ALOTTAFUN, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 30, 1999
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21279
ALOTTAFUN, INC.
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(Exact name of registrant as specified in its 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: (262) 334-4500
Securities registered pursuant to Section 12(b) of the Act: NONE
Check Whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X ]
State issuer's revenues for its most recent reporting period (Fiscal
year)........$128,844.
Aggregate market value of the voting stock held by non-affiliates of the
registrant at December 31, 1999 was $5,528,760. The bid price of the common
stock at that date was $0.69.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Company's definitive proxy statement for the Annual Meeting of the
Company's stockholders to be held on AUGUST 15, 2000 are incorporated by
reference into part III of this Form.
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ALOTTAFUN, INC.
FORM 10-KSB - Index
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PART I
Page
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Item 1. Business 1.
Item 2. Properties 14.
Item 3. Legal Proceedings 14.
Item 4. Submission of Matters to a Vote of
Security Holders 15.
PART II
Item 5. Market of the Registrant's Securities and
Related Stockholder Matters 15.
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16.
Item 7. Consolidated Financial Statements and
Supplementary Data 24.
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 24.
PART III
Item 9. Directors and Executive Officers of the
Registrant 24.
Item 10. Executive Compensation 24.
Item 11. Security Ownership of Certain Beneficial
Owners and Management 24.
Item 12. Certain Relationships and Related Transactions 24.
PART IV
Item 13. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K 25.
Signatures 27.
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This Form 10-KSB contains forward looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, regarding future events and the future performance of the
Company involve risks and uncertainties which may cause our actual results in
future periods to be materially different from any future performance suggested
herein. We believe that its business strategy that includes focus on collectible
toy products and our internet initiative are unique. There can be no assurance
that our strategy will be successful. There can be no assurance that sufficient
capital can be obtained to market our products and internet services and our
performance and actual results could differ materially from those projected in
the forward looking statements contained herein.
PART I
ITEM 1. BUSINESS.
GENERAL
OVERVIEW
We were originally established on August 15 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 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 $4,715,397 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
contracted with M.W Kasch, an independent U.S. toy distributor, to launch an
e-commerce Internet portal called TOYPOP.COM. The Joint venture was owned 33.3%
by E-Commerce Fulfillment and 67.7% by Alottafun!, Inc. E-Commerce Fulfillment
(ECF) was a wholly owned by Jeffrey C. Kasch, President of M.W. Kasch Company.
ECF's responsibilities and obligations included selling toy products to the
joint venture, at prices that did not exceed prices charged to ECF's typical
customers. ECF provided its products based on regular availability. ECF also
merchandised toys on the Web site and made decisions as to which toys to
highlight as special buys, to promote, or present as a `hot' toy. M.W. Kasch
Company warehoused and provided fulfillment to ECF. The relationship between
M.W. Kasch Company and ECF was exclusive as far as ECF was concerned, but not
exclusive with regard to M.W. Kasch. M.W. Kasch was free to sell any and all
other retailers, electronic or otherwise. Our role was to manage marketing
strategies, and to provide the electronic mediums for the sale, customer
support, and fulfillment of products that the joint venture purchases.
In October 1999, we commenced negotiations with a software developer, MHA, to
jointly develop a business-to-business site, that would allow toy manufacturers
to sell direct to retailers as a further expansion of its TOYPOP site. We chose
not to partner with MHA, and instead decided to pursue a business-to-business
strategy ourselves. At Toy Fair 2000, we announced our strategy and began
signing up both manufacturers and retailers. We announced our
business-to-business internet strategy on February 22, 2000.
On February 28, 2000, the M. W. Kasch and us agreed to terminate our
relationship and thereupon, M.W. Kasch Co. gave notice that effective March 28,
2000 our agreement with them was terminated.
On February 10, 2000 as a result of our independent pursuit of a
business-to-business strategy without MHA, who hosted the TOYPOP internet site,
MHA shut down our TOYPOP site. We intend to remake the site into a channel in
the new MRABA internet initiative. Sales of toy products through the TOYPOP site
amounted to $ 16,506 during the Holiday selling season, primarily due to the
lack of marketing and the limited availability of the better selling toy
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products that was available through M. W. Kasch. We are optimistic that TOYPOP
can be made a viable internet retail portal through a reorganization and
restructuring within our MRABA internet opportunity.
