61,387 $ 24,371 $ (22,447) $ 63,311
------------------- ------------------- ------------- --------------
COSTS AND EXPENSES:
General and administrative expenses (651,007) (14,478) (131,838)(4) (797,323)
Research and development (1,263,720) (131,838) 22,447 (5) (1,241,273)
------------------- ------------------- ------------- --------------
INCOME (LOSS) FROM
OPERATIONS (1,853,340) 9,893 (131,838) (1,975,285)
------------------- ------------------- ------------- --------------
OTHER INCOME (EXPENSE)
INCOME FROM LITIGATION SETTLEMENT 91,110 91,110
------------------- ------------------- ------------- --------------
NET INCOME (LOSS) $ (1,762,230) $ 9,893 $ (131,838) $ (1,884,175)
=================== =================== ============= ==============
NET (LOSS) PER COMMON SHARE
BASIC $ (0.18)
==============
BASIC WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 10,693,530
==============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL
STATEMENT AND EXPLANATORY HEADNOTE
F-3
<PAGE>
NOTE 1 - PROFORMA ADJUSTMENTS
The adjustments relating to the unaudited proforma consolidated statement of
operations are computed assuming the acquisition of Wpg.net, Inc. (Wpg.net) was
consummated at the beginning of the applicable period presented.
NOTE 2 - ACQUISITION OF SUBSIDIARY
- ---------------------------------------
The acquisition is recorded using the purchase method which resulted in an
intangible asset-goodwill of $1,186,555.
NOTE 3 - ADDITIONAL AMORTIZATION
- ------------------------------------
The unaudited proforma consolidated statement of operations reflect amortization
of Intangible asset - goodwill using the straight-line method over 3 years.
NOTE 4 - INTANGIBLE ASSET - GOODWILL
- ------------------------------------------
Goodwill consists of the excess of the purchase price of Wpg.net over the
estimated fair values of the assets acquired and liabilities assumed. The stock
was valued at the quoted market price for a period before and after the date the
terms of the acquisition were agreed to and announced. The options were valued
pursuant to SFAS 123 (see Interactive Buyers Network International and
Subsidiaries Financial Statement Note 5). In estimating the above acquisition
cost, the Company used the Modified Black-Scholes European Pricing Model. The
average risk-free interest rate used was 7.00%, volatility was estimated at 155%
and the expected life was 3 years. Goodwill is being amortized over a 3-year
period.
NOTE 5 - INTERCOMPANY REVENUE AND EXPENSE
- --------------------------------------------
Interactive Buyers Network International, LTD. paid Wpg.Net, Inc. $22,447 during
the four months ended May 31, 1998 for consulting services.
NOTE 6 - INCOME TAXES
- ------------------------
The unaudited proforma statement of operations does not include an adjustment
with respect to income taxes as the effect of the combination with respect to
taxable net income would not be material to the combined proforma financial
statements.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Interactive Buyers Network International, Ltd.
and Subsidiaries
Ventura, California
We have audited the accompanying consolidated balance sheet of Interactive
Buyers Network International, Ltd. and subsidiaries as of January 31, 1999 and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years ended January 31, 1999 and 1998. These
consolidated 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interactive Buyers
Network International, Ltd. and subsidiaries as of January 31, 1999 and the
results of its operations, and its cash flows for the years ended January 31,
1999 and 1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,762,230 during the year ended
January 31, 1999, and as of that date, had a working capital deficiency of
$920,680 and stockholders' equity of $128,796. These conditions raise
substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are described in Note 9. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Lucas, Horsfall, Murphy & Pindroh
Pasadena, California
May 15, 1999, except for Note 10 to the financial statements
which is as of September 3, 1999.
F-5
<PAGE>
<TABLE>
<CAPTION>
Interactive Buyers Network International Ltd. and subsidiaries
CONSOLIDATED BALANCE SHEET
INFORMATION AS OF JULY 31, 1999 IS UNAUDITED
ASSETS
JANUARY 31, JULY 31,
1999 1999
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,937 $ 438,300
Accounts receivable . . . . . . . . . . . . . . . . . . . 3,590 -
---------------- ---------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . 63,527 438,300
---------------- ---------------
PROPERTY AND EQUIPMENT
Furniture and fixtures. . . . . . . . . . . . . . . . . . 64,588 155,547
Software. . . . . . . . . . . . . . . . . . . . . . . . . 8,899 8,899
---------------- ---------------
73,487 164,446
Less: accumulated depreciation. . . . . . . . . . . . . . 50,920 72,170
---------------- ---------------
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . . . 22,567 92,276
---------------- ---------------
OTHER ASSETS
Prepaid rent. . . . . . . . . . . . . . . . . . . . . . . 37,500 15,000
Employee receivables. . . . . . . . . . . . . . . . . . . 68,027 102,597
Intangible assets, net of accumulated amortization. . . . 922,875 725,115
Other assets. . . . . . . . . . . . . . . . . . . . . . . 1,757 1,319
---------------- ---------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . . . 1,030,159 844,031
---------------- ---------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $ 1,116,253 $ 1,374,607
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 49,222 $ 120,487
Accrued liabilities . . . . . . . . . . . . . . . . . . . 77,785 87,727
Convertible notes payable - related parties . . . . . . . 857,200 777,206
---------------- ---------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . 984,207 985,420
DEFERRED REVENUE. . . . . . . . . . . . . . . . . . . . . . 3,250 933
---------------- ---------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . 987,457 986,353
---------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value
5,000,000 shares authorized,
- 0 - shares issued and outstanding . . . . . . . . . . - -
Common stock, $.01 par value,
50,000,000 shares authorized,
11,401,451 issued and outstanding on Jan. 31, 1999
and 13,061,352 issued and outstanding on July 31, 1999. 114,014 130,614
Additional paid-in capital. . . . . . . . . . . . . . . . 4,296,392 6,407,111
Accumulated deficit . . . . . . . . . . . . . . . . . . . (4,281,610) (5,970,673)
---------------- ---------------
128,796 567,052
Less: notes receivable - related parties. . . . . . . . - (178,798)
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT). . . . . . . . . . 128,796 388,254
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT). . . . $ 1,116,253 $ 1,374,607
================ ===============
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Interactive Buyers Network International Ltd. and subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
FOR THE YEAR FOR THE YEAR FOR THE SIX FOR THE SIX
