This registration statement has been filed with the Securities and Exchange
Commission but has not yet become effective. Information in this registration
statement is subject to completion or amendment.
As filed with the Securities and Exchange Commission on November 2, 1999.
-------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
AMENDMENT NO. 2
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------
ALOTTAFUN!, INC.
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(Exact Name of Registrant As Specified in Charter)
Delaware 39-1765590
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(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
141 N. Main Street, Suite 207, West Bend, Wisconsin 53095
---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 334-4500
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
To be so registered Each class is to be registered
N/A N/A
--- ---
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of Class)
Total Number of Pages: _____
Index to Exhibits at Page: _____
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TABLE OF CONTENTS
PART I
PAGE NO.
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ITEM 1. Description of Business 4
Overview 4
The Toy Industry 6
Electronic Commerce 6
Business Strategy 7
Products 10
Sales, Marketing and Distribution 11
Manufacturing 12
Intellectual Property 13
Competition 13
Legal Proceedings 15
Seasonality 15
Government and Industry Regulation 15
Product Liability Insurance 15
Employees 16
ITEM 2. Management's Discussion and Analysis 17
Selected Financial Data 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
General 18
Results of Operations 19
Liquidity and Capital Resources 21
ITEM 3. Description of Property 26
ITEM 4. Security Ownership of Certain Beneficial Owners and
Management 26
ITEM 5. Directors, Executive Officers, and Key Employees 27
Business Experience of Executive Officers
and Directors 27
Board of Directors 28
Key Employees 28
ITEM 6. Executive Compensation 29
Summary Compensation Table 29
Employment and Other Agreements 29
Company's Incentive Stock Option Plan 30
Directors Compensation 30
ITEM 7. Certain Relationships and Related Transactions 30
ITEM 8. Description of Securities 32
Common Stock 32
Preferred Stock 33
Warrants 34
PART II
ITEM 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters 35
Market Price of Registrant's Common Stock 35
Dilution and Absence of Dividends 36
ITEM 2. Legal Proceedings 37
ITEM 3. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 38
ITEM 4. Recent Sales of Unregistered Securities 39
ITEM 5. Indemnification of Officers and Directors 41
</TABLE>
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<S> <C> <C>
PAGE NO.
PART F/S
Financial Statements and Supplementary Data 42
PART III
ITEM 1. Index to Exhibits 43
ITEM 2. Description of Exhibits 43
</TABLE>
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ITEM 1. DESCRIPTION OF BUSINESS
Overview
We were originally established in July 1993 as a distributor, and marketer of
collectible toys and candy products for children between the ages of three and
twelve years old. We have marketed products that include tea sets, games,
puzzles, books, plush toys, purses, ride-on cars, and unique surprise boxes and
collectible toys that contain gum and candy, collectible toys, trading cards,
milk caps (pogs), comic strips, tattoos, stickers, and various promotional
inserts. Alottafun! has not generated sufficient revenues in the last two years
to fund its ongoing operations and has sustained substantial losses since its
inception. Accumulated losses to date are approximately $3,700,000 and there is
substantial doubt about our ability to continue as a going concern.
In May 1999, Alottafun! joint ventured with E-Commerce Fulfillment, LLC. which
has a contract with M.W Kasch, an independent U.S. toy distributor, to launch an
e-commerce Internet portal called TOYPOP.COM. The Joint venture is owned 33.3%
by E-Commerce Fulfillment and 67.7% by Alottafun!, Inc. E-Commerce Fulfillment
(ECF) is wholly owned by Jeffrey C. Kasch, President of M.W. Kasch Company.
ECF's responsibilities and obligations include selling toy products to the joint
venture, at prices which do not exceed the prices charged to ECF's typical
customers. ECF will provide sufficient quantities of its products based on
regular availability. ECF will also merchandise the toys on the Web site and
make decisions as to which toys to highlight as special buys, promote, or
present as a `hot' toy. M.W. Kasch Company will warehouse and provide
fulfillment to ECF on an ongoing basis. The relationship between M.W. Kasch
Company and ECF is exclusive as far as ECF is concerned, but not exclusive with
regard to M.W. Kasch. M.W. Kasch is free to sell any and all other retailers,
electronic or otherwise. The non-exclusive nature of this joint venture may
negatively impact our E-commerce business prospects. There is no assurance that
we will be successful in our toy-electronic business venture. The role of
Alottafun! is to manage marketing strategies, and to provide the electronic
mediums for the sale, customer support, and fulfillment of products that the
joint venture purchases.
According to Toy Manufacturers of America, the leading toy industry trade group,
total annual retail toy sales were estimated at $27.2 billion in 1998. This
represents traditional retail toy sales of $21 billion and video games of $6.2
billion. These figures represent the retail sales of toys through all major
retail outlets such as national toy stores, discount stores, department, drug,
food and variety stores; gift and novelty shops; price clubs; bookstores; home
supply stores, mail order catalogs and online toy stores.
Toy sales through the Internet represented the fastest growing segment of toy
retail sales during the last quarter of 1998. According to Jupiter
Communications, Inc., a New York research firm, retail sales through online toy
stores is expected to generate $52 million in 1999, $555 million in 2002, and
$1.5 billion by 2003 excluding software, books and other children's categories.
Our joint venture with E-Commerce Fulfillment provides us with the ability to
sell all major brands of toy products over the Internet. We expect to capture
$50 million of this $1.5 billion toy electronic segment of the toy industry by
2003. There is no assurance that we will be successful in marketing and
distributing toys through electronic commerce. If we experience any difficulties
regarding the development of our Internet site, our future business prospects
will be adversely affected.
We have implemented the second phase of our web-site development with the launch
of our e-commerce site on September 21, 1999. We have contracted with three
software development companies to complete all the phases of the web site. The
first phase of our site was completed in August 1999 and we conducted beta
testing until the grand opening on September 21, 1999. The Web-site e-commerce
development program, when fully completed, is expected to cost about $300,000
and we further expect to spend about $50,000 to initially market the site for
Christmas 1999. In comparison with other retailers of toys, our expenditures
will be relatively small. All marketing expenditures will be for newspapers,
radio and magazine advertisements. We are not on schedule with our original
marketing program that called for expenditures of $500,000 as funding has not
been arranged as initially anticipated. Should additional funding not be
arranged to the satisfactory of management, the opportunity for sales through
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our Internet site will be lost for this selling season. Such an occurrence will
have a serious and detrimental effect on our future plans. To date, we have
funded our Web-site e-commerce development with working capital provided by the
sales of our securities and borrowings. However, there is no assurance that
these working capital reserves will be sufficient to complete, launch, and
market our e-commerce site. Furthermore, there is no assurance that we will be
able to raise additional funds through securities sales and borrowings in the
future.
We will be using industry standard software and systems to process orders and to
protect the security of our customers. We are implementing a broad array of
scaleable site management, search, customer, interaction, and systems used to
process customers' orders and payments. These services and systems use a
combination of technologies developed by our software developers and are
commercially available, licensed technologies.
Our systems will be designed to reduce downtime in the event of outages.- they
provide 24-hour-a-day, seven-day-a-week availability. Our system hardware will
be hosted at a third party facility in Vancouver, Canada, which provides
redundant communications lines and emergency power back up.
We plan a series of acquisitions to strengthen and expand our current product
lines. Mother Hubbard Toys (now Hearthside Treasures ) was acquired in June 1998
to provide high quality tea sets, cook n' serve sets, continental cookware sets,
and food sets to children between the ages of three to five years old. This
acquisition presents us with an opportunity to expand our distribution in this
growing segment of the toy industry. Mother Hubbard Toys was founded in 1997.
The terms of our agreement with Mother Hubbard's Toys calls for Alottafun! to
pay its previous owner, Gerald Waak, the principal of Vagabond Associates, a
royalty payment for years 1999 through years 2001. We had no prior affiliation
with the seller prior to this acquisition. Prior to our acquisition, Mother
Hubbard had approximately $35,000 in sales in 1998 and no sales prior to that
date. We have had Mother Hubbard products sales of $109,459 through September
30, 1999.
We continue to seek acquisitions of companies that market basic toy products,
however, we have no pending or contemplated acquisitions. If we are presented
with appropriate opportunities, we intend to make investments in complementary
companies, products or technologies. We could have difficulty in assimilating
the acquired technology or products into our operations which could disrupt our
ongoing business, distract our management and employees and increase our
expenses. Furthermore, we may have to incur further debt or issue more equity
securities to pay for any future acquisitions or investments, the issuance of
which could be dilutive to us or our existing stockholders.
Most of our products are relatively simple and inexpensive toys. We believe that
these products have proven to have enduring appeal and are less subject to
general economic conditions, toy product fads and trends, changes in retail
distribution channels and other factors. In addition, the simplicity of these
products enables us to choose among a wider range of manufacturers and affords
us greater flexibility in product design, pricing and marketing.
We sell our products through our in-house sales staff and independent sales
representatives. Our in-house sales organization is solely our Vice-President of
Sales. He manages a network of 16 Sales Representative throughout the United
States and Canada. We are not materially dependent upon the sales of any one
representative. Purchasers of our products include grocery, drug, variety,
video, mass merchandisers and specialty outlets, although revenues from toy
product sales have been very limited in amount to date. Alottafun!, Inc.'s
revenue will all be denominated in U.S. dollars Our joint venture with
E-Commerce Fulfillment, LLC., will allow us to compete with established
retailers in the sales of toy products to consumers. Our target markets are toy
retailers and toy distributors. We hope that development of an Internet site
will allow us to market directly to a new targeted audience-children. However,
there is no assurance that our marketing and distribution efforts will be
successful. Furthermore, marketing and distribution of our products through
e-commerce may adversely affect our ability to market our products directly to
retailers and other local distributors.
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Over the past few years, the toy industry has experienced substantial
consolidation among both toy companies and toy retailers. We believe that the
ongoing consolidation of toy companies provides us with increased growth
opportunities due to retailers' desire not to be entirely dependent on a few
dominant toy companies. Such dependence places tremendous sales and
profitability pressure on distributors because if one major retailer decides not
to order your product, it could have significant effect on unit sales and unit
profitability. On the other hand, if a distributor can develop an exclusive
arrangement with a retailer for a particular toy, this can guarantee healthy
sales and profits.
The Toy Industry
According to Toy Manufacturers of America, Inc. ("TMA"), the leading industry
trade group, total manufacturers' wholesale shipments of toys, excluding video
games, in the U.S., were approximately $15.2 billion in 1998. According to the
TMA, the United States represents 36% of toy revenue; Western Europe, Asia and
Japan follow with 28%, 13% and 10%. (TMA, 1997). The U.S. is also the leader in
toy development, sales support, marketing, advertising and special promotions.
Classic toys have consistently remained the backbone of the toy business which
includes games, preschool and infant items and activity toys, although,
high-tech toys have become increasingly popular among children.
Electronic Commerce
We believe that a significant opportunity exists for the online retail sale of
toys on the Internet. The Internet has grown rapidly in recent years, spurred by
development of easy-to-use Web browsers, a large and growing installed base of
advanced personal computers, the adoption of faster and more cost efficient
networks, the emergence of compelling Web-based content and commerce
applications, and the growing sophistication of the user base. At the end of
1998, there were 98 million Internet users, and projections indicate this user
base to grow to 320 million by 2002. In addition, the Internet's commercial use
presents a significant opportunity for merchants to reach an expanded customer
base. Jupiter Communications, a marketing research firm, estimates that the
value of goods and services purchased over the Internet will increase from $2.6
billion in 1997 to $37.5 billion in 2002. The broad acceptance of the Internet
as a global communication medium presents significant opportunities for online
retail commerce. Online toy retailers currently account for a small portion of
total Internet commerce sales, however, a number of businesses have developed
plans and begun to focus in this area.
The online commerce market is new, rapidly evolving and intensely competitive.
Management expects competition to intensify in the future as more and more
businesses develop an Internet presence. Barriers to entry are low which enable
current and new competitors to enter that market and sell competitive products
without much resistance.
Alottafun! will compete with a variety of other companies, which include:
- - Current online toy retailers.
- - Traditional store-based toy and children's product retailers.
- - Major discount retailers.
- - Entertainment companies that sell and license children's products.
- - Catalog retailers of children's products.
- - Manufacturers of children's products.
- - Online retailers that currently sell other products and could easily
add children's products.
- - Internet portals and destination Web sites that host shopping for
children's products.
TOYPOP.COM will readily compete in the online retail toy market based on the
following factors:
- - Unique child oriented site
- - Wholesale pricing
- - brand recognition
- - selection
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- - convenience
- - price
- - speed and accessibility
- - customer service
- - quality of site content
- - reliability and speed of fulfillment.
Many of TOYPOP.COM's current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources. Many of these current and potential competitors can devote
substantially more resources to Web site and systems development than we can. In
addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with online competitors or children's toy
suppliers as the use of the Internet and other online services increases.
Competitors may be able to secure products from vendors on more favorable terms,
fulfill customer orders more efficiently and adopt more aggressive pricing or
inventory availability policies. Traditional store-based retailers also enable
customers to see and feel products in a manner that is not possible over the
Internet.
TOYPOP.COM's online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs that select specific titles from a variety of Web sites and
may direct customers to other online toy, video game, software, video and music
retailers, may increase competition.
However, we feel that wholesale pricing, child oriented marketing, and
proprietary products will differentiate the TOYPOP.COM site in the long run and
ensure long-term profitability, although we can not provide assurance that we
will be successful in doing so.
Online toy sales were estimated to be $60 million in 1998, up from just
$1,000,000 in 1997. The online sales of toys are growing dramatically, although
it represents a very small portion of total toy annual sales of $25 billion.
Business Strategy
Our business strategy consists of the following elements:
- - Expand core products. In February 2000, we plan to introduce new products
within our core product lines, including children's dolls and several
unique collectible toys at the industry Toy Fair 2000 scheduled during that
month. These classic toys continue to be popular among children and are not
greatly effected by new trends in the toy industry.
- - Enter new product categories. We are currently developing 80 new "Pocket
Ghost" collectible products in conjunction with our Hong Kong agent for
manufacturing in China. Molds have been made for 44 characters within this
product line with the balance of 36 characters scheduled for completion in
January 2000. The Hong Kong agent supervises the quality control and
development aspects of new toy products. Alottafun! maintains strong
affiliations with companies in Europe that enables us to identify new
trends and products in the European toy market which can be marketed in the
U.S. market. In addition, these relationships present us opportunities in
exporting products to Europe. This exporting opportunity would be made
available through a European distributor that we are now in the process of
identifying. To facilitate sales in Europe, we intend before the end of the
year 2000, to make our TOYPOP site available in other languages.
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- - Development of TOYPOP.COM Interactive online toy store. The TOYPOP.COM
online toy store will be one of the first interactive online toy stores.
Our Internet destination, targeted to children between the ages of three
and twelve, will contain more interactive games and puzzles than are
traditionally found on electronic commerce Web sites. A number of
characteristics of the toy industry make the online sale of toys
particularly attractive relative to traditional distribution channels. The
online environment offers many data management and multimedia features
which enable consumers to conduct effective searches by name, product type,
or product category and display products better than traditional catalogs.
Online retailers can more easily obtain extensive demographic and
behavioral data about their customers, providing them with greater direct
marketing opportunities and the ability to offer a more personalized
shopping experience. In addition, online retailers can also offer consumers
significantly broader product selection, the convenience of home shopping
and 24-hour-a-day, seven-day-a-week operations, available to any location,
foreign or domestic, that has access to the Internet.
While physical store-based toy retailers must make significant investments
in inventory, real estate and personnel for each store location, online
retailers incur a fraction of these costs, generally use centralized
distribution, and have virtually unlimited merchandising space. Traditional
retailers are compelled to limit the amount of inventory they carry at each
store and focus on a smaller selection of faster-selling hit releases. As a
result, we believe that a typical toy store is able to carry far less
merchandise units compared to the unlimited capability of an online toy
store. Online retailers can offer consumers a broader range of products
that include hundreds of smaller toy companies that currently have
difficulty competing against major toy retailers. As an example, Pokemon
was made available on our site on October 22, 1999. This product is
purchased through M. W. Kasch Company. Kasch is subject to the same market
conditions as any other distribution outlet for a popular and in-demand toy
product. Pokemon products are presently in short supply. As is generally
true for popular toy products, availability of these products is highly
dependent upon supply commitments from manufacturers and their perception
as to expected unit sales. We will, however have the same difficulty as
other small retailers obtaining access to a new toy product and such lack
of availability could impact our sales and profitability. We cannot provide
any assurance that our efforts will be successful. In addition, if these
popular products are available through us, we can not provide any assurance
that our marketing efforts will be successful as we presently have very
limited resources to both promote and market our product offerings. In
addition, should such capital resources be made available, we further
cannot provide any assurance that it would be available on a timely basis
or that we would appropriately spend such funds on an effective or a
successful marketing program.
TOYPOP.COM's objective is to be a leading retailer of children's toy
products. Key elements of our strategy include:
- FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS
TOYPOP.COM intends to become the primary destination for consumers
purchasing children's products. Our online store is focused exclusively on
children's products and will offer an extensive selection of games,
software, videos and music. While it intends to focus on toys, TOYPOP.COM
will expand offerings into additional children's product categories to take
advantage of our customer base, brand name, merchandising expertise and
distribution capabilities. Children's consumer electronic products are now
available on the site as of November 1, 1999. By February 2000, this will
be further expanded to books, videos and music categories. At that time we
will also add baby related items and sporting goods. We intend to
substantially add to the depth of selections within each category as we add
many new manufacturers to the site. Presently, we only buy through M. W.
Kasch and are limited to their in-stock offerings. We intend to bring
on-line the products of small manufacturers to enable them to market to
consumers through our TOYPOP.COM site by which they will drop ship their
merchandise directly to the consumer. We also intend to add a gift registry
to the site and add, what we view as quite important, a on-line customer
service capability so that our customers can get needed service to order in
a prompt and timely manner.
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- BUILD BRAND RECOGNITION
Through Alottafun!'s advertising and promotional activities, it will target
purchasers of children's products, with a primary focus on children and
mothers. Management believes that while mothers are the principal for
purchases of children's products and strongly influence the purchasing
decisions of family and friends- children are the ultimate consumer and
strongly influence the buying decision. Both off-line and online marketing
strategies will be used to maximize customer awareness and enhance brand
recognition.
- OFF-LINE ADVERTISING. TOYPOP.COM will use offline advertising to
promote both brand name and specific merchandising opportunities with
traditional advertising efforts that will include print advertising in
FAMILY FUN, FAMILY PC, PARENTING, PARENTS and CHILD publications, and
radio and television advertising in major markets. Management plans to
increase the use of traditional off-line advertising in order to
continue building brand recognition.
- ONLINE ADVERTISING. TOYPOP.COM will partner with online portals and
Internet service providers, parenting-related Web sites and
Children-oriented companies.
- DIRECT ONLINE MARKETING. As our customer base grows, management will
continue to collect significant data about customers' buying
preferences and habits in an effort to increase repeat purchases by
existing customers. Management intends to maximize the value of this
information by delivering meaningful and helpful suggestions and
special offers to customers via e-mail and other means. In addition, a
in-house newsletter, THE TOYPOP NEWS, will alert customers to important
developments and merchandising initiatives.
- BUILD RELATIONSHIPS WITH CHILDREN
Management intends to build a relationship with children through
collectible toys to be launched in February 2000. Within each package will
be placed an insert, which will lead the child to a game at the TOYPOP.COM
Web site. The site will feature an interconnected series of game challenges
with identified users able to earn points, and ultimately prizes as a
result of successful completion of a number of challenges. This game
element within the site will challenge the ingenuity, problem solving
skills, and persistence of the user to boost the perceived value of the
rewards. Along the way the users will gain not only an enhancement of those
qualities, but a great deal of useful information and positive attitudes.
The site will also contain quite a bit of irreverent humor and a bit of
silliness, as well as product descriptions, and children auctions, and
message boards.
The site will function as a tool to drive sales of our collectible toys by
utilizing secret code numbers included in toy packaging. The allure of the
game element of the site will drive the target user base to purchase the
toys not just for the sale of the toys but also for the facilitation of the
game. The characters found in collectible toys will be incorporated into
the Game Space as well.
PURSUE WAYS TO INCREASE SALES
Management intends to pursue new opportunities to increase sales by:
- opening new departments on TOYPOP.COM to expand into new children's
product categories;
- increasing product selection in existing departments;
- adding more services to further personalize the customer experience;
- pursuing international market opportunities; and
- acquiring complementary businesses, products or technologies.
- Pursue strategic acquisitions. Since our inception, we intended to
acquire and develop Alottafun! brands through the acquisition of other
toy companies or their assets. Our Hearthside Treasures product line is
the first of many intended acquisitions that complement our intended
product lines. We intend to continue our efforts to acquire and develop
the Alottafun! Brand through the acquisition of other toy businesses
with valuable trademarks or brands and compatible product lines.
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We intend to focus the majority of our time and resources on the development of
our collectible toys and the ToyPop.com website. We anticipate bringing to
market our collectible toys in February of 2000. Our web site opened on
September 21, 1999. There is no assurance that our business strategy, which is
highly dependent upon e-commerce, will be successful or that we will be able to
generate any significant sales. The on-line marketing efforts of competitors,
who are substantially larger and have far more financial resources could have a
critical impact on our opportunity for success.
Products
Our initial product consisted of a surprise box that included quality gum and
candy, toys, trading cards, milk caps (pogs), comic strips, tattoos, stickers,
and various promotional inserts. Our initial emphasis was placed upon gaining
distribution among convenience and neighborhood stores. More recently, we have
targeted larger volume trade channels such as grocery, drug, variety, video,
mass merchandisers and specialty outlets. Our success in distributing our
Surprise Box was very limited in targeting neighborhood and convenience stores.
We have obtained about $300 of sales within this channel of distribution to
date. If we are to be successful in this effort in the future, substantially
more advertising and promotion would have to be devoted to this segment. We
cannot provide any assurance that we will be successful in this endeavor or that
the capital resources will be readily available to fund such a program. Our
Internet strategy to sell toys direct to the public could potentially conflict
with the distribution of our products though regular retail channels and could
adversely impact our sales and profitability. We also cannot provide assurances
that we will be successful in this regard.
Our packaging and graphic designs target children between the ages of three and
twelve years old. Package designs and graphics are provocative, colorful and
irreverent. The main cartoon character located on the package is Reely, which is
representative of a typical 10 year old. To develop brand loyalty among the
higher age groups of seven to twelve years old, high quality trading cards, milk
caps and comics are added to maintain their interest.
Since the introduction of the Alottafun! Surprise Box, we have significantly
expanded our product offerings to include:
- - Cooking and housekeeping sets
- - Collectible toys
- - Puzzles
- - Books with built-in games
- - Plush toys
- - Purses
- - Girl make-up kits
- - Ride-on push cars
- - Building block sets
- - Models
Our collectible toy products are based on the European Collectible Toy market
products. European candy companies have produced collectible toys for over
twenty five years which consist of small toys surrounded by candy shells. The
toys inside the candy shell are well engineered collectible models of airplanes,
cars, clowns, frogs, crocodiles, pandas and a various other objects. These toys
have been collected and traded in Europe for many years and have established a
substantial secondary market.
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We plan on releasing 80 original collectible toys at the Toy Fair 2000 industry
convention in February 2000. We have designed our own version of the European
Collectible toy that conforms to U.S. product guidelines. Prior to this new
design, collectible toys could not meet these guidelines. Our design
incorporates the high quality easily assembled objects within a plastic shell.
We will introduce new objects inside the collectible frequently and will limit
the number of objects produced to stimulate the collectable aspects of the
product. The collectible toy product is a natural extension of our Surprise Box
and will prove to be a significant product in the United States.
Our Hearthside Treasures acquisition provides high quality tea sets, cook n'
serve sets, continental cookware sets, and food sets to children between the
ages of three to five years old. This acquisition presents us with an
opportunity to expand our distribution in this growing segment of the toy
industry. These products are primarily targeted toward young girls which allow
us to further diversify our customer base.
TOYPOP.COM
Our Internet destination consists of three major components that make it unique.
Upon entering TOYPOP.COM, individuals may either choose a section called, "Fun
Stuff" which contains jokes, puzzles, comics, links to Internet sites targeted
toward children. The second section contains a guest book for registering on the
site allowing us to collect valuable demographic information and extend special
promotion to our members. Finally, the last section contains interactive online
games that children may play individually or against others.
Sales, Marketing, and Distribution
We sell all of our products through our own in-house sales staff and independent
sales representatives. Purchasers of our products include toy and discount
retail chain stores, department stores, toy specialty stores and wholesalers.
The Alottafun! Surprise Box product is also distributed through convenience and
small specialty retail establishments. As we continue to expand our operations,
we will hire additional independent sales representatives to handle specific
classes of trade, such as video, military, mass merchandisers, variety, toy, and
other outlets.
Our success depends on our ability to establish and increase the size of our
distribution network for our products. To facilitate growth in our distribution
network, we provide incentives to distributors by offering them discounts on
volume purchases. Except for purchase orders relating to products on order, we
do not have written agreements with our customers. Instead, we generally sell
products to our customers pursuant to letters of credit or, in some cases, on
open account with payment terms typically varying from 30 to 90 days.
We will budget approximately 5% of our net sales for advertising and promotion
of our traditional products. We will use radio and to a lesser extent television
commercials to market our products. We advertise our products in trade and
consumer magazines and other publications, market our products at major and
regional toy trade shows, conventions and exhibitions and carry on cooperative
advertising with toy retailers and other customers.
TOYPOP.COM
TOYPOP.COM will promote its brand using a combination of online and traditional
advertising. We will advertise online on those popular destinations that target
children. As part of these arrangements, we will purchase banner advertisements,
often in conjunction with specified search keywords or on contextually
appropriate pages that allow children to immediately click through to the
TOYPOP.COM site. The significant flexibility of online advertising will allow us
to quickly adjust advertising plans in response to seasonal and promotional
activities.
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We believe that traditional advertising is a key ingredient in building brand
recognition and promoting the benefits of online retail shopping. Traditional
advertising can be an effective means of promoting widespread brand awareness
and attracting traditional retail consumers to TOYPOP.COM's online retail toy
store.
Our joint venture with E-Commerce Fulfillment, LLC. requires us to maintain very
low inventory levels. M.W. Kasch currently has the infrastructure and installed
computer systems to process and fill orders. The joint venture with E-Commerce
Fulfillment, LLC will compensate M.W. Kasch with a small markup of between 4% to
10% on toys purchased. This fee will vary with the categories of toys we
purchase. We will purchase the inventory directly from M.W. Kasch, who has
ongoing relationships with manufacturers. This strategic relationship allows us
to avoid the high fixed costs and capital requirements associated with owning
and warehousing product inventory and the significant operational effort
associated with same-day shipment. We believe that this is a key strategic
advantage in competing with other online toy retailers.
TOYPOP.COM will transmit data to M.W. Kasch through a secure network to ensure
customer security and data integrity. M.W. Kasch will package and ship customer
orders and charge us for merchandise, shipping and handling. Products will be
shipped within two business days after an order is placed with TOYPOP.COM.
Alottafun! will perform customer billing through a third-party credit card
processor. We have selected the First National Bank of Omaha as our credit card
processor. Because we are processing confidential information over the Internet,
we must take necessary steps to prevent security breaches and fraudulent
activities. However, we cannot assure that we can prevent all security breaches
even though our third party credit card processor may approve payment of the
orders. Under current credit card practices, which we will be subjected, a
merchant is liable for fraudulent credit card transactions whereby that merchant
does not obtain a cardholder's signature. A failure to adequately control
fraudulent credit card transactions would adversely affect our business.
Manufacturing
Our products are manufactured through contract manufacturers whom we choose on
the basis of quality, reliability and price. Consistent with industry practice,
the use of third-party manufacturers enables us to avoid incurring fixed
manufacturing costs. All of the manufacturing services performed overseas for us
are paid for either by letter of credit or on open account with the
manufacturers. To date, we have not experienced any material delays in the
delivery of our products; however, delivery schedules are subject to various
factors beyond our control, and any delays in the future could adversely affect
our sales. Currently, we have ongoing relationships with approximately five
manufacturers. We believe that alternative sources of supply are available,
although we cannot assure you that adequate supplies of manufactured products
can be obtained. At the present time, all of our manufactured products are sold
on the basis of letters of credit or wire transfers. We do not inventory
product. As we expand our business, we would expect to maintain a thirty day
supply of inventory equal to our forecasted demand. These inventory levels will
be subject to inventory risk in the form of obsolescence or through purchasing
too much inventory and obtaining low product demand.
Although we do not conduct the day-to-day manufacturing of our products, we
participate in the design of the product prototype and production tooling and
molds for the products we develop or acquire, and we seek to ensure quality
control by actively reviewing the production process and testing the products
produced by our manufacturers.
We use our officers for our research and development efforts which include
travel expenses to identify manufacturers and use their participation in toy
product designs. However, these manufacturers bear a majority of the costs
associated with developing new toy products and prototypes. As a consequence of
this approach, we have no material research and development expenses.
