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 December 6, 1999.
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
AMENDMENT NO. 3
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
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(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 16
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 22
ITEM 3. Description of Property 27
ITEM 4. Security Ownership of Certain Beneficial Owners and
Management 27
ITEM 5. Directors, Executive Officers, and Key Employees 29
Business Experience of Executive Officers
and Directors 29
Board of Directors 30
Key Employees 30
ITEM 6. Executive Compensation 31
Summary Compensation Table 31
Employment and Other Agreements 31
Company's Incentive Stock Option Plan 32
Directors Compensation 32
ITEM 7. Certain Relationships and Related Transactions 32
ITEM 8. Description of Securities 34
Common Stock 34
Preferred Stock 35
Warrants 36
PART II
ITEM 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters 37
Market Price of Registrant's Common Stock 37
Dilution and Absence of Dividends 38
ITEM 2. Legal Proceedings 39
ITEM 3. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 40
ITEM 4. Recent Sales of Unregistered Securities 41
ITEM 5. Indemnification of Officers and Directors 43
</TABLE>
2
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<TABLE>
<S> <C> <C>
PAGE NO.
PART F/S
Financial Statements and Supplementary Data 44
PART III
ITEM 1. Index to Exhibits 45
ITEM 2. Description of Exhibits 45
</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 and we do not expect to become profitable until 2001. Accumulated
losses to date are approximately $4,076,323 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. Our marketing program
has not been funded for this holiday selling season. Our lack of marketing
resources has had a negative impact on our sales thus far this season and our
ability to meet our sales projections. Our Toypop.com site is currently
processing orders this season, however, we have not had material sales this
selling season which has had a serious adverse effect on our business. Our poor
operating results this season may hinder our ability to raise additional capital
to fund our operations going forward. 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 and although these
products were previously available for purchase on our Toypop.com site, we
have had no sales to-date for Pokemon products because of a lack of
inventory and industry-wide supply shortages. 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;
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- 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.
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
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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.
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 collectible toy products introduction has been delayed until February 2000
because it has taken us longer than anticipated to construct the molds to
manufacture these products and secure distribution relationships. We originally
expected to launch these products at the end of 1999, however, we felt that by
delaying the launch until Toy Fair 2000 would provide for a more successful
introduction. All of the major toy distributors are present for this event which
will effectively introduce our collectible products to key distributors without
having to visit each one individually. Our limited capital resources to-date
make this introduction our most viable alternative, however, there are no
assurances that these distributors will be receptive to our collectible toy
products and that these products will be successfully introduced.
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.
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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.
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
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<PAGE>
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.
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. If
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.
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<PAGE>
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.
- - 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.
14
<PAGE>
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.
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
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<PAGE>
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.
Employees
As of November 30, 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)
Nine Months Ended
Year Ended December 31, September 30,
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
1997 1998 1998 1999
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
Income Statement
Data
<S> <C> <C> <C> <C>
Total Revenue $ 54,963 $ 37,429 $ 72,624 $ 110,024
Net loss (495,232) (789,620) (232,684) (1,177,083)
Net loss per share ($0.26) ($0.31) ($0.10) ($0.16)
Shares used in per 1,917,013 2,528,155 2,318,672 7,502,476
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
At December 31, At December 31, At September 30,
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
1997 1998 1998 1999
- -------------------------- ---------------------- ---------------------- ---------------- ----------------
Balance Sheet Data
<S> <C> <C> <C> <C>
Total assets $ 367,594 $ 693,151 $ 134,826 $ 446,695
Working capital (153,210) 79,318 (212,461) (1,177,083)
Long-term debt(1) 22,646 360,489 121,690 --
Stockholders' Equity (169,064) (53,142) (204,869) (355,350)
(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.
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<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 $4,076,323 at September 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. Although, we have
substantially missed our opportunity for sales through our Toypop Internet site
during the late 1999 selling season, we believe that we are on target for
profitability in 2001. Our marketing program will continue to be developed in
2000 to prepare for the fourth quarter selling season. In addition, the
introduction of our collectible toy products at Toy Fair 2000 may support
additional sales in 2000 to help the us become profitable. However, there are no
assurances that Alottafun! will become profitable in 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.