ENDED ENDED MONTHS ENDED MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, JULY 31,
1998 1999 1998 1999
(UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue. . . . . . . . . . . . . . . . $ 72,015 $ 61,387 $ 41,702 $ 7,985
General and administrative expenses. . (351,712) (651,007) (303,740) (576,996)
Research and development . . . . . . . (682,736) (1,263,720) (589,614) (1,120,052)
-------------- -------------- -------------- --------------
Loss from operations . . . . . . . . . (962,433) (1,853,340) (851,652) (1,689,063)
-------------- -------------- -------------- --------------
Other income (expenses):
Loss on abandonment of equipment . . (27,856) - - -
Income from litigation settlement. . - 91,110 - -
-------------- -------------- -------------- --------------
Total other income (expenses) (27,856) 91,110 - -
-------------- -------------- -------------- --------------
Net loss . . . . . . . . . . . . . . . $ (990,289) $ (1,762,230) $ (851,652) $ (1,689,063)
============== ============== ============== ==============
Basic weighted average number of
common shares outstanding. . . . . . 9,192,811 10,529,147 10,756,620 12,231,402
============== ============== ============== ==============
Net loss per common share
Basic. . . . . . . . . . . . . . . . $ (0.11) $ (0.17) $ (0.08) $ (0.14)
============== ============== ============== ==============
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Interactive Buyers Network International Ltd. and subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
Notes
Common Stock Additional Total
---------------------- Receivable - Stockholders'
No. of Paid-in- Related Accumulated Equity
Shares Amount Capital Parties (Deficit) (Deficit)
----------- --------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 31, 1997 . . . . . . . . . . 6,042,880 $ 60,429 $1,198,110 $ - $ (1,529,091) $ (270,552)
Issuance of common stock - private placements
net of $8,500 issuance cost . . . . . . . . . 3,882,693 38,827 787,775 - - 826,602
Issuance of common stock upon
conversion of demand notes . . . . . . . . . . 475,000 4,750 90,250 - - 95,000
Beneficial conversion feature. . . . . . . . . . - - 43,623 - - 43,623
Issuance of stock options for services . . . . . - - 26,447 - - 26,447
Issuance of common stock for services. . . . . . 403,722 4,037 164,519 - - 168,556
Net loss . . . . . . . . . . . . . . . . . . . . - - - - (990,289) (990,289)
----------- --------- ---------- ---------- ------------- ------------
Balances at January 31, 1998 . . . . . . . . . . 10,804,295 108,043 2,310,724 - (2,519,380) (100,613)
Common stock surrendered . . . . . . . . . . . . (1,000,000) (10,000) 10,000 - - -
Issuance of common stock -
Acquisition of WPG.Net, Inc. . . . . . . . . . 500,000 5,000 1,181,555 - - 1,186,555
Issuance of common stock upon
conversion of demand notes . . . . . . . . . . 778,656 7,786 311,221 - - 319,007
Beneficial conversion feature. . . . . . . . . . - - 290,657 - - 290,657
Issuance of stock options for services . . . . . - - 45,725 - - 45,725
Issuance of common stock for services. . . . . . 318,500 3,185 146,510 - - 149,695
Net loss . . . . . . . . . . . . . . . . . . . . - - - - (1,762,230) (1,762,230)
----------- --------- ---------- ---------- ------------- ------------
Balances at January 31, 1999 . . . . . . . . . . 11,401,451 114,014 4,296,392 - (4,281,610) 128,796
Unaudited:
Issuance of common stock - private placements
net of $7,400 issuance costs . . . . . . . . 887,869 8,879 1,191,063 - - 1,199,942
Issuance of common stock upon
conversion of demand notes . . . . . . . . . 91,932 920 110,200 - - 111,120
Issuance of common stock for services. . . . . 44,000 440 76,560 - - 77,000
Issuance of common stock options for services. - - 68,802 - - 68,802
Beneficial conversion feature. . . . . . . . . - - 167,564 - - 167,564
Modification in term of stock options. . . . . - - 324,093 - - 324,093
Exercise of stock options. . . . . . . . . . . 636,100 6,361 172,437 (178,798) - -
Net loss . . . . . . . . . . . . . . . . . . . - - - - (1,689,063) (1,689,063)
----------- --------- ---------- ---------- ------------- ------------
Balances at July 31, 1999 (unaudited). . . . . . 13,061,352 $130,614 $6,407,111 $(178,798) $ (5,970,673) $ 388,254
=========== ========= ========== ========== ============= ============
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Interactive Buyers Network International Ltd. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
FOR THE YEAR FOR THE YEAR FOR THE SIX FOR THE SIX
ENDED ENDED MONTHS ENDED MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, JULY 31,
1998 1999 1998 1999
(UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $ (990,289) $ (1,762,230) $ (851,652) $ (1,689,063)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation & amortization. . . . . . . . . . . . . . . 21,753 285,340 77,188 219,730
Beneficial conversion feature. . . . . . . . . . . . . . 43,623 290,657 132,726 167,564
Loss on abandonment of equipment . . . . . . . . . . . . 27,856 - - -
Issuance of stock, stock options, and debt for services,
expense reimbursements and accrued interest . . . . . . 195,003 347,347 112,520 471,038
Changes in:
Accounts receivable . . . . . . . . . . . . . . . . . . . - (3,590) - 3,590
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . (22,317) 27,562 15,750 -
Prepaid rent. . . . . . . . . . . . . . . . . . . . . . . - (37,500) (600) 22,500
Other assets. . . . . . . . . . . . . . . . . . . . . . . (49,376) 877 (6,074) -
Accounts payable. . . . . . . . . . . . . . . . . . . . . (119,898) 16,735 31,211 71,266
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 19,351 (25,469) (12,657) (2,317)
Accrued liabilities . . . . . . . . . . . . . . . . . . . 17,222 49,042 36,783 9,942
-------------- -------------- -------------- --------------
NET CASH USED BY OPERATING ACTIVITIES . . . . . . . . . . (857,072) (811,229) (464,805) (725,750)
CASH FLOWS FROM (TO) INVESTING ACTIVITIES
Advances to employees . . . . . . . . . . . . . . . . . . . - (9,400) - (34,570)
Purchase of equipment . . . . . . . . . . . . . . . . . . . (1,355) - - (90,959)
-------------- -------------- -------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES. . . . . (1,355) (9,400) - (125,529)
-------------- -------------- -------------- --------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES
Proceeds from issuance of common stock. . . . . . . . . . . 826,602 - - 1,199,942
Proceeds from borrowings. . . . . . . . . . . . . . . . . . 62,675 825,160 433,499 29,700
-------------- -------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . 889,277 825,160 433,499 1,229,642
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . 30,850 4,531 (31,306) 378,363
CASH, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 24,556 55,406 55,406 59,937
-------------- -------------- -------------- --------------
CASH, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 55,406 $ 59,937 $ 24,100 $ 438,300
============== ============== ============== ==============
<FN>
See Note 1 for supplemental disclosure.