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Intellectual Property
The steps we take to protect our proprietary rights may be inadequate. We regard
our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have a trademark for "Alottafun" for toys, games and
playthings and for sales of toys, games and playthings. We have filed trademark
applications for Alottatoys.com(TM) and ToyPop.com(TM). We also have
applications for Hearthside Treasures(TM), Microtoy Magic Capsule(TM) and Pocket
Ghosts(TM). We have not received confirmation that any of these trademark
applications have been accepted or that the trademarks have been granted. Once
granted these trademarks will be protected from the use by others for a period
of 10 years as long as our usage of these trademarks continue. There is no
assurance trademarks will be granted for these names. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which we will sell our products and services only. Furthermore,
the relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights.
Competition
Competition in the toy industry is intense. Many of our competitors have greater
financial resources, stronger name recognition and larger sales, marketing and
product development departments and benefit from greater economies of scale.
These factors, among others, may enable our competitors to market their products
at lower prices or on terms more advantageous to customers than those we could
offer for our competitive products. Competition often extends to the procurement
of entertainment and product licenses, as well as to the marketing and
distribution of products and the obtaining of adequate shelf space. Competition
may result in price reductions, reduced gross margins and loss of market share,
any of which could have a material adverse effect on our business, financial
condition and results of operations. In each of our product lines we compete
against one or both of the toy industry's two dominant companies, Mattel, Inc.
and Hasbro, Inc. We also compete with numerous smaller domestic and foreign toy
manufacturers, importers and marketers in each of our product categories.
TOYPOP.COM
The online commerce market is new, rapidly evolving and intensely competitive.
We expect competition to intensify in the future as more and more businesses
develop an Internet presence. Barriers to entry are low which enable current and
new competitors to enter our market and sell competitive products without much
resistance.
Currently, we compete with a variety of other companies, including:
- - Current online toy retailers.
- - Traditional store-based toy and children's product retailers.
- - Major discount retailers.
- - Entertainment companies that sell and license children's products.
- - Catalog retailers of children's products;
- - Manufacturers of children's products.
- - Online retailers that currently sell other products and could easily add
children's products.
13
<PAGE>
- - Internet portals and destination Web sites that host shopping for
children's products.
TOYPOP.COM will compete in the online retail toy market based on the following
factors:
- - brand recognition;
- - selection;
- - convenience;
- - price;
- - speed and accessibility;
- - customer service;
- - quality of site content; and
- - reliability and speed of fulfillment.
Many of our current and potential traditional store-based and online competitors
have longer operating histories, larger customer or user bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do. Many of these current and potential competitors can devote
substantially more resources to Web site and systems development than we can. In
addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with online competitors or children's toy
suppliers as the use of the Internet and other online services increases.
Certain of our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet.
Prospective competitors will be able to use the Internet as a marketing medium
to reach significant numbers of potential customers. Finally, new technologies
and the expansion of existing technologies, such as price comparison programs
that select specific titles from a variety of Web sites and may direct customers
to other online toy, video game, software, video and music retailers, may
increase competition. If we face increased competition, our operating results
may be adversely affected.
There are several ways we intend to differentiate ourselves from other on-line
merchandisers. First, we will sell products at 20% above cost or approximately
20% to 30% less than retail prices. Secondly, our site will be much more child
oriented than other on-line toy merchandisers which will include games and other
activities for kids. Finally, we will be selling our own line of proprietary
collectible toys to children to stimulate traffic on our site. However, there is
no assurance that we will be able to successfully differentiate ourselves from
our competition. Barriers to entry are low, therefore, our competitors which
include major on-line toy merchandisers may adopt our strategies. Our inability
to differentiate ourselves from our competitors may have a material adverse
effect on our business.
M.W. Kasch Company, a national toy distributor, will supply toy products to our
joint venture with E-Commerce Fulfillment, LLC. M.W. Kasch has long standing and
established relationships with all toy manufacturers and the company distributes
all major brands of toy products. M.W. Kasch Company was founded in 1952 as a
Wisconsin toy distributor. The company has grown and established itself as a
national toy distributor and currently distributes toys to more than 40 states
and employs more than 200 people. M.W. Kasch Company distributes major brands
such as Hasbro, Kerner, Mattel, Milton Bradley, and Fisher Price among others.
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<PAGE>
We intend to use a combination of off-line advertising in magazines, television,
etc. and on-line advertising with e-mail campaigns, affiliate programs and the
like. However, due to limited advertising resources, we run the risk that we
will only be able to attract a limited number of customers to our site and thus
we may have an inability to generate significant sales.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising
out of our ordinary course of business. We believe that there are no claims or
actions pending or threatened against us, the ultimate disposition of which
would have a materially adverse effect on us.
Seasonality
Sales of toy products are seasonal. Traditionally, the first quarter is the
period of lowest shipments and sales in our business which may cause our
operating results to fluctuate significantly from quarter to quarter. Due to
these fluctuations, our results of operations for any quarter may vary
significantly. Our results of operations may also fluctuate as a result of
factors such as the timing of new products introduced by us or our competitors,
the advertising activities of our competitors, delivery schedules set by our
customers and the emergence of new market entrants. On a quarter by quarter
basis, we will do 40% of annual sales in the fourth quarter of the year. In the
first, second and third quarters of the year, we will likely do 10%, 25%, and
25% of annual sales, respectively. Our sales are highly dependent on the
successful launch of our e-commerce site. A delay in the phases of the
TOYPOP.com site feature implementation or difficulties attracting customers to
our site could have an adverse effect on our sales in any given quarter.
Furthermore, the majority of our sales are expected to occur in the fourth
quarter. If our Internet E-commerce site is not fully functional and attractive
to potential customers, it could have a major affect on our sales in the fourth
quarter.
Government and Industry Regulation
Our products are subject to the provisions of the Consumer Product Safety Act
("CPSA"), the Food & Drug Administration ("FDA"), the Federal Hazardous
Substances Act ("FHSA"), the Flammable Fabrics Act ("FFA") and the regulations
promulgated thereunder. The FDA has review function over any candy products
which we produce or which we purchase. The FDA sets standards as to what is
proper color additives and food flavoring with regard to our candy products. All
our candy is produced under FDA approved conditions. The CPSA and the FHSA
enable the Consumer Product Safety Commission to exclude from the market
consumer products that fail to comply with applicable product safety regulations
or otherwise create a substantial risk of injury, and articles that contain
excessive amounts of a banned hazardous substance. The FFA enables the Consumer
Products Safety Commission to regulate and enforce flammability standards for
fabrics used in consumer products. The Consumer Products Safety Commission may
also require the repurchase by the manufacturer of articles which are banned.
Similar laws exist in some states and cities and in various international
markets. We maintain a quality control program designed to ensure compliance
with all applicable laws.
Product Liability Insurance
We have never had any liability claims asserted against us. However, we could be
subject to product liability claims in connection with the use of the products
that we sell. We currently have product liability of $1,000,000 per occurrence
and a $2,000,000 aggregate limit. There is no assurance that we can maintain
this coverage or that it will be adequate to protect us against future claims.
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<PAGE>
Employees
As of May 20, 1999, we employed 5 persons, all of whom are full-time employees,
including three executive officers. Our employment reflects our outsourcing of
manufacturing and the establishment of strategic partnerships that allows us to
minimize staffing. We believe that we have good relationships with our
employees. None of our employees belong to a labor union.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(Unaudited)
Six Months Ended
Year Ended December 31, June 30,
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
1997 1998 1998 1999
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
Income Statement
Data
<S> <C> <C> <C> <C>
Total Revenue $ 54,963 $ 37,429 $ 26,572 $ 19,931
Net loss (495,232) (789,620) (120,516) (776,376)
Net loss per share ($0.26) ($0.31) ($0.05) ($0.11)
Shares used in per 1,917,013 2,528,155 2,309,494 7,052,244
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
At December 31, At December 31, At June 30,
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
1997 1998 1998 1999
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
Balance Sheet Data
<S> <C> <C> <C> <C>
Total assets $ 367,594 $ 693,151 $ 216,400 $ 801,002
Working capital (153,210) 79,318 (32,465) (128,337)
Long-term debt(1) 22,646 360,489 5,357 --
Stockholders' Equity (169,064) (53,142) (115,702) (37,518)
(Deficit)
</TABLE>
(1) The balance of long-term debt does not include current maturities of
long-term debt or mandatory redeemable equity instruments.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations
This Registration Statement contains forward-looking statements. The
words "anticipated," "believe," "expect," "plan," "intend," "seek," "estimate,"
"project," "will," "could," "may" and similar expressions are intended to
identify forward-looking statements. These statements include, among others,
information regarding future operations, future capital expenditures and future
net cash flow. Such statements reflect our current views with respect to future
events and financial performance and involve risks and uncertainties, including,
without limitation, general economic and business conditions, changes in
foreign, political, social and economic conditions, regulatory initiatives and
compliance with governmental regulations, the ability to achieve further market
penetration and additional customers, and various other matters, many of which
are beyond our control, including, without limitation, the risks described under
the caption "Business." Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated,
or otherwise indicated. consequently, all of the forward-looking statements made
in this Registration Statement are qualified by these cautionary statements and
there can be no assurance of the actual results or developments.
17
<PAGE>
General
We were founded in August 1993. Until we generated significant revenues in 1996,
we were a development stage enterprise. During the development stage period, we
devoted the majority of our efforts to development of a viable product line,
testing of product concepts, developing channels of distribution, financing and
marketing. These activities were funded by investments from stockholders and
borrowings from unrelated third parties.
We have not, through the present time, been in a position to generate sufficient
revenues during our limited operating history to fund on-going operating
expenses or product development activities. As a result, we resorted to raising
capital through equity fundings and from borrowings. In June of 1998, we
acquired inventory, equipment, and goodwill of the Mother Hubbard's Creations
toy line. We have renamed the Mother Hubbard's Creations toy line Hearthside
Treasures. We have sustained significant operating losses since inception
resulting in an accumulated deficit of approximately $3,675,615 at June 30,
1999.
Our present strategy is focused on expanding our core products including our
Hearthside Treasures toy line and collectible toys; entering new product
categories, the development of the ToyPop.com interactive online toy store, and
pursuing strategic acquisitions.
We have taken a long-term approach to the development of our business model. Our
present strategy anticipates a systematic and cost efficient introduction of new
products by developing the marketing channels of distribution to create
substantial demand and excitement for our product offerings. We believe this
more prudent approach to development of our business will further enhance our
long-term prospects for profitable operations.
Because of the highly seasonal nature of the toy business with 80% of its sales
occurring in the fourth calendar quarter of each year and the present timing of
our advertising and marketing programs for this calendar year, we do not believe
that we will become profitable until the year 2001.
We believe that recent success in the collectible toy market, particularly
Pokeman and Beanie Babies have set the stage for a resurgence in the collectible
market, which we are specifically targeting. Combined with our child oriented
internet e-commerce site, our line of collectibles will generate substantial
sales in relationship to the past. However, should our collectible toy lines not
be received favorably, or should we not be able to adequately market our
web-site, this will have a negative impact on our forecasts.
We will continue to incur losses until we are able to increase sales, introduce
new product lines and establish distribution capabilities sufficient to offset
ongoing operating and administrative costs.
We use software, computer technology and other services developed and provided
by third-party vendors that may fail due to the year 2000 phenomenon. We are and
will be dependent on telecommunications vendors, financial institutions, and
third party Internet hosting companies.
The Year 2000 phenomenon is the result of computer programming using two digits
rather than four to define the applicable year. Computer programs that have
time-sensitive software may recognize a date using "00" as the Year 1900 rather
than the Year 2000. This could result in a major system failure or
miscalculations.
We are currently assessing the year 2000 readiness of our third-party supplied
software, computer technology and other services, which includes software used
in our accounting systems and the systems of our joint venture partner, M.W.
Kasch. The failure of such software or systems to be year 2000 compliant could
have a material negative impact on our corporate accounting functions and the
operation of our Web site. We have received assurances from these vendors that
their software, computer technology and other services are year 2000 compliant.
The failure of our software and computer systems and of our third-party
suppliers to be year 2000 compliant would have a material adverse effect on our
business. Alottafun! has substantially completed its assessment of its year 2000
readiness. We have received assurances from our major vendors and Web
development partners that their systems including hardware and software are year
2000 compliant.
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<PAGE>
We have not yet developed a complete contingency plan with regard to situations
which may result from year 2000 issues. We depend solely on our vendor's efforts
to address and prepare for year 2000 issues. The cost of developing an internal
contingency plan and implementing such a plan could be material. The present
status of our contingency plan is to have several vendors who are capable of
providing our products and who with our tooling could manufacture to our product
specifications. In May 1999, we invested approximately $12,000 in new computer
systems to provide for our administrative and accounting requirements. These
systems are year 2000 compliant. The portion of our contingency plan that is
dependent on the Internet is highly dependent upon service providers that have
given us assurances that they are Year 2000 compliant. We do not have the
resources to independently verify that this is in fact true. These third party
web development businesses have designed our software to be year 2000 compliant.
Costs incurred for the your 2000 ready software are a component of our Web
development costs, therefore, we do not expect to incur any material costs for
the year 2000 phenomenon remediation. With the low level of present sales, we
have determined that the risk of such non-compliance and the opportunity to
replace these service providers with others does not warrant a significant
investment at the present time. Any failure of our systems, our vendor's systems
or the Internet to be year 2000 compliant could have a material adverse
consequences for us. Such consequences could include difficulties in operating
our Web site, taking product orders, delivering products or conducting other
fundamental parts of our business. Any one of which could result in us not being
able to conduct our business or, more importantly cause our business operations
to end which is our worst case scenario.
Results of Operations
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Total Revenues
- --------------
Total revenues for the six months ended June 30, 1999 were $19,931 compared to
$26,572 for the same period of 1998, which represents a decrease of $6,641, or
33%. . Revenues decreased for the six months ended June 30, 1999 as compared to
the same period the previous year due to our transition from selling candy
products to our new focus on selling toys. We expect that sales for this year
will increase with the introduction of our TOYPOP website and its product sales
and the revenues anticipated from our Hearthside Treasures product line that
will be evidence in the final calendar quarter of this year.
Cost of Sales
- -------------
Cost of Sales were 79% and 96% of sales, respectively, for the six month period
ended June 30, 1999, as compared to the prior period ended June 30, 1998. This
decrease in cost of sales as a percentage of sales is attributed to our shift to
selling higher margined toy products rather than candy products. We expect, once
our products are developed and marketed, that the cost of sales to a will be
65-70% of sales which is more typically the traditional margins within the toy
industry.
Selling, General and Administrative Expenses
- --------------------------------------------
For the six months ended June 30, 1999, total selling, general and
administrative expenses ("S, G & A") were $365,806 as compared to $138,777 for
the same period of the previous year, an increase of $227,029, or 264%. This
increase is the result of higher marketing, staffing and other general expenses
associated with the pace of our development and marketing of our new product
lines. For the six months ended June, 1999 selling costs were $72,199 as
compared to $36,015 for the same period of the previous year. This increase was
attributable to an increase of $12,947 in trade show costs, as well as, a
$16,389 charge for product samples. General and administrative expenses were
$293,607 as compared to $102,762 for the six months ended June 30, 1999 and
1998, respectively. This increase was primarily attributed to an increase in
accounting and legal expenses of $72,093 for the period ended June 30, 1999.
There were no other material factors that caused an increase in selling, general
and administrative expenses. We expect that there will be further increases in
our S, G & A expenses as our business continues to develop.
19
<PAGE>
During the six months ended June 30, 1999, we had realized and unrealized losses
of $173,877 from securities transactions in investments unrelated to our
business. This compares to gains of $33,708 in the same period of June 30, 1998.
These securities transactions involved purchases and sales of common stock of
publicly traded companies in the technology sector. The realized and unrealized
losses associated with these transactions were not the result of one individual
transaction. We have taken steps to reduce losses as incurred in the six months
ended June 30, in the future by investing our working capital in more secure
instruments until these funds are needed in our operation. Our cash reserves
continue to remain in brokerage accounts, however, our positions have been sold
and the funds are invested in a no-load mutual fund. We run the risk of market
fluctuations which could have a materially adverse effect on our cash reserves.
We have sustained losses regarding these investments on our financial statements
and it is uncertain whether these losses will continue as a result of these
market fluctuations.
Interest Expense
- ----------------
We had interest expense of $201,532 for the period ended June 30, 1999 as
compared to $9,508 for the six months ended June 30, 1998. The interest expense
associated with the conversion of the outstanding debenture at a discount to the
market price of the common stock resulted in an additional charge of $192,043
for the period ended June 30, 1999.
Net Loss
- --------
Our loss for the six months ended June 30, 1999 was $776,376 as compared to a
loss of $120,516 in the prior year's period. This loss represents a 644%
increase over the basic loss experienced in the year ago period. The basic loss
per share was $0.11 per share for the six months ended June 30, 1999 as compared
to $0.05 per share for the same period in 1998. The loss per share for the
current period was higher than that of the same period a year ago period. The
weighted average shares outstanding for the six months ended June 30, 1999 was
7,052,244 as compared to 2,309,494 for the same period ended June 30, 1998.
We have experienced losses since our inception. Therefore, we do not utilize a
provision within GAAP for a tax benefit from these losses as we are uncertain
when we will become profitable. Our eventual profitability depends upon the
consumer acceptance of our new product lines.
Calendar year 1998 compared to calendar year 1997
Revenues
- --------
Total revenues for 1998 were $ 37,429 compared to $54,963 for 1997, which
represents a decrease of $17,534, or 32%. The decrease was primarily the result
of lower sales for our Alottafun! Surprise Box product line. We focused our
efforts primarily on expanding into the toy industry and decreased our focus on
candy sales by doing much less promotion. There was no contribution from the
Mother Hubbard product line during 1998. The acquisition of this product line
occurred too late in the selling season to benefit operating results. The
acquisition occurred late in the second quarter and there was not enough time to
re-introduce this product line to the market.
Cost of Sales
- -------------
Cost of sales for 1998 increased $522 or 0.2% to $28,543 from $28,021 in 1997.
Cost of sales as a percentage of sales increased from 51% to 76% from 1997 to
1998. This increase was the result of lower margins realized on the sale of our
candy products. We expect that improvement in gross profit margins will occur
during 1999 as we increase revenues. During the year ended December 31, 1997,
cost of sales included a write-down of inventory in the amount of $14,867 for
obsolete products.
Selling, General and Administrative Expenses
- --------------------------------------------
For the year ended December 31, 1998, total selling, general and administrative
expenses ("S, G & A") were $454,127 as compared to $372,426, for 1997, a 22%
increase. This increase is attributed to the additional expense from higher
compensation paid to our existing personnel, which increased by approximately
$96,000. This compensation related to a bonus paid with our common stock. There
20
<PAGE>
were no other material factors that caused an increase in selling, general and
administrative expenses. It is not anticipated that these expenses will decrease
in the coming periods as the business grows and matures. As revenues increase,
we expect that S, G, & A expenses as a percentage of sales to be in the 20-25%
range.
Interest Expense
- ----------------
Interest expense increased 280%, or $217,229 to $294,896 for 1998 from $77,667
in 1997. This increase in interest expense is attributed to the substantial
charge for issuance of warrants at par value, a significant discount to the then
market price of the common stock, as part of the funding of $400,000 through a
convertible debenture.
Loss on disposal of impaired assets
- -----------------------------------
During 1997, we experienced a loss from a write-off of fixed assets that were no
longer being used in our business. These items consisted of dies, films, molds,
trademarks, and packaging design costs. These equipment assets previously were
used to generate income but they became of no further use in our operations
during 1997. These assets were disposed of in the year ended December 31, 1997
and there were no similar charges during the year.
Net Loss
- --------
The net loss and the net loss per share were $789,620 and $0.31 per share
respectively, for 1998, as compared to a net loss and net loss per share of
$495,232 and $0.26 per share respectively, for 1997. The loss was an increase of
$294,388, or 59%, over the previous year. The loss per share was about 19% more
than the previous year. In 1997, we benefited from the settlement of an
outstanding payable that resulted in a $0.02 per share extraordinary gain. For
1998, there were 2,528,155 shares of common stock outstanding, on a weighted
average basis, as compared to 1,917,013 shares outstanding in 1997, on the same
basis. This represents a 32% increase in shares outstanding in 1998 over the
previous year.
Acquisition of Mother Hubbard Creations product line
On June 26, 1998, we purchased Mother Hubbard Creations Product Line of toys
from Vagabond Associates and Gerald Waak. This purchase included license rights
to the toy line. The consideration for this purchase was royalty payments on
sales of Mother Hubbard products of 2% for 1999, 1% for 2000 and 0.5% in 2001
with a minimum guarantee royalty of $10,000 per year. Additionally, we will pay
a 1% royalty for the exclusive use of the Mother Hubbard trademark. The Mother
Hubbard's Creations toy line has been renamed Hearthside Treasures. We have had
Mother Hubbard product sales of $109,459 through September 30, 1999. We
anticipate that the expansion of this new product line will represent a niche
for young girls that we believe has been neglected and should represent a
significant business opportunity for us.
Liquidity and Capital Resources
To date, we have funded our capital requirements and our business operations,
including product line development activities with funds provided by the sale of
securities and from borrowings. The Swartz equity placement of up to $20 million
will provide additional funding and will be utilized over the next three years,
subject to meeting funding conditions. We are optimistic that we can meet these
conditions. Upon funding from Swartz, we intend to repay all our outstanding
indebtedness and utilize the remainder of this funding for working capital
purposes to grow the acceptance of our products within the toy industry. We
estimate that the Swartz equity placement will initially repay $2 million of
debt that includes note payables outstanding and the obligations that we
anticipate creating with the development and the initial marketing of our
website, however, there is no assurance that these funds will be available to
repay all outstanding indebtedness.
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<PAGE>
Since our formation on August 2, 1993 and until June 30, 1999, we have issued
3,808,032 shares of our common stock and raised $1,422,841. Some common stock
was issued for services, all of which has been appropriately valued at the time
of issuance.
During 1998, we issued $400,000 of convertible debt together with warrants to
purchase 400,000 shares at $0.001 per share. This debt allowed the holder to
convert at the lower of $1.25 or 65% of the five-day average of the closing
price of the common stock before the election to convert. All this debt was
converted into common stock during the six-month period ended June 30, 1999. We
have since January 1, 1999, issued 4,217,000 shares of common stock and raised
$321,907 and converted debentures of $360,489. These funds were used to further
develop our product line, the hiring of key personnel and for working capital
purposes.
For the six months ended June 30, 1999 we used $1,106.537 in cash used by
operating activities as compared to $211,905 in the similar period ended June
30, 1998. Investing activities for the present six month period included the
acquisition of equipment in the amount of $87,339. . Financing activities for
the six months ended June 30, 1999 provided $782,762 that included $321,511 from
the issuance of common stock. For six months ended June 30, 1999, cash decreased
$411,114 as compared to a decrease of $33,864 in the prior year's period.
For the calendar year 1998, we used $418,719 in cash used by operating
activities as compared to $236,975 in calendar year 1997. Investing activities
for 1998 included the purchase and sale of marketable securities in the amount
of $1,320,231 and $1,203,794, respectively, for net proceeds of $116,437, and
the acquisition of equipment in the amount of $34,969, thus providing $81,468 in
cash. For the prior year, investing activities used $182,488 from the purchase
of marketable securities for $440,320, the sale of such securities in the amount
of $290,840, and the acquisition of equipment in the amount of $33,008.
Financing activities for 1998 provide $709,343, the major portion of which was
the issuance of a convertible debenture in the amount of $400,489 and proceeds
from stock issuance of $221,699. For 1998, cash increased $372,092 as compared
to an increase of $39,022 in the prior year.
Historically we have not generated sufficient revenues from operations to
self-fund our capital and operating requirements. We expect that our working
capital and capital to grow our business will come from fundings that will
primarily include the equity placement line for $20 million arranged with Swartz
Private Equity LLC ("Swartz") subject to certain conditions. This placement will
provide funding for the establishment and marketing for our new Internet
destination web site and the introduction of our product lines. We do not
anticipate significant funding with this investment agreement for the present
selling season. We do expect that with the commencement of fundings in the first
quarter of 2000 which will permit more extensive marketing of new products and
further development and refinement of the features of the TOYPOP website. We
presently do not have any material capital commitments other than the tools and
molds for our collectible product line. Presently, it is anticipated that molds
for this product line will cost not more than $60,000..
With our present business strategy, we believe we are focusing on the key
elements necessary for us to be both profitable and successful over the
long-term. We have recently adopted our present strategy with the key element of
using the Internet as a significant channel of distribution for our product
lines. We have focused on the successful implementation of this Internet
opportunity. We believe that we will arrange for all the financial resources
needed to properly execute our plan.
In our opinion, we have sufficient cash to operate for the next 120 days that
will include a limited promotion for this years toy selling season and to
provide product availability for our Hearthside Treasures. We will need capital
to provide for our anticipated working capital needs over the next twelve
months. We are presently seeking $1 million in equity to allow us to sustain
ourselves until we can benefit from the Swartz investment agreement. We can not
provide any assurance that we will be successful in raising such capital as such
undertakings are difficult to complete and given the lateness within the toy
selling season may be difficult to arrange at all. Should our Internet endeavor
become highly successful, it will require more capital. Should this occur, the
funding availability in the Swartz placement, if available, which is a periodic
equity funding that we are not permitted to entirely draw upon at any one time,
may not be sufficient to meet these capital needs. If this is the case or the
Swartz facility is unavailable, we have negotiated provisions with Swartz to
permit additional fundings outside of our obligation to them. We are optimistic
that we will be successful in obtaining future financing from Swartz or others
to meet our needs.
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Seasonality and fluctuations in quarterly operating results
Within the toy industry, there are significant seasonal factors that result in
revenue and sales being concentrated in the last half of the calendar year. We
expect that as our product lines gain acceptance and that collectibles become a
more significant component of our sales, some seasonality can be reduced. Until
that occurs, we will experience the same season cycles within the toy industry
with which other participants are also confronted.
Inflation
Inflation has not proven to be a factor in our business since our inception and
is not expected to have a material impact on our business in the foreseeable
future.
Investment agreement overview
On June 4, 1999, we entered into an Investment Agreement with Swartz Private
Equity, LLC.("Swartz"). The Investment Agreement entitles us to issue and sell
our common stock for up to an aggregate of $20 million from time to time during
a three-year period through June 3, 2002 subject to certain conditions. This is
also referred to as a put right. The Common Stock will be registered for resale
in a Form S-1 registration statement to be filed in the near future. There are
no provisions in this investment agreement requiring Swartz to vote shares for
or support current management in corporate governance matters.
The terms of the Amended Investment Agreement allow Alottafun! to deliver Put
Notices to the investor, at times and amounts determined by us, requiring the
Investor to purchase the specified number of shares, subject to maximum dollar
amounts and subject to limitations based upon our trading volumes. There is no
limit on the price of the shares provided that we, in our sole discretion, may
specify a minimum price for each Put. The price of such Put is dependent upon
the closing price of our common stock. We determine when and in what amount
funding will occur. The Company's discretion to determine both the timing of the
funding and the amount of funding avoids the conditions that exist with
so-called "toxic' or death spiral convertible stock issues. The registration
statement, once prepared, will include the resale of the common stock issuable
upon exercise of the warrants. The warrants will have an exercise price that
resets based upon future market prices at fixed times outside of the Investor's
control. There are no conditions within the control of Swartz, or which Swartz
can cause to not be satisfied. There is a limit such that the amount of a single
Put cannot exceed 9.9% of our market cap, but no limit on ownership percentage.
We do not expect to benefit from this funding until the first calendar quarter
of 2000.
Put rights
In order to invoke a put right, we must have an effective registration statement
on file with the Securities and Exchange Commission registering the resale of
the common shares which may be issued as a consequence of the invocation of that
put right. Additionally, we must give at least ten but not more than twenty
business days advance notice to Swartz of the date on which we intend to
exercise a particular put right and we must indicate the number of shares of
common stock we intend to sell to Swartz. At our option, we may also designate a
maximum dollar amount of common stock (not to exceed $2 million) which we will
sell to Swartz during the put and/or a minimum purchase price per common share
at which Swartz may purchase shares during the put. The number of common shares
sold to Swartz may not exceed 15% of the aggregate daily reported trading volume
during a period which begins on the business day immediately following the day
we invoked the put right and ends on and includes the day which is twenty
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business days after the date we invoked the put right. For each common share,
Swartz will pay us the lesser of (i) the market price for such put, minus $.10
or (ii) 91% of the market price for the put, with that percentage determined by
the market price in effect on the date we inform Swartz of the put(see table A).
Market price is defined as the closing bid price for our common stock on
Alottafun!'s principal market However, the market price may not be less than the
designated minimum per share price, if any, that we indicated in our notice. If
there were no shares traded during the applicable Pricing Period, no shares
could be Put, and there would be no need to determine a market price for that
Pricing Period.