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.
Without the joint venture with E-Commerce Fulfillment, we have revised the
expectation of our ability to sell toy products over the Internet. As we develop
relationships with the toy manufacturers through our MRABA initiative, and
providing that we can arrange the necessary capital, we now expect to capture
$20 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.
Our e-commerce site was originally launched on September 21, 1999. The Web-site
e-commerce development program cost about $235,144 through December 31, 1999. In
comparison with other retailers of toys, our expenditures were relatively small.
Marketing expenditures included limited newspapers, radio, magazine, and
internet advertisements. Our expected marketing program was not funded for the
recent holiday selling season. Our lack of marketing resources has had a
negative impact on our sales and our ability to meet our sales projections. Our
Toypop.com site was processing orders through February 10, 2000 when it was
closed.
Our operating results 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.
When we again reopen our TOYPOP portal during the second quarter 2000, we will
be using industry standard software and systems to process orders and to protect
the security of our customers. We will implement a broad array of scaleable site
management, search, customer, interaction, and systems used to process
customers' orders and payments. These services and systems will use a
combination of technologies developed by our software developers and are
commercially available, licensed technologies.
Our systems will again 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 New York city that provides
redundant communications lines and emergency power back up.
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 us 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 December 31, 1999.
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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 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 Vice-President of Sales is our only in-house sales
employee. 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. Our revenue will all be denominated in
U.S. dollars.
Our new e-Commerce initiative will be directed toward established manufacturers,
distributors and retailers in the toy industry. We hope that development of our
MRABA Internet site will allow us to become a business-to-business portal within
the toy industry to expedite delivery of toy products throughout that channel.
However, there is no assurance that our marketing and distribution efforts will
be successful. Furthermore, the MRABA project and the re-establishment of our
TOYPOP site to market and distribute our products through e-commerce may
conflict with our ability to market our products directly to retailers and other
local distributors.
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 a 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 the 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 both the online retail sale
of toys and other products and for business-to-business e-Commerce for the toy
industry 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
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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.
We 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
- - Online games
- - pocket ghost collectibles
- - 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.
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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 $200 million in 1999, 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 introduced new products within
our core product lines, including several unique collectible toys. These
classic toys continue to be popular among children and are not greatly
affected 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 84 characters within this
product line with the balance of 70 characters scheduled for completion in
Summer 2000. Our manufacturer in Israel supervises the quality control and
development aspects of new toy products. We maintain strong affiliations
with companies in Europe that will enable 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 European distributors. To facilitate sales in Europe, we
intend before the end of the year 2000, to make our TOYPOP site available
in other languages.
- - Development of TOYPOP.COM Interactive online toy store. The TOYPOP.COM
online toy store, originally opened on September 21, 1999 and was suspended
on February 10, 2000, will be reformulated to become part of the MRABA
network of 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 that 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 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.
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We cannot provide any assurance that our efforts will be successful. In
addition, if these popular products are available through us, we cannot
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.
Our principal TOYPOP 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 will focus 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. We will further expand into books, videos and music
categories. We intend to add to the depth of selections within each
category as we add many new manufacturers to the site. 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.
- BUILD BRAND RECOGNITION
Through our advertising and promotional activities, we will target
purchasers of children's products, with a primary focus on children and
mothers. We believe 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. Our plans will use 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, we expect
to continue to collect significant data about customers' buying
preferences and habits in an effort to increase repeat purchases
by existing customers. We will 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
We intend to build a relationship with children through collectible toys to
be launched in the summer of 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
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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
We intend to pursue new opportunities to increase sales by:
- opening new departments on TOYPOP.COM to expand into new
product categories;
- increasing product selection in existing departments;
- adding more services to further personalize the customer experience;
- pursuing international market opportunities; and
- acquiring complementary businesses, products or technologies.