</TABLE>
F-9
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and business
- ---------------------------
Interactive Buyers Network International, Ltd. (IBNL or the "Company") creates
and markets Internet-based applications for businesses. An Internet-based
application is best described as computer software and data that reside on a
remote server, rather than the user's computer, where that software and data are
accessed over the Internet. The Company intends to generate fees by licensing
its Internet-based applications for use by businesses. Currently, the Company
offers two such applications, Virtual Source Network and Virtual Source
Publisher. Virtual Source Network may be used by corporate clients to purchase
goods and services via the Internet. Virtual Source Publisher is a do-it-
yourself web site builder that allows a user to establish its own Internet web
site.
IBNL was incorporated in the State of Nevada on October 22, 1980 as Cinema-Star
Corporation, and in September 1989, was renamed Dyna-Seal Corporation. Prior to
February 1, 1995, the Company's name was changed several times, and its former
line of business (manufacturing, packaging and distribution of coatings,
sealants and adhesive for use in aircraft and marine industries) was completely
discontinued.
In July 1995 the Company changed its name to Interactive Buyers Network
International, Ltd., and acquired all of the outstanding shares of Buyer/Seller
Interactive Software, Inc. a corporation who's name subsequently changed to
Virtual Source, Inc., ("VSI") (incorporated in the State of Nevada on July 11,
1995).
On June 1, 1998, the Company acquired all of the outstanding stock of Wpg.Net,
Inc. ("Wpg.Net") See Note 2.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of Interactive Buyers
Network International, Ltd. and its wholly owned subsidiaries Virtual Source,
Inc. and Wpg.Net, Inc. Significant intercompany accounts have been eliminated.
Revenue Recognition
- --------------------
The Company accounts for revenue recognition in accordance with the guidance in
the American Institute of Certified Public Accountants (the AICPA) Statement of
Position (SOP) No. 97-2 "Software Revenue Recognition" which provides guidance
on applying generally accepted accounting principles for software revenue
recognition transactions.
When the Internet version of the Company's software is fully functional and
available for sale, the clients of the Company will incur the following charges:
- a charge of an initial License Fee of $1,000
- an additional $100 per individual user (client employee)
The maximum charges any client of the Company will incur will be a maximum of
$100,000 per corporate business unit and a maximum of $1,000,000 per corporation
(regardless of the number of business units). The initial license fees are
charged in return for granting the client access to the network and the
Interactive Buyer's servers where the system resides. At this point, the
Company has received no revenue related to the Internet version of the software.
The revenue related to the initial license fees will be amortized over the
service life of a customer relationship, currently estimated to be five years.
In addition to the initial fees, Interactive Buyers will earn a transaction fee
for each transaction consummated by the licensee, on the network. VSN project
management assistance (including production, modification, customization,
service and technical support), at the request of the client, will be provided
by unrelated third parties who will bill and collect revenues independent of
Interactive Buyers. The cost and extent of these integration and training
projects will vary from client to client based on a variety of factors
including, but not limited to, the number of purchasing agents and other
employees designated to use VSN, the number and complexity of other computer
systems that must communicate data to or from VSN, the number and kinds of items
to be purchased, the number and kinds of vendors the client wishes to deal with,
the number of business units to be included in the network, the VSN
configuration options selected by the client, other business procedures employed
by the client which impact, or are impacted by, the clients procurement
processes, the extent to which the client employees perform system integration
functions rather than outside consultants, and the hourly rates negotiated
between the client and the various consultants. No revenue related to the
project management assistance and the configuration assistance will be
recognized by Interactive Buyers, as the services will be provided by
independent third parties.
The levels of service that can be chosen by a Company client are:
1. No integration. Only the initial VSN license fees will be charged.
2. Limited Integration. Only the initial VSN license fees will be
charged. Hourly fees will be paid directly to third-party system
integrators and technology consultants based on defined and limited
project scope approved by the client, and will not produce any
revenue by the Company. Training consultants will be paid by the
client based on the service requirements negotiated between the
consultant and the client.
3. Full Integration. The level of service contemplated in full
integration is essentially comparable to limited integration, except
the scope of the systems integration, consulting, and training
programs will be far more comprehensive and complete.
Under Wpg.Net's Virtual Source Publisher, a monthly fee will be charged to
clients after an initial free introductory period has lapsed. The monthly
charge will be recognized as income in the period in which the fee is charged.
The Company did not recognize any revenue on Virtual Source Publisher in 1999.
F-10
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(Continued)
Year 2000 Issues
- ------------------
Many computers and other equipment with embedded chips or microprocessors may
not be able to appropriately interpret dates after December 31, 1999, because
such systems use only two digits to indicate a year in the date field rather
than four digits. If not corrected, many computers and computer applications
could fail or create miscalculations, causing disruptions to the Company's
operations. In addition, the failure of customer and supplier computer systems
could result in interruption of sales and deliveries of key supplies or
utilities. Because of the complexity of the issues and the number of parties
involved, the Company cannot reasonably predict with certainty the nature or
likelihood of such impacts.