Table A
Examples of Swartz Common Stock Underwriting at Various Market Prices.
Common Stock Market Price
$.50(1) $1.00(1) $2.00(2) $5.00(2)
- --------------------------------------------------------------------------------
Dollars Converted
$5,000,000 12,500,000 5,555,555 2,747,253 1,098,901
$10,000,000 25,000,000 11,111,111 5,494,505 2,197,802
$20,000,000 50,000,000 22,222,222 10,989,011 4,395,604
(1) Conversion at market price less $.10 per share (the contracted minimum
discount to market price)
(2) Conversion at 91% of market price
Warrants
In partial consideration of the equity line commitment, we issued and delivered
to Subscriber or its designated assignee warrants to purchase a total of 450,000
shares of Common Stock. Swartz is the sole subscriber. Each Commitment Warrant
shall be exercisable at a price, which shall initially equal $1.00625. Within
five business days after the end of each purchase period, we are required to
issued and deliver to Swartz a warrant to purchase a number of shares of common
stock equal to 15% of the common shares issued to Swartz in the applicable put.
Each warrant will be exercisable at a price which will initially equal 110% of
the market price on the last day of the applicable purchase period. The exercise
price of the warrants resets based upon the market price at fixed times outside
of the Investor's control.
Limitations and conditions precedent to our put rights
Swartz is not required to acquire and pay for any common shares with respect to
any particular put for which: we have announced or implemented a stock split or
combination of our stock; we have paid a common stock dividend; we have made a
distribution of our common stock or of all or any portion of our assets between
the put notice date and the date the particular put closes; or we have
consummated a major transaction (including a transaction, which constitutes a
change of control) between the advance put notice date and the date the
particular put closes.
" Major Transaction" shall mean and shall be deemed to have occurred at such
time upon any of the following events:
(i) a consolidation, merger or other business combination or event or
transaction following which the holders of our Common Stock immediately
preceding such consolidation, merger, combination or event either (i)
no longer hold a majority of the shares of our Common Stock or (ii) no
longer have the ability to elect the board of directors (a "Change of
Control"); provided, however, that if the other entity involved in such
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consolidation, merger, combination or event is a publicly traded
company with "Substantially Similar Trading Characteristics" (as
defined below) as we and the holders of our Common Stock are to receive
solely Common Stock or no consideration (if we are the surviving
entity) or solely common stock of such other entity (if such other
entity is the surviving entity), such transaction shall not be deemed
to be a Major Transaction (provided the surviving entity, if other than
us, shall have agreed to assume all obligations under this Agreement
and the Registration Rights Agreement). For purposes hereof, an entity
shall have Substantially Similar Trading Characteristics as ours if the
average daily dollar trading volume of the common stock of such entity
is equal to or in excess of $200,000 for the 90th through the 31st day
prior to the public announcement of such transaction;
(ii) the sale or transfer of all or substantially all of our assets
that includes both tangible and intangible assets that allow us to
operate most profitably; or
(iii) a purchase, tender or exchange offer made to the holders of
outstanding shares of' Common Stock, such that following such purchase,
tender or exchange offer a Change of Control shall have occurred.
Swartz is irrevocably committed to purchase and is not entitled to make any
further investment decision with regard to the $20 million.
Short sales
Swartz and its affiliates are prohibited from engaging in short sales of our
common stock unless they have received a put notice and the amount of shares
involved in a short sale does not exceed the number of shares specified in the
put notice. Swartz is allowed only to sell the number of shares that have been
put to Swartz, after the Put Date that such shares are put to Swartz. Such a
sale could be a short sale (technically defined as a "short exempt" sale). The
potential profits from short exempt sales is equal to the Investor's sales
price, whatever that may be when the Investor elects to sell a portion of the
Put Shares, less the Put Share Price (as defined in the Investment Agreement)
for those shares The potential effect on the market price is minimized due to
the fact that the amount put is limited to 15% of the trading volume over the
Pricing Period.
Cancellation of puts
We must cancel a particular put between the date of the advance put notice and
the last day of the pricing period if we discover an undisclosed material fact
relevant to Swartz's investment decision, the registration statement registering
resales of the common shares becomes ineffective, or shares are delisted from
the then primary exchange. However, will be required, at Swartz's option, to
issue common shares equal to the number of shares included in purchase notices
delivered by Swartz on or before the end of the applicable put cancellation
date. As prerequisite to a Put, our Common Stock shall be listed for and
actively trading on the OTC Bulletin Board, the NASDAQ Small Cap Market, the
NASDAQ National Market or the New York Stock Exchange.
Termination of investment agreement
We may also terminate our right to initiate further puts or terminate the
Investment Agreement by providing Swartz with notice of such intention to
terminate; however, any such termination will not affect any other rights or
obligations we have concerning the Investment Agreement or any related
agreement.
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ITEM 3. DESCRIPTION OF PROPERTY
Alottafun! leases approximately 2,000 square feet of space at 141 N. Main
Street, Suite 207, West Bend, Wisconsin, 53095, which is currently used for our
principal executive offices. The lease for the offices expire on December 31,
2001. The monthly rent for the offices is approximately $900.00.
We also lease office space in Hong Kong, which is used for our outsourcing
operations. The office is located at the Peninsula Center, 67 Mody Road,
Tsimshatsui East, Kowloon, Hong Kong. In addition to the above locations, we
also maintain a New York office at 1178 Procan Ct, Hewlett NY, and a office at
Flughafenstrafse 5264546, Morfelden-Walldorf, Germany. We pay no rent for the
offices in Hong Kong, New York and Germany. In Hong Kong, we have use of the
space as it is in our supplier's office. In New York, our office is the
residence of our COO, David Bezalel. In Germany, we share an office with a
business partner of Mr. Bezalel, at no cost to Alottafun!.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership known to Company of shares of Alottafun! Common Stock owned
as of June 30, 1999 beneficially by (i) each person who beneficially owns more
than 5% of the outstanding Common Stock, (ii) each of our directors, (iii) the
Officers of Alottafun!, and (iv) directors and executive officers of Alottafun!
as a group:
Name of Beneficial Amount and Nature
Owner (3) of Beneficial Percent of Class(2)
Ownership Common(5) Preferred
(1) (6)
Common Preferred
- ------------------ ------------------ ------------------ --------- ----------
Michael Porter(4)(7) 3,431,407 1,000,000 25.1 50
David Bezalel (7) 2,500,000 1,000,000 18.3 50
Gerald Couture(8) 590,000 -- 4.3 --
------------------ ------------------ --------- ----------
All directors and
executive officers 6,521,407 2,000,000 47.7 100
as a group (3 persons)
(1) Represents sole voting and investment power unless otherwise
indicated.
(2) Based on approximately 8,058,912 shares of Company Common Stock
outstanding as of June 30, 1999 plus, as to each person listed,
that portion of the unissued shares of Company Common Stock
subject to outstanding options which may be exercised by such
person, and as to all directors and executive officers as a
group, unissued shares of Company Common Stock as to which the
members of such group have the right to acquire beneficial
ownership upon the exercise of stock options within the next 60
days.
(3) The address of each individual is in Alottafun!'s care.
(4) May be deemed to be a "founder" of Alottafun! for the purpose of
the Securities Act.
(5) Excludes 10,000,000 shares reserved for issuance under our Stock
Option Plan. See "Executive Compensation - Stock Option Plan".
(6) Each share of Preferred Stock has the power to cast twenty- five
(25) votes per share on any matters submitted for vote or action
by Common Stock holders. Each share of Preferred Stock is
convertible into 10 shares of Common Stock. Accordingly, Mr.
Porter and Mr. Bezalel control the management and affairs of
Alottafun!. See "Certain Relationships and Related Transactions"
and "Description of Securities".
(7) Includes options to acquire 2,500,000 share of Common Stock at
$.15 per share. See "Executive Compensation - Employment
Agreements".
(8) Includes options to acquire 500,000 share of Common Stock at $.15
per share. See "Executive Compensation - Employment Agreements".
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers of the Company
The following table sets forth certain information with respect to each person
who is a director or an executive officer as of June 30, 1999.
NAME AGE POSITION
---- --- --------
Michael Porter 45 Chairman of the Board of Directors
President, Chief Executive Officer
David Bezalel 48 Chief Operating Officer, Vice President
Of Marketing and Director
Gerald Couture 54 Vice President of Finance, Director, Secretary
Executive officers are elected by the Board of Directors and serve until their
successors are duly elected and qualify, subject to earlier removal by the Board
of Directors. Directors are elected at the annual meeting of shareholders to
serve for their term and until their respective successors are duly elected and
qualify, or until their earlier resignation, removal from office, or death. The
remaining directors may fill any vacancy in the Board of Directors for an
unexpired term. See "Board of Directors" for a discussion of the Directors'
terms.
Business Experience of Executive Officers and Directors
Michael Porter, President and Chief Executive Officer of the Company,
founded Alottafun! in 1993. From 1985 through 1993, Mr. Porter co-founded and
served as President and Chief Executive Officer of Everything's a $1.00, a
one-price close out variety store. During his tenure as Chief Executive Officer
operations expanded from one store to sixty stores nationally. Subsequent to
Everything's a $1.00's merger with Value Merchants, Inc., Mr. Porter served as
Executive Vice President of the international operations. Prior to his
involvement with Everything's a $1.00, Mr. Porter practiced law in the State of
Virginia. He received his B.A. in Political Science from Duke University, his
M.B.A. from the University of South Carolina Business School and his J.D. from
the University of South Carolina Law School.
David Bezalel, Executive Vice President, joined Alottafun! in May 1997. In
1991, he founded and currently serves as President of Ideaforce, Inc. an
international premium and incentive marketing company. Mr. Bezalel also formed
Dmooyat Character Licensing in Israel in 1992, which licenses cartoon characters
and entertainment characters. He founded and served as President of Lev
International Promoters, Inc. from 1989 through 1991. From 1990 through 1991,
Mr. Bezalel also worked for General Motors. Mr. Bezalel is a graduate of Hebrew
University with a Bachelor's degree in Mass Communications and Marketing.
Gerald Couture, Vice President of Finance, began working for Alottafun! in
March 1998. In addition to his responsibilities for Alottafun!, Mr. Couture
maintains a financial consulting practice, as Couture & Company, Inc., a firm
founded in 1977, that specializes in providing consulting services to high
potential companies, including services relating to public offerings, mergers
and acquisitions, venture capital investing, crisis management and corporate
restructurings. Prior to his consulting career, Mr. Couture worked for several
years as an engineer for General Electric Company in the nuclear power field and
Rohm & Haas Company in the chemical industry. He received a Bachelor of Science
in Chemical Engineering from the University of Massachusetts and an MBA in
Finance from Temple University, Philadelphia. Mr. Couture will work for us 480
hours per year or approximately 40 hours per month.
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Board of Directors
Our Bylaws fix the size of the Board of Directors at no fewer than one and no
more than seven members, to be elected annually by a plurality of the votes cast
by the holders of Common Stock, and to serve until the next annual meeting of
stockholders and until their successors have been elected or until their earlier
resignation or removal. Currently, there are three (3) directors who were
elected on April 20, 1999.
Key Employee
Thomas J. Rathsack, Vice President of Sales and Marketing, joined Alottafun! in
August, 1998. Prior to joining us, he was the Director of Sales/Marketing of
Hearts N' Home, a division of the Strombecker Corp.-Tootsie Toys. Prior to
working at Hearts N' Rome, Mr. Rathsack was Vice President of Sales/Marketing
for Globe Toys, Inc. Mr. Rathsack received his B.S. in Education from the
University of Wisconsin.
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ITEM 6. EXECUTIVE COMPENSATION
Executive Compensation
The following table shows the compensation paid or accrued by us for the year
ended December 30, 1998, to or for the account of the Chief Executive Officer.
No other executive officers received an annual salary and bonus in excess of
$100,000 or more during the stated period. Accordingly, the summary compensation
table does not include compensation of other executive officers.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
Restricted
Other Annual Stock Options/ LTIP All Other
Name & Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -------------------- ------- ---------- --------- --------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Porter
President, CEO 1998 89,561 -- -- -- -- -- --
1997 74,371 -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Excludes options to acquire up to 2,500,000 shares at $.15 per share issued
to Mr. Porter in January 1999. See "Certain Relationships and Related
Transactions."
Employment and Other Agreements
In January 1999, we entered into written employment agreements with Michael
Porter and David Bezalel. Each employment agreement has a term of five (5)
years. Each employment agreement has annual base compensation beginning at
$75,000 annually starting May 31, 1999 and increasing $10,000 per year to annual
compensation of $115,000 for 2004.
Each executive has the right, at his election, to receive compensation in the
form of our restricted common stock valued at 50% of the closing bid price as
such stock as of the date of executive's election. Each executive is entitled to
bonuses as approved by our Board of Directors and reimbursement for ordinary and
necessary business expenses.
Upon execution of each agreement, each executive was granted non-qualified stock
options to purchase 2,500,000 shares of our Common Stock at an exercise price of
$.15 per share. These options were immediately exercisable, contain a cashless
exercise provision, and have an exercise period of ten (10) years. Each
executive's employment agreement provides for an automobile allowance of $800
per month.
In January 1999, we also entered into a written employment agreement with Gerald
Couture. This employment agreement has a term of five (5) years and has an
annual base compensation of $60,000 for 480 hours of employment per year. As
consideration for this employment agreement, Mr. Couture received an option to
purchase 500,000 shares of our common stock over a ten-year period at $0.15 per
share. These options may be immediately exercisable and contain a cash-less
exercise provision.
During the term of these employment agreements, each executive agrees not to
compete in the Collectible Toy business. The agreements provide for severance
payments equal to 299% of the annual base compensation then due under each
agreement in the event there is a "change of control" , as defined in the
agreement, and the executive is subsequently terminated without cause. If Swartz
eventually obtains sufficient shares to qualify as a "change in control",
Alottafun! is still obligated to pay severance payments.
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A "Change of Control" shall be deemed to have taken place if any person other
than Executive Officers, collectively or immediately, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended,
becomes the owner or beneficial owner of our securities having more than 50% of
the combined voting power of our then outstanding securities that may be cast
for the election of our directors. A "Change of Control" shall not be deemed to
have occurred if the person who becomes the owner of more that 50% of the
combined voting power is the Executive or an entity (or entities) controlled by
the Executive.
Incentive Stock Option Plan
We have in effect a stock option plan, which authorizes the grant of incentive
stock options under Section 422 of the Internal Revenue Code (the "Plan"). The
Plan was adopted in January, 1999. A total of 10,000,000 shares have been
reserved for issuance under the Plan. As of May 1, 1999, 5,575,000 options to
purchase a total of 5,575,000 shares at $.15 a share were issued and outstanding
under the Plan.
The Plan provides that (a) the exercise price of options granted under the Plan
shall not be less than the fair market value of the shares on the date on which
the option is granted unless an employee, immediately before the grant, owns
more than 10% of the total combined voting power of all classes of stock of
Alottafun! or any subsidiaries, whereupon the exercise price shall be at least
110% of the fair market value of the shares on the date on which the option is
granted; (b) the term of the option may not exceed ten years and may not exceed
five years if the employee owns more than 10% of the total combined voting power
of all classes of stock of Alottafun! or any subsidiaries immediately before the
grant; (c) the shares of stock may not be disposed of for a period of two years
from the date of grant of the option and for a period of one year after the
transfer of such shares to the employee; and (d) at all time from the date of
grant of the option and ending on the date three months before the date of the
exercise, the employee shall be employed by Alottafun!, or our subsidiary,
unless employment is terminated because of disability, in which cased such
disabled employee shall be employed from date of grant to a year preceding the
date of exercise, or unless such employment is terminated due to death.
Director Compensation
A director who is an employee receives no additional compensation for services
as director or for attendance at or participation in meetings except
reimbursement of out-of-pocket expenses and options. Outside directors will be
reimbursed for out-of-pocket expenditures incurred in attending or otherwise
participating in meetings and may be issued stock options for serving as a
director.
We have no other arrangements regarding compensation for services as a director.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Alottafun! was originally formed as a Wisconsin corporation in 1993. In
September, 1998, we reincorporated as a Delaware corporation. In connection with
this reincorporation from Wisconsin to Delaware, our Articles of Incorporation
were amended to provide for the issuance of 25,000,000 shares, of which
5,000,000 shares were designated as Preferred Stock and 20,000,000 designated as
Common Stock. In June 1999, we amended our Certificate of Incorporation to
provide for the issuance of 55,000,000 shares, of which 5,000,000 shares are
Preferred Stock and 50,000,000 Common Stock.
Mr. Porter, our founder, was originally issued 1,200,000 shares for nominal
consideration. Mr. Porter has transferred 350,000 shares of our Common Stock he
owns to unaffiliated individuals in satisfaction of certain Company
indebtedness, more fully described below.
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Mr. Porter and Mr. Bezalel are currently the holders of record of 2,000,000 of
Series A Preferred Stock. Each individual owns 1,000,000 shares of the Series A
Preferred Stock and are parties to a Preferred Stockholders Agreement, dated
February 20, 1999. Neither Mr. Porter nor Mr. Bezalel may convert, sell, or
transfer the Preferred Stock without giving the other a right of first refusal.
However, Mr. Porter or Mr. Bezalel may pledge or encumber his Series A Preferred
Stock if the proceeds of such loan, which is secured by such stock, is used by
or advanced to Alottafun!. In the event of the death, disability or termination
of employment for any reason, the voting rights of the Series A Preferred Stock
shall transfer to either Mr. Porter or Mr. Bezalel. Mr. Porter and Mr. Bezalel
each agree to vote all of their shares of Preferred Stock to elect each other as
our directors.
In connection with the Preferred Stockholders Agreement, Mr. Porter and Mr.
Bezalel each agree that during the term of the agreement and for a period of 2
years after the sale or transfer of the Series A Preferred Stock that neither
individual will enter into any business that competes with the products offered
by Alottafun!.
The Series A Preferred Stock held by Mr. Porter and Mr. Bezalel has the right to
cast 25 votes per share on all matters submitted to the vote of other holders of
Common Stock. The Series A Preferred Stock was issued to Mr. Porter and Mr.
Bezalel, our founders, to assure complete and unfettered control of Alottafun!
by our founders during our formative stages. The issuance of the Series A
Preferred Stock constitutes an anti-takeover device since the approval of any
merger or acquisition of Alottafun! will be completely dependent upon the
approval of Mr. Porter and Mr. Bezalel.
Each share of the Series A Preferred Stock is convertible into 10 shares of our
Common Stock depending on certain Company performance milestones by the election
of either Mr. Porter or Mr. Bezalel. If either Mr. Porter or Mr. Bezalel elect
to convert the Series A Preferred Stock into Common Stock, their relative
ability to control the affairs of Alottafun! would be reduced because upon
conversion, the Common Stock, which replaces the Preferred Stock, would only
have one (1) per share as opposed to 25 votes per share.
Prior to filing this Form 10-SB, Mr. Porter and Mr. Bezalel entered into
employment agreements which provide for annual base compensation and other
benefits. In connection with each individual's employment agreement, Alottafun!
agreed to issue options to acquire up to 2,500,000 shares of our Common Stock at
an exercise price of $.15 per share, which was the fair market value of our
Common Stock underlying such options as of the date of each executive's
employment agreement. See "Executive Compensation Employment Agreements".
During fiscal year 1997, Alottafun! paid Mr. Bezalel $16,000 in consulting fees.
We paid Mr. Bezalel $15,500 as consulting fees.
In May of 1996, Mr. Porter personally assumed approximately $186,000 of
Alottafun!'s trade debt to an unaffiliated party. Mr. Porter pledged his stock
in Alottafun! as security for this debt. Mr. Porter was issued 400,000 shares of
common stock for this debt assumption. The fair market value of this stock was
equal to the amount of the reported debt or $186,000. As a result of this note
payable assumption, there was no note or interest payable on Alottafun!'s
balance sheets, for this particular obligation, as of December 31, 1997 and
1998. Mr. Porter subsequently defaulted on this obligation and did not make
payments under his note as required. On March 31, 1999, Mr. Porter entered into
a Stock Surrender Agreement in which he agreed to deliver 325,000 shares of his
personally owned Company Common Stock to this unaffiliated individual. To date,
this individual has sold 220,000 shares for $220,000 of consideration. The
individual still retains 105,000 shares of common stock that was delivered to
him as part of this agreement.
In March 1998, we engaged Gerald Couture of Couture & Company, Inc., as a
consultant and subsequently in January 1999 expanded his responsibilities to
serve as our Chief Financial Officer. Mr. Couture entered into an employment
agreement with Alottafun! in January 1999. Previously, for his consulting
services, we issued Mr. Couture 60,000 shares of our restricted Common Stocks.
An additional 30,000 shares of Common Stock was issued to Couture & Company in
connection with additional services required in connection with the preparation
and filing of this Form 10-SB and our periodic reporting obligations under the
1934 Act, and the management of Alottafun! believes that all of the transactions
with our officers, directors or affiliates were fair and in the best interests
of Alottafun!, such transactions may not necessarily have been on the same terms
as if negotiated from unaffiliated third parties. However, management believes
that these terms are no less favorable than those that would have been available
from unaffiliated third parties. Although no other transactions are
contemplated, it is Alottafun!'s policy that all future transactions with our
officers, directors or affiliates would be approved by members of our board of
directors not having an interest in the transaction, and will be on terms no
less favorable than could be obtained from unaffiliated third parties.
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ITEM 8. DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock consists of 50,000,000 shares of common stock, $.01
par value ("Common Stock"), and 5,000,000 of preferred stock, $.0001 par value
("Preferred Stock"), issuable in series. The following description of our
capital stock is subject to and qualified in its entirety by our Certificate of
Incorporation and Bylaws, which are included as exhibits to this registration
statement and by the provisions of applicable Delaware law.
As of September 1, 1999, there were 8,058,912 shares of Common Stock
outstanding, held of record by approximately 151 stockholders. We hold 24,400
shares as treasury stock. In addition, as of September 1, 1999, there were
5,575,000 shares of Common Stock subject to outstanding options and 700,000
shares of Common Stock subject to outstanding warrants.
The holders of Common Stock are entitled to one vote per share for the selection
of directors and all other purposes and do not have cumulative voting rights.
However, Mr. Porter and Mr. Bezalel, through their holdings of the voting
Preferred Stock, control the affairs of Alottafun!, including the election of
directors. The holders of Common Stock are entitled to receive dividends when,
as, and if declared by the Board of Directors, and in the event of the
liquidation by Alottafun!, to receive pro-rata, all assets remaining after
payment of debts and expenses and liquidation of the preferred stock. Holders of
the Common Stock do not have any pre-emptive or other rights to subscribe for or
purchase additional shares of capital stock, no conversion rights, redemption,
or sinking-fund provisions. In the event of dissolution, whether voluntary or
involuntary, of Alottafun!, each share of the Common Stock is entitled to share
ratably in the assets available for distribution to holders of the equity
securities after satisfaction of all liabilities. All the outstanding shares of
Common Stock are fully paid and non-assessable.
Approximately 1,021,407 shares of our common stock are currently available for
resale pursuant to Rule 144. The possibility of future sales by existing
stockholders under Rule 144 or otherwise, may, in the future, have a depressive
effect on the market price of our common stock, and such sales, if substantial,
might also adversely affect our ability to raise additional capital.
Generally under Rule 144, a person holding restricted securities for a period of
one (1) year may, if there is adequate public information available concerning
the company, sell every three (3) months in ordinary brokerage transactions or
transactions with a market maker an amount equal to the greater of (a) one
percent (1%) of the company's outstanding stock or (b) the average weekly volume
of sales during the 4 calendar weeks preceding the sale. Rule 144 does not limit
the amount of restricted securities, which a person who is not an affiliate of
the company may sell after 2 years. Affiliate sales under Rule 144 are subject
to such volume limitations regardless of the length of the holding period. Sales
under Rule 144, may, in the future, have a depressive effect on the market price
of our securities. In addition, future sales of our common stock underlying
outstanding options or warrants pursuant to Rule 144 or otherwise, could depress
the market price of our common stock. We are unable to predict when such
options, warrants or other commitments to purchase our common stock would in
fact be exercised.
Our transfer agent is Manhattan Transfer Registrar Company of Lake Ronkonkoma,
New York.
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Preferred Stock
Our Board of Directors (without further action by the shareholders), has the
option to issue from time to time authorized un-issued shares of Preferred Stock
and determine the terms, limitations, residual rights, and preferences of such
shares. We have the authority to issue up to 5,000,000 shares of Preferred Stock
pursuant to action by our Board of Directors. As of the date of this
registration statement, we have outstanding 2,000,000 shares of Series A
Preferred Stock. One million of these shares are held by Mr. Porter and the
other one million are held by Mr. Bezalel. Each share of the Series A Preferred
Stock has the right to cast 25 votes per share on each and any matter on which
the Common Stock is entitled to vote. Accordingly, Mr. Porter and Mr. Bezalel
are able to control the affairs and operations of Alottafun! including, but not
limited to, election of directors, sale of assets or other business
opportunities. The Series A Preferred Stock has no dividend rights, redemption
provisions, sinking fund provisions or preemptive rights. However, the Series A
Preferred Stock holders have the right to convert each share of Series A
Preferred Stock into ten (10) shares of our Common Stock based upon the
following targets. Each one-half (1/2) share of Series A Preferred Stock is
convertible into five (5) shares of Common Stock. For example, we currently have
2,000,000 Series A Preferred shares outstanding, which would convert to a total
of 10,000,000 shares of common stock at such time as the Corporation generated
$5,000,000 of annual revenues in any twelve month period. Each remaining one
half (1/2) share of Series A Preferred Stock is convertible into an additional
five (5) shares of Common Stock at such time as the Corporation generates
$10,000,000 in annual revenues in any twelve month period.
In the future, our Board of Directors has the authority to issue additional
shares of Preferred Stock in series with rights, designations and preferences as
determined by the Board of Directors. When any shares of Preferred Stock are
issued, certain rights of the holders of Preferred Stock may affect the rights
of the holders of Common Stock. The authority of the Board of Directors to issue
shares of Preferred Stock with characteristics which it determines (such as
preferential voting, conversion, redemption and liquidation rights) may have a
deterrent effect on persons who might wish to take a takeover bid to purchase
our shares at a price, which might be attractive to our shareholders. However,
the Board of Directors must fulfill its fiduciary obligation to us and our
shareholders in evaluating an takeover bid.
Certain Provisions of the Certificate of Incorporation and Bylaws
Our Certificate of Incorporation provides that no directors shall be personally
liable to Alottafun! or our stockholders for monetary damages for breach of
fiduciary duty as a director except as limited by Delaware law. Our Bylaws
provide that we shall indemnify to the full extent authorized by law each of our
directors and officers against expenses incurred in connection with any
proceeding arising by reason of the fact that such person is or was an agent of
the corporation.
Insofar as indemnification for liabilities may be invoked to disclaim liability
for damages arising under the Securities Act of 1933, as amended, or the
Securities Act of 1934, (collectively, the "Acts") as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
Delaware Anti-Takeover Law and Our Certificate of Incorporation and Bylaw
Provisions
Provisions of Delaware law and our Certificate of Incorporation and Bylaws could
make more difficult our acquisition by a third party and the removal of our
incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of Alottafun! to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with proponent of an unfriendly or unsolicited acquisition
proposal outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation could result in an improvement of their terms.
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We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- the Board of Directors approved the transaction in which such
stockholder became an interested stockholder prior to the date
the interested stockholder attained such status;
- upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, he or she
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding
shares owned by persons who are directors and also officers;
or
- on or subsequent to such date the business combination is
approved by the Board of Directors and authorized at an annual
or special meeting of stockholders.
A "business combination" generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of the
corporation's voting stock.
Warrants
As of June 30, 1999, there are warrants outstanding to purchase a total of
700,000 shares of Common Stock at a price of $1.00625 per share. The holders of
these warrants are entitled to piggyback registration rights under the
Securities Act subject to limitations specified in the agreement between
Alottafun! and the warrant holders. We will bear all registration expenses other
than underwriting discounts and commissions. All registration rights terminate
at such time as the holders are entitled to sell all of our shares in any
three-month period under Rule 144 of the Securities Act.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Market Price of the Registrant's Common Stock
The Common Stock is traded in the over-the-counter market in the so
called "pink sheets," or on the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. (the "NASD") under the symbol "ALFN."
The transfer agent and registrar for the Common Stock is Manhattan Transfer
Registrar Company of Lake Ronkonkoma, New York. The following table sets forth
for the periods indicated the high and low sale prices for shares of the Common
Stock as reported on the OTC. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
Sales Price (1)
---------------
High Low
---- ---
1997
Fourth Quarter 5 1/8 1 5/16
Third Quarter 5 1 7/8
1998
Fourth Quarter 1 1/2 5/32
Third Quarter 2 1/16 7/8
Second Quarter 2 5/8 9/16
First Quarter 3 1
1999
First Quarter 3 1/4 1/8
Second Quarter 1 3/4 13/16
Third Quarter 1 3/4 5/8
(1) Our Common Stock began trading on approximately March 11, 1997. There is no
trading market for our warrants.