- Pursue strategic acquisitions. Since our inception, we intended to
acquire and develop our unique 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, the ToyPop.com website and the MRABA.COM portal. We
marketed our collectible toys at the February 2000 Toy Fair. 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.
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.
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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
COLLECTIBLE TOYS
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 introduced 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 was 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. We have
focused on introducing our products in the European market initially.
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.
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SALES, MARKETING, AND DISTRIBUTION
We sell all of our products through our own in-house sales staff and
independent sales representatives. Purchasers of our products include toy and
discount retail chain stores, department stores, toy specialty stores and
wholesalers. The Alottafun! Surprise Box product is also distributed through
convenience and small specialty retail establishments. As we continue to expand
our operations, we will hire additional independent sales representatives to
handle specific classes of trade, such as video, military, mass merchandisers,
variety, toy, and other outlets.
Our success depends on our ability to establish and increase the size of our
distribution network for our products. To facilitate growth in our distribution
network, we provide incentives to distributors by offering them discounts on
volume purchases. Except for purchase orders relating to products on order, we
do not have written agreements with our customers. Instead, we generally sell
products to our customers pursuant to letters of credit or, in some cases, on
open account with payment terms typically varying from 30 to 90 days.
We will budget approximately 5% of our net sales for advertising and promotion
of our traditional products. We will use radio and to a lesser extent television
commercials to market our products. We advertise our products in trade and
consumer magazines and other publications, market our products at major and
regional toy trade shows, conventions and exhibitions and carry on cooperative
advertising with toy retailers and other customers.
TOYPOP.COM
TOYPOP.COM will promote its brand using a combination of online and traditional
advertising. We will advertise online on those popular destinations that target
children. As part of these arrangements, we will purchase banner advertisements,
often in conjunction with specified search keywords or on contextually
appropriate pages that allow children to immediately click through to the
TOYPOP.COM site. The significant flexibility of online advertising will allow us
to quickly adjust advertising plans in response to seasonal and promotional
activities.
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.
With our joint venture with E-Commerce Fulfillment, LLC, we expected to maintain
very low inventory levels, but with the withdrawal of M.W. Kasch we are now
dependent upon establishing another relationship or providing for the inventory,
and computer systems and other elements of the infrastructure to process and
fill orders.. The strategic relationship with Kasch had allowed 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 are now obligated to incur additional investment to
provide for what we originally believed was a key strategic advantage in
competing with other online toy retailers. We believe our MRABA site and the
developing relationships we are building with toy manufacturers has the
potential to supplant the Kasch relationship.
TOYPOP.COM, once re-opened, will internally process customer orders and will be
responsible for both security and data integrity. We will package and ship
customer orders and charge for merchandise, shipping and handling. We expect
that products will be shipped within two business days after an order is placed.
We will perform customer billing through a third-party credit card processor. We
will use 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
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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.
MRABA.COM
GENERAL
MRABA,COM will allow companies to sell products on the internet via a giant
network of thousands of retailers. This is an opportunity to increase the
distribution base and profits of e-Commerce participants.
We will utilize experienced professionals who are knowledgeable about
business-to-business e-Commerce that are based in New York City. We will create
a eCommerce network specifically designed for manufacturers, distributors and
wholesalers which enables them to display, promote and sell all of their product
offerings with no out-of-pocket expenses involved. We will charge a 1%
transaction fee for sales that move through our MRABA.COM portal.
ESTABLISH CUSTOMER WEBSITES
We will assist companies to set up products for sale with our e-Commerce
software and rapidly establish their presences on our network. We also include
previously established company websites that want to benefit from the
business-to-business exchange within the MRABA.COM network. The entire focus of
this business-to-business portal is to showcase a company's merchandise through
a vast network of retailers. For the first time user of the internet, we only
require that they provide product pictures, descriptions and prices and we will
establish their internet presences.
MRABA.COM ADVANTAGE OVER OTHER e-COMMERCE OPTIONS.