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<PAGE>
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.
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
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Revenues
- --------
Total revenues for the three month period ended September 30, 1999 were $90,092
compared to $10,828 for the same period in 1998, which represents an increase of
$79,264 or 732%. The increase was the result of increased sales of our
Hearthside Treasures toy product lines.
Cost of Sales
- -------------
Cost of sales for the three months ended September 30, 1999 increased $61,788 or
3278% to $63,673 from $1,885 in the same period in 1998. Cost of sales as a
percentage of sales increased to 71% from 17% for the three months ended 1999
and 1998, respectively. We expect that improvement in gross profit margins will
occur during 1999 as we increase revenues.
Selling, General and Administrative Expenses
- --------------------------------------------
For the three month period ended September 30, 1999, total selling, general and
administrative expenses ("S, G & A") were $293,613 as compared to $42,553, for
the same period of 1998, a 590% increase. This increase is attributed to the
additional expense from higher compensation paid to our existing personnel,
which increased by approximately $34,615. This compensation related to a bonus
paid with our common stock. In addition, development expenses associated with
our Toypop.com Internet site increased $103,403 during the three months ended
September 30, 1999. There were no development expenses in the prior year period.
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.
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<PAGE>
Interest Expense
- ----------------
Interest expense increased 91%, or $3,845 to $8,056 for the three month period
ended September 30, 1999 from $4,211 for the same period of 1998.
Net Loss
- --------
The net loss and the net loss per share were $410,031 and $0.05 per share
respectively, for the three months ended September 30, 1999, as compared to a
net loss and net loss per share of $112,166 and $0.05 per share respectively,
for the same period of 1998. This loss was an increase of $297,865 or 266%, over
the same period the previous year. For the three month period ending September
30, 1999, there were 8,161,779 shares of common stock outstanding, on a weighted
average basis, as compared to 2,439,543 shares outstanding in 1998, on the same
basis. This represents a 235% increase in shares outstanding in this period as
compared to the same period of the previous year.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Total Revenues
- --------------
Total revenues for the nine months ended September 30, 1999 were $110,024
compared to $72,624 for the same period of 1998, which represents an increase of
$37,400 or 52%. Revenues increased for the nine months ended September 30, 1999
as compared to the same period the previous year due to our focus on selling toy
products rather than selling candy products. We expect that our toy 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 72% of revenues for the nine month periods ended September
30, 1999 and 1998. 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 nine months ended September 30, 1999, total selling, general and
administrative expenses ("S, G & A") were $689,394 as compared to $198,890 for
the same period of the previous year, an increase of $490,504, or 246%. 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 nine months ended September 30, 1999 selling costs were $137,065
as compared to $98,105 for the same period of the previous year. This increase
was attributable to an increase of $23,748 in advertising costs, as well as, a
$25,206 charge for product samples. General and administrative expenses were
$510,220 as compared to $90,303 for the nine months ended September 30, 1999 and
1998, respectively. This increase was primarily attributed to an increase in
accounting and legal expenses of $97,768, for the period ended September 30,
1999. In addition, there was an increase in our Internet development expenses of
$113,457 for the nine months ended September 30, 1999 as compared to the same
period in 1998. We expect that there will be further increases in our S, G & A
expenses as our business continues to develop.
During the nine months ended September 30, 1999, we had realized and unrealized
losses of $308,659 from securities transactions in investments unrelated to our
business. This loss in 1999, compares to losses of $40,638 in the same period in
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
nine months ended September 30, in the future by investing our working capital
in more secure instruments until these funds are needed in our operation. Our
cash reserves 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.
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<PAGE>
Interest Expense
- ----------------
We had interest expense of $209,586 for the period ended September 30, 1999 as
compared to $13,720 for the nine months ended September 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 nine month period ended September 30, 1999.