Alottafun!'s common stock is not listed on NASDAQ, but is currently traded in
the over-the-counter market in the so called "pink sheets," of the National
Association of Securities Dealers, Inc. (the "NASD"). Accordingly, an investor
may find it more difficult to dispose of, or obtain accurate quotations as to
the market value of the common stock. Further, in the absence of a security
being quoted on NASDAQ, a market price of at least $5.00 per share or a company
having in excess of $4,000,000 in net tangible assets, trading in Alottafun!'s
securities may be covered by a Securities and Exchange Commission ("SEC") rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally institutions with net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchasers' written
agreement to the transaction prior to the sale. Consequently, the rule affects
the ability of broker-dealers to sell our securities and also may affect the
ability of purchasers in this offering to sell their securities in the secondary
market.
Previously, the SEC adopted seven rules ("Rules") under the Securities Exchange
Act of 1934 requiring broker/dealers engaging in certain recommended
transactions with their customers in specified equity securities falling within
the definition of "penny stock" (generally non-NASDAQ securities priced below
$5.00 per share) to provide to those customers certain specified information.
Unless the transaction is exempt under the Rules, broker/dealers effecting
customer transactions in such defined penny stocks are required to provide their
customers with: (1) a risk disclosure document; (2) disclosure of current bid
and ask quotations, if any; (3) disclosure of the compensation of the
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broker/dealers and its sales person in the transaction; and (4) monthly account
statements showing the market value of each penny stock held in the customer's
account.
Recent changes to Rule 15c2-11 require that companies, such as Alottafun!, must
be reporting issuers under Section 12(g) of the Securities Exchange Act of 1934,
as amended in order to maintain trading privileges on the "Electronic Bulletin
Board". As such our failure to obtain clearance of this Form 10-SB or our
inability to file form 10-K's, and other reports required under Section 12(g) on
a timely basis would adversely effect the marketability of our securities. Our
common stock currently trades on the "Pink Sheets" and will no qualify for
trading privileges in the "Electronic Bulletin Board" until the staff of the
Commission notifies the staff of the NASD that there are no more comments on the
Form 10-SB.
As a result of the aforesaid rules regulating penny stocks, the market liquidity
for Alottafun!'s securities could be severely adversely affected by limiting the
ability of broker-dealers to sell our securities and the ability of shareholders
sell their securities in the secondary market.
Dilution and Absence of Dividends
We have not paid any cash dividends on our common or preferred stock and we do
not anticipate paying any such cash dividends in the foreseeable future.
Earnings, if any, will be retained to finance future growth. We may issue shares
of common stock and preferred stock in private or public offerings to obtain
financing, capital or to acquire other businesses that can improve our
performance and growth. Issuance and or sales of substantial amounts of common
stock could adversely affect prevailing market prices of our common stock.
The Nasdaq rules regarding so called "death spiral" or "toxic" convertibles
address the problems that are created when a large dollar amount of "forward
priced" convertible securities are converted into common stock, at a undesirably
low conversion prices, at times and in amounts that are chosen by the investor.
The Swartz Equity Line structure helps alleviate these problems by giving the
Company sole discretion as to the time and amount of each Put. If the price is
undesirably low at a given time, the Company can simply chose to delay the Put
indefinitely.
Another purported problem with the forward priced securities is that they create
the potential for the issuance of a virtually unlimited number of shares of
common stock, potentially violating the Nasdaq Rules that require shareholder
approval for issuances of more than 20% of the Company's outstanding common
stock. The Investment Agreement for the Equity Line transaction deals with this
problem by prohibiting the issuance of any shares in excess of 20% without
shareholder approval.
Accordingly, although the Equity Line securities are forward priced, safeguards
are in place to assure that the placement (i) does not create the involuntary
and unlimited dilution problems that can result from a "death spiral
convertible" and (ii) does not violate the Nasdaq 20% Rule.
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ITEM 2. LEGAL PROCEEDINGS
To the best knowledge of management there are no pending or threatened legal
proceedings, which would have a material adverse effect on Alottafun!.
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ITEM 3. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS
None.
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ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
For the 12 months ended, December 31, 1998, we raised approximately $222,000
through the sale of 849,694 shares of our Common Stock to approximately 26
unaffiliated investors. For the period commencing January 1st through May 1st
1999, we sold an additional 941,979 shares of Common Stock, which raised
approximately $321,511. As of May 1, 1999, warrants to acquire 700,000 shares of
our Common Stock at $1.00625 are outstanding. We relied upon Rule 504 of
Regulation D and Section 4(2) for the issuance of these securities.
In December, 1998, we entered into a $300,000 Convertible Debenture Agreement
with Lampton, Inc. and a $100,000 Convertible Debenture Agreement with GEM
Management Limited. These debentures provided for a conversion at 65% of the
average closing bid price for the 5 trading days prior to conversion. All
$400,000 of the convertible debentures held by GEM Management Limited and
Lampton, Inc. were converted into a total of 3,931,211 shares of our Common
Stock at an average conversion price of $.10 In connection with these
debentures, we issued warrants to acquire approximately 411,000 shares of our
Common Stock at an exercise price of $0.001. We relied upon Rule 504 of
Regulation D and Section 4(2) for the issuance of these securities.
In connection with the execution of their employment agreements in January,
1999, Mr. Porter and Mr. Bezalel were each granted options to acquire up to
2,500,000 shares of the Common Stock at an exercise price of $.15 per share. In
addition, Mr. Couture was granted an option to acquire 500,000 shares of the
Common Stock also at an exercise price of $.15. We relied upon Section 4(2) for
the issuance of these securities. See "Executive Compensation - Employment
Agreements".
In April, 1999, Mr. Porter agreed to transfer 325,000 shares of Alottafun!
Common Stock he owns to an unaffiliated party as part of an agreement to satisfy
obligations of Alottafun! he personally assumed in 1996. The resale of these
shares in satisfaction of this indebtedness pursuant to Rule 144 may have an
adverse effect on the market price of our Common Stock.
In January, 1999, we issued an aggregate of 90,000 shares of our restricted
Common Stock to Couture & Company in connection with consulting services. We
relied upon Section 4(2) for the issuance of these securities. See "Certain
Relationships and Related Transactions".
We issued 7,500 shares of our Common Stock to outside general corporate counsel
in 1997 as partial payment for fees. We have also agreed to issue approximately
20,000 additional shares for services in connection with this Form 10-SB. We
relied upon Section 4(2) for the issuance of these securities.
In June, 1999, we issued warrants to acquire 450,000 shares of our Common Stock
at an exercise price of $1.00625 to Swartz Private Equity LLC. These warrants
contain certain registration rights, anti-dilution and cashless exercise
conversion provisions. We relied upon Section 4(2) for the issuance of these
securities. In addition, In June, 1999, we issued warrants to acquire up to
250,000 shares of our Common Stock at an exercise price of $1.00625 to Dunwoody
Brokerage Services, Inc. an affiliate of Swartz Private Equity LLC. We relied
upon Section 4(2) for the issuance of these securities.
We have 10,000,000 of our Common Stock reserved for issue under our Stock Option
Plan.
In February 1999, Mr. Porter and Mr. Bezalel entered into a stockholders
agreement with Alottafun! in connection with issuance of 1,000,000 shares each
to Mr. Porter and Mr. Bezalel of Series A Voting Preferred Stock. These shares
were issued for nominal consideration. We relied upon Section 4(2) for the
issuance of these securities. See "Description of Securities - Preferred Stock".
For all above enumerated transactions, we relied upon various exemptions
afforded by Section 4(2) and Section 3(b) of the Securities Act of 1933, as
amended ("Securities Act") as an exemption available from the registration
requirements of Section 5 of the Securities Act for transactions by an issuer
not involved in a public offering. We have relied upon the Rule 504 offering
exemption promulgated under Regulation D of the Securities Act prior to the
repeal of this rule in April 1999. No advertising or general solicitation was
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employed by us in the offering of any of our securities. All purchasers
represented in a manner satisfactory to Alottafun!, that they were "accredited"
or otherwise sophisticated based upon underlying subscription and purchase
agreements. All purchasers had access to information we deem necessary to make
an informed investment decision.
As of June 30, 1999, we had approximately 8,058,912 shares of our Common Stock
outstanding. Of this amount, approximately 6,393,914 shares may be considered
freely tradable under the Securities Act. The remaining approximate 1,632,067
shares of Alottafun!'s outstanding Common Stock are "restricted securities",
including shares held by officers and directors, as that term is defined under
Rule 144 promulgated under the Securities Act.
Generally under Rule 144, a person holding restricted securities for a period of
one (1) year may, if there is adequate public information available concerning
the Company, sell every three months in ordinary brokerage transactions or
transactions with a market maker an amount equal to the greater of (a) 1% of the
Company's then outstanding stock or (b) the average weekly volume of sales
during the four calendar weeks preceding the sale. Rule 144 does not limit the
amount of restricted securities, which a person who is not an affiliate of the
Company may sell after two years. Affiliate sales under Rule 144 are subject to
such volume limitations regardless of the length of the holding period. Sales
under Rule 144 may, in the future, have a depressive effect on the market price
of the Company's securities should a public market develop.
In addition to sales subject to resale pursuant to Rule 144, Alottafun! has
approximately 6,250,000 warrants, options or other commitments to issue
6,250,000 shares of Common Stock outstanding. In addition, each share of Voting
Preferred Stock held by Mr. Porter and Mr. Bezalel is convertible into 10 shares
of Common Stock. If we elect to draw upon the Swartz equity credit facility, a
substantial number of additional shares of Common Stock would be issued at
unknown values. The exercise of such options, warrants, or other commitments to
acquire our Common Stock could have a potentially depressive effect on the
market value of the Common Stock. We are unable to predict when such options,
warrants or other commitments to purchase our Common Stock would in fact be
exercised.
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ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Liability and Indemnification of Officers and Directors
Delaware General Corporation Law (the "DGCL") provides that "a corporation shall
have power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. With
respect to derivative actions, the DGCL provides in relevant part that a
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
(by reason of his service in one of the capacities specified in the preceding
sentence) against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Circuit Court or the court in which such
action or suit was bought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Circuit Court or such other court shall deem proper. Our Certificate of
Incorporation provides for such indemnification to the fullest extent provided
for by the DGCL.
Alottafun!'s Certificate of Incorporation provides that no director of
Alottafun! shall be personally liable to Alottafun! or our stockholders for
monetary damages for breach of fiduciary duty as a director except as limited by
the DGCL.
Alottafun!'s Bylaws provide that we shall indemnify to the full extent
authorized by law each of our directors and officers against expenses incurred
in connection with any proceeding arising by reason of the fact that such person
is or was an agent of the corporation.
Insofar as indemnification for liabilities may be invoked to disclaim liability
for damages arising under the Securities Act of 1933, as amended, or the
Securities Act of 1934, (collectively, the "Acts") as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
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PART F/S
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part III for listing of financial statements and exhibits herein,
which include:
1. Audited Financial Statements consisting of Alottafun!'s balance
sheet as of December 31, 1998, and related statements of operations, changes in
stockholders equity, and cash flows ended December 31, 1997 and 1998, as audited
by Pender, Newkirk & Company, Certified Public Accountant, along with its report
thereon.
2. Unaudited Interim Financial Statements consisting of a Balance Sheet
as of June 30, 1999, the last day of Alottafun!'s most recent past fiscal
quarter and related statements of operations, changes in stockholders deficit,
and cash flows for the three and six months periods then ended.
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PART III
EXHIBITS
A. Financial Statements:
The following is a list of each financial statement filed under Part
f/s of this Registration Statement:
1. Audited Financial Statements consisting of Alottafun!'s balance
sheet as of December 31, 1998, and related statements of operations, changes in
stockholders equity, and cash flows ended December 31, 1997 and 1998, as audited
by Pender, Newkirk & Company, Certified Public Accountant, along with its report
thereon.
2. Unaudited Interim Financial Statements consisting of a Balance Sheet
as of June 30, 1999, and related Statements of Operation, Changes in
Stockholders Deficit and Cash Flows for the three and six months then ended June
30, 1999 and 1998.
B. Index of Exhibits:
All of the items below are incorporated by reference to the Registrant's General
Form For Registration of Securities filed June 9, 1999, except for Exhibits
6(e), 6(h), and 10, which are included with this filing.
EXHIBITS AND SEC REFERENCE NUMBERS
EXHIBITS AND SEC REFERENCE NUMBERS
Number Title of Document Location
- ------ ----------------- --------
2(a) Certificate of Incorporation (2)
2(b) Plan of Merger (2)
2(c) Agreement and Plan of Merger (2)
2(d) Certificate of Merger (2)
2(e) Amendment to Certificate of Incorporation to Increase
Authorized Shares (2)
2(f) ByLaws (2)
3(a) Amended and Restated Certificate of Designation,
3(b) Convertible Debenture Agreement by and between
Alottafun! and Lampton, Inc. and GEM Management
Limited dated December 8, 1998 (2)
3(c) 2% Convertible Debenture (2)
3(d) Warrant to Purchase Common Stock (2)
3(e) Escrow Agreement (2)
3(f) Preferred Shareholder Agreement (2)
6(a) Agreement by and between Michael Porter and Brian
Henke (2)
6(b) Employment Contract with Michael Porter
dated 1/22/99 (2)
6(c) Employment Contract with David Bezalel
dated 1/22/99 (2)
6(d) Employment Contract with Gerald Couture
dated 1/22/99 (2)
6(e) Amended Investment Agreement by and between
Alottafun! and Swartz Private Equity, LLC
Dated June 3, 1999. (1)
6(f) Amended Registration Rights Agreement by and between
Alottafun! and Swartz Private Equity, LLC
dated June 3, 1999 (2)
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6(g) Stock Option Plan of Alottafun! dated
May __, 1999 (3)
6(h) Joint Venture Agreement by and between Alottafun!
and E-Commerce Fulfillment, L.L.C. dated
May 17, 1999 (3)
10 Consent of Pender, Newkirk & Company, CPA (1)
(1) Filed Herewith.
(2) Filed as exhibits to Form 10-SB filed on June 9, 1999.
(3) Filed as exhibits to Form 10-SB/A filed on September 21, 1999.
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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.
ALOTTAFUN!, INC.
Dated: November 2, 1999 By: /s/ Michael Porter
----------------------
Michael Porter
Chief Executive Officer
Dated: November 2, 1999 By: /s/ Gerald Couture
----------------------
Gerald Couture
Chief Financial Officer,
Principal Accounting Officer
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Financial Statements
Alottafun!, Inc.
Years Ended December 31, 1998 and 1997
Independent Auditors' Report
<PAGE>
Alottafun!, Inc.
Financial Statements
Years Ended December 31, 1998 and 1997
Contents
Independent Auditors' Report on Financial Statements.........................1
Financial Statements:
Balance Sheet............................................................2
Statements of Operations.................................................3
Statements of Changes in Stockholders' Deficit...........................4-5
Statements of Cash Flows.................................................6-7
Notes to Financial Statements...........................................8-18
<PAGE>
Independent Auditors' Report
Board of Directors
Alottafun!, Inc.
West Bend, Wisconsin
We have audited the accompanying balance sheet of Alottafun!, Inc., hereinafter
referred to as the Company, as of December 31, 1998 and the related statements
of operations, changes in stockholders' deficit, and cash flows for the years
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the management of the Company. 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. These 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 the Company as of December 31,
1998 and the results of its operations and its cash flows for the years ended
December 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully discussed in Notes 1 and
2 to the financial statements, the Company has sustained substantial losses
since inception that total approximately $2,900,000, has used cash in operations
of approximately $656,000 for the years ended December 31, 1998 and 1997, has a
negative tangible net worth of approximately $278,000 at December 31, 1998, and
is currently in default on approximately $81,000 of notes payables.
Additionally, the Company has not had significant revenues over the past two
years. These issues raise substantial doubt about the Company's ability to
continue as a going concern. Realization of the Company's assets is dependent
upon the Company's ability to raise additional capital, as well as generate
revenues sufficient to result in future profitable operations. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Pender, Newkirk & Company
Certified Public Accountants
Tampa, Florida
May 9, 1999, except for Note 13, as to which the
date is June 1, 1999
1
<PAGE>
Alottafun!, Inc.
Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash $ 411,114
Inventory 4,914
Deposits, inventory purchases 19,450
Other assets 6,929
---------------
Total current assets 442,407
---------------
Property and equipment, net of accumulated depreciation 25,710
---------------
Other assets:
Deferred financing costs, net of accumulated amortization 32,991
Other intangibles, net of accumulated amortization 192,043
---------------
Total other assets 225,034
---------------
$ 693,151
===============
Liabilities and Stockholders' Deficit Current liabilities:
Current maturities of long-term debt $ 183,953
Accounts payable 99,121
Accrued expenses 80,015
---------------
Total current liabilities 363,089
---------------
Long-term debt, net of current maturities 360,489
---------------
Mandatorily redeemable equity instruments; par value of $.01
per share; 4,643 shares issued and outstanding 22,715
---------------
Stockholders' deficit:
Preferred stock; par value of $.0001 per share; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock; par value of $.01 per share; 20,000,000 shares
authorized; 3,832,433 shares issued; 3,808,033 shares outstanding 38,080
Additional paid-in capital 2,875,905
Accumulated deficit (2,899,239)
Treasury stock, at cost; 24,400 shares (67,888)
---------------
Total stockholders' deficit (53,142)
---------------
$ 693,151
===============
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
2
<PAGE>
Alottafun!, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Revenue:
Sales, net of allowance and discounts $ 37,429 $ 54,963
-------------------------------
Costs and expenses:
Cost of sales 28,543 13,154
Obsolete inventory 14,867
-------------------------------
28,543 28,021
-------------------------------
Gross profit 8,886 26,942
-------------------------------
Operating expenses:
Selling 66,886 64,386
General and administrative 387,241 308,040
Depreciation and amortization 13,976 37,087
-------------------------------
468,103 409,513
-------------------------------
Loss from operations (459,217) (382,571)
-------------------------------
Other expense:
Net realized loss on sale of securities, trading (35,507) (5,917)
Unrealized gain on securities, trading 8,380
Interest expense (294,896) (77,667)
Loss on impairment of fixed assets (92,081)
-------------------------------
Total other expense (330,403) (167,285)
-------------------------------
Loss before taxes and extraordinary gain (789,620) (549,856)
Income taxes 8,200
-------------------------------
Net loss before extraordinary gain (789,620) (541,656)
Extraordinary gain on forgiveness of debt, net of
income tax of $8,200 46,424
-------------------------------
Net loss $ (789,620) $ (495,232)
===============================
Loss per common share:
Loss before extraordinary gain $(.31) $(.28)
Extraordinary gain .02
-------------------------------
Net loss per common share $(.31) $(.26)
===============================
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Alottafun!, Inc.
Statements of Changes in Stockholders' Deficit
For the Period December 31, 1996 to December 31, 1998
Common Stock
--------------------------
Shares $.01 Par
Issued Value
--------------------------
<S> <C> <C>
Balance, December 31, 1996 2,849,369 $ 28,494
Issuance of common stock for cash, net of offering costs
of $167,836 615,525 6,155
Issuance of common stock for services 94,000 940
Conversion of debt to equity by creditors 5,968 60
Reverse 1-for-2 stock split (1,784,169) (17,842)
Issuance of common stock for cash 339,150 3,391
Issuance of common stock for services 1,000 10
Conversion of debt to equity by creditors 7,500 75
Acquisition of treasury stock
Net loss for year
--------- --------
Balance, December 31, 1997 2,128,343 21,283
Acquisition of treasury stock
Issuance of common stock for services 237,700 2,377
Conversion of debt to equity by creditors 27,500 275
Issuance of common stock for cash 730,900 7,309
</TABLE>
Read independent auditors' report. The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Treasury
Capital Deficit Stock Total
- -------------- ------------------ ----- -----
<S> <C> <C> <C>
$ 1,202,819 $ (1,614,387) $ (383,074)
354,564 360,719
75,560 76,500
11,876 11,936
17,842
312,572 315,963
490 500
4,682 4,757
$ (61,133) (61,133)
(495,232) (495,232)
- --------------------------------------------------------------------------
1,980,405 (2,109,619) (61,133) (169,064)
(6,755) (6,755)
152,078 154,455
44,725 45,000
220,798 228,107
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Alottafun!, Inc.
Statements of Changes in Stockholders' Deficit
For the Period December 31, 1996 to December 31, 1998
Common Stock
--------------------------
Shares $.01 Par
Issued Value
--------------------------
<S> <C> <C>
Intrinsic value of convertible feature of debentures
with detachable warrants
Issuance of common stock for conversion of debentures 269,590 2,696
Exercise of detachable warrants 411,000 4,110
Issuance of common stock in settlement of mandatorily
redeemable equity instruments 3,000 30
Net loss for year
Balance, December 31, 1998 3,808,033 $ 38,080
============================
</TABLE>
Read independent auditors' report. The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Treasury
Capital Deficit Stock Total
- ------------ ----------- ------------ -----------
<S> <C> <C> <C>
440,949 440,949
37,304 40,000
(4,110)
3,756 3,786
(789,620) (789,620)
- --------------------------------------------------------------------------
$ 2,875,905 $ (2,899,239) $ (67,888) $ (53,142)
==========================================================================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Alottafun!, Inc.
Statements of Cash Flows
Year Ended December 31,
------------------------------
1998 1997
------------------------------
<S> <C> <C>
Operating activities
Net loss $ (789,620) $ (495,232)
------------------------------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 13,976 37,086
Loss on impairment of fixed assets 92,081
Loss on sale of marketable securities 35,507 5,917
Unrealized gain on marketable securities (8,380)
Interest due to conversion feature of convertible debentures 223,529
Interest on warrants 25,377
Common stock issued for services 154,455 77,000
(Increase) decrease in:
Inventory 8,086 10,910
Other assets (1,013) 2,264
Deposits (19,250)
Increase (decrease) in:
Accounts payable (96,218) (9,999)
Accrued expenses 26,452 51,378
------------------------------
Total adjustments 370,901 258,257
------------------------------
Net cash used by operating activities (418,719) (236,975)
------------------------------
Investing activities
Acquisition of equipment and intangible assets (34,969) (33,008)
Proceeds from sale of marketable securities 1,320,231 290,840
Purchase of marketable securities (1,203,794) (440,320)
------------------------------
Net cash provided (used) by investing activities 81,468 (182,488)
------------------------------
Financing activities
Proceeds from collection of stock subscription 126,213
Proceeds from common stock and related paid-in capital 221,699 718,294
Payment of offering costs (167,826)
Purchase of treasury stock (6,755) (61,133)
Principal reductions of long-term debt (27,688) (25,350)
Issuance of convertible debentures 400,489
Reduction in mandatorily redeemable equity instruments (4,615) (5,500)
------------------------------
Net cash provided by financing activities 709,343 458,485
------------------------------
Net increase in cash 372,092 39,022
Cash at beginning of year 39,022
------------------------------
Cash at end of year $ 411,114 $ 39,022
==============================
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
6
<PAGE>
Alottafun!, Inc.
Statements of Cash Flows
Year Ended December 31,
-----------------------
1998 1997
-----------------------
Supplemental disclosures of cash flow information
and noncash financing activities
Cash paid during the year for interest $ 14,821 $ 20,429
=======================
During the year ended December 31, 1997, the Company exchanged 13,468 shares
of common stock for accounts payable totaling $16,693. The number of shares
issued was based on the fair value of the stock.
During the year ended December 31, 1997, the Company issued 345,000 shares
of common stock. The Company received $80,000 in cash and received stock
subscriptions of $126,213. The stock subscriptions are accounted for as a
non-cash transaction.
During the year ended December 31, 1998, the Company exchanged 27,500 shares
of common stock as payment on $45,000 of notes payable.
In addition, the Company reclassified 3,000 shares of the mandatorily
redeemable equity instruments to common stock. This was done as payment
against the outstanding payable of $3,786.
The Company issued approximately $400,000 in convertible debentures in 1998
that are convertible into common stock. The Company has recorded interest of
approximately $223,500 to reflect the intrinsic value of the conversion
feature of these debentures. In December 1998, $40,000 of the debentures
were converted into 269,590 shares of common stock.
In connection with the convertible debentures, the Company issued detachable
stock warrants to acquire 411,000 shares of common stock valued at $217,420,
which is recorded as other intangible assets in the accompanying financial
statements. The Company used the Black-Scholes pricing-model to value these
warrants. These shares were issued in December 1998.
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
7
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
1. Background Information
Alottafun!, Inc. (the "Company") was incorporated in the state of Wisconsin on
August 2, 1993, and effectively re-incorporated in the state of Delaware on
September 17, 1998 by merging the Wisconsin corporation into a newly created
Delaware corporation. The Company was in the development stage through December
31, 1996. In 1996, the Company received significant revenue from the sale of
toys and candy. Beginning on January 1, 1997, the Company was considered to be
an operating company. The Company headquarters is located in West Bend,
Wisconsin.
Initially, the Company operated as an assembler of toy and candy packages. Its
customers were retailers and distributors located primarily throughout the
mid-eastern United States.
In 1997, the Company ceased its assembly operations and changed its focus to
distribution of toys and candy packages. Starting in late 1998, the Company
again shifted its focus, this time towards becoming a toy manufacturer and
marketer with a more extensive toy line. Included in this line are tea and cook
sets, housekeeping toys, games and puzzles, purses, and ride on cars. The
Company intends to distribute the product line through leading toy retailers and
over the Internet.
2. Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, the Company has sustained
substantial losses since inception that total approximately $2,900,000, has used
cash in operations of approximately $656,000 for the years ended December 31,
1998 and 1997, and has a negative tangible net worth of $(278,000). In addition,
as further explained in Note 5 to the financial statements, the Company is
currently in default on approximately $81,000 of notes payable. The Company also
has no significant revenues. Presently, the Company's ability to develop a
product and transition to attaining profitable operations is dependent upon
obtaining adequate financing and achieving a level of sales adequate to support
the Company's cost structure. These factors raise substantial doubt about the
Company's ability to continue as a going concern. These financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
Read independent auditors' report.
8
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
3. Significant Accounting Policies
The significant accounting policies followed are:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company extends credit to its various customers based on the
customer's ability to pay. Based on management's review of accounts
receivable, no allowance for doubtful accounts is considered necessary.
Property and equipment are stated at cost. Additions and improvements to
property and equipment are capitalized. Maintenance and repairs are
expensed as incurred. When property is retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in operations.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets ranging from 5 to 7 years.
Inventories are stated at the lower of cost or market, determined on an
average cost method.
Costs incurred in obtaining financing are being amortized over the loan
life on a straight-line basis. Amortization for the years ended December
31, 1998 and 1997 amounted to $1,001 and $1,001, respectively. The costs
have been fully amortized as of December 31, 1998 and 1997.
Selling costs related to the issuance of debentures have been
capitalized and are being amortized over the life of the debentures
using the interest method. Amortization amounted to $549 for the year
ended December 31, 1998.
The Company records revenue and related profit when the product is
shipped to the customer.
Deposits, inventory purchases include money advanced to toy
manufacturers for the purchase of the Company's toy inventory. The
deposit is reduced as toy shipments are received.
Read independent auditors' report.
9
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
3. Significant Accounting Policies (continued)
The Company accounts for marketable securities in accordance with
Financial Accounting Standards Board (FASB) Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification on its investments
in marketable securities at the time of purchase and reevaluates such
determination at each balance sheet date. Management has classified its
marketable securities as "trading securities." Trading securities are
bought and held principally for the purpose of selling them in the near
term. Unrealized holding gains and losses are deemed temporary and are
included in earnings. The cost of the marketable securities is based on
the specific identification method. Interest and dividends on equity
securities are included in investment income. The Company had no
marketable securities at December 31, 1998.
FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15,
1995. This statement provides that expense equal to the fair value of
all stock-based awards on the date of the grant be recognized over the
vesting period. Alternatively, this statement allows entities to
continue to apply the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation expense is recorded on the date the options are granted to
employees equal to the excess of the market price of the underlying
stock over the exercise price. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma
disclosure of the provisions of FASB No. 123.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statements carrying amounts of existing assets and liabilities
and their respective income tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the
period that included the enactment date.
Read independent auditors' report.
10
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
3. Significant Accounting Policies (continued)
The Company follows FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Statement No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of these assets may not be recoverable. In
performing the review for recoverability, the Company estimates the
future cash flows are expected to result from the use of the assets and
their eventual disposition.
The Company issues stock in lieu of cash for certain transactions.
Generally, the fair value of the stock, based on comparable cash
purchases, is used to value the transactions.
Offering costs associated with the sale of stock are capitalized and
offset against the proceeds of the offering or expenses if the offering
is unsuccessful.
The Company issued approximately $400,000 in convertible debentures in
1998. These debentures are convertible into common stock. The Company
has recorded interest totaling $223,529 to reflect the intrinsic value
of the beneficial conversion feature of these debentures. The
convertible debentures are convertible at any time over a five-year
period.