The Company is actively addressing this situation and anticipates that it will
not experience a material adverse impact to its operations, liquidity or
financial condition related to systems under control. The Company is addressing
the Year 2000 issue in four overlapping phases: (i) identification and
assessment of all critical software systems and equipment requiring modification
or replacement prior to 2000; (ii) assessment of critical business relationships
requiring modification prior to 2000; (iii) corrective action and testing of
critical systems; (iv) development of contingency and business continuation
plans to mitigate any disruption to the Company's operations arising from the
Year 2000 issue.
The Company is in the process of implementing a plan to obtain information from
its external service providers, significant suppliers and customers, and
financial institutions to confirm their plans and readiness to become Year 2000
compliant, in order to better understand and evaluate how their Year 2000 issues
may affect the Company's operations. The Company currently is not in a position
to assess this aspect of the Year 2000 issues; however, the Company plans to
take the necessary steps to provide itself with reasonable assurance that its
service providers, suppliers, customers and financial institutions are Year 2000
compliant.
The Company is developing contingency plans to identify and mitigate potential
problems and disruptions to its operations arising from the Year 2000 issue.
The total cost to achieve Year 2000 compliance is not expected to be material.
Amounts spent to date have not been material.
F-11
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(Continued)
While the Company believes that its own internal assessment and planning efforts
with respect to its external service providers, suppliers, customers and
financial institutions are and will be adequate to address its Year 2000
concerns, there can be no assurance that these efforts will be successful or
will not have a material adverse effect on the Company's operations.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In 1997, the Financial Accounting Standards Board (FASB) issued Statements No.
130, Reporting Comprehensive Income, and No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Company's adoption of these
statements had no material impact on the accompanying financial statements.
Research and Development
- --------------------------
Research and development expenditures are charged to operations as incurred.
Software Development Cost
- ---------------------------
Software development costs have been accounted for in accordance with Statement
of Financial Accounting Standard (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under that
standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to the net realizable value
considerations. Capitalized software costs are amortized over the greater of:
1) the amount computed using the ratio that current gross revenues for a product
bear to the total current and anticipated future gross revenues for that
product; or 2) the straightline method over the remaining estimated useful life
of the product in which the life is generally estimated to be three years. The
Company has not incurred any significant capitalization costs after
technological feasibility was achieved and thus does not have any capitalized
software development costs for the year ended January 31, 1999 or the six months
ended July 31, 1999.
Property and Equipment
- ------------------------
Property and equipment are stated at cost. The assets are depreciated using the
straight-line method over their estimated useful lives of five years. Carrying
values are reviewed periodically for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable.
It is the policy of the Company to capitalize significant improvements and to
expense repairs and maintenance.
Depreciation expense for the years ended January 31, 1998 and 1999 was $20,877
and $21,661, respectively. Depreciation expense for the six months ended July
31, 1998 and 1999 was $10,830 and $21,250, respectively.
Impairment of Long Lived Assets
- -----------------------------------
The Company evaluates its long lived assets by measuring the carrying amount of
the assets against the estimated undiscounted future cash flows associated with
them. If such evaluations indicate that the future undiscounted cash flows of
certain long lived assets are not sufficient to recover the carrying value of
such assets, the assets are adjusted to their fair values. No adjustment to the
carrying values of the assets has been made.
Intangible Assets
- ------------------
Intangible assets, principally goodwill, are amortized on the straight-line
method over a period of 3 years. The carrying amounts of intangible assets are
assessed for impairment when operating profit from the related business
indicates the carrying amounts of the assets may not be recoverable. Carrying
values are reviewed periodically for impairment whenever events or changes in
circumstances indicate that the carrying amounts of intangible assets may not be
recoverable. Amortization for the years ended January 31, 1998 and 1999 was
$876 and $263,679, respectively. Amortization for the six months ended July 31,
1998 and 1999 was $66,358 and $198,480, respectively.
F-12
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(Continued)
Stock Based Compensation
- --------------------------
The Company accounts for stock-based compensation as prescribed by Statement of
Financial Accounting Standard (SFAS) No. 123 Accounting for Stock-Based
Compensation, and has adopted its disclosure provisions. The Company has chosen
under the provisions of SFAS 123 to continue using the intrinsic-value method of
accounting for employee stock-based compensation in accordance with Accounting
Principles Board (APB) Opinion No. 25 Accounting for Stocks Issued to Employees.
Loss Per Share
- ----------------
Loss per share of common stock is computed using the weighted average number of
common shares outstanding during the period shown. Common stock equivalents are
not included in the determination of the weighted average number of shares
outstanding, as they would be antidilutive.
Advertising Cost
- -----------------
The Company charges advertising costs to expense as incurred. Advertising
expense for the years ended January 31, 1998 and 1999 was $5,152 and $1,073,
respectively. Advertising expense for the six months ended July 31, 1998 and
1999 was $1,073 and $0, respectively.
Statement of Cash Flows
- --------------------------
For the purpose of the statement of cash flows, cash includes amounts "on-hand"
and amounts deposited with financial institutions.
Supplemental disclosure of cash flow information is as follows:
Cash paid during the periods for:
<TABLE>
<CAPTION>
For the For the For the six For the six
year ended year ended months ended months ended
January 31, January 31, July 31, 1998 July 31, 1999
1998 1999 (UNAUDITED) (UNAUDITED)
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
-
Interest $ - $ $ - $ -
Income taxes $ 1,600 $ 1,600 $ 1,600 $ 1,600
</TABLE>
Supplemental schedule of non-cash investing and financing transactions:
Issuance of common stock in connection with the following transactions:
<TABLE>
<CAPTION>
For the For the For the six For the six
year ended year ended months ended months ended
January 31, January 31, July 31, 1998 July 31, 1999
1998 1999 (UNAUDITED) (UNAUDITED)
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Conversion of notes payable $ 95,000 $ 319,007 $ 25,000 $ 111,120
Purchase of Wpg.Net, Inc. $ - $ 1,186,555 $ 1,186,555 $ -
</TABLE>
For the six month period ended July 31, 1999, 636,100 stock options were
exercised upon the issuance of notes receivable in the amount of $178,798. See
Note 10.
F-13
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(continued)
Use of Estimates
- ------------------
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements, and revenues and expenses during the reporting
period. Actual results could differ from estimates and assumptions made.