We expect to provide superior technology to showcase a company's merchandise and
provide superior customer service. These elements include:
- - Superior Technology
Superior technology provides the MRABA.COM merchant and enables various product
departments to offer merchandise with excellent product presentations that are
instantaneously published and fully integrated into the MRABA.COM network. The
result is a compelling shopping experience for the retailer. Completed product
sales through the system automatically generate orders for fulfillment.
- - Showcasing Merchandise
With very little effort, MRABA.COM's flexible design capabilities exploits and
presents product values. Quality photographs and descriptions are the raw
materials needed to create an effective online presentation. Our internet
specialists work with a company to create the intital product offering. When
this initial product selection is launched, a participant can add, remove or or
modify the offering at any time using our simple internet-based management tools
that require no special installation or training. By logging into the MRABA.COM
BackOffice with a password, changes can be made directly through the desktop
web-browser (Netscape, Internet Explorer or AOL) at any time. In addition to
merchandising products in MRABA.COM's network, a company can also get to view
all transactions and orders on a real time basis.
Product pages become easily accessed through the appropriate departments. A
participant company also gains access to a variety of special promotional
options that move merchandise in ways that will benefit their product offerings.
Featured Selections and What's New are both areas that focus retailer's
attention on specific products at the head of department pages. The Outlet Store
and Auction House are other examples that present MRABA.COM member's selections
including refurbished items, production over-runs and short-term clearance
sales.
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- - Superior Customer Service
One of the biggest barriers to merchandising on the web is reliable and
trustworthy customer service. We make the process easy for the participant
company. We have refined and developed simple policies and procedures that are
easy to use for the consumer.
We have made selling merchandise through the Internet an easy process for the
participant company. The complexities of presenting and marketing merchandise as
well as administrating customer service are all expeditiously and timely
handled. By providing and delivering quality merchandise, a participant company
benefits within the MRABA.COM internet portal community.
MANUFACTURING
Our own toy products are manufactured through contract manufacturers whom we
choose on the basis of quality, reliability and price. Consistent with industry
practice, the use of third-party manufacturers enables us to avoid incurring
fixed manufacturing costs. All of the manufacturing services performed overseas
for us are paid for either by letter of credit or on open account with the
manufacturers. To date, we have not experienced any material delays in the
delivery of our products; however, delivery schedules are subject to various
factors beyond our control, and any delays in the future could adversely affect
our sales. Currently, we have ongoing relationships with approximately five
manufacturers. We believe that alternative sources of supply are available,
although we cannot assure you that adequate supplies of manufactured products
can be obtained. At the present time, all of our manufactured products are sold
on the basis of letters of credit or wire transfers. We do not inventory
product. As we expand our business, we would expect to maintain a thirty-day
supply of inventory equal to our forecasted demand. These inventory levels will
be subject to inventory risk in the form of obsolescence or through purchasing
too much inventory and obtaining low product demand.
Although we do not conduct the day-to-day manufacturing of our products, we
participate in the design of the product prototype and production tooling and
molds for the products we develop or acquire, and we seek to ensure quality
control by actively reviewing the production process and testing the products
produced by our manufacturers.
We use our officers for our research and development efforts that include travel
expenses to identify manufacturers and use their participation in toy product
designs. However, our 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 filed a patent application for the Pocket Ghost Capsule. We
have not received confirmation that any of these trademark or patent
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.
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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 and MRABA.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.
We will 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.
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.
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Prospective competitors will be able to use the Internet as a marketing medium
to reach significant numbers of potential customers. Finally, new technologies
and the expansion of existing technologies, such as price comparison programs
that select specific titles from a variety of Web sites and may direct customers
to other online toy, video game, software, video and music retailers, may
increase competition. If we face increased competition, our operating results
may be adversely affected.
There are several ways we intend to differentiate ourselves from other on-line
merchandisers. First, we will sell products at significantly 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.
With the withdrawal of M.W. Kasch Company, to supply toy products to us, we are
confronted with major uncertainty that we can make a similar arrangement with
another toy distributor or other manufacturers. If we are not able to accomplish
this, then we will change the on-line retail concept of TOYPOP to provide only
our toy products and collectibles.
We continue to 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 once again opened and thus we may have an inability to generate significant
sales.