In connection with the convertible debentures, the Company issued
detachable stock warrants to acquire 411,000 shares of common stock
valued at $217,420, which is recorded as other intangibles in the
accompanying financial statements. The Company used the Black-Scholes
pricing-model to value these warrants. The value of these warrants is
being amortized over the five-year life of the convertible debentures.
The conversion of the debentures into stock accelerates the amortization
of the warrants.
Basic loss per share (EPS) is computed by dividing loss available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
from the exercise or conversion of securities into common stock. Diluted
EPS is not presented because they are anti-dilutive.
Read independent auditors' report.
11
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
4. Property and Equipment
Property and equipment at December 31, 1998 consist of:
Leasehold improvements $ 7,800
Office equipment 16,386
Warehouse equipment 55,404
----------
79,590
Less accumulated depreciation 53,880
----------
$ 25,710
==========
During 1997, the Company ceased its assembly line and changed its focus to
distribution of toys and candy packages. The Company determined that many of the
fixed assets maintained by the Company had become impaired. These items
consisted of dies, films, molds, trademarks, and packaging design costs. This
decision was based on the continuing operating losses of the Company and its
inability to generate future cash flows from this product line. The expected
future cash flows from carrying these assets was projected to be $0 as of
December 31, 1997. Accordingly, the carrying values of the impaired assets were
written off resulting in a loss of approximately $92,000.
5. Notes Payable and Long-Term Debt
Notes payable and long-term debt at December 31, 1998 consist of:
Note payable to bank; payable in monthly installments
of $3,350 including principal and interest at 2.25%
over prime; remaining unpaid balance due on
July 6, 1999; collateralized by all assets of the
Company; personally guaranteed by majority
stockholder and 90.0% by the U.S. Small Business
Administration $ 22,808
Revolving note payable to bank (loan limited to lesser
of $100,000 or $30,000, plus 50.0% of accounts receivable); interest
at 2.0% over the bank's base rate; interest payable monthly;
outstanding principal payable via lockbox collection of accounts
receivable; collateralized by a selective business security
agreement and personal guarantees; due on demand 30,000
Read independent auditors' report.
12
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
5. Notes Payable and Long-Term Debt (continued)
Note payable to Private Industry Council of Milwaukee County, Inc.;
interest at 18.0%; unsecured; payments of $8,750 each were required
on July 5, 1996, October 5, 1996,
and April 5, 1997; in default 70,000
Note payable, unsecured; payable in monthly
installments of $903, including principal
and interest at 18.0% per annum; in default 11,043
Note payable, unsecured; interest at 24.0% per
annum; due on demand 50,102
Convertible debentures; 2.0% interest per annum;
maturity date of December 8, 2003; payments
semi-annually in arrears; convertible into shares
of common stock at the noteholders' option 360,489
-----------
544,442
Less current maturities 183,953
-----------
$ 360,489
===========
Principal reductions of long-term debt for future years are as follows:
Year Ending
December 31,
-----------
1999 $ 183,953
2003 360,489
------------
$ 544,442
============
6. Mandatorily Redeemable Equity Instruments
As part of the Company's restructuring in 1996, the Company issued 7,955 shares
of stock valued at $37,014 for concessions in accounts payable. Each share
contained a call feature that obligated the Company to repurchase the shares of
stock by December 31, 1996; however, all shares were not repurchased as of that
date. Of this amount, $14,299 has been paid as of December 31, 1998 and the
remainder is past due. The remaining $22,715 is included in the accompanying
financial statements as mandatorily redeemable equity instruments, which
represent 4,643 shares.
Read independent auditors' report.
13
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
7. Common Stock
The minutes of the Company reflect that a 1-for-2 reverse stock split for its
$.01 par value common stock was authorized on August 25, 1997. The reverse split
reduced the total shares outstanding at that date from 3,564,862 to 1,784,169.
The new post-split shares retained a par value of $.01 per share and the
accompanying financial statements were adjusted to reflect this change.
In December 1997, the Company acquired 18,400 shares of common stock for
$61,133. In January 1998, the Company acquired an additional 6,000 shares of
common stock for $6,755. These shares are shown as treasury stock on the
financial statements and are shown at cost. Treasury stock totaled $67,888 at
December 31, 1998.
The Company issued $400,000 in convertible debentures in December 1998. The
debentures pay interest at two percent per annum and mature on December 8, 2003.
The debentures are convertible into shares of common stock at the option of the
holder and may be converted at any time commencing on the issue date. The
conversion price for each debenture at the date of conversion will be the lessor
of $1.25 or 65 percent of the average closing bid price for the five trading
days immediately preceding the conversion date. If the closing price is less
than or equal to $.10 per share, the Company, at its sole option, may allow the
holder to proceed with the conversion or may redeem the unconverted amount of
debentures at 154 percent of such unconverted amount, plus any accrued and
unpaid interest. The stock was trading at $.53 per share on the date of
issuance. Based upon this price, the debentures could be converted into
approximately 1,176,000 shares of stock. The Company has recorded interest of
approximately $223,500 to reflect the intrinsic value of the conversion feature
of these debentures.
In association with the convertible debentures listed above, the Company issued
detachable stock warrants to acquire 411,000 shares of common stock. The
warrants entitle the holders to purchase common stock at $.001 per share at any
time prior to December 31, 2003. The Company used the Black-Scholes
pricing-model to value the warrants. Based on this pricing-model, the value of
the warrants is $217,519, which is shown as other intangible assets in the
accompanying financial statements. This cost is being amortized over the
five-year life of the convertible debentures; however, the conversion of
debentures to stock accelerates the amortization. The Company has amortized
$25,377 of the intrinsic value during the year ended December 31, 1998.
Read independent auditors' report.
14
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
7. Common Stock (continued)
The average fair value of the warrants at their grant during the year ended
December 31, 1998 was $.529. The estimated fair value of each option and warrant
granted is calculated using the Black-Scholes option-pricing model. The
following summarizes the weighed average of the assumptions used in the model:
Risk-free interest rate 5.67%
Expected years until exercised 5
Expected dividend yield 0
Estimated fair market value of underlying stoc $.53
During 1998, the Company issued 1,060,100 shares of stock. The checks issued for
these shares were returned for lack of sufficient funds and all stock
certificates were cancelled subsequent to year-end. These shares are not
included in the common stock outstanding since the Company did not have
constructive receipt of the money paid for those shares.
8. Operating Leases
The Company is obligated under various month-to-month operating leases for the
rental of space and related equipment. For 1998 and 1997, total rent amounted to
$6,600 and $6,610, respectively.
9. Income Taxes
The Company has incurred significant operating losses since its inception and,
therefore, no tax liabilities have been incurred for the years presented. These
operating losses give rise to a deferred tax asset at December 31, 1998 and are
as follows:
Deferred tax assets $ 1,018,000
Allowance (1,018,000)
--------------
$ 0
==============
Read independent auditors' report.
15
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
9. Income Taxes (continued)
The Company has available at December 31, 1998 approximately $2.6 million of
unused operating loss carryforwards that may be applied against future taxable
income which would reduce taxes payable by approximately $1.0 million in the
future. These operating loss carryforwards expire beginning in 2008. Due to the
Company's history of operating losses, management has established a valuation
allowance in the full amount of the deferred tax assets arising from these
losses because management believes it is more likely than not that the Company
will not generate sufficient taxable income within the appropriate period to
offset these operating loss carryforwards. Income tax benefits resulting from
the utilization of these carryforwards will be recognized in the periods in
which they are realized for federal and state tax purposes.
10. Extraordinary Gain
During 1997, several creditors accepted partial payments on balances due to each
of them as payments in full. The net differences between amounts accepted as
full payments and the vendors outstanding balances as of the date of acceptance
are shown in the accompanying financial statements as extraordinary gain. The
extraordinary item of $46,424 is net of income taxes of $8,200.
11. Earnings Per Share
The following data shows the amounts used in computing earnings per share:
Year Ended December 31,
------------------------------
1998 1997
------------------------------
Net loss $ (789,620) $ (495,232)
==============================
Weighted average number of
common shares used in
basic EPS 2,528,155 1,917,013
==============================
Read independent auditors' report.
16
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
12. Commitments
The Company entered into an agreement to purchase the rights to a line of toys
on June 26, 1998. In consideration of these rights, the Company will pay a
royalty on all sales equal to two percent in 1999, one percent in 2000, and .05
percent in 2001, with a minimum guarantee royalty of $10,000 per year. During
1998, no royalties incurred in connection with this agreement.
13. Subsequent Events
In January 1999, the Company initiated a stock option plan for employees of the
Company. A total of 10,000,000 shares have been reserved for issuance under the
plan. Approximately 5,500,000 options to purchase a total of 5,500,000 shares of
stock were granted to executives of the Company as part of their employment
agreements.
In January 1999, the Company entered into employment agreements with two
stockholders of the Company. Each employment agreement has a term of five years
and has an annual base compensation beginning at $75,000 annually for the
12-month period ending May 31, 2000. The agreements increase $10,000 per year to
an annual compensation of $115,000 for the 12-month period ending May 31, 2004.
Each executive has the right, at his election, to receive compensation in the
form of the Company's restricted common stock valued at 50 percent of the
closing bid price as of the date of the executive election. In addition, upon
execution of the employment agreements, each executive was granted non-qualified
stock options to purchase 2,500,000 shares of the Company's common stock at an
exercise price of $.15 per share, which was the fair value at the date of the
grant. These options are immediately exercisable and have an exercise period of
10 years.
Additionally, in January 1999, the Company entered into an employment agreement
with its chief financial officer. This employment agreement has a term of five
years. The annual compensation is $60,000 for 480 hours of service. As
consideration for this employment agreement, the chief financial officer
received an option to purchase 500,000 shares of the Company's common stock over
a 10-year period at $.15 per share, which was the fair value at the date of the
grant. These options may be immediately exercisable.
Each of the above employment agreements has a non-compete clause. The agreements
also generally provide for severance payments equal to 299 percent of the annual
base compensation then due under each agreement in the event of termination
without cause.
Read independent auditors' report.
17
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
13. Subsequent Events (continued)
Subsequent to December 31, 1998, the holders of the convertible debentures
exercised their option to convert $358,000 of the debentures into 3,250,621
shares of common stock. As a result of this conversion, the Company accelerated
the amortization of the intrinsic value assigned to the detachable stock
warrants.
In February 1999, the Company issued two stockholders/officers 1,000,000 shares
each of preferred stock. Each share of preferred stock entitles the holder to 25
votes on matters that the holders of common stock are entitled to vote on. The
holders are not entitled to receive dividends. The preferred stock may be
converted by the holders based on the Company attaining specified annual revenue
limits.
Subsequent to December 31, 1998, the Company's board of directors changed the
capitalization of the Company. The number of authorized shares of common stock
was increased from 20,000,000 shares to 50,000,000 shares.
Read independent auditors' report.
18
<PAGE>
Financial Statements
Alottafun!, Inc.
Six Months Ended June 30, 1999 and 1998
(Unaudited)
19
<PAGE>
Alottafun!, Inc.
Financial Statements
Six Months Ended June 30, 1999 and 1998
Contents
Financial Statements:
Balance Sheet...........................................................21
Statements of Operations................................................22
Statements of Changes in Stockholders' Deficit.........................23
Statements of Cash Flows................................................24
Notes to Financial Statements......................................25 - 26
<PAGE>
Alottafun!, Inc.
Balance Sheet
<TABLE>
<CAPTION>
June 30,
1999
---------------------
(Unaudited)
<S> <C>
Assets
Current assets:
Cash $ -
Marketable securities 655,979
Inventory 21,017
Deposits, inventory purchases 9,750
Other assets 722
---------------------
Total current assets 687,468
---------------------
Property and equipment, net of accumulated depreciation 113,236
---------------------
Other assets:
Other intangibles, net of accumulated amortization 298
---------------------
Total other assets 298
---------------------
$ 801,002
=====================
Liabilities and Stockholders' Deficit
Current liabilities:
Bank overdraft $ 16,236
Current maturities of long-term debt 628,968
Accounts payable 167,127
Accrued expenses 3,474
---------------------
Total current liabilities 815,805
---------------------
Mandatorily redeemable equity instruments; par value of $.01
per share; 4,643 shares issued and outstanding. 22,715
---------------------
Stockholders' deficit:
Common stock; par value of $.01 per share; 50,000,000 shares
authorized; 8,025,026 shares outstanding. 80,250
Preferred stock; par value of $.0001; 5,000,000 shares
authorized; 2,000,000 shares issued and outstanding. 200
Additional paid-in capital 4,080.935
Accumulated deficit (3,675,615)
Deferred financing costs (455,400)
Treasury stock, at cost; 24,400 shares (67,888)
---------------------
Total stockholders' deficit (37,518)
---------------------
$ 801,002
=====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
Alottafun!, Inc.
Statements of Operations
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
--------------------------------- ----------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Sales, net of allowance and discounts $ 471 $ 2,349 $ 19,931 $ 26,572
Cost of sales 348 1,410 15,795 25,523
--------------------------------- ----------------------------------
Gross profit 123 939 4,136 1,049
--------------------------------- ----------------------------------
Operating expenses:
Selling 24,234 10,926 72,199 36,015
General and administrative 149,475 64,822 293,607 102,762
Depreciation and amortization 3,793 3,494 39,297 6,988
--------------------------------- ----------------------------------
177,502 79,242 405,103 145,765
--------------------------------- ----------------------------------
Loss from operations (177,379) (78,303) (400,967) (144,716)
--------------------------------- ----------------------------------
Other expense:
Net realized gain (loss) on sale of securities, trading (133,091) 5,690 (139,437) 42,088
Unrealized gain (loss) on securities, trading 44,175 (8,380) (34,440) (8,380)
Interest expense (5,880) (5,255) (201,532) (9,508)
--------------------------------- ----------------------------------
Total other expense (94,796) (7,945) (375,409) 24,200
--------------------------------- ----------------------------------
Loss before taxes (272,175) (86,248) (776,376) (120,516)
Income taxes
--------------------------------- ----------------------------------
Net loss $ (272,175) $ (86,248) $ (776,376) $ (120,516)
================================= ==================================
--------------------------------- ----------------------------------
Net loss per common share $ (0.03) $ (0.04) $ (0.11) $ (0.05)
================================= ==================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
Alottafun!, Inc.
Statements of Changes in Stockholders' Deficit
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------------- --------------------------------
Shares $.01 Par Shares $.0001 Par
Issued Value Issued Value
------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 3,808,033 $ 38,080 - $ -
Issuance of common stock for conversion of debentures 3,520,211 35,202 - -
Issuance of common stock for cash 586,782 5,868 - -
Issuance of common stock for services 110,000 1,100 - -
Issuance of prefered stock to officers - - 2,000,000 200
Intrinsic value of stock warrants - - - -
Net loss for the six months ended June 30, 1999 - - - -
============= ============== =============== =============
Balance, June 30, 1999 8,025,026 $ 80,250 2,000,000 $ 200
============= ============== =============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated Deferred Treasury
Capital Deficit Financing Costs Stock Total
--------------- ----------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
$ 2,875,905 $ (2,899,239) - $ (67,888) $ (53,142)
325,287 - - - 360,489
315,643 - - - 321,511
108,900 - - - 110,000
(200) - - - -
455,400 - (455,400) - -
- (776,376) - - (776,376)
=============== ================= ============== ============== ==============
$ 4,080,935 $ (3,675,615) (455,400) $ (67,888) $ (37,518)
=============== ================= ============== ============== ==============
</TABLE>
23
<PAGE>
Alottafun!, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------
1999 1998
-----------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss $ (776,376) $ (120,516)
-----------------------------------------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 32,804 -
Loss (gain) on marketable securities 173,877 (33,708)
Common stock issued for services 110,000 -
Interest on conversion of convertible debentures 191,745 (58)
(Increase) decrease in:
Marketable securities - trading (829,856) (15,277)
Inventory (16,103) 5,370
Other assets 6,207 -
Deposits 9,700 (19,250)
Increase (decrease) in:
Accounts payable 68,006 (26,448)
Accrued expenses (76,541) (2,018)
-----------------------------------------
Total adjustments (330,161) (91,389)
-----------------------------------------
Net cash used by operating activities (1,106,537) (211,905)
-----------------------------------------
Investing activities
Acquisition of equipment (87,339) -
-----------------------------------------
Net cash provided (used) by investing activities (87,339) -
-----------------------------------------
Financing activities
Bank overdraft 16,236 -
Proceeds from the collection of stock subscriptions - 107,463
Proceeds from issuance of note payable 445,015 54,506
Proceeds from common stock and related paid-in capital 321,511 130,405
Purchase of treasury stock - (6,755)
Principal reductions of long-term debt - (106,578)
Reduction in mandatorily redeemable equity instruments - (1,000)
-----------------------------------------
Net cash provided by financing activities 782,762 178,041
-----------------------------------------
Net increase in cash (411,114) (33,864)
Cash at beginning of period 411,114 39,022
-----------------------------------------
Cash at end of period $ - $ 5,158
=========================================
</TABLE>
Supplemental disclosures of cash flow information
and noncash financing activities
During the six month period ending June 30, 1999, the Company issued stock
warrants to acquire 700,000 shares of common stock valued at $455,400, which is
recorded as deferred financing costs in the accompanying financial statements.
The Company used the Black-Scholes pricing-model to value these warrants. These
warrants were issued in June 1999.
During the six month period ending June 30, 1999, the Company converted $360,489
of debentures to 586,782 shares of common stock.
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
ALLOTAFUN!, INC.
Notes to Financial Statements
(Unaudited)
Note 1 - Basis of presentation
The accompanying unaudited financial statements, which are for interim periods,
do not include all disclosures provided in the annual financial statements.
These unaudited financial statements should be read in conjunction with the
financial statements and the footnotes thereto contained in the Audited
Financial Statements for the year ended December 31, 1998 and 1997 of
Alottafun!, Inc. (the "Company").
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments (which are of a normal and recurring nature) necessary
for a fair presentation of the financial statements. The results of operations
for the six month period ended June 30, 1999 are not necessarily indicative of
the results to be expected for the full year.
Note 2 - Per share calculations
Per share data was computed by dividing net loss by the weighted average number
of shares outstanding during the six month period ended June 30, 1999. The
weighted average shares outstanding for the six month period ended June 30, 1999
was 7,052,244 as compared to 2,309,494 for the six months ended June 30, 1998.
Note 3 - Equity Transactions
Please refer to Audited Financial Statements consisting of the Company's balance
sheet as of December 31, 1998, and related statements of operations, changes in
stockholders equity, and cash flows ended December 31, 1998, as audited by
Pender, Newkirk & Company, Certified Public Accountant.
On June 4, 1999, we entered into an Investment Agreement with Swartz Private
Equity, LLC.("Swartz"). The Investment Agreement entitles the Company to issue
and sell common stock for up to an aggregate of $20 million from time to time
during a three-year period through June 3, 2002. This is also referred to as a
put right. In order to invoke a put right, the Company must file a registration
statement with the Securities and Exchange Commission registering the resale of
the common shares.
On each put the Company must indicate the number of shares of common stock or
maximum dollar amount of common stock (not to exceed $2 million) that it will
sell to Swartz. The number of common shares sold may not exceed 15% of the
aggregate daily reported trading volume for twenty business days after the date
of the put right. Swartz will pay the Company either the lesser of the market
price minus $.10 or 91% of the market price.
In partial consideration of the equity line commitment, the Company issued to
Swartz or its designee warrants to purchase 450,000 shares of Common Stock. Each
warrant is exercisable at $1.00625. In addition, following each purchase, the
Company is obligated to issue to Swartz, a warrant to purchase shares of common
stock equal to 15% of the common shares issued in each put. Each warrant is to
be exercisable at a price equal to 110% of the market price. These warrants were
valued at $292,757 using the Black-Scholes pricing-model and recorded as
deferred financing costs in the financial statements. In addition, we issued
warrants to acquire up to 250,000 shares of our Common Stock at an exercise
price of $1.00625 to Dunwoody Brokerage Services, Inc., an affiliate of Swartz
Private Equity LLC. These warrants were valued at $162,643 and recorded as
deferred financing costs in the financial statements.
Alottafun! has authority to issue up to 5,000,000 shares of Preferred Stock
pursuant to action by our Board of Directors. In February 1999, Mr. Porter and
Mr. Bezalel entered into a stockholders agreement with Alottafun! that granted
them 1,000,000 shares each to Mr. Porter and Mr. Bezalel of Series A Voting
Preferred Stock. These shares were issued for nominal consideration and were
valued at $.0001 par value. We relied upon Section 4(2) for the issuance of
these securities. Each share of the Series A Preferred Stock has the right to
cast 25 votes per share on each and any matter on which the Common Stock is
entitled to vote. Accordingly, Mr. Porter and Mr. Bezalel are able to control
the affairs and operations of Alottafun! including, but not limited to, election
of directors, sale of assets or other business opportunities. The Series A
Preferred Stock has no dividend rights, redemption provisions, sinking fund
provisions or preemptive rights. However, the Series A Preferred Stock holders
have the right to convert each share of Series A Preferred Stock into ten (10)
shares of our Common Stock based upon the following targets. Each one-half (1/2)
share of Series A Preferred Stock is convertible into five (5) shares of Common
Stock.
25
<PAGE>
ALLOTAFUN!, INC.
Notes to Financial Statements (continued)
(Unaudited)
For example, we currently have 2,000,000 Series A Preferred shares outstanding,
which would convert to a total of 10,000,000 shares of common stock at such time
as the Corporation generated $5,000,000 of annual revenues in any twelve month
period. Each remaining one half (1/2) share of Series A Preferred Stock is
convertible into an additional five (5) shares of Common Stock at such time as
the Corporation generates $10,000,000 in annual revenues in any twelve month
period.
During 1998, we issued $400,000 of convertible debt together with warrants to
purchase 400,000 shares at $0.001 per share. This debt allowed the holder to
convert at the lower of $1.25 or 65% of the five-day average of the closing
price of the common stock before the election to convert. All this debt was
converted into common stock during the six-month period ended June 30, 1999. We
have since January 1, 1999, issued 4,217,000 shares of common stock and raised
$321,511 and converted debentures of $360,489. These funds were used to further
develop our product line, the hiring of key personnel and for working capital
purposes.
In January, 1999, we issued an aggregate of 90,000 shares of our restricted
Common Stock to Couture & Company in connection with consulting services. We
issued outside general corporate counsel approximately 20,000 shares for
services prior to and in connection with the preparation of this Form 10-SB. We
relied upon Section 4(2) for the issuance of these securities.
Note 4 - Joint Venture Agreement
In May 1999, we joint ventured with E-Commerce Fulfillment, LLC. which has
established a contract with M.W Kasch, an independent U.S. toy distributor, to
launch an e-commerce Internet portal called TOYPOP.COM. The Joint venture is
owned 33.3% by E-Commerce Fulfillment and 67.7% by Alottafun!, Inc. E-Commerce
Fulfillment (ECF) is wholly owned by Jeffrey C. Kasch, President of M.W. Kasch
Company. ECF's responsibilities and obligations include selling toy products to
the joint venture, at prices which do not exceed the prices charged to ECF's
typical customers. ECF will provide sufficient quantities of its products based
on regular availability. ECF will also merchandise the toys on the Web site and
make decisions as to which toys to highlight as special buys, promote, or
present as a `hot' toy. M.W. Kasch Company will warehouse and provide
fulfillment to ECF on an ongoing basis. The relationship between M.W. Kasch
Company and ECF is exclusive as far as ECF is concerned, but not exclusive with
regard to M.W. Kasch. M.W. Kasch is free to sell any and all other retailers,
electronic or otherwise. This joint venture agreement did not materially impact
the financial statements for the six months ended June 30, 1999.
26
ALOTTAFUN!, INC.
AMENDED INVESTMENT AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES
AUTHORITIES. THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE FEDERAL AND STATE SECURITIES LAWS.
THIS INVESTMENT AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN
RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE
SUCH AUTHORITIES CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. THE
INVESTOR MUST RELY ON ITS OWN ANALYSIS OF THE INVESTMENT AND
ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN
THE ATTACHED DISCLOSURE DOCUMENTS AS EXHIBIT J.
SEE ADDITIONAL LEGENDS AT SECTIONS 4.7.
THIS AMENDED INVESTMENT AGREEMENT (this "Agreement" or
"Investment Agreement") is deemed to be dated as of the 3rd day of June, 1999,
by and between Alottafun!, Inc., a corporation duly organized and existing under
the laws of the State of Delaware (the "Company"), and the undersigned Investor
executing this Agreement ("Investor") and supersedes that certain Investment
Agreement between the Company and the Investor dated June 3, 1999.
RECITALS:
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor, and the
Investor shall purchase from the Company, from time to time as provided herein,
shares of the Company's Common Stock (the "Common Stock"), as part of an
offering of Common Stock by the Company to Investor, for a maximum aggregate
offering amount of Twenty Million Dollars ($20,000,000) (the "Maximum Offering
Amount"); and
WHEREAS, the solicitation of this Investment Agreement and, if accepted
by the Company, the offer and sale of the Common Stock are being made in
reliance upon the provisions of Section 4(2) promulgated under the Act,
Regulation D promulgated under the Act, and/or upon such other exemption from
the registration requirements of the Act as may be available with respect to any
or all of the purchases of Common Stock to be made hereunder.
<PAGE>
TERMS:
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement (including the
recitals above), the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"20% Approval" shall have the meaning set forth in Section 5.26.
"Accredited Investor" shall have the meaning set forth in Section 3.1.
"Act" shall mean the Securities Act of 1933, as amended.
"Advance Put Notice" shall have the meaning set forth in Section
2.3.1(a), the form of which is attached hereto as Exhibit E.
"Advance Put Notice Confirmation" shall have the meaning set forth in
Section 2.3.1(a), the form of which is attached hereto as Exhibit F.
"Advance Put Notice Date" shall have the meaning set forth in Section
2.3.1(a).
"Affiliate" shall have the meaning as set forth Section 6.5.
"Aggregate Issued Shares" equals the aggregate number of shares of
Common Stock issued to Investor pursuant to the terms of this Agreement or the
Registration Rights Agreement as of a given date, including Put Shares and
Warrant Shares.
"Agreed Upon Procedures Report" shall have the meaning set forth in
Section 2.6.3(b).
"Agreement" shall mean this Investment Agreement.
"Automatic Termination" shall have the meaning set forth in
Section 2.3.2.
"Bring Down Cold Comfort Letters" shall have the meaning set forth in
Section 2.3.6(b).
"Business Day" shall mean any day during which the Principal Market is
open for business.
"Calendar Month" shall mean the period of time beginning on the numeric
day in question in a calendar month (the "Numeric Day") and for Calendar Months
thereafter, beginning on the earlier of (i) the same Numeric Day of the next
calendar month or (ii) the last day of the next calendar month. Each Calendar
Month shall end on the day immediately preceding the beginning of the next
succeeding Calendar Month.
"Cap Amount" shall have the meaning set forth in Section 2.3.11.
"Capital Raising Limitations" shall have the meaning set forth in
Section 6.6.1.
"Capitalization Schedule" shall have the meaning set forth in Section
3.2.4, attached hereto as Exhibit K.
"Closing" shall mean one of (i) the Investment Commitment Closing and
(ii) each closing of a purchase and sale of Common Stock pursuant to Section 2.
<PAGE>
"Closing Bid Price" means, for any security as of any date, the last
closing bid price for such security on the O.T.C. Bulletin Board, or, if the
O.T.C. Bulletin Board is not the principal securities exchange or trading market
for such security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by such principal securities exchange or trading market, or if the
foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security, or,
if no closing bid price is reported for such security, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the Investor in this Offering. If the
Company and the Investor in this Offering are unable to agree upon the fair
market value of the Common Stock, then such dispute shall be resolved by an
investment banking firm mutually acceptable to the Company and the Investor in
this offering and any fees and costs associated therewith shall be paid by the
Company.
"Commitment Evaluation Period" shall have the meaning set forth in
Section 2.7.
"Common Shares" shall mean the shares of Common Stock of the Company.
"Commitment Warrants" shall have the meaning set forth in Section 2.7.
"Commitment Warrant Exercise Price" shall have the meaning set forth in
Section 2.7.
"Common Stock" shall mean the common stock of the Company.
"Company" shall mean Alottafun!, Inc., a corporation duly organized and
existing under the laws of the State of Delaware.
"Company Designated Maximum Put Dollar Amount" shall have the meaning
set forth in Section 2.3.1(a).
"Company Designated Minimum Put Share Price" shall have the meaning set
forth in Section 2.3.1(a).
"Company Termination" shall have the meaning set forth in
Section 2.3.14.
"Conditions to Investor's Obligations" shall have the meaning as set
forth in Section 2.2.4.
"Delisting Event" shall mean any time during the term of this
Investment Agreement, that the Company's Common Stock is not listed for and
actively trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the
Nasdaq National Market, the American Stock Exchange, or the New York Stock
Exchange or is suspended or delisted with respect to the trading of the shares
of Common Stock on such market or exchange.