Net Loss
- --------
Our loss for the nine months ended September 30, 1999 was $1,177,083 as compared
to a loss of $232,684 in the prior year's period. This loss represents a 406%
increase over the net loss experienced in the year ago period. The basic loss
per share was $0.16 per share for the nine months ended September 30, 1999 as
compared to $0.10 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 nine months ended September 30,
1999 was 7,502,476 as compared to 2,318,672 for the same period ended September
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
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.
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<PAGE>
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.
Since our formation on August 2, 1993 and until September 30, 1999, we have
issued 8,357,481 shares of our common stock and raised $2,071,248. 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 nine month period ended September 30,
1999. We have since January 1, 1999, issued 4,549,448 shares of common stock and
raised $365,021 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 nine months ended September 30, 1999 we used $1,009,374 in cash used by
operating activities as compared to $359,696 in the similar period ended
September 30, 1998. Investing activities for the present nine month period
included the acquisition of equipment in the amount of $126,155. Financing
activities for the nine months ended September 30, 1999 provided $728,703 that
included $365,021 from the issuance of common stock. For nine months ended
September 30, 1999, cash decreased $411,114 as compared to a decrease of $39,022
in the prior year's period.
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<PAGE>
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.
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.
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<PAGE>
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
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 and
examples of the corresponding percentage of total shares of Swartz ownership as
of September 30, 1999.
24
<PAGE>
<TABLE>
<CAPTION>
Common Stock Market Price
$.50(1) % $1.00(1) % $1.11(2) % $2.00(3) % $5.00(3) %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars Converted
$5,000,000 12,500,000 59% 5,555,555 40% 4,950,495 37% 2,747,253 25% 1,098,901 12%
$10,000,000 25,000,000 74% 11,111,111 57% 9,900,990 54% 5,494,505 40% 2,197,802 21%
$20,000,000 50,000,000 86% 22,222,222 73% 19,801,980 70% 10,989,011 57% 4,395,604 35%
</TABLE>
(1) Conversion at market price less $.10 per share (the contracted minimum
discount to market price)
(2) Price at which conversion at market price less $.10 per share changes
to 91% of market price
(3) 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
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;
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<PAGE>
(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, 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, 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. 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.
Restrictive Covenants
During the term of the investment agreement and for a period of one year
thereafter, we are prohibited from certain transactions. These include the
issuance of any debt or equity securities in a private transaction which are
convertible or exercisable into shares of common stock at a price based on the
trading price of the common stock at any time after the initial issuance of such
securities or with a fixed conversion or exercise price subject to adjustment.
We are also prohibited from entering into any private equity line type
agreements similar to the investment agreement without obtaining Swartz's prior
written approval.
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<PAGE>
Right of First Refusal
Swartz has a right of first refusal to purchase any variable priced securities
offered by us in any private transaction which closes on or prior to six months
after the termination of the investment agreement.
Swartz's Right of Indemnification
We are obligated to indemnify Swartz (including their stockholders, officers,
directors, employees and agents) from all liability and losses resulting from
any misrepresentations or breaches we made in connection with the investment
agreement, our registration rights agreement, other related agreements, or the
registration statement.
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.
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<PAGE>
(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".
28
<PAGE>
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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<PAGE>
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
$100,000 or more during the stated period. Accordingly, the summary compensation
table does not include compensation of other executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
Restricted
Other Annual Stock Options/ LTIP All Other
Name & Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -------------------- ------- ---------- --------- --------------- ----------- ----------- ----------- ---------------
<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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<PAGE>
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
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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.
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 30, 1999, there were 8,357,481 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 30, 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 September 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
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.
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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".
In August, 1999, we issued an aggregate of 155,000 shares of our restricted
Common Stock in connection with software development services for the company's
Toypop.com Internet site. We issued Macdonald Harris and Associates, Ltd.
125,000 shares and Think Innovative Media, Inc. 30,000 shares for these
services. We relied upon Section 4(2) for the issuance of these securities.
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".
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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
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 September 30, 1999, we had approximately 8,357,481 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.