Unaudited Interim Financial Statements
- -----------------------------------------
In the opinion of management, the unaudited interim financial statements for the
six month periods ending July 31, 1998 and 1999 are presented on a basis
consistent with the audited financial statements and reflect all adjustments,
consisting only of normal recurring accruals, necessary for fair presentation of
the results of such periods.
2. ACQUISITION OF WPG.NET, INC.
On June 1, 1998, the Company acquired all of the outstanding stock of Wpg.Net,
Inc. for an aggregate purchase price of $1,186,555. IBNL issued 500,000 shares
of common stock with a fair value of $625,000 ($1.25 per share), plus stock
options on 500,000 shares with a fair value of $561,555. The options vest
ratably, on a monthly basis, over the 3 years subsequent to the purchase. If
Wpg.Net, Inc. division revenues reach $500,000 before the 3-year vesting period
has expired, the additional 500,000 options vest immediately. The former
shareholders of Wpg.Net, Inc. (Wpg.Net, Inc. Shareholders) are entitled to a
commission of 50% of revenue generated by the Wpg.Net, Inc. division. If the
revenue is generated by the Virtual Source division sales force, Wpg.Net, Inc.
Shareholders are entitled to a commission of 25% of the revenue. In the event
that IBNL is sold, the Wpg.Net, Inc. Shareholders are entitled to a one-time
payment of $3,000,000, the options vest immediately, and all commission
obligations cease to accrue at that time. IBNL guaranteed a minimum stock price
of $7.00 per share for stock held by the Wpg.Net, Inc. Shareholders upon the
sale of the Company.
The acquisition was accounted for as a purchase and was included with the
combined operations from June 1, 1998 through January 31, 1999. As a result of
the acquisition, goodwill was recorded in the amount of $1,186,555. In
conjunction with the acquisition of Wpg.Net, three of Wpg.net's executives
signed one-year employment agreements with the Company. The contracts
guaranteed the Wpg.Net executives salaries ranging from $49,500 to $77,250 per
year.
3. NOTES RECEIVABLE - RELATED PARTIES
The Company has unsecured recourse notes receivable from several officers which
totaled $178,798 at July 31, 1999. The notes are due on demand and bear
interest at an annual rate of 6%. The notes were granted in connection with the
exercise of 636,100 stock options on May 15, 1999. See Note 10.
4. CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
The following table summarizes information about convertible notes payable
outstanding at January 31, and July 31, 1999:
<TABLE>
<CAPTION>
Amount
Range of of
Approximate conversion Notes
Maturity dates Interest rate shares if converted rates Convertible
-------------- -------------- ------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
On demand--
January 31, 1999 Dec. 31, 1999 10% 2,042,946 $0.20 - $1.25 $ 857,200
On demand-
July 31, 1999 Dec. 31, 1999 10% 2,095,787 $0.20 - $1.25 $ 777,206
</TABLE>
F-14
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
3. CONVERTIBLE NOTES PAYABLE - RELATED PARTIES (Continued)
The following table summarizes information about convertible notes payable
outstanding at January 31, and July 31, 1999:
<TABLE>
<CAPTION>
Approximate Range of Amount of
shares if conversion Notes
Maturity dates Interest rate converted rates Convertible
- ------------------------ -------------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
On demand--Dec. 31, 1999 10% 2,042,946 $0.20 - $1.25 $ 857,200
On demand-Dec. 31, 1999 10% 2,095,787 $0.20 - $1.25 $ 777,206
</TABLE>
At January 31, and July 31, 1999, on an as converted basis, the related party
notes were convertible to approximately 2,042,946 and 2,095,787 shares of IBNL
common stock, respectively.
At January 31, and July 31, 1999, accrued interest on the convertible notes
payable in the amount of approximately $48,000 and $87,727 (UNAUDITED),
respectively, is included in accrued liabilities on the consolidated balance
sheet.
The following table indicates the high and low closing prices of the stock for
the years ended January 31, 1998 and 1999, and for the six month period ended
July 31, 1999:
Low High
----- -----
January 31, 1998 $0.15 $1.00
January 31, 1999 $0.44 $2.75
July 31, 1999 $1.41 $2.13
F-15
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
5. STOCK OPTIONS
Under various plans, the Company may grant stock options to key executives,
management and other employees at exercise prices equal to or exceeding the
market price at the date of grant. In general, options become exercisable from
2 to 10 year periods from the grant date. Stock reserved for current or future
option exercise at January 31, and July 31, 1999, totaled 1.5 million, inclusive
of the 1,436,100 shares related to options previously granted.
On June 10, 1998, the Board of Directors granted options to shareholders' of
Wpg.Net, Inc., to purchase 500,000 shares of the Company's restricted common
stock at an exercise price of $0.59 per share. The options vest monthly over a
three-year period and have a term ending June 2008.
The following table summarizes information about stock option transactions for
the year ended January 31, 1998 and 1999 and six months ended July 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
---------- ------
<S> <C> <C>
Outstanding at beginning of year - -
Awards:
Granted for the year ended January 31, 1998 506,100 $ 0.19
Exercised - -
Forfeited - -
---------- ------
Outstanding at January 31, 1998 506,100 0.18
Awards:
Granted for the year ended January 31, 1999 630,000 0.59
Exercised - -
Forfeited - -
---------- ------
Outstanding at January 31, 1999 1,136,100 0.42
Awards:
Granted for the six months ended July 31, 1999 300,000 0.65
Exercised (636,100) 0.28
Forfeited - -
---------- ------
Outstanding at July 31, 1999 800,000 $ 0.65
========== ======
Exercisable at January 31, 1998 29,589 $ 0.18
========== ======
Exercisable at January 31, 1999 268,343 $ 0.29
========== ======
Exercisable at July 31, 1999 (UNAUDITED) 252,215 $ 0.63
========== ======
</TABLE>
F-16
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
5. STOCK OPTIONS (Continued)
The following table summarizes information about stock options outstanding at
January 31, 1998 and 1999, and at July 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Exercisable
Remaining Weighted Weighted
Number of Years of Average Number of Average
Range of options Contractual Exercise Options Exercise
exercise prices outstanding life Price Exercisable Price
---------------- ----------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1998 $ 0.18 - 0.63 506,100 9.24 $ 0.19 29,589 $ 0.18
January 31, 1999 $ 0.18 - 0.63 1,136,100 8.88 $ 0.42 268,343 $ 0.29
July 31, 1999
(UNAUDITED) $ 0.59 - 0.75 800,000 9.21 $ 0.65 252,215 $ 0.63
</TABLE>
During fiscal 1997, the Company adopted SFAS 123 and under the provisions of the
new standard has elected to continue using the intrinsic-value method of
accounting for stock-based awards granted to employees in accordance with APB
25. For the six months ended July 31, 1999, the Company recorded compensation
expense in the amount of $145,802.