"Disclosure Documents" shall have the meaning as set forth in
Section 3.2.4.
"Due Diligence Review" shall have the meaning as set forth in
Section 2.6
"Effective Date" shall have the meaning set forth in Section 2.3.1.
"Evaluation Day" shall have the meaning set forth in Section 2.3.7(b).
<PAGE>
"Equity Securities" shall have the meaning set forth in Section 6.6.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Excluded Day" shall have the meaning set forth in Section 2.3.7(b).
"Extended Put Period" shall mean the period of time between the
Advanced Put Notice Date until the Pricing Period End Date.
"Impermissible Put Cancellation" shall have the meaning set forth in
Section 2.3.1(e).
"Indemnified Liabilities" shall have the meaning set forth in
Section 9.
"Indemnities" shall have the meaning set forth in Section 9.
"Indemnitor" shall have the meaning set forth in Section 9.
"Individual Put Limit" shall have the meaning set forth in Section
2.3.1 (b).
"Ineffective Period" shall mean any period of time that the
Registration Statement or any Supplemental Registration Statement (each as
defined in the Registration Rights Agreement) becomes ineffective or unavailable
for use for the sale or resale, as applicable, of any or all of the Registrable
Securities (as defined in the Registration Rights Agreement) for any reason (or
in the event the prospectus under either of the above is not current and
deliverable) during any time period required under the Registration Rights
Agreement.
"Intended Put Share Amount" shall have the meaning set forth in Section
2.3.1(a).
"Investment Commitment Closing" shall have the meaning set forth in
Section 2.2.3.
"Investment Agreement" shall mean this Investment Agreement.
"Investment Commitment Opinion of Counsel" shall mean an opinion from
Company's independent counsel, substantially in the form attached as Exhibit B,
or such other form as agreed upon by the parties, as to the Investment
Commitment Closing.
"Investment Date" shall mean the date of the Investment Commitment
Closing.
"Investor" shall have the meaning set forth in the preamble hereto.
"Key Employee" shall have the meaning set forth in Section 5.18, as set
forth in Exhibit N. "Late Payment Amount" shall have the meaning set
forth in Section 2.3.8.
"Legend" shall have the meaning set forth in Section 4.7.
"Major Transaction" shall mean and shall be deemed to have occurred at
such time upon any of the following events:
(i) a consolidation, merger or other business combination or
event or transaction following which the holders of Common Stock of the Company
immediately preceding such consolidation, merger, combination or event either
(i) no longer hold a majority of the shares of Common Stock of the Company or
<PAGE>
(ii) no longer have the ability to elect the board of directors of the Company
(a "Change of Control"); provided, however, that if the other entity involved in
such consolidation, merger, combination or event is a publicly traded company
with "Substantially Similar Trading Characteristics" (as defined below) as the
Company and the holders of Common Stock are to receive solely Common Stock or no
consideration (if the Company is the surviving entity) or solely common stock of
such other entity (if such other entity is the surviving entity), such
transaction shall not be deemed to be a Major Transaction (provided the
surviving entity, if other than the Company, shall have agreed to assume all
obligations of the Company under this Agreement and the Registration Rights
Agreement). For purposes hereof, an entity shall have Substantially Similar
Trading Characteristics as the Company if the average daily dollar trading
volume of the common stock of such entity is equal to or in excess of $200,000
for the 90th through the 31st day prior to the public announcement of such
transaction;
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to the holders
of outstanding shares of Common Stock, such that following such purchase, tender
or exchange offer a Change of Control shall have occurred.
"Market Price" shall equal the lowest Closing Bid Price for the Common
Stock on the Principal Market during the Pricing Period for the applicable Put.
"Material Facts" shall have the meaning set forth in Section 2.3.6(a).
"Maximum Put Dollar Amount" shall mean the lesser of (a) the Company
Designated Maximum Put Dollar Amount, if any, specified by the Company in a Put
Notice, and (ii) $2 million.
"Maximum Offering Amount" shall mean Twenty Million Dollars
($20,000,000).
"Nasdaq 20% Rule" shall have the meaning set forth in Section 2.3.11.
"NASD" shall have the meaning set forth in Section 6.10.
"NYSE" shall have the meaning set forth in Section 6.10.
"Numeric Day" shall mean the numerical day of the month of the
Investment Date.
"Offering" shall mean the Company's offering of common stock and
warrants issued under this Investment Agreement.
"Officer's Certificate" shall mean a certificate, signed by an officer
of the Company, to the effect that the representations and warranties of the
Company in this Agreement required to be true for the applicable Closing are
true and correct in all material respects and all of the conditions and
limitations set forth in this Agreement for the applicable Closing are
satisfied.
"Opinion of Counsel" shall mean, as applicable, the Investment
Commitment Opinion of Counsel, the Put Opinion of Counsel, the Registration
Opinion and the Purchase Warrant Opinion of Counsel.
"Payment Due Date" shall have the meaning set forth in Section 2.3.8.
"Pricing Period" shall have the meaning set forth in Section 2.3.7(b).
<PAGE>
"Pricing Period End Date" shall mean the last Business Day of any
Pricing Period.
"Principal Market" shall mean the O.T.C. Bulletin Board, the Nasdaq
Small Cap Market, the Nasdaq National Market, the American Stock Exchange or the
New York Stock Exchange, whichever is at the time the principal trading exchange
or market for the Common Stock.
"Proceeding" shall have the meaning as set forth Section 5.1.
"Purchase" shall have the meaning set forth in Section 2.3.7(a).
"Purchase Warrants" shall have the meaning set forth in Section 2.4.2.
"Purchase Warrant Exercise Price" shall have the meaning set forth in
Section 2.4.2.
"Purchase Warrant Opinion of Counsel" shall mean an opinion from
Company's independent counsel, substantially in the form attached as Exhibit O,
or such other form as agreed upon by the parties, as to the issuance of Purchase
Warrants to the Investor.
"Put" shall have the meaning set forth in Section 2.3.1(d).
"Put Cancellation" shall have the meaning set forth in
Section 2.3.13(a).
"Put Cancellation Notice Confirmation" shall have the meaning set forth
in Section 2.3.13(c), the form of which is attached hereto as Exhibit S.
"Put Cancellation Date" shall have the meaning set forth in
Section 2.3.13(a).
"Put Cancellation Notice" shall have the meaning set forth in Section
2.3.13(a), the form of which is attached hereto as Exhibit Q.
"Put Closing" shall have the meaning set forth in Section 2.3.8.
"Put Closing Date" shall have the meaning set forth in Section 2.3.8.
"Put Date" shall mean the date that is specified by the Company in any
Put Notice for which the Company intends to exercise a Put under Section 2.3.1,
unless the Put Date is postponed pursuant to the terms hereof, in which case the
"Put Date" is such postponed date.
"Put Dollar Amount" shall be determined by multiplying the Put Share
Amount by the Put Share Price with respect to such Put Shares, subject to the
limitations herein.
"Put Notice" shall have the meaning set forth in Section 2.3.1(d), the
form of which is attached hereto as Exhibit G.
"Put Notice Confirmation" shall have the meaning set forth in Section
2.3.1(d), the form of which is attached hereto as Exhibit H.
"Put Opinion of Counsel" shall mean an opinion from Company's
independent counsel, in the form attached as Exhibit I, or such other form as
agreed upon by the parties, as to any Put Closing.
"Put Share Amount" shall have the meaning as set forth
Section 2.3.1(b).
"Put Share Price" shall have the meaning set forth in Section 2.3.1(c).
<PAGE>
"Put Shares" shall mean shares of Common Stock that are purchased by
the Investor pursuant to a Put.
"Registrable Securities" shall have the meaning as set forth in the
Registration Rights Agreement.
"Registration Opinion" shall have the meaning set forth in
Section 2.3.6(a).
"Registration Opinion Deadline" shall have the meaning set forth in
Section 2.3.6(a).
"Registration Rights Agreement" shall mean that certain registration
rights agreement entered into by the Company and Investor on even date herewith,
in the form attached hereto as Exhibit A, or such other form as agreed upon by
the parties.
"Registration Statement" shall have the meaning as set forth in the
Registration Rights Agreement.
"Regulation D" shall mean Regulation D promulgated under the Securities
Act of 1933, as amended.
"Reporting Issuer" shall have the meaning set forth in Section 6.2.
"Required Put Documents" shall have the meaning set forth in
Section 2.3.5.
"Risk Factors" shall have the meaning set forth in Section 3.2.4,
attached hereto as Exhibit J.
"Schedule of Exceptions" shall have the meaning set forth in Section 5,
and is attached hereto as Exhibit C.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall mean this Investment Agreement, together with the
Common Stock of the Company, the Warrants and the Warrant Shares issuable
pursuant to this Investment Agreement.
"Semi-Annual Non-Usage Fee" shall have the meaning set forth in
Section 2.7.
"Share Authorization Increase Approval" shall have the meaning set
forth in Section 5.26.
"Six Month Anniversary" shall mean the date that is the same Numeric
Day of the sixth (6th) calendar month after the Investment Date, and the date
that is the same Numeric Day of each sixth (6th) calendar month thereafter,
provided that if such date is not a Business Day, the next Business Day
thereafter.
"Stockholder 20% Approval" shall have the meaning set forth in
Section 6.12.
"Supplemental Registration Statement" shall have the meaning set forth
in the Registration Rights Agreement.
<PAGE>
"Term" shall mean the term of this Agreement, which shall be a period
of time beginning on the date of this Agreement and ending on the Termination
Date.
"Termination Date" shall mean the earlier of (i) the date that is three
(3) years after the date of this Agreement, or (ii) the date that is thirty (30)
Business Days after the later of (a) the Put Closing Date on which the sum of
the aggregate Put Share Price for all Put Shares equal the Maximum Offering
Amount, (b) the date that the Company has delivered a Termination Notice to the
Investor, (c) the date of an Automatic Termination, and (d) the date that all of
the Warrants have been exercised. Notwithstanding the above, if no Registration
Statement has been declared effective by the date that is one (1) year after the
date of this Agreement, the Termination Date shall be the date that is one (1)
year after the date of this Agreement.
"Termination Fee" shall have the meaning as set forth in Section 2.7.
"Termination Notice" shall have the meaning as set forth in
Section 2.3.14.
"Third Party Report" shall have the meaning set forth in Section 3.2.4.
"Transaction Documents" shall have the meaning set forth in Section 9.
"Transfer Agent Instructions" shall mean the Company's instructions to
its transfer agent, substantially in the form attached hereto as Exhibit T, or
such other form as agreed upon by the parties.
"Trigger Price" shall have the meaning set forth in Section 2.3.7(b).
"Truncated Pricing Period" shall have the meaning set forth in
Section 2.3.7(b).
"Truncated Put Share Amount" shall have the meaning set forth in
Section 2.3.13(b).
"Unlegended Share Certificates" shall mean a certificate or
certificates, or electronically delivered shares, as appropriate (in
denominations as instructed by Investor) representing the shares of Common Stock
to which the Investor is then entitled to receive, registered in the name of
Investor or its nominee (as instructed by Investor) and not containing a
restrictive legend and not subject to any stop transfer order, including but not
limited to the Put Shares for the applicable Put and Warrant Shares.
"Use of Proceeds Schedule" shall have the meaning as set forth in
Section 3.2.4, attached hereto as Exhibit L.
"Warrant Shares" shall mean the Common Stock issuable upon exercise of
the Warrants.
"Warrants" shall mean the Commitment Warrants and the Purchase
Warrants.
2. Purchase and Sale of Common Stock.
2.1 Offer to Subscribe.
Subject to the terms and conditions herein and the
satisfaction of the conditions to closing set forth in Sections 2.2 and 2.3
below, Investor hereby agrees to purchase such amounts of Common Stock and
accompanying Warrants as the Company may, in its sole and absolute discretion,
from time to time elect to issue and sell to Investor according to one or more
Puts pursuant to Section 2.3 below.
<PAGE>
2.2 Investment Commitment.
2.2.1 [Intentionally Left Blank].
2.2.2 [Intentionally Left Blank].
2.2.3 Investment Commitment Closing. The closing of this
Agreement (the "Investment Commitment Closing") shall be deemed to occur when
this Agreement and the Registration Rights Agreement have been executed by both
Investor and the Company, the Transfer Agent Instructions have been executed by
both the Company and the Transfer Agent, and the other Conditions to Investor's
Obligations set forth in Section 2.2.4 below have been met.
2.2.4 Conditions to Investor's Obligations. As a
prerequisite to the Investment Commitment Closing and the Investor's obligations
hereunder, all of the following (the "Conditions to Investor's Obligations")
shall have been satisfied prior to or concurrently with the Company's execution
and delivery of this Agreement:
(a) the following documents shall have been delivered to
the Investor: (i) the Registration Rights Agreement
(executed by the Company and Investor), (ii) the
Investment Commitment Opinion of Counsel (signed by
the Company's counsel), (iii) the Transfer Agent
Instructions (executed by the Company and the
Transfer Agent), and (iv) a Secretary's Certificate
as to (A) the resolutions of the Company's board of
directors authorizing this transaction, (B) the
Company's Certificate of Incorporation, and (C) the
Company's Bylaws;
(b) this Investment Agreement, accepted by the Company,
shall have been received by the Investor;
(c) [Intentionally Left Blank];
(d) the Company's Common Stock shall be listed for
trading and actually trading on the O.T.C. Bulletin
Board, the Nasdaq Small Cap Market, the Nasdaq
National Market, the American Stock Exchange or the
New York Stock Exchange;
(e) other than continuing losses described in the Risk
Factors set forth in the Disclosure Documents
(provided for in Section 3.2.4), as of the Closing
there have been no material adverse changes in the
Company's business prospects or financial condition
since the date of the last balance sheet included in
the Disclosure Documents, including but not limited
to incurring material liabilities; and
(f) the representations and warranties of the Company in
this Agreement shall be true and correct in all
material respects and the conditions to Investor's
obligations set forth in this Section 2.2.4 shall
have been satisfied as of such Closing; and the
Company shall deliver an Officer's Certificate,
signed by an officer of the Company, to such effect
to the Investor.
2.3 Puts of Common Shares to the Investor.
<PAGE>
2.3.1 Procedure to Exercise a Put. Subject to the Individual
Put Limit, the Maximum Offering Amount and the Cap Amount (if applicable), and
the other conditions and limitations set forth in this Agreement, at any time
beginning on the date on which the Registration Statement is declared effective
by the SEC (the "Effective Date"), the Company may, in its sole and absolute
discretion, elect to exercise one or more Puts according to the following
procedure, provided that each subsequent Put Date after the first Put Date shall
be no sooner than twenty (20) Business Days following the preceding Put Date:
(a) Delivery of Advance Put Notice.At least ten (10)
Business Days but not more than twenty (20) Business Days prior to any intended
Put Date (unless otherwise agreed in writing by the Investor), the Company shall
deliver advance written notice (the "Advance Put Notice," the form of which is
attached hereto as Exhibit E, the date of such Advance Put Notice being the
"Advance Put Notice Date") to Investor stating the Put Date for which the
Company shall, subject to the limitations and restrictions contained herein,
exercise a Put and stating the number of shares of Common Stock (subject to the
Individual Put Limit and the Maximum Put Dollar Amount) which the Company
intends to sell to the Investor for the Put (the "Intended Put Share Amount").
The Company may, at its option, also designate in any Advance Put
Notice (i) a maximum dollar amount of Common Stock, not to exceed $2,000,000,
which it shall sell to Investor during the Put (the "Company Designated Maximum
Put Dollar Amount") and/or (ii) a minimum purchase price per Put Share at which
the Investor may purchase Shares pursuant to such Put Notice (a "Company
Designated Minimum Put Share Price"). The Company Designated Minimum Put Share
Price, if applicable, shall be no greater than 80% of the Closing Bid Price of
the Company's common stock on the Advance Put Notice Date.
Notwithstanding the above, if, at the time of delivery of an Advance
Put Notice, more than two (2) Calendar Months have passed since the previous Put
Date, such Advance Put Notice shall provide at least twenty (20) Business Days
notice of the intended Put Date, unless waived in writing by the Investor. In
order to effect delivery of the Advance Put Notice, the Company shall (i) send
the Advance Put Notice by facsimile on such date so that such notice is received
by the Investor by 6:00 p.m., New York, NY time, and (ii) surrender such notice
on such date to a courier for overnight delivery to the Investor (or two (2) day
delivery in the case of an Investor residing outside of the U.S.). Upon receipt
by the Investor of a facsimile copy of the Advance Put Notice, the Investor
shall, within two (2) Business Days, send, via facsimile, a confirmation of
receipt (the "Advance Put Notice Confirmation," the form of which is attached
hereto as Exhibit F) of the Advance Put Notice to the Company specifying that
the Advance Put Notice has been received and affirming the intended Put Date and
the Intended Put Share Amount.
(b) Put Share Amount. The "Put Share Amount" is the number
of shares of Common Stock that the Investor shall be obligated to purchase in a
given Put, and shall equal the lesser of (i) the Intended Put Share Amount, and
(ii) the Individual Put Limit. The "Individual Put Limit" shall equal the lesser
of (i) 15% of the sum of the aggregate daily reported trading volumes in the
outstanding Common Stock on the Company's Principal Market, excluding any block
trades of 20,000 or more shares of Common Stock, for all Evaluation Days (as
defined below) in the Pricing Period, (ii) the number of Put Shares which, when
multiplied by their respective Put Share Prices, equals the Maximum Put Dollar
Amount, and (iii) 9.9% of the total amount of the Company's Common Stock that
would be outstanding upon completion of the Put, but shall in no event exceed
15% of the sum of the aggregate daily reported trading volumes in the
outstanding Common Stock on the Company's Principal Market, excluding any block
trades of 20,000 or more shares of Common Stock, for the twenty (20) Trading
Days immediately preceding the Put Date (this limitation, together with the
limitation in (i) immediately above, are collectively referred to herein as the
"Volume Limitations").
<PAGE>
(c) Put Share Price. The purchase price for the Put Shares
(the "Put Share Price") shall equal the lesser of (i) the Market Price for such
Put, minus $.10, or (ii) 91% of the Market Price for such Put, but shall in no
event be less than the Company Designated Minimum Put Share Price for such Put,
if applicable.
(d) Delivery of Put Notice. After delivery of an Advance Put
Notice, on the Put Date specified in the Advance Put Notice (which Put Date
shall be no sooner than the Business Day immediately following the last day of
the previous Pricing Period), the Company shall deliver written notice (the "Put
Notice," the form of which is attached hereto as Exhibit G) to Investor stating
(i) the Put Date, (ii) the Intended Put Share Amount as specified in the Advance
Put Notice (such exercise a "Put"), (iii) the Company Designated Maximum Put
Dollar Amount (if applicable), and (iv) the Company Designated Minimum Put Share
Price (if applicable). In order to effect delivery of the Put Notice, the
Company shall (i) send the Put Notice by facsimile on the Put Date so that such
notice is received by the Investor by 6:00 p.m., New York, NY time, and (ii)
surrender such notice on the Put Date to a courier for overnight delivery to the
Investor (or two (2) day delivery in the case of an Investor residing outside of
the U.S.). Upon receipt by the Investor of a facsimile copy of the Put Notice,
the Investor shall, within two (2) Business Days, send, via facsimile, a
confirmation of receipt (the "Put Notice Confirmation," the form of which is
attached hereto as Exhibit H) of the Put Notice to Company specifying that the
Put Notice has been received and affirming the Put Date and the Intended Put
Share Amount.
(e) Delivery of Required Put Documents. On or before the Put
Date for such Put, the Company shall deliver the Required Put Documents (as
defined in Section 2.3.5 below) to the Investor (or to an agent of Investor, if
Investor so directs). Unless otherwise specified by the Investor, the Put Shares
of Common Stock shall be transmitted electronically pursuant to such electronic
delivery system as the Investor shall request; otherwise delivery shall be by
physical certificates. If the Company has not delivered all of the Required Put
Documents to the Investor on or before the Put Date, the Put shall be
automatically cancelled, unless the Investor agrees to delay the Put Date by up
to three (3) Business Days, in which case the Pricing Period begins on the
Business Day following such new Put Date. If the Company has not delivered all
of the Required Put Documents to the Investor on or before the Put Date (or new
Put Date, if applicable), and the Investor has not agreed in writing to delay
the Put Date, the Put is automatically canceled (an "Impermissible Put
Cancellation") and, unless the Put was otherwise canceled in accordance with the
terms of Section 2.3.13, the Company shall pay the Investor $5,000 for its
reasonable due diligence expenses incurred in preparation for the canceled Put
and the Company may deliver an Advance Put Notice for the subsequent Put no
sooner than ten (10) Business Days after the date that such Put was canceled.
2.3.2 Termination of Right to Put. The Company's right to
require the Investor to purchase any subsequent Put Shares shall terminate
permanently (each, an "Automatic Termination"), upon the occurrence of any of
the following:
(a) the Company shall not exercise a Put or any Put
thereafter if, at any time, either the Company or any director or executive
officer of the Company has engaged in a transaction or conduct related to the
Company that gives rise to (i) a Securities and Exchange Commission enforcement
action, or (ii) a civil judgment or criminal conviction for fraud or
misrepresentation, or for any other offense that, if prosecuted criminally,
would constitute a felony under applicable law;
(b) the Company shall not exercise a Put or any Put
thereafter, on any date after a cumulative time period, including both
Ineffective Periods and Delisting Events, that lasts for an aggregate of four
(4) months;
<PAGE>
(c) the Company shall not exercise a Put or any Put
thereafter if at any time the Company has filed for and/or is subject to any
bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors instituted by or against the Company or any subsidiary of the Company;
provided that in the event that an involuntary bankruptcy petition is filed
against the Company, the Company shall have sixty (60) days to obtain dismissal
of such petition before such Put prohibition shall initiate;
(d) the Company shall not exercise a Put after the sooner of
(i) the date that is three (3) years after the date of this Agreement, or (ii)
the Put Closing Date on which the aggregate of the Put Dollar Amounts for all
Puts equal the Maximum Offering Amount; and
(e) the Company shall not exercise a Put after the Company
has breached any covenant in Section 2.7, Section 6, or Section 9 hereof.
2.3.3 Put Limitations. The Company's right to exercise a Put
shall be limited as follows:
(a) [Intentionally Left Blank].
(b) notwithstanding the amount of any Put, the Investor
shall not be obligated to purchase any additional Put Shares once the aggregate
Put Dollar Amount paid by Investor equals the Maximum Offering Amount;
(c) the Investor shall not be obligated to acquire and pay
for the Put Shares with respect to any Put for which the Company has announced a
subdivision or combination, including a reverse split, of its Common Stock or
has subdivided or combined its Common Stock during the Extended Put Period;
(d) the Investor shall not be obligated to acquire and pay
for the Put Shares with respect to any Put for which the Company has paid a
dividend of its Common Stock or has made any other distribution of its Common
Stock during the Extended Put Period;
(e) the Investor shall not be obligated to acquire and pay
for the Put Shares with respect to any Put for which the Company has made,
during the Extended Put Period, a distribution of all or any portion of its
assets or evidences of indebtedness to the holders of its Common Stock;
(f) the Investor shall not be obligated to acquire and pay
for the Put Shares with respect to any Put for which a Major Transaction has
occurred during the Extended Put Period;
2.3.4 Conditions Precedent to the Right of the Company to
Deliver an Advance Put Notice or a Put Notice and the Obligation of the Investor
to Purchase Put Shares. The right of the Company to deliver an Advance Put
Notice or a Put Notice and the obligation of the Investor hereunder to acquire
and pay for the Put Shares incident to a Closing is subject to the satisfaction,
on (i) the date of delivery of such Advance Put Notice or Put Notice and (ii)
the applicable Put Closing Date, of each of the following conditions:
(a) the Company's Common Stock shall be listed for and
actively trading on the O.T.C. Bulletin Board, the
Nasdaq Small Cap Market, the Nasdaq National Market
or the New York Stock Exchange and the Put Shares
shall be so listed, and to the Company's knowledge
there is no notice of any suspension or delisting
with respect to the trading of the shares of Common
Stock on such market or exchange;
<PAGE>
(b) the Company shall have satisfied any and all
obligations pursuant to the Registration Rights
Agreement, including, but not limited to, the filing
of the Registration Statement with the SEC with
respect to the resale of all Registrable Securities
and the requirement that the Registration Statement
shall have been declared effective by the SEC for the
resale of all Registrable Securities and the Company
shall have satisfied and shall be in compliance with
any and all obligations pursuant to this Agreement
and the Warrants;
(c) [Intentionally Left Blank].
(d) the representations and warranties of the Company are
true and correct in all material respects as if made
on such date and the conditions to Investor's
obligations set forth in this Section 2.3.4 are
satisfied as of such Closing, and the Company shall
deliver a certificate, signed by an officer of the
Company, to such effect to the Investor;
(e) the Company shall have reserved for issuance a
sufficient number of Common Shares for the purpose of
enabling the Company to satisfy any obligation to
issue Common Shares pursuant to any Put and to effect
exercise of the Warrants;
(f) the Registration Statement is not subject to an
Ineffective Period as defined in the Registration
Rights Agreement, the prospectus included therein is
current and deliverable, and to the Company's
knowledge there is no notice of any investigation or
inquiry concerning any stop order with respect to the
Registration Statement; and
(g) if the Aggregate Issued Shares after the Closing of
the Put would exceed the Cap Amount, the Company
shall have obtained the Stockholder 20% Approval as
specified in Section 6.12.
2.3.5 Documents Required to be Delivered on the Put Date as
Conditions to Closing of any Put. The Closing of any Put and Investor's
obligations hereunder shall additionally be conditioned upon the delivery to the
Investor of each of the following (the "Required Put Documents") on or before
the applicable Put Date:
(a) a number of Unlegended Share Certificates (or freely
tradeable electronically delivered shares, as appropriate) equal to the Intended
Put Share Amount, in denominations of not more than 50,000 shares per
certificate;
(b) the following documents: Put Opinion of Counsel,
Officer's Certificate, Put Notice, any required Registration Opinion, and any
report or disclosure required under Section 2.3.6 or Section 2.6;
(c) current Risk Factors; and
(d) all documents, instruments and other writings required
to be delivered on or before the Put Date pursuant to any provision of this
Agreement in order to implement and effect the transactions contemplated herein.
<PAGE>
2.3.6 Accountant's Letter and Registration Opinion.
(a) The Company shall have caused to be delivered to the
Investor, (i) whenever required by Section 2.3.6(b) or by Section 2.6.3, and
(ii) on the date that is three (3) Business Days prior to each Put Date (the
"Registration Opinion Deadline"), an opinion of the Company's independent
counsel, in substantially the form of Exhibit R (the "Registration Opinion"),
addressed to the Investor stating, inter alia, that no facts ("Material Facts")
have come to such counsel's attention that have caused it to believe that the
Registration Statement is subject to an Ineffective Period or to believe that
the Registration Statement, any Supplemental Registration Statement (as each may
be amended, if applicable), and any related prospectuses, contain an untrue
statement of material fact or omits a material fact required to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. If a Registration Opinion cannot be delivered by the
Company's independent counsel to the Investor on the Registration Opinion
Deadline due to the existence of Material Facts or an Ineffective Period, the
Company shall promptly notify the Investor and as promptly as possible amend
each of the Registration Statement and any Supplemental Registration Statements,
as applicable, and any related prospectus or cause such Ineffective Period to
terminate, as the case may be, and deliver such Registration Opinion and updated
prospectus as soon as possible thereafter. If at any time after a Put Notice
shall have been delivered to Investor but before the related Pricing Period End
Date, the Company acquires knowledge of such Material Facts or any Ineffective
Period occurs, the Company shall promptly notify the Investor and shall deliver
a Put Cancellation Notice to the Investor pursuant to Section 2.3.13 by
facsimile and overnight courier by the end of that Business Day.
(b) (i) the Company shall engage its independent auditors to
perform the procedures in accordance with the provisions of Statement on
Auditing Standards No. 71, as amended, as agreed to by the parties hereto, and
reports thereon (the "Bring Down Cold Comfort Letters") as shall have been
reasonably requested by the Investor with respect to certain financial
information contained in the Registration Statement and shall have delivered to
the Investor such a report addressed to the Investor, on the date that is three
(3) Business Days prior to each Put Date.
(ii) in the event that the Investor shall have requested
delivery of an "Agreed Upon Procedures Report" pursuant to Section 2.6.3, the
Company shall engage its independent auditors to perform certain agreed upon
procedures and report thereon as shall have been reasonably requested by the
Investor with respect to certain financial information of the Company and the
Company shall deliver to the Investor a copy of such report addressed to the
Investor. In the event that the report required by this Section 2.3.6(b) cannot
be delivered by the Company's independent auditors, the Company shall, if
necessary, promptly revise the Registration Statement and the Company shall not
deliver a Put Notice until such report is delivered.
2.3.7 Mechanics of Purchase of Put Shares.
(a) Investor's Obligation and Right to Purchase Shares.