43
<PAGE>
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 September 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 nine month periods then ended.
44
<PAGE>
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 September 30, 1999, and related Statements of Operation, Changes in
Stockholders Deficit and Cash Flows for the three and nine months then ended
September 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 Exhibit 10,
which is included with this filing.
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. (4)
6(f) Amended Registration Rights Agreement by and between
Alottafun! and Swartz Private Equity, LLC
dated June 3, 1999 (2)
45
<PAGE>
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.
(4) Filed as exhibits to Form 10-SB/A filed on November 2, 1999.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALOTTAFUN!, INC.
Dated: December 6, 1999 By: /s/ Michael Porter
----------------------
Michael Porter
Chief Executive Officer
Dated: December 6, 1999 By: /s/ Gerald Couture
----------------------
Gerald Couture
Chief Financial Officer,
Principal Accounting Officer
47
<PAGE>
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.
Three Months and Nine Months
Ended September 30, 1999 and 1998
(Unaudited)
19
<PAGE>
Alottafun!, Inc.
Financial Statements
Three Months and Nine Months
Ended September 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
20
<PAGE>
Alottafun!, Inc.
Balance Sheet
<TABLE>
<CAPTION>
September 30,
1999
---------------------
<S> <C>
Assets (Unaudited)
Current assets:
Cash $ 4,288
Marketable securities 295,303
Accounts receivable 2,946
Other assets 186
---------------------
Total current assets 302,723
---------------------
Property and equipment, net of accumulated depreciation 143,429
---------------------
Other assets:
Other intangibles, net of accumulated amortization 543
---------------------
Total other assets 543
---------------------
$ 446,695
=====================
Liabilities and Stockholders' Deficit
Current liabilities:
Current maturities of long-term debt 547,635
Accounts payable 195,327
Accrued expenses 36,368
---------------------
Total current liabilities 779,330
---------------------
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; 5,000,000 shares
authorized; 2,000,000 shares issued and outstanding. 200
Common stock; par value of $.01 per share; 50,000,000 shares
authorized; 8,357,481 shares outstanding. 83,575
Additional paid-in capital 4,160,485
Accumulated deficit (4,076,322)
Deferred financing costs (455,400)
Treasury stock, at cost; 24,400 shares (67,888)
---------------------
Total stockholders' deficit (355,350)
---------------------
$ 446,695
=====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
Alottafun!, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ -----------------------------------
1999 1998 1999 1998
------------------------------------ -----------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Sales, net of allowance and discounts $ 90,092 $ 10,828 $ 110,024 $ 72,624
Cost of sales 63,673 1,885 79,468 52,061
------------------------------------ -----------------------------------
Gross profit 26,419 8,943 30,556 20,563
------------------------------------ -----------------------------------
Operating expenses:
Selling 64,866 2,945 137,065 98,105
General and administrative 225,935 36,114 510,220 90,303
Depreciation and amortization 2,812 3,494 42,109 10,482
------------------------------------ -----------------------------------
293,613 42,553 689,394 198,890
------------------------------------ -----------------------------------
Loss from operations (267,194) (33,610) (658,838) (178,327)
------------------------------------ -----------------------------------
Other expense:
Net realized gain (loss) on sale of
securities, trading (86,640) (74,345) (226,077) (32,257)
Unrealized gain (loss) on securities, trading (48,141) - (82,582) (8,380)
Interest expense (8,056) (4,211) (209,586) (13,720)
------------------------------------ -----------------------------------
Total other expense (142,837) (78,556) (518,245) (54,357)
------------------------------------ -----------------------------------
Loss before taxes (410,031) (112,166) (1,177,083) (232,684)
Income taxes
------------------------------------ -----------------------------------
Net loss $ (410,031) $ (112,166) $ (1,177,083) $ (232,684)
==================================== ===================================
==================================== ===================================
Net loss per common share $ (0.05) $ (0.05) $ (0.16) $ (0.10)
==================================== ===================================
</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 Additional
---------------------------- -----------------------------
Shares $.01 Par Shares $.0001 Par Paid-in