The following table reflects pro forma net income and earnings per share had the
Company elected to adopt the fair value approach of SFAS 123 for the years ended
January 31, 1998 and 1999, and the six months ended July 31, 1998 and 1999:
<TABLE>
<CAPTION>
January 31, January 31, July 31, July 31,
1998 1999 1998 1999
------------- ------------- ---------- ------------
Net loss: (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
As reported $ (990,289) $ (1,762,230) $(851,652) $(1,689,063)
Pro forma (1,007,513) (1,802,545) (864,223) (1,722,033)
Loss per share:
As reported $ (0.11) $ (0.17) $ (0.08) $ (0.14)
Pro forma (0.11) (0.17) (0.08) (.014)
</TABLE>
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model with a weighted average risk free rate of
6.4%, volatility of 177% and expected life of 1 to 5 years.
6. INCOME TAXES
Income taxes are provided pursuant to SFAS No. 109 Accounting for Income Taxes.
The statement requires the use of an asset and liability approach for financial
reporting for income taxes. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized. Accordingly, as the realization and use of the net operating loss
carryforward is not probable at January 31, 1999 and July 31, 1999 the tax
benefit of the loss carryforward has been offset by a valuation allowance of the
same amount.
The composition of deferred tax assets is as follows:
<TABLE>
<CAPTION>
January 31, July 31,
1999 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Total deferred tax assets $ 902,000 $ 1,170,000
Total valuation allowance (902,000) (1,170,000)
------------- ------------
Total deferred tax assets $ - $ -
============= ============
</TABLE>
F-17
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
6. INCOME TAXES (Continued)
The tax effects of temporary differences and carryforwards that give rise to
deferred assets are as follows:
<TABLE>
<CAPTION>
January 31, July 31,
1999 1999
------------- ------------
Deferred tax assets: (UNAUDITED)
<S> <C> <C>
Net operating loss carryforwards $ 902,000 $ 1,170,000
------------- ------------
Gross deferred tax assets 902,000 1,170,000
Valuation allowance (902,000) (1,006,251)
------------- ------------
Net deferred tax assets $ - $ -
============= ============
</TABLE>
No provision for income taxes has been recorded for the periods ended January
31, 1999 and 1998 and for the periods ended July 31, 1999 and 1998 as the
Company has incurred losses during these periods.
The Company had approximately $4,200,000 of federal and state loss carryforwards
available to reduce future federal and state tax liability through the year 2018
for federal loss carryforwards and 2003 for the state loss carryforwards.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has used market information for similar instruments and applied
judgment to estimate fair values of financial instruments. At January 31, 1999,
and July 31, 1999, the fair values of cash, accounts receivable, employee
receivables, notes payable and accounts payable approximated carrying values
because of the short-term nature of these instruments.
8. COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company leases its main office facilities under a noncancellable operating
lease agreement expiring December 31, 1999 with the option to extend the lease
for one additional year. The Company has exercised their right to a one-year
extension through December 31, 2000. The future expense that will be incurred
under the lease for the year ended January 31, 2000 is $37,500, which is
reflected as prepaid rent at January 31, 1999. See Litigation Settlement
discussion below.
Rent expense for the years ended January 31, 1998 and 1999 was $94,067 and
$35,063, respectively. Rent expense for the six months ended July 31, 1998 and
1999 was $15,750 and $37,457, respectively.
Litigation Settlement
- ----------------------
On August 28, 1998, the Company filed a complaint against the owner of the
building complex in which its main office is maintained in Ventura, California.
The complaint arose out of a dispute between the parties regarding the exercise
by the Company of an option to extend the term of the current lease, and
concerning the actions of the parties in connection with the negotiation of a
potential new lease. The Company, in its complaint, sought specific performance,
declaratory relief, injunctive relief, and damages.
In a mutual compromise settlement reached in October 1998, the Company agreed to
accept the following in settlement of the complaint: an amount of $30,000 in
cash; payment of attorney fees incurred in the amount of $7,500; payment of
out-of-pocket expenses it incurred in a move to a new office space, up to a
maximum of $10,000; and new office space in an adjacent building with
"free-rent" for a one year period commencing December 1, 1998, with a monthly
lease fair value of $3,750. The total settlement amount of $91,110 is reflected
as income from litigation settlement in the consolidated statement of operations
for the year ended January 31, 1999. The remaining months of abated rent are
reflected as prepaid rent on the consolidated statement of financial position in
the amount of $37,500 and $15,000 (UNAUDITED) at January 31, 1999 and July 31,
1999, respectively.
F-18
<PAGE>
Interactive Buyers Network International, Ltd.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR THE PERIODS ENDED JULY 31, 1998 AND 1999 IS UNAUDITED
9. GOING CONCERN
The Company has not had significant revenues and has experienced operating
losses since inception primarily caused by its continued development and
marketing costs. As shown in the accompanying financial statements, the Company
incurred a net loss of $1,762,230 during the year ended January 31, 1999, and as
of that date, the Company's current liabilities exceeded its current assets by
$920,680. At January 31, 1999, the Company's stockholders' equity was $128,796.
Those factors create an uncertainty about the Company's ability to continue as a
going concern. The management of the Company intends to pursue various means of
obtaining additional capital. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. Continuation of the Company as a going concern is dependent on
the Company continuing to raise capital, developing significant revenues, and
ultimately attaining profitable operations.