Subject to the conditions set forth in this Agreement, following the Investor's
receipt of a validly delivered Put Notice, the Investor shall be required to
purchase (each a "Purchase") from the Company a number of Put Shares equal to
the Put Share Amount, in the manner described below.
<PAGE>
(b) Pricing Period. For purposes hereof, the "Pricing
Period," shall mean, unless otherwise shortened under the terms of this
Agreement, the period beginning on the Business Day immediately following the
Put Date and ending on and including the date which is 20 Business Days after
such Put Date; provided that, if a Put Cancellation Notice has been delivered to
the Investor after the Put Date, the Pricing Period for such Put shall end at
the close of trading on the last full trading day on the Principal Market that
ends prior to the moment of initial delivery of the Put Cancellation Notice (a
"Truncated Pricing Period") to the Investor.
For purposes of this Agreement:
"Trigger Price" for any Pricing Period shall mean the greater
of (i) the Company Designated Minimum Put Share Price, plus $.10, or (ii) the
Company Designated Minimum Put Share Price divided by .91.
An "Evaluation Day" shall mean each Business Day during a
Pricing Period where the lowest intra-day trading price of the Common Stock is
greater than or equal to the Trigger Price.
An "Excluded Day" shall mean each Business Day where the
lowest intra-day trading price of the Common Stock is less than the Trigger
Price.
2.3.8 Mechanics of Put Closing. Each of the Company and the
Investor shall deliver all documents, instruments and writings required to be
delivered by either of them pursuant to this Agreement at or prior to each
Closing. Subject to such delivery and the satisfaction of the conditions set
forth in Sections 2.3.4 and 2.3.5, the closing of the purchase by the Investor
of Shares shall occur by 5:00 PM, New York City Time, on the date which is five
(5) Business Days following the applicable Pricing Period End Date (or such
other time or later date as is mutually agreed to by the Company and the
Investor) (the "Payment Due Date") at the offices of Investor. On or before each
Payment Due Date, the Investor shall deliver to the Company, in the manner
specified in Section 8 below, the Put Dollar Amount to be paid for such Put
Shares, determined as aforesaid. The closing (each a "Put Closing") for each Put
shall occur on the date that both (i) the Company has delivered to the Investor
all Required Put Documents, and (ii) the Investor has delivered to the Company
such Put Dollar Amount and any Late Payment Amount, if applicable (each a "Put
Closing Date").
If the Investor does not deliver to the Company the Put Dollar Amount
for such Put on or before the Payment Due Date, then the Investor shall pay to
the Company, in addition to the Put Dollar Amount, an amount (the "Late Payment
Amount") at a rate of X% per month, accruing daily, multiplied by such Put
Dollar Amount, where "X" equals one percent (1%) for the first month following
the date in question, and increases by an additional one percent (1%) for each
month that passes after the date in question, up to a maximum of five percent
(5%).
2.3.9 [Intentionally Left Blank].
2.3.10 Limitation on Short Sales. The Investor and its
Affiliates shall not engage in short sales of the Company's Common Stock;
provided, however, that the Investor may enter into any short exempt sale or any
short sale or other hedging or similar arrangement it deems appropriate with
respect to Put Shares after it receives a Put Notice with respect to such Put
Shares so long as such sales or arrangements do not involve more than the number
of such Put Shares specified in the Put Notice.
2.3.11 Cap Amount. If the Company becomes listed on the
Nasdaq Small Cap Market or the Nasdaq National Market, then, unless the Company
has obtained Stockholder 20% Approval as set forth in Section 6.12 or unless
otherwise permitted by Nasdaq, in no event shall the Aggregate Issued Shares
exceed the maximum number of shares of Common Stock (the "Cap Amount") that the
Company can, without stockholder approval, so issue pursuant to Nasdaq Rule
4460(i)(1)(d)(ii) (or any other applicable Nasdaq Rules or any successor rule)
(the "Nasdaq 20% Rule").
<PAGE>
2.3.12 [Intentionally Left Blank]
2.3.13 Put Cancellation.
(a) Mechanics of Put Cancellation. If at any time during a
Pricing Period the Company discovers the existence of Material Facts or any
Ineffective Period or Delisting Event occurs, the Company shall cancel the Put
(a "Put Cancellation"), by delivering written notice to the Investor (the "Put
Cancellation Notice"), attached as Exhibit Q, by facsimile and overnight
courier. The "Put Cancellation Date" shall be the date that the Put Cancellation
Notice is first received by the Investor, if such notice is received by the
Investor by 6:00 p.m., New York, NY time, and shall be the following date, if
such notice is received by the Investor after 6:00 p.m., New York, NY time.
(b) Effect of Put Cancellation. Anytime a Put Cancellation
Notice is delivered to Investor after the Put Date, the Put, , shall remain
effective with respect to a number of Put Shares (the "Truncated Put Share
Amount"), which shall equal the lesser of (i) 15% of the sum of the daily
reported trading volume in the outstanding Common Stock on the Company's
Principal Market during each Evaluation Day of the Truncated Pricing Period,
(ii) the number of Put Shares which, when multiplied by their respective Put
Share Prices, equals the Maximum Put Dollar Amount, and (iii) 9.9% of the total
amount of the Company's Common Stock that would be outstanding upon completion
of the Put.
(c) Put Cancellation Notice Confirmation. Upon receipt by
the Investor of a facsimile copy of the Put Cancellation Notice, the Investor
shall promptly send, via facsimile, a confirmation of receipt (the "Put
Cancellation Notice Confirmation," a form of which is attached as Exhibit S) of
the Put Cancellation Notice to the Company specifying that the Put Cancellation
Notice has been received and affirming the Put Cancellation Date.
2.3.14 Investment Agreement Cancellation. The Company may
terminate (a "Company Termination") its right to initiate future Puts by
providing written notice ("Termination Notice") to the Investor, by facsimile
and overnight courier, at any time other than during an Extended Put Period,
provided that such termination shall have no effect on the parties' other rights
and obligations under this Agreement, the Registration Rights Agreement or the
Warrants. Notwithstanding the above, any cancellation occurring during an
Extended Put Period is governed by Section 2.3.13.
2.3.15 Return of Excess Common Shares. In the event that the
number of Shares purchased by the Investor pursuant to its obligations hereunder
is less than the Intended Put Share Amount, the Investor shall promptly return
to the Company any shares of Common Stock in the Investor's possession that are
not being purchased
by the Investor.
2.4 Warrants.
2.4.1 [Intentionally Omitted].
2.4.2 Purchase Warrants. Within five (5) Business Days of
the end of each Pricing Period, the Company shall issue and deliver to the
Investor a warrant ("Purchase Warrant"), in the form attached hereto as Exhibit
D, or such other form as agreed upon by the parties, to purchase a number of
shares of Common Stock equal to 9% of the number of Put Shares issued to
Investor in that Put. Each Purchase Warrant shall be exerciseable at a price
(the "Purchase Warrant Exercise Price") which shall initially equal 110% of the
Market Price on the Pricing Period End Date, and shall have semi-annual reset
provisions. Each Purchase Warrant shall be immediately exercisable at the
Purchase Warrant Exercise Price, and shall have a term beginning on the date of
issuance and ending on the date that is five (5) years thereafter. The Warrant
Shares shall be registered for resale pursuant to the Registration Rights
Agreement. Concurrently with the issuance and delivery of the Purchase Warrant
to the Investor, the Company shall deliver to the Investor a Purchase Warrant
Opinion of Counsel (signed by the Company's independent counsel).
<PAGE>
2.5 [Intentionally Left Blank].
2.6 Due Diligence Review. The Company shall make available
for inspection and review by the Investor (the "Due Diligence Review"), advisors
to and representatives of the Investor (who may or may not be affiliated with
the Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of Common Stock on behalf of the Investor
pursuant to the Registration Statement, any Supplemental Registration Statement,
or amendments or supplements thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
2.6.1 Treatment of Nonpublic Information. The Company shall
not disclose nonpublic information to the Investor or to its advisors or
representatives unless prior to disclosure of such information the Company
identifies such information as being nonpublic information and provides the
Investor and such advisors and representatives with the opportunity to accept or
refuse to accept such nonpublic information for review. The Company may, as a
condition to disclosing any nonpublic information hereunder, require the
Investor and its advisors and representatives to enter into a confidentiality
agreement (including an agreement with such advisors and representatives
prohibiting them from trading in Common Stock during such period of time as they
are in possession of nonpublic information) in form reasonably satisfactory to
the Company and the Investor.
Nothing herein shall require the Company to disclose nonpublic
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate nonpublic information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
nonpublic information (whether or not requested of the Company specifically or
generally during the course of due diligence by and such persons or entities),
which, if not disclosed in the Prospectus included in the Registration
Statement, would cause such Prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading. Nothing contained in this Section 2.6 shall be construed to mean
that such persons or entities other than the Investor (without the written
consent of the Investor prior to disclosure of such information) may not obtain
nonpublic information in the course of conducting due diligence in accordance
with the terms of this Agreement; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any nonpublic information
discovered by such advisors or representatives in the course of their due
diligence without the written consent of the Investor prior to disclosure of
such information.
<PAGE>
2.6.2 Disclosure of Misstatements and Omissions. The
Investor's advisors or representatives shall make complete disclosure to the
Investor's counsel of all events or circumstances constituting nonpublic
information discovered by such advisors or representatives in the course of
their due diligence upon which such advisors or representatives form the opinion
that the Registration Statement contains an untrue statement of a material fact
or omits a material fact required to be stated in the Registration Statement or
necessary to make the statements contained therein, in the light of the
circumstances in which they were made, not misleading. Upon receipt of such
disclosure, the Investor's counsel shall consult with the Company's independent
counsel in order to address the concern raised as to the existence of a material
misstatement or omission and to discuss appropriate disclosure with respect
thereto; provided, however, that such consultation shall not constitute the
advice of the Company's independent counsel to the Investor as to the accuracy
of the Registration Statement and related Prospectus.
2.6.3 Procedure if Material Facts are Reasonably Believed to
be Untrue or are Omitted. In the event after such consultation the Investor or
the Investor's counsel reasonably believes that the Registration Statement
contains an untrue statement or a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading,
(a) the Company shall file with the SEC an amendment to the
Registration Statement responsive to such alleged untrue statement or omission
and provide the Investor, as promptly as practicable, with copies of the
Registration Statement and related Prospectus, as so amended, or
(b) if the Company disputes the existence of any such
material misstatement or omission, (i) the Company's independent counsel shall
provide the Investor's counsel with a Registration Opinion and (ii) in the event
the dispute relates to the adequacy of financial disclosure and the Investor
shall reasonably request, the Company's independent auditors shall provide to
the Company a letter ("Agreed Upon Procedures Report") outlining the performance
of such "agreed upon procedures" as shall be reasonably requested by the
Investor and the Company shall provide the Investor with a copy of such letter.
2.7 Commitment Payments. In partial consideration hereof, following the
execution of the Letter of Agreement dated on or about April 5, 1999 between the
Company and the Investor, the Company issued and delivered to Investor or its
designated assignees warrants (the "First Commitment Warrants") in the form
attached hereto as Exhibit U, to purchase 225,000 shares of Common Stock. On the
date of the Investment Commitment Closing, the Company shall issue and deliver
to Investor or its designated assignees warrants (the "Second Commitment
Warrants," together with the First Commitment Warrants, collectively referred to
as the "Commitment Warrants) in the form attached hereto as Exhibit U, or such
other form as agreed upon by the parties, to purchase 225,000 additional shares
of Common Stock. Each Commitment Warrant shall be exerciseable at a price (the
"Commitment Warrant Exercise Price") which shall initially equal the average
closing bid price for the five (5) trading days immediately preceding April 5,
1999 ("Initial Exercise Price"), and shall have semi-annual reset provisions.
Each Commitment Warrant shall be immediately exercisable at the Commitment
Warrant Exercise Price, and shall have a term beginning on the date of issuance
and ending on date that is five (5) years thereafter. The Warrant Shares shall
be registered for resale pursuant to the Registration Rights Agreement.
<PAGE>
Concurrently with the issuance and delivery of the Commitment Warrant to the
Investor, the Company shall deliver to the Investor a Commitment Warrant Opinion
of Counsel (signed by the Company's independent counsel).
On the last Business Day of each six (6) Calendar Month period
following the Effective Date (each such period a "Commitment Evaluation
Period"), if the Company has not Put at least $1,000,000 in aggregate Put Dollar
Amount during that Commitment Evaluation Period, the Company, in consideration
of Investor's commitment costs, including, but not limited to, due diligence
expenses, shall pay to the Investor an amount (the "Semi-Annual Non-Usage Fee ")
equal to the difference of (i) $100,000, minus (ii) 10% of the aggregate Put
Dollar Amount of the Put Shares put to Investor during that Commitment
Evaluation Period. In the event that the Company delivers a Termination Notice
to the Investor or an Automatic Termination occurs, the Company shall pay to the
Investor (the "Termination Fee") the greater of (i) the Semi-Annual Non-Usage
Fee for the applicable Commitment Evaluation Period, or (ii) the difference of
(x) $200,000, minus (y) 10% of the aggregate Put Dollar Amount of the Put Shares
put to Investor during all Puts to date, and the Company shall not be required
to pay the Semi-Annual Non-Usage Fee thereafter.
Notwithstanding the above, no Semi-Annual Non-Usage Fee shall accrue
during any Commitment Evaluation Period where the Company completed six (6)
Puts, each of which was for the full amount of the Individual Put Limit.
Each Semi Annual Non-Usage Fee or Termination Fee is payable, in cash,
within five (5) business days of the date it accrued. The Company shall not be
required to deliver any payments to Investor under this subsection until
Investor has paid all Put Dollar Amounts that are then due.
3. Representations, Warranties and Covenants of Investor. Investor
hereby represents and warrants to and agrees with the Company as follows:
3.1 Accredited Investor. Investor is an accredited investor
("Accredited Investor"), as defined in Rule 501 of Regulation D, and has checked
the applicable box set forth in Section 10 of this Agreement.
3.2 Investment Experience; Access to Information;
Independent Investigation.
3.2.1 Access to Information. Investor or Investor's
professional advisor has been granted the opportunity to ask questions of and
receive answers from representatives of the Company, its officers, directors,
employees and agents concerning the terms and conditions of this Offering, the
Company and its business and prospects, and to obtain any additional information
which Investor or Investor's professional advisor deems necessary to verify the
accuracy and completeness of the information received.
3.2.2 Reliance on Own Advisors. Investor has relied
completely on the advice of, or has consulted with, Investor's own personal tax,
investment, legal or other advisors and has not relied on the Company or any of
its affiliates, officers, directors, attorneys, accountants or any affiliates of
any thereof and each other person, if any, who controls any of the foregoing,
within the meaning of Section 15 of the Act for any tax or legal advice (other
than reliance on information in the Disclosure Documents as defined in Section
3.2.4 below and on the Opinion of Counsel). The foregoing, however, does not
limit or modify Investor's right to rely upon covenants, representations and
warranties of the Company in this Agreement.
3.2.3 Capability to Evaluate. Investor has such knowledge
and experience in financial and business matters so as to enable such Investor
to utilize the information made available to it in connection with the Offering
in order to evaluate the merits and risks of the prospective investment, which
are substantial, including without limitation those set forth in the Disclosure
Documents (as defined in Section 3.2.4 below).
<PAGE>
3.2.4 Disclosure Documents. Investor, in making Investor's
investment decision to subscribe for the Investment Agreement hereunder,
represents that (a) Investor has received and had an opportunity to review (i)
the Risk Factors, attached as Exhibit J, (the "Risk Factors") (ii) the
Capitalization Schedule, attached as Exhibit K, (the "Capitalization Schedule")
and (iii) the Use of Proceeds Schedule, attached as Exhibit L, (the "Use of
Proceeds Schedule"); (b) Investor has read, reviewed, and relied solely on the
documents described in (a) above, the Company's representations and warranties
and other information in this Agreement, including the exhibits, documents
prepared by the Company which have been specifically provided to Investor in
connection with this Offering (the documents described in this Section 3.2.4 (a)
and (b) are collectively referred to as the "Disclosure Documents"), and an
independent investigation made by Investor and Investor's representatives, if
any; (c) Investor has, prior to the date of this Agreement, been given an
opportunity to review material contracts and documents of the Company which have
been filed as exhibits to the Company's filings under the Act and the Exchange
Act and has had an opportunity to ask questions of and receive answers from the
Company's officers and directors; and (d) is not relying on any oral
representation of the Company or any other person, nor any written
representation or assurance from the Company other than those contained in the
Disclosure Documents or incorporated herein or therein. The foregoing, however,
does not limit or modify Investor's right to rely upon covenants,
representations and warranties of the Company in Sections 5 and 6 of this
Agreement. Investor acknowledges and agrees that the Company has no
responsibility for, does not ratify, and is under no responsibility whatsoever
to comment upon or correct any reports, analyses or other comments made about
the Company by any third parties, including, but not limited to, analysts'
research reports or comments (collectively, "Third Party Reports"), and Investor
has not relied upon any Third Party Reports in making the decision to invest.
3.2.5 Investment Experience; Fend for Self. Investor has
substantial experience in investing in securities and it has made investments in
securities other than those of the Company. Investor acknowledges that Investor
is able to fend for Investor's self in the transaction contemplated by this
Agreement, that Investor has the ability to bear the economic risk of Investor's
investment pursuant to this Agreement and that Investor is an "Accredited
Investor" by virtue of the fact that Investor meets the investor qualification
standards set forth in Section 3.1 above. Investor has not been organized for
the purpose of investing in securities of the Company, although such investment
is consistent with Investor's purposes.
3.3 Exempt Offering Under Regulation D.
3.3.1 [Intentionally Left Blank].
3.3.2 No General Solicitation. The Investment Agreement was
not offered to Investor through, and Investor is not aware of, any form of
general solicitation or general advertising, including, without limitation, (i)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
3.3.3 Restricted Securities. Investor understands that the
Investment Agreement is, the Common Stock and Warrants issued at each Put
Closing will be, and the Warrant Shares will be, characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction exempt from the registration
requirements of the federal securities laws and that under such laws and
applicable regulations such securities may not be transferred or resold without
registration under the Act or pursuant to an exemption therefrom. In this
connection, Investor represents that Investor is familiar with Rule 144 under
the Act, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
<PAGE>
3.3.4 Disposition. Without in any way limiting the
representations set forth above, Investor agrees that until the Securities are
sold pursuant to an effective Registration Statement or an exemption from
registration, they will remain in the name of Investor and will not be
transferred to or assigned to any broker, dealer or depositary. Investor further
agrees not to sell, transfer, assign, or pledge the Securities (except for any
bona fide pledge arrangement to the extent that such pledge does not require
registration under the Act or unless an exemption from such registration is
available and provided further that if such pledge is realized upon, any
transfer to the pledgee shall comply with the requirements set forth herein), or
to otherwise dispose of all or any portion of the Securities unless and until:
(a) There is then in effect a registration statement under
the Act and any applicable state securities laws covering such proposed
disposition and such disposition is made in accordance with such registration
statement and in compliance with applicable prospectus delivery requirements; or
(b) (i) Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition to the extent relevant
for determination of the availability of an exemption from registration, and
(ii) if reasonably requested by the Company, Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of the Securities under the Act
or state securities laws. It is agreed that the Company will not require the
Investor to provide opinions of counsel for transactions made pursuant to Rule
144 provided that Investor and Investor's broker, if necessary, provide the
Company with the necessary representations for counsel to the Company to issue
an opinion with respect to such transaction.
The Investor is entering into this Agreement for its own
account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
3.4 Due Authorization.
3.4.1 Authority. The person executing this Investment
Agreement, if executing this Agreement in a representative or fiduciary
capacity, has full power and authority to execute and deliver this Agreement and
each other document included herein for which a signature is required in such
capacity and on behalf of the subscribing individual, partnership, trust,
estate, corporation or other entity for whom or which Investor is executing this
Agreement. Investor has reached the age of majority (if an individual) according
to the laws of the state in which he or she resides.
3.4.2 Due Authorization. If Investor is a corporation,
Investor is duly and validly organized, validly existing and in good tax and
corporate standing as a corporation under the laws of the jurisdiction of its
incorporation with full power and authority to purchase the Securities to be
purchased by Investor and to execute and deliver this Agreement.
<PAGE>
3.4.3 Partnerships. If Investor is a partnership, the
representations, warranties, agreements and understandings set forth above are
true with respect to all partners of Investor (and if any such partner is itself
a partnership, all persons holding an interest in such partnership, directly or
indirectly, including through one or more partnerships), and the person
executing this Agreement has made due inquiry to determine the truthfulness of
the representations and warranties made hereby.
3.4.4 Representatives. If Investor is purchasing in a
representative or fiduciary capacity, the representations and warranties shall
be deemed to have been made on behalf of the person or persons for whom Investor
is so purchasing.
4. Acknowledgments Investor is aware that:
4.1 Risks of Investment. Investor recognizes that an
investment in the Company involves substantial risks, including the potential
loss of Investor's entire investment herein. Investor recognizes that the
Disclosure Documents, this Agreement and the exhibits hereto do not purport to
contain all the information, which would be contained in a registration
statement under the Act;
4.2 No Government Approval. No federal or state agency has
passed upon the Securities, recommended or endorsed the Offering, or made any
finding or determination as to the fairness of this transaction;
4.3 No Registration, Restrictions on Transfer. As of the
date of this Agreement, the Securities and any component thereof have not been
registered under the Act or any applicable state securities laws by reason of
exemptions from the registration requirements of the Act and such laws, and may
not be sold, pledged (except for any limited pledge in connection with a margin
account of Investor to the extent that such pledge does not require registration
under the Act or unless an exemption from such registration is available and
provided further that if such pledge is realized upon, any transfer to the
pledgee shall comply with the requirements set forth herein), assigned or
otherwise disposed of in the absence of an effective registration of the
Securities and any component thereof under the Act or unless an exemption from
such registration is available;
4.4 Restrictions on Transfer. Investor may not attempt to
sell, transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws;
4.5 No Assurances of Registration. There can be no assurance
that any registration statement will become effective at the scheduled time, or
ever, or remain effective when required, and Investor acknowledges that it may
be required to bear the economic risk of Investor's investment for an indefinite
period of time;
4.6 Exempt Transaction. Investor understands that the
Securities are being offered and sold in reliance on specific exemptions from
the registration requirements of federal and state law and that the
representations, warranties, agreements, acknowledgments and understandings set
forth herein are being relied upon by the Company in determining the
applicability of such exemptions and the suitability of Investor to acquire such
Securities.
4.7 Legends. The certificates representing the Put Shares
shall not bear a Restrictive Legend. The certificates representing the Warrant
Shares shall not bear a Restrictive Legend unless they are issued at a time when
the Registration Statement is not effective for resale. It is understood that
the certificates evidencing any Warrant Shares issued at a time when the
Registration Statement is not effective for resale, subject to legend removal
under the terms of Section 6.9 below, shall bear the following legend (the
"Legend"):
<PAGE>
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities
laws, nor the securities laws of any other jurisdiction. They may not
be sold or transferred in the absence of an effective registration
statement under those securities laws or pursuant to an exemption
therefrom."
5. Representations and Warranties of the Company . The Company hereby
makes the following representations and warranties to Investor (which shall be
true at the signing of this Agreement, and as of any such later date as
contemplated hereunder) and agrees with Investor that, except as set forth in
the Schedule of Exceptions attached hereto as Exhibit C:
5.1 Organization, Good Standing, and Qualification. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, USA and has all requisite corporate
power and authority to carry on its business as now conducted and as proposed to
be conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the Company and its
subsidiaries taken as a whole. The Company is not the subject of any pending,
threatened or, to its knowledge, contemplated investigation or administrative or
legal proceeding (a "Proceeding") by the Internal Revenue Service, the taxing
authorities of any state or local jurisdiction, or the Securities and Exchange
Commission, The National Association of Securities Dealer, Inc., The Nasdaq
Stock Market, Inc. or any state securities commission, or any other governmental
entity, which have not been disclosed in the Disclosure Documents. None of the
disclosed Proceedings, if any, will have a material adverse effect upon the
Company or the market for the Common Stock. The Company has no subsidiaries.
5.2 Corporate Condition. The Company's condition is, in all
material respects, as described in the Disclosure Documents (as further set
forth in any subsequently filed Disclosure Documents, if applicable), except for
changes in the ordinary course of business and normal year-end adjustments that
are not, in the aggregate, materially adverse to the Company. Except for
continuing losses, there have been no material adverse changes to the Company's
business, financial condition, or prospects since the dates of such Disclosure
Documents. The financial statements as contained in the Company's Form 10 have
been prepared in accordance with generally accepted accounting principles,
consistently applied (except as otherwise permitted by Regulation S-X of the
Exchange Act), subject, in the case of unaudited interim financial statements,
to customary year end adjustments and the absence of certain footnotes, and
fairly present the financial condition of the Company as of the dates of the
balance sheets included therein and the consolidated results of its operations
and cash flows for the periods then ended,. Without limiting the foregoing,
there are no material liabilities, contingent or actual, that are not disclosed
in the Disclosure Documents (other than liabilities incurred by the Company in
the ordinary course of its business, consistent with its past practice, after
the period covered by the Disclosure Documents). The Company has paid all
material taxes that are due, except for taxes that it reasonably disputes. There
is no material claim, litigation, or administrative proceeding pending or, to
the best of the Company's knowledge, threatened against the Company, except as
disclosed in the Disclosure Documents. This Agreement and the Disclosure
Documents do not contain any untrue statement of a material fact and do not omit
to state any material fact required to be stated therein or herein necessary to
make the statements contained therein or herein not misleading in the light of
the circumstances under which they were made. No event or circumstance exists
relating to the Company which, under applicable law, requires public disclosure
but which has not been so publicly announced or disclosed.
<PAGE>
5.3 Authorization. All corporate action on the part of the
Company by its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance and
delivery of the Common Stock being sold hereunder and the issuance (and/or the
reservation for issuance) of the Warrants and the Warrant Shares have been
taken, and this Agreement and the Registration Rights Agreement constitute valid
and legally binding obligations of the Company, enforceable in accordance with
their terms, except insofar as the enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, or other similar laws affecting
creditors' rights generally or by principles governing the availability of
equitable remedies. The Company has obtained all consents and approvals required
for it to execute, deliver and perform each agreement referenced in the previous
sentence.
5.4 Valid Issuance of Common Stock. The Common Stock and the
Warrants, when issued, sold and delivered in accordance with the terms hereof,
for the consideration expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations of Investor in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Warrant Shares, when issued in accordance with the
terms of the Warrants, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Investor, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Put Shares, the Warrants and the Warrant Shares will
be issued free of any preemptive rights.
5.5 Compliance with Other Instruments. The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
Bylaws, each as amended and in effect on and as of the date of the Agreement, or
of any material provision of any material instrument or material contract to
which it is a party or by which it is bound or of any provision of any federal
or state judgment, writ, decree, order, statute, rule or governmental regulation
applicable to the Company, which would have a material adverse effect on the
Company's business or prospects, or on the performance of its obligations under
this Agreement or the Registration Rights Agreement. The execution, delivery and
performance of this Agreement and the other agreements entered into in
conjunction with the Offering and the consummation of the transactions
contemplated hereby and thereby will not (a) result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such provision, instrument or contract or
an event which results in the creation of any lien, charge or encumbrance upon
any assets of the Company, which would have a material adverse effect on the
Company's business or prospects, or on the performance of its obligations under
this Agreement, the Registration Rights Agreement, (b) violate the Company's
Certificate of Incorporation or By-Laws or (c) violate any statute, rule or
governmental regulation applicable to the Company which violation would have a
material adverse effect on the Company's business or prospects.
5.6 Reporting Company. The Company will use its best efforts
to become subject to the reporting requirements of the Exchange Act, and to have
a class of securities registered under Section 12 of the Exchange Act not later
than six (6) months from the date hereof, and shall file all reports required by
the Exchange Act following the date the Company first becomes subject to such
reporting obligations. The Company undertakes to furnish Investor with copies of
such reports as may be reasonably requested by Investor prior to consummation of
this Offering and thereafter, to make such reports available, for the full term
of this Agreement, including any extensions thereof, and for as long as Investor
holds the Securities. The Common Stock is duly listed on the O.T.C. Bulletin
Board. The Company is not in violation of the listing requirements of the O.T.C.
Bulletin Board and does not reasonably anticipate that the Common Stock will be
delisted by the O.T.C. Bulletin Board for the foreseeable future. The Company
has filed all reports required under the Exchange Act. The Company has not
furnished to the Investor any material nonpublic information concerning the
Company.
<PAGE>
5.7 Capitalization. The capitalization of the Company as of
June 3, 1999, is, and the capitalization as of the Closing, subject to exercise
of any outstanding warrants and/or exercise of any outstanding stock options,
after taking into account the offering of the Securities contemplated by this
Agreement and all other share issuances occurring prior to this Offering, will
be, as set forth in the Capitalization Schedule as set forth in Exhibit K. There
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities. Except as disclosed in
the Capitalization Schedule, as of the date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its subsidiaries, and (ii) there are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of its or their securities under the Act
(except the Registration Rights Agreement).