Issued Value Issued Value Capital
-------------- ---------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 3,808,033 $ 38,080 - $ - $ 2,875,905
Issuance of common stock for conversion of debentures 3,520,211 35,202 - - 325,287
Issuance of common stock for cash 761,737 7,618 - - 357,403
Issuance of common stock for services 267,500 2,675 - - 146,690
Issuance of prefered stock to officers - - 2,000,000 200 (200)
Intrinsic value of stock warrants - - - 455,400
Net loss for the nine months ended September 30, 1999 - - - - -
============== ========== ============= ============ ==============
Balance, September 30, 1999 8,357,481 $ 83,575 2,000,000 $ 200 $ 4,160,485
============== ========== ============= ============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Accumulated Deferred Treasury
Deficit Financing Costs Stock Total
---------------- ----------------- ------------ --------------
$ (2,899,239) $ - $ (67,888) $ (53,142)
- - - 360,489
- - - 365,021
- - - 149,365
- - - -
- (455,400) - -
(1,177,083) - - (1,177,083)
================ ================= ============ ==============
$ (4,076,322) $ (455,400) $ (67,888) $ (355,350)
================ ================= ============ ==============
</TABLE>
23
<PAGE>
Alottafun!, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
1999 1998
-----------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss $ (1,177,083) $ (232,684)
-----------------------------------------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 42,109 10,482
Loss (gain) on marketable securities 308,659 40,638
Common stock issued for services 149,365 -
Interest on conversion of convertible debentures 190,818 -
(Increase) decrease in:
Marketable securities - trading (603,962) (92,760)
Accounts and notes receivable (2,946) (61,028)
Inventory 4,914 7,255
Other assets 6,743 -
Deposits 19,450 (19,250)
Increase (decrease) in:
Accounts payable 96,206 (11,351)
Accrued expenses (43,647) (998)
-----------------------------------------
Total adjustments 167,709 (127,012)
-----------------------------------------
Net cash used by operating activities (1,009,374) (359,696)
-----------------------------------------
Investing activities
Acquisition of equipment (126,155) -
-----------------------------------------
Net cash provided (used) by investing activities (126,155) -
-----------------------------------------
Financing activities
Bank overdraft - 1,428
Proceeds from the collection of stock subscriptions - 121,213
Proceeds from issuance of note payable 445,015 1,324
Proceeds from common stock and related paid-in capital 365,021 275,739
Purchase of treasury stock - (6,755)
Reduction in notes payable (81,333) (71,276)
Principal reductions of long-term debt - -
Reduction in mandatorily redeemable equity instruments - (1,000)
-----------------------------------------
Net cash provided by financing activities 728,703 320,674
-----------------------------------------
Net increase in cash (406,826) (39,022)
Cash at beginning of period 411,114 39,022
-----------------------------------------
Cash at end of period $ 4,288 $ -
=========================================
</TABLE>
Supplemental disclosures of cash flow information
and noncash financing activities
During the nine month period ending September 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 nine month period ending September 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 three month and nine month periods ended September 30, 1999 and 1998 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 periods ended September 30, 1999 and 1998. The
weighted average shares outstanding for the nine month period ended September
30, 1999 was 7,502,476 as compared to 2,318,672 for the nine months ended
September 30, 1998. The weighted average shares outstanding for the three month
period ended September 30, 1999 was 8,161,779 as compared to 2,439,543 for the
three months ended September 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 nine month period ended September 30,
1999. We have since January 1, 1999, issued 4,549,448 shares of common stock and
raised $365,021 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.
In August, 1999, we issued an aggregate of 155,000 shares of our restricted
Common Stock in connection with software development services for the company's
Toypop.com Internet site. We issued Macdonald Harris and Associates, Ltd.
125,000 shares and Think Innovative Media, Inc. 30,000 shares for these
services. 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 nine months ended September 30, 1999.
26
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 December 6, 1999 Form
10-SB Amendment No. 3 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
December 6, 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>