10. SUBSEQUENT EVENTS
Option Vesting Term Modification and Exercise
- --------------------------------------------------
On or about May 15, 1999, the Board of Directors of the Company, in order to
gain additional commitment from the Company executives, modified the vesting
terms of the then outstanding 636,100 stock options, held by various Company
executives, by accelerating the vesting provisions to require immediate
exercise of the options. In association with the modification of the option
terms, the Company recognized additional incremental compensation expense of
$324,093 (UNAUDITED) in accordance with the provisions of SFAS No. 123 there was
no change in the number of options or exercise price of the options. The option
holders, upon the exercise of the options, issued note receivables to the
Company in the amount of $178,798 (UNAUDITED) in connection with the purchase of
the underlying stocks, which are reflected as a reduction of stockholders'
equity (deficit) on the financial statements.
Transfer of Wpg.net Assets, Liabilities, and Operations to the VSI Subsidiary
- --------------------------------------------------------------------------------
In June 1999, the Board of Directors approved the transfer of all assets,
liabilities, and operations of Wpg.Net into the VSI subsidiary, to be followed
by the dissolution of the Wpg.Net corporate entity. Following that action, IBNL
will function as a holding company with VSI as its only operating subsidiary.
Conversion Notice given to Convertible Notes Payable Holders
- -------------------------------------------------------------------
On July 31, 1999, the Board of Directors provided all holders of the convertible
notes payable with notification that the Board would exercise the conversion
provision in the note agreements. In accordance with the note agreements, the
note holders were given the required 90-day notice on the conversion, which is
to be effective on October 31, 1999. The Company further informed the note
holders that it desired to accelerate the conversion of the notes to an
effective date of July 31, 1999. As consideration for agreeing to a July 31,
1999 conversion, the Company will give the note holders the share equivalent of
interest that would have accrued during the period from August 1, 1999 to
October 31, 1999. As of September 3, 1999, the Company has not yet determined
which note holders will accept early conversion. Thus, no adjustments have been
reflected in the accompanying financial statements for the effective conversion
of the notes payable to stock as of July 31, 1999.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Interactive Buyers Network Limited.
Ventura, California
We have audited the accompanying balance sheet of Wpg.Net, Inc. (A Development
Stage Company) as of December 31, 1997 and 1996 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1997 and for the period October 23, 1996 (inception) to December
31, 1996. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wpg.Net, Inc. (A Development
Stage Company) as of December 31, 1997 and 1996 and the results of its
operations, and its cash flows for the year ended December 31, 1997 and for the
period October 23, 1996 (inception) to December 31, 1996, respectively, in
conformity with generally accepted accounting principles.
/s/ Lucas, Horsfall, Murphy & Pindroh
Pasadena, California
December 6, 1999
F-20
<PAGE>
<TABLE>
<CAPTION>
Wpg.Net, Inc.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31,
1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 2,693
-------- --------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . 1 2,693
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 2,693
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES - -
-------- --------
STOCKHOLDERS' EQUITY
Common stock, no par value,
20,000,000 shares authorized,
1,000,000 issued and outstanding on December 31, 1997
and 935,680 issued and outstanding on December 31, 1996. 4,275 4,000
Deficit accumulated during the development stage . . . . . (4,274) (1,307)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . 1 2,693
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . $ 1 $ 2,693
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
<TABLE>
<CAPTION>
Wpg.Net, Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FOR THE OCTOBER 23, 1996 OCTOBER 23, 1996
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $ - $ -
General and administrative expenses 2,967 1,307 4,274
-------------- ---------------- ----------------
Net loss. . . . . . . . . . . . . . $ (2,967) $ (1,307) $ (4,274)
============== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
<TABLE>
<CAPTION>
Wpg.Net, Inc.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
------------------- Total
No. of Accumulated Stockholders'
Shares Amount (Deficit) Equity
--------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at October 23, 1996 (Inception) - $ - $ - $ -
Issuance of common stock. . . . . . . . 935,680 4,000 - 4,000
Net loss. . . . . . . . . . . . . . . . - - (1,307) (1,307)
--------- -------- ------------- -------------
Balances at December 31, 1996 . . . . . 935,680 4,000 (1,307) 2,693
Issuance of common stock. . . . . . . . 64,320 275 - 275
Net loss . . . . . . . . . . . . . . . . - - (2,967) (2,967)
--------- -------- ------------- -------------
Balances at December 31, 1997. . . . . . 1,000,000 $ 4,275 $ (4,274) 1
========= ======== ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
<TABLE>
<CAPTION>
Wpg.Net, Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE OCTOBER 23, 1996 OCTOBER 23, 1996
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . $ (2,967) $ (1,307) $ (4,274)
-------------- ---------------- ----------------
NET CASH USED BY OPERATING ACTIVITIES . . (2,967) (1,307) (4,274)
CASH FLOWS FROM (TO) FINANCING ACTIVITIES
Proceeds from issuance of common stock. . . 275 4,000 4,275
-------------- ---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 275 4,000 4,275
-------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH . . . . . . . (2,692) 2,693 1
CASH, BEGINNING OF PERIOD . . . . . . . . . . 2,693 0 -
-------------- ---------------- ----------------
CASH, END OF PERIOD . . . . . . . . . . . . . $ 1 $ 2,693 $ 1
============== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
Wpg.Net, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and business
- ---------------------------
Wpg.Net, Inc. (the "Company") was incorporated in the State of Washington on
October 23, 1996, to develop Base Publisher. Base Publisher is a user
friendly, do-it-yourself, web site builder that requires no technical
expertise, no special software, and no consultants.
Revenue Recognition
- --------------------
No revenue has been earned on the Company's application. Under Wpg.Net's Base
Publisher, a monthly fee will be charged to clients after an initial free
introductory period has lapsed. The monthly charge will be recognized as income
in the period in which the fee is charged. The Company did not recognize any
revenue on Base Publisher in 1997 and 1996.
Year 2000 Issues
- ------------------
Many computers and other equipment with embedded chips or microprocessors may
not be able to appropriately interpret dates after December 31, 1999, because
such systems use only two digits to indicate a year in the date field rather
than four digits. If not corrected, many computers and computer applications
could fail or create miscalculations, causing disruptions to the Company's
operations. In addition, the failure of customer and supplier computer systems
could result in interruption of sales and deliveries of key supplies or
utilities. Because of the complexity of the issues and the number of parties
involved, the Company cannot reasonably predict with certainty the nature or
likelihood of such impacts.