5.8 Intellectual Property. The Company has valid, unrestricted
and exclusive ownership of or rights to use the patents, trademarks, trademark
registrations, trade names, copyrights, know-how, technology and other
intellectual property necessary to the conduct of its business. Exhibit M lists
all patents, trademarks, trademark registrations, trade names and copyrights of
the Company. The Company has granted such licenses or has assigned or otherwise
transferred a portion of (or all of) such valid, unrestricted and exclusive
patents, trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business as set forth in Exhibit M. The Company has been granted licenses,
know-how, technology and/or other intellectual property necessary to the conduct
of its business as set forth in Exhibit M. To the best of the Company's
knowledge after due inquiry, the Company is not infringing on the intellectual
property rights of any third party, nor is any third party infringing on the
Company's intellectual property rights. There are no restrictions in any
agreements, licenses, franchises, or other instruments that preclude the Company
from engaging in its business as presently conducted.
5.9 Use of Proceeds. As of the date hereof, the Company
expects to use the proceeds from this Offering (less fees and expenses) for the
purposes and in the approximate amounts set forth on the Use of Proceeds
Schedule set forth as Exhibit L hereto. These purposes and amounts are estimates
and are subject to change without notice to any Investor.
5.10 No Rights of Participation. No person or entity,
including, but not limited to, current or former stockholders of the Company,
underwriters, brokers, agents or other third parties, has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the financing contemplated by this Agreement which has not been
waived.
5.11 Company Acknowledgment. The Company hereby acknowledges
that Investor may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Warrants, and other agreements
contemplated hereby, and the Company further acknowledges that Investor has made
no representations or warranties, either written or oral, as to how long the
Securities will be held by Investor or regarding Investor's trading history or
investment strategies.
5.12 No Advance Regulatory Approval. The Company acknowledges
that this Investment Agreement, the transaction contemplated hereby and the
Registration Statement contemplated hereby have not been approved by the SEC, or
any other regulatory body and there is no guarantee that this Investment
Agreement, the transaction contemplated hereby and the Registration Statement
contemplated hereby will ever be approved by the SEC or any other regulatory
body. The Company is relying on its own analysis and is not relying on any
representation by Investor that either this Investment Agreement, the
transaction contemplated hereby or the Registration Statement contemplated
hereby has been or will be approved by the SEC or other appropriate regulatory
body.
<PAGE>
5.13 Underwriter's Fees and Rights of First Refusal. The
Company is not obligated to pay any compensation or other fees, costs or related
expenditures in cash or securities to any underwriter, broker, agent or other
representative other than the Investor in connection with this Offering.
5.14 Availability of Suitable Form for Registration. The
Company is currently eligible and agrees to maintain its eligibility to register
the resale of its Common Stock on a registration statement on a suitable form
under the Act.
5.15 No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under Regulation D of the Act or
would require the issuance of any other securities to be integrated with this
Offering under the Rules of Nasdaq. The Company has not engaged in any form of
general solicitation or advertising in connection with the offering of the
Common Stock or the Warrants.
5.16 [Intentionally Left Blank].
5.17 Foreign Corrupt Practices. Neither the Company, nor any
of its subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any subsidiary has, in the course of its
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
5.18 Key Employees. Each "Key Employee" (as defined in Exhibit
N) is currently serving the Company in the capacity disclosed in Exhibit N. No
Key Employee, to the best knowledge of the Company and its subsidiaries, is, or
is now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best knowledge of the Company and
its subsidiaries, any intention to terminate his employment with, or services
to, the Company or any of its subsidiaries.
5.19 Representations Correct. The foregoing representations,
warranties and agreements are true, correct and complete in all material
respects, and shall survive any Put Closing and the issuance of the shares of
Common Stock thereby.
5.20 Tax Status. The Company has made or filed all federal and
state income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and as set aside on its books provision reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.
<PAGE>
5.21 Transactions With Affiliates. Except as set forth in the
Disclosure Documents, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
5.22 Application of Takeover Protections. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under Delaware law which is or could become
applicable to the Investor as a result of the transactions contemplated by this
Agreement, including, without limitation, the issuance of the Common Stock, any
exercise of the Warrants and ownership of the Common Shares and Warrant Shares.
The Company has not adopted and will not adopt any "poison pill" provision that
will be applicable to Investor as a result of transactions contemplated by this
Agreement.
5.23 Other Agreements. The Company has not, directly or
indirectly, made any agreements with the Investor under a subscription in the
form of this Agreement for the purchase of Common Stock, relating to the terms
or conditions of the transactions contemplated hereby or thereby except as
expressly set forth herein, respectively, or in exhibits hereto or thereto.
5.24 Major Transactions. There are no other Major
Transactions currently pending or contemplated by the Company.
5.25 Financings. There are no other financings currently
pending or contemplated by the Company.
5.26 Shareholder Authorization. The Company shall, at its next
annual shareholder meeting following its listing on either the Nasdaq Small Cap
Market or the Nasdaq National Market, or at a special meeting to be held as soon
as practicable thereafter, use its best efforts to obtain approval of its
shareholders to (i) authorize the issuance of the full number of shares of
Common Stock which would be issuable under this Agreement and eliminate any
prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or any of its securities with respect to the
Company's ability to issue shares of Common Stock in excess of the Cap Amount
(such approvals being the "20% Approval") and (ii) the increase in the number of
authorized shares of Common Stock of the Company (the "Share Authorization
Increase Approval") such that at least 25,000,000 shares can be reserved for
this Offering. In connection with such shareholder vote, the Company shall use
its best efforts to cause all officers and directors of the Company to promptly
enter into irrevocable agreements to vote all of their shares in favor of
eliminating such prohibitions. As soon as practicable after the 20% Approval and
the Share Authorization Increase Approval, the Company agrees to use its best
efforts to reserve 25,000,000 shares of Common Stock for issuance under this
Agreement.
5.27 Acknowledgment of Limitations on Put Amounts. The Company
understands and acknowledges that the amounts available under this Investment
Agreement are limited, among other things, based upon the liquidity of the
Company's Common Stock traded on its Principal Market.
<PAGE>
6. Covenants of the Company
6.1 Independent Auditors. The Company shall, until at least
the Termination Date, maintain as its independent auditors an accounting firm
authorized to practice before the SEC.
6.2 Corporate Existence and Taxes. The Company shall, until at
least the Termination Date, maintain its corporate existence in good standing
and, once it becomes a "Reporting Issuer" (defined as a Company which files
periodic reports under the Exchange Act), remain a Reporting Issuer (provided,
however, that the foregoing covenant shall not prevent the Company from entering
into any merger or corporate reorganization as long as the surviving entity in
such transaction, if not the Company, assumes the Company's obligations with
respect to the Common Stock and has Common Stock listed for trading on a stock
exchange or on Nasdaq and is a Reporting Issuer) and shall pay all its taxes
when due except for taxes which the Company disputes.
6.3 Registration Rights. The Company will enter into a
registration rights agreement covering the resale of the Common Shares and the
Warrant Shares substantially in the form of the Registration Rights Agreement
attached as Exhibit A.
6.4 [Intentionally Omitted].
6.5 Asset Transfers. The Company shall not (i) transfer, sell,
convey or otherwise dispose of any of its material assets to any Subsidiary
except for a cash or cash equivalent consideration and for a proper business
purpose or (ii) transfer, sell, convey or otherwise dispose of any of its
material assets to any Affiliate, as defined below, during the Term of this
Agreement. For purposes hereof, "Affiliate" shall mean any officer of the
Company, director of the Company or owner of twenty percent (20%) or more of the
Common Stock or other securities of the Company.
6.6 Capital Raising Limitations; Rights of First Refusal.
6.6.1 Capital Raising Limitations. During the period from
the date of this Agreement until the Termination Date, the Company shall not
issue or sell, or agree to issue or sell Equity Securities (as defined below),
for cash in private capital raising transactions without obtaining the prior
written approval of the Investor of this Offering (the limitations referred to
in this subsection 6.6.1 are collectively referred to as the "Capital Raising
Limitations"), except that, provided that the Company has completed at least one
Put during each Calendar Month since the Effective Date, the Company may issue
and sell Equity Securities without the Investor's written approval to the extent
that the aggregate sum of all such placements of Equity Securities do not exceed
the difference of (x) $500,000 multiplied by the number of Puts that the Company
has completed since the Effective Date, minus (y) the sum of the Individual Put
Limits for the Puts that the Company has completed since the Effective Date ((x)
minus (y) being referred to hereafter as the "Equity Line Shortfall").
For purposes hereof, the following shall be collectively
referred to herein as, the "Equity Securities": (i) Common Stock or any other
equity securities, (ii) any debt or equity securities which are convertible
into, exercisable or exchangeable for, or carry the right to receive additional
shares of Common Stock or other equity securities, or (iii) any securities of
the Company pursuant to an equity line structure or format similar in nature to
this Offering.
<PAGE>
6.6.2 Investor's Right of First Refusal. For any private
capital raising transactions of Equity Securities which close after the date
hereof and on or prior to the date that is six (6) months after the Termination
Date of this Agreement, not including any warrants issued in conjunction with
this Investment Agreement, the Company agrees to deliver to Investor, at least
ten (10) days prior to the closing of such transaction, written notice
describing the proposed transaction, including the terms and conditions thereof,
and providing the Investor and its affiliates an option during the ten (10) day
period following delivery of such notice to purchase the securities being
offered in such transaction on the same terms as contemplated by such
transaction.
6.6.3 Exceptions to Rights of First Refusal. Notwithstanding
the above, the Rights of First Refusal shall not apply to any transaction
involving issuances of securities in connection with a merger, consolidation,
acquisition or sale of assets, or in connection with any strategic partnership
or joint venture (the primary purpose of which is not to raise equity capital),
or in connection with the disposition or acquisition of a business, product or
license by the Company or exercise of options by employees, consultants or
directors.
6.7 Financial 10-KSB Statements, Etc. and Current Reports on
Form 8-K. Once the Company becomes a "reporting company" within the meaning of
the Exchange Act, the Company shall deliver to the Investor copies of its annual
reports on Form 10-KSB, and quarterly reports on Form 10-QSB and shall deliver
to the Investor current reports on Form 8-K within two (2) days of filing for
the Term of this Agreement.
6.8 Opinion of Counsel. Investor shall, concurrent with the
purchase of the Common Stock and accompanying Warrants pursuant to this
Agreement, receive an opinion letter from the Company's legal counsel, in the
form attached as Exhibit B or in such form as agreed upon by the parties, as to
the Investment Commitment Closing and in the form attached as Exhibit I or in
such form as agreed upon by the parties, as to any Put Closing.
6.9 Removal of Legend. If the certificates representing any
Securities are issued with a restrictive Legend in accordance with the terms of
this Agreement, the Legend shall be removed and the Company shall issue a
certificate without such Legend to the holder of any Security upon which it is
stamped, and a certificate for a security shall be originally issued without the
Legend, if (a) the sale of such Security is registered under the Act, or (b)
such holder provides the Company with an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable transactions (the
reasonable cost of which shall be borne by the Investor), to the effect that a
public sale or transfer of such Security may be made without registration under
the Act, or (c) such holder provides the Company with reasonable assurances that
such Security can be sold pursuant to Rule 144. Each Investor agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act.
6.10 Listing. Subject to the remainder of this Section 6.10,
the Company shall ensure that its shares of Common Stock (including all Warrant
Shares) are listed and available for trading on the O.T.C. Bulletin Board.
Thereafter, the Company shall (i) use its best efforts to continue the listing
and trading of its Common Stock on the O.T.C. Bulletin Board or to become
eligible for and listed and available for trading on the Nasdaq Small Cap
Market, the NMS, or the New York Stock Exchange ("NYSE"); and (ii) comply in all
material respects with the Company's reporting, filing and other obligations
under the By-Laws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
<PAGE>
6.11 The Company's Instructions to Transfer Agent. The Company
will instruct the Transfer Agent of the Common Stock, by delivering instructions
in the form of Exhibit T hereto, to issue certificates, registered in the name
of each Investor or its nominee, for the Put Shares and Warrant Shares in such
amounts as specified from time to time by the Company upon any exercise by the
Company of a Put and/or exercise of the Warrants by the holder thereof. Such
certificates shall not bear a Legend unless issuance with a Legend is permitted
by the terms of this Agreement and Legend removal is not permitted by Section
6.9 hereof and the Company shall cause the Transfer Agent to issue such
certificates without a Legend. Nothing in this Section shall affect in any way
Investor's obligations and agreement set forth in Sections 3.3.3 or 3.3.4 hereof
to resell the Securities pursuant to an effective registration statement and to
deliver a prospectus in connection with such sale or in compliance with an
exemption from the registration requirements of applicable securities laws. If
(a) an Investor provides the Company with an opinion of counsel, which opinion
of counsel shall be in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that the Securities to be sold
or transferred may be sold or transferred pursuant to an exemption from
registration or (b) an Investor transfers Securities, pursuant to Rule 144, to
an affiliate which is an accredited investor, the Company shall permit the
transfer, and, in the case of Put Shares and Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates in such name and in such
denomination as specified by such Investor. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to an
Investor by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 6.11 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 6.11, that an Investor shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
6.12 Stockholder 20% Approval. Prior to the closing of any Put
that would cause the Aggregate Issued Shares to exceed the Cap Amount, the
Company shall obtain approval of its stockholders to authorize (i) the issuance
of the full number of shares of Common Stock which would be issuable pursuant to
this Agreement but for the Cap Amount and eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Company or any of its securities with respect to the Company's ability to
issue shares of Common Stock in excess of the Cap Amount (such approvals being
the "Stockholder 20% Approval").
6.13 Press Release. The Company agrees that the Investor shall
have the right to review and comment upon any press release issued by the
Company in connection with the Offering which approval shall not be unreasonably
withheld by Investor.
6.14 Change in Law or Policy. In the event of a change in law,
or policy of the SEC, as evidenced by a No-Action letter or other written
statements of the SEC or the NASD which causes the Investor to be unable to
perform its obligations hereunder, this Agreement shall be automatically
terminated and no further Commitment Fees shall be due.
7. Investor Covenant/Miscellaneous.
7.1 Representations and Warranties Survive the Closing;
Severability. Investor's and the Company's representations and warranties shall
survive the Investment Date and any Put Closing contemplated by this Agreement
notwithstanding any due diligence investigation made by or on behalf of the
party seeking to rely thereon. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, or is altered by a term required by the Securities
Exchange Commission to be included in the Registration Statement, this Agreement
shall continue in full force and effect without said provision; provided that if
the removal of such provision materially changes the economic benefit of this
Agreement to the Investor, this Agreement shall terminate.
<PAGE>
7.2 Successors and Assigns. This Agreement shall not be
assignable without the Company's written consent, If assigned, the terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement. Investor may assign Investor's rights
hereunder, in connection with any private sale of the Common Stock of such
Investor, so long as, as a condition precedent to such transfer, the transferee
executes an acknowledgment agreeing to be bound by the applicable provisions of
this Agreement in a form acceptable to the Company and provides an original copy
of such acknowledgment to the Company.
7.3 Execution in Counterparts Permitted. This Agreement may be
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
7.4 Titles and Subtitles; Gender. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement. The use in this
Agreement of a masculine, feminine or neither pronoun shall be deemed to include
a reference to the others.
7.5 Written Notices, Etc. Any notice, demand or request
required or permitted to be given by the Company or Investor pursuant to the
terms of this Agreement shall be in writing and shall be deemed given when
delivered personally, or by facsimile or upon receipt if by overnight or two (2)
day courier, addressed to the parties at the addresses and/or facsimile
telephone number of the parties set forth at the end of this Agreement or such
other address as a party may request by notifying the other in writing;
provided, however, that in order for any notice to be effective as to the
Investor such notice shall be delivered and sent, as specified herein, to all
the addresses and facsimile telephone numbers of the Investor set forth at the
end of this Agreement or such other address and/or facsimile telephone number as
Investor may request in writing.
7.6 Expenses. Except as set forth in the Registration Rights
Agreement, each of the Company and Investor shall pay all costs and expenses
that it respectively incurs, with respect to the negotiation, execution,
delivery and performance of this Agreement.
7.7 Entire Agreement; Written Amendments Required. This
Agreement, including the Exhibits attached hereto, the Common Stock
certificates, the Warrants, the Registration Rights Agreement, and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants, whether oral, written, or
otherwise except as specifically set forth herein or therein. Except as
expressly provided herein, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
7.8 Actions at Law or Equity; Jurisdiction and Venue. The
parties acknowledge that any and all actions, whether at law or at equity, and
whether or not said actions are based upon this Agreement between the parties
hereto, shall be filed in any state or federal court sitting in Atlanta,
Georgia. Georgia law shall govern both the proceeding as well as the
interpretation and construction of the Transaction Documents and the transaction
as a whole. In any litigation between the parties hereto, the prevailing party,
as found by the court, shall be entitled to an award of all attorney's fees and
costs of court. Should the court refuse to find a prevailing party, each party
shall bear its own legal fees and costs.
<PAGE>
8. Subscription and Wiring Instructions; Irrevocability.
8.1 Subscription
(a) Wire transfer of Subscription Funds.
Investor shall deliver Put Dollar
Amounts (as payment towards any Put
Share Price) by wire transfer, to the
Company pursuant to a wire instruction
letter to be provided by the Company,
and signed by the Company.
(b) Irrevocable Subscription. Investor
hereby acknowledges and agrees, subject
to the provisions of any applicable laws
providing for the refund of subscription
amounts submitted by Investor, that this
Agreement is irrevocable and that
Investor is not entitled to cancel,
terminate or revoke this Agreement or
any other agreements executed by such
Investor and delivered pursuant hereto,
and that this Agreement and such other
agreements shall survive the death or
disability of such Investor and shall be
binding upon and inure to the benefit of
the parties and their heirs, executors,
administrators, successors, legal
representatives and assigns. If the
Securities subscribed for are to be
owned by more than one person, the
obligations of all such owners under
this Agreement shall be joint and
several, and the agreements,
representations, warranties and
acknowledgments herein contained shall
be deemed to be made by and be binding
upon each such person and his heirs,
executors, administrators, successors,
legal representatives and assigns.
8.2 Acceptance of Subscription. Ownership of the number of
securities purchased hereby will pass to Investor upon the Warrant Closing or
any Put Closing.
9. Indemnification.
In consideration of the Investor's execution and delivery of the
Investment Agreement, the Registration Rights Agreement and the Warrants (the
"Transaction Documents") and acquiring the Securities thereunder and in addition
to all of the Company's other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless Investor and all of
its stockholders, officers, directors, employees and direct or indirect
investors and any of the foregoing person's agents, members, partners or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorney's fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
documents contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby, or
(c) any cause of action, suit or claim, derivative or otherwise, by any
stockholder of the Company based on a breach or alleged breach by the Company or
any of its officers or directors of their fiduciary or other obligations to the
stockholders of the Company.
<PAGE>
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which it
would be required to make if such foregoing undertaking was enforceable which is
permissible under applicable law.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 9, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 9, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 9 to the extent it is prejudicial.
[INTENTIONALLY LEFT BLANK]
<PAGE>
10. Accredited Investor. Investor is an "accredited investor" because
(check all applicable boxes):
(a) [ ] it is an organization described in Section
501(c)(3) of the Internal Revenue Code, or a
corporation, limited duration company, limited
liability company, business trust, or partnership not
formed for the specific purpose of acquiring the
securities offered, with total assets in excess of
$5,000,000.
(b) [ ] any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of
acquiring the securities offered, whose purchase is
directed by a sophisticated person who has such
knowledge and experience in financial and business
matters that he is capable of evaluating the merits
and risks of the prospective investment.
(c) [ ] a natural person, who
[ ] is a director, executive officer or general partner
of the issuer of the securities being offered or sold
or a director, executive officer or general partner
of a general partner of that issuer.
[ ] has an individual net worth, or joint net worth
with that person's spouse, at the time of his
purchase exceeding $1,000,000.
[ ] had an individual income in excess of $200,000 in
each of the two most recent years or joint income
with that person's spouse in excess of $300,000 in
each of those years and has a reasonable expectation
of reaching the same income level in the current
year.
(d) [ ] an entity each equity owner of which is an entity
described in a - b above or is an individual who
could check one (1) of the last three (3) boxes under
subparagraph (c) above.
(e) [ ] other [specify] ____________________________________
<PAGE>
The undersigned hereby subscribes the Maximum Offering Amount and
acknowledges that this Agreement and the subscription represented hereby shall
not be effective unless accepted by the Company as indicated below.
IN WITNESS WHEREOF, the undersigned Investor does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Investor by the following signature(s) executed this Agreement.
Dated this 3rd day of June, 1999.
- ------------------------------------ ------------------------------------
Your Signature PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
SECURITY DELIVERY INSTRUCTIONS:
- ------------------------------------ ------------------------------------
Name: Please Print Please type or print address where
your security is to be delivered
____________________________________ ATTN:_______________________________
Title/Representative Capacity (if applicable)
- ------------------------------------ ------------------------------------
Name of Company You Represent (if applicable) Street Address
- ------------------------------------ ------------------------------------
Place of Execution of this Agreement City, State or Province,
Country, Offshore Postal Code
NOTICE DELIVERY INSTRUCTIONS: WITH A COPY DELIVERED TO:
- ----------------------------------- ------------------------------------
Please print address where any Notice Please print address where Copy
is to be delivered is to be delivered
ATTN: _____________________________ ATTN: _______________________________
- ----------------------------------- -------------------------------------
Street Address Street Address
- -------------------------------------------
- -------------------------------------------
City, State or Province, Country, City, State or Country, Offshore
Offshore Postal Code Postal Code
Telephone: ________________________________Telephone: __________________________
Facsimile: ________________________________Facsimile: __________________________
Facsimile: ________________________________Facsimile: __________________________
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF THE MAXIMUM OFFERING
AMOUNT ON THE 3rd DAY OF JUNE, 1999.
ALOTTAFUN!, INC.
By:
-------------------
Michael Porter, CEO
Address:
Attn: Michael Porter
ALOTTAFUN!, INC.
141 N. Main St., #207
West Bend, WI 53095
Telephone (414) 334-4500
Facsimile (414) 334-4502
<PAGE>
ADVANCE PUT NOTICE
ALOTTAFUN!, INC. (the "Company") hereby intends, subject to the Individual Put
Limit (as defined in the Investment Agreement), to elect to exercise a Put to
sell the number of shares of Common Stock of the Company specified below, to
_____________________________, the Investor, as of the Intended Put Date written
below, all pursuant to that certain Investment Agreement (the "Investment
Agreement") by and between the Company and Swartz Private Equity, LLC dated on
or about June 3, 1999.
Date of Advance Put Notice: ___________________
Intended Put Date :___________________________
Intended Put Share Amount: __________________
Company Designation Maximum Put Dollar Amount (Optional):
----------------------------------------.
Company Designation Minimum Put Share Price (Optional):
----------------------------------------.
ALOTTAFUN!, INC.
By:
----------------------
Michael Porter, CEO
Address:
ALOTTAFUN!, INC.
141 N. Main St., #207
West Bend, WI 53095
Telephone (414) 334-4500
Facsimile (414) 334-4502
EXHIBIT E
<PAGE>
CONFIRMATION of ADVANCE PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
ALOTTAFUN!, INC.'s (the "Company") Advance Put Notice on the Advance Put Date
written below, and its intention to elect to exercise a Put to sell shares of
common stock ("Intended Put Share Amount") of the Company to the Investor, as of
the intended Put Date written below, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about June 3, 1999.
Date of Confirmation: ____________________
Date of Advance Put Notice: _______________
Intended Put Date: ________________________
Intended Put Share Amount: ________________
Company Designation Maximum Put Dollar Amount (Optional):
----------------------------------------.
Company Designation Minimum Put Share Price (Optional):
----------------------------------------.
INVESTOR(S)
-----------------------------------
Investor's Name
By: ________________________________
(Signature)
Address:____________________________________
------------------------------------
------------------------------------
Telephone No.: ___________________________________
Facsimile No.: ___________________________________
EXHIBIT F
<PAGE>
PUT NOTICE
ALOTTAFUN!, INC. (the "Company") hereby elects to exercise a Put to sell shares
of common stock ("Common Stock") of the Company to
_____________________________, the Investor, as of the Put Date, at the Put
Share Price and for the number of Put Shares written below, all pursuant to that
certain Investment Agreement (the "Investment Agreement") by and between the
Company and Swartz Private Equity, LLC dated on or about June 3, 1999.
Put Date :_________________
Intended Put Share Amount (from Advance Put Notice):_________________ Common
Shares
Company Designation Maximum Put Dollar Amount (Optional):
- ----------------------------------------.
Company Designation Minimum Put Share Price (Optional):
- ----------------------------------------.
Note: Capitalized terms shall have the meanings ascribed to them in this
Investment Agreement.
ALOTTAFUN!, INC.
By:
-----------------------
Michael Porter, CEO
Address:
ALOTTAFUN!, INC.
141 N. Main St., #207
West Bend, WI 53095
Telephone (414) 334-4500
Facsimile (414) 334-4502
EXHIBIT G
<PAGE>
CONFIRMATION of PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
Alottafun!, Inc. (the "Company") Put Notice and election to exercise a Put to
sell ___________________________ shares of common stock ("Common Stock") of the
Company to Investor, as of the Put Date, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about June 3, 1999.
Date of this Confirmation: ________________
Put Date :_________________
Number of Put Shares of
Common Stock to be Issued: _____________
Volume Evaluation Period: _____ Business Days
Pricing Period: _____ Business Days
INVESTOR(S)
-----------------------------------
Investor's Name
By: _________________________________
(Signature)
Address:
------------------------------------
------------------------------------
------------------------------------
Telephone No.: ___________________________________
Facsimile No.: ____________________________________
EXHIBIT H
<PAGE>
PUT CANCELLATION NOTICE
ALOTTAFUN!, INC. (the "Company") hereby cancels the Put specified below,
pursuant to that certain Investment Agreement (the "Investment Agreement") by
and between the Company and Swartz Private Equity, LLC dated on or about June 3,
1999, as of the close of trading on the date specified below (the "Cancellation
Date," which date must be on or after the date that this notice is delivered to
the Investor), provided that such cancellation shall not apply to the number of
shares of Common Stock equal to the Truncated Put Share Amount (as defined in
the Investment Agreement).
Cancellation Date: _____________________
Put Date of Put Being Canceled: __________
Number of Shares Put on Put Date: _________
Reason for Cancellation
(check one):
[ ] Material Facts, Ineffective Registration
Period.
[ ] Delisting Event
The Company understands that, by canceling this Put, it must give twenty (20)
Business Days advance written notice to the Investor before effecting the next
Put.
ALOTTAFUN!, INC.
By:
-----------------------
Michael Porter, CEO
Address:
ALOTTAFUN!, INC.
141 N. Main St., #207
West Bend, WI 53095
Telephone (414) 334-4500
Facsimile (414) 334-4502
EXHIBIT Q
<PAGE>
PUT CANCELLATION NOTICE CONFIRMATION
The undersigned Investor to that certain Investment Agreement (the "Investment
Agreement") by and between the Company, and Swartz Private Equity, LLC dated on
or about June 3, 1999, hereby confirms receipt of Alottafun!, Inc.'s (the
"Company") Put Cancellation Notice, and confirms the following:
Date of this Confirmation: ________________
Put Cancellation Date : ___________________
INVESTOR(S)
-----------------------------------
Investor's Name
By: _________________________________
(Signature)
Address:____________________________________
------------------------------------
------------------------------------
Telephone No.: ___________________________________
Facsimile No.: ___________________________________
EXHIBIT S
Exhibit 10
Consent of Pender, Newkirk & Company, CPA
<PAGE>
Consent of Independent Auditors
We hereby consent to the use of our Auditors' opinion, dated May 9, 1999, except
for Note 13 as to which the date is June 1, 1999, in the November 2, 1999 Form
10-SB Amendment No. 2 to be filed by Alottafun!, Inc. accompanying the financial
statements of Alottafun!, Inc. as of December 31, 1998 and the results of
operations and its cash flows for the years ended December 31, 1998 and 1997.
Certified Public Accountants
Tampa, Florida
November 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 411,114
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,914
<CURRENT-ASSETS> 442,407
<PP&E> 79,590
<DEPRECIATION> 53,880
<TOTAL-ASSETS> 693,151
<CURRENT-LIABILITIES> 363,089
<BONDS> 0
22,715
0
<COMMON> 38,080
<OTHER-SE> (91,222)
<TOTAL-LIABILITY-AND-EQUITY> 693,151
<SALES> 37,429
<TOTAL-REVENUES> 37,429
<CGS> 28,543
<TOTAL-COSTS> 66,886
<OTHER-EXPENSES> 401,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,896
<INCOME-PRETAX> (789,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> (789,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (789,620)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