While the Company believes that its own internal assessment and planning efforts
with respect to its external service providers, suppliers, customers and
financial institutions are and will be adequate to address its Year 2000
concerns, there can be no assurance that these efforts will be successful or
will not have a material adverse effect on the Company's operations.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In 1997, the Financial Accounting Standards Board (FASB) issued Statements No.
130, Reporting Comprehensive Income, and No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Company's adoption of these
statements had no material impact on the accompanying financial statements.
F-25
<PAGE>
Wpg.Net, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(Continued)
Software Development Cost
- ---------------------------
Software development costs will be accounted for in accordance with Statement of
Financial Accounting Standard (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under that
standard, capitalization of software development costs will begin upon the
establishment of technological feasibility, subject to the net realizable value
considerations. Capitalized software costs will be amortized over the greater
of: 1) the amount computed using the ratio that current gross revenues for a
product bear to the total current and anticipated future gross revenues for that
product; or 2) the straightline method over the remaining estimated useful life
of the product in which the life is generally estimated to be three years. The
Company has not incurred any significant capitalizable costs after technological
feasibility was achieved and thus does not have any capitalized software
development costs for the years ended December 31, 1997 and 1996.
Statement of Cash Flows
- --------------------------
For the purpose of the statement of cash flows, cash includes amounts "on-hand"
and amounts deposited with financial institutions.
Use of Estimates
- ------------------
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements, and revenues and expenses during the reporting
period. Actual results could differ from estimates and assumptions made.
2. INCOME TAXES
Income taxes are provided pursuant to SFAS No. 109 Accounting for Income Taxes.
The statement requires the use of an asset and liability approach for financial
reporting for income taxes. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized. Accordingly, as the realization and use of the net operating loss
carryforward is not probable at December 31, 1997 and 1996 the tax benefit of
the loss carryforward has been offset by a valuation allowance of the same
amount.
No provision for income taxes has been recorded for the periods ended December
31, 1997 and 1996 as the Company has incurred losses during these periods.
3. SUBSEQUENT EVENT
On June 1, 1998, the Company sold all of the outstanding stock to Interactive
Buyers Network Limited (IBNL) for an aggregate sales price of $1,186,555. IBNL
issued 500,000 shares of common stock with a fair value of $625,000 ($1.25 per
share), plus stock options on 500,000 shares with a fair value of $561,555. The
options vest ratably, on a monthly basis, over the 3 years subsequent to the
purchase. If the Company's division revenues reach $500,000 before the 3-year
vesting period has expired, the additional 500,000 options vest immediately.
The former shareholders of the Company are entitled to a commission of 50% of
revenue generated by the Company division. If the revenue is generated by the
Base Publisher division sales force, Company Shareholders are entitled to a
commission of 25% of the revenue. In the event that IBNL is sold, the Company
Shareholders are entitled to a one-time payment of $3,000,000, the options vest
immediately, and all commission obligations cease to accrue at that time. IBNL
guaranteed a minimum stock price of $7.00 per share for stock held by the
Company Shareholders upon the sale of IBNL.
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE BUYERS NETWORK INTERNATIONAL, LTD.
By: /s/ Robert C. McShirley
-----------------------------------------------
Robert C. McShirley
President, Chief Executive Officer and Director
Date: December 14, 1999
37
<PAGE>
PART III
Item 1. INDEX TO EXHIBITS
The Exhibits listed below are filed as part of this Registration
Statement.
Exhibit
No. Document
- ------- ---------------------------------------------
2.1* Articles of Incorporation
2.2* Bylaws
3.1* Specimen Stock Certificate
3.2* Specimen Convertible Demand Note Series 3
3.3* Specimen Convertible Demand Note Series 2
3.4* Specimen Convertible Demand Note
10.1* Stock Purchase and Exchange Agreement
10.2* Option to Purchase Common Stock
17 Computation of Earnings/Loss Per Common Share
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
* Previously filed.
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 17
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
FOR THE YEAR FOR THE YEAR FOR THE SIX FOR THE SIX
ENDED ENDED MONTHS ENDED MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, JULY 31,
1998 1999 1998 1999
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic:
Net income (loss) attributable
to common stockholders $ (990,289) $ (1,762,230) $ (851,652) $ (1,689,063)
============= ============= ============== ==============
Weighted average number of
common shares outstanding 9,192,811 10,529,147 10,756,620 12,231,402
============= ============= ============== ==============
Income (loss) per common share $ (0.11) $ (0.17) $ (0.08) $ (0.14)
============= ============= ============== ==============
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports included herein:
Report Date: Financial Statements of:
------------------------- --------------------------
May 15, 1999, except for Interactive Buyer Network
Note 10 to the financial International Ltd.
statements which is as of
September 3, 1999
November 17, 1999 Wpg.Net, Inc.
and to the reference to our firm under the caption "Experts" included in or made
part of this Form 10-SB.
/s/ Lucas, Horsfall, Murphy & Pindroh, LLP
December 14, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-2000
<PERIOD-START> FEB-01-1998 FEB-01-1999
<PERIOD-END> JAN-31-1999 JUL-31-1999
<CASH> 59937 438300
<SECURITIES> 0 0
<RECEIVABLES> 3590 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 63527 438300
<PP&E> 73587 164446
<DEPRECIATION> 50920 72170
<TOTAL-ASSETS> 1116253 1374607
<CURRENT-LIABILITIES> 984207 985420
<BONDS> 0 0
<COMMON> 114014 130614
0 0
0 0
<OTHER-SE> 14782 436438
<TOTAL-LIABILITY-AND-EQUITY> 627152 1068148
<SALES> 61387 7985
<TOTAL-REVENUES> 0 7985
<CGS> 0 0
<TOTAL-COSTS> 1914727 1697048
<OTHER-EXPENSES> 91110 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1762230 1689063
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1762230 1689063
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1762230 1689063
<EPS-BASIC> (0.17) (0.14)
<EPS-DILUTED> 0 0
</TABLE>