SEASONALITY
Sales of toy products are seasonal. Traditionally, the first quarter is the
period of lowest shipments and sales in our business that 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 restarting TOYPOP.com 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 either of
our Internet E-commerce sites are not fully functional and attractive to
potential customers, it could have a major affect on our sales in the fourth
quarter.
GOVERNMENT AND INDUSTRY REGULATION
Our products are subject to the provisions of the Consumer Product Safety Act
("CPSA"), the Food & Drug Administration ("FDA"), the Federal Hazardous
Substances Act ("FHSA"), the Flammable Fabrics Act ("FFA") and the regulations
promulgated thereunder. The FDA has review function over any candy products
which we produce or which we purchase. The FDA sets standards as to what is
proper color additives and food flavoring with regard to our candy products. All
our candy is produced under FDA approved conditions. The CPSA and the FHSA
enable the Consumer Product Safety Commission to exclude from the market
consumer products that fail to comply with applicable product safety regulations
or otherwise create a substantial risk of injury, and articles that contain
excessive amounts of a banned hazardous substance. The FFA enables the Consumer
Products Safety Commission to regulate and enforce flammability standards for
fabrics used in consumer products. The Consumer Products Safety Commission may
also require the repurchase by the manufacturer of articles which are banned.
Similar laws exist in some states and cities and in various international
markets. We maintain a quality control program designed to ensure compliance
with all applicable laws.
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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 April 7, 2000, 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.
EMPLOYMENT AGREEMENTS
We have employment agreements with Mr. Michael Porter, the company's president,
Mr. David Bazel, its Executive Vice President, and Mr. Gerald Couture, its Vice
President of Finance and Chief Financial Officer. The specifics of these
employment agreements are more fully explained in the proxy statement that is to
be filed shortly following this submission.
DIVIDEND POLICY
The Company has not paid any dividends on its common stock and does not intend
to pay cash dividends on its common stock in the foreseeable future. The Company
intends to follow a policy of retaining earnings, if any, to finance the
development and expansion of its business.
TRANSFER AGENT
Manhattan Transfer Registrar Company of Lake Ronkonkoma, New York acts as the
Company's Transfer Agent.
ITEM 2. DESCRIPTION OF PROPERTY
We lease 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 expires 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 us.
ITEM 3. LEGAL PROCEEDINGS.
LEGAL PROCEEDINGS
There is no pending litigation case, only threatened litigation against the
company from MHA, the company's past web site host and e-commerce provider that
terminated the company's TOYPOP website and refused to provide additional
e-commerce support services. This dispute involves a claim that we failed to
timely pay for past services rendered. However, there is no executed written
contract between the parties. Also, MHA is refusing to turn over the HTML web
pages that comprise our TOYPOP web site. MHA has also asserted certain copyright
infringement and trade secret misappropriation claims. No lawsuit has been
filed, merely an exchange of letters between respective counsel. If necessary,
and if litigation is instituted, we plan to vigorously defend and assert
substantial counterclaims. The likelihood of an unfavorable outcome is
impossible to assess at this time. The maximum potential loss to us is also
impossible to assess at this time.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter of
fiscal 1999.
PART II
ITEM 5. MARKET VALUE
Our Common Stock is listed and traded on NASDAQ OTC Bulletin Board under the
symbol ALFN. Manhattan Transfer Registrar Company of Lake Ronkonkoma, New York
is the transfer agent and registrar for our Common Stock. 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.
High Low
---- ---
1997
Fourth Quarter 5 1/8 1 5/16
Third Quarter 5 1 7/8
1998
Fourth Quarter 11/2 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
Four Quarter 7/8 11/16
(1) Our Common Stock began trading on approximately March 11, 1997. There is no
trading market for our warrants.
As of December 30, 1999, there were approximately 180 holders of record for
common stock However, the Company' management believes that approximately 3,088
of shareholder's beneficially own the Company's Common Stock as of December 31,
1999.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This 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 filing are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
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 $4,715,397 at December 31,
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
the MRABA.COM business-to-business e-Commerce portal 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 industry with 80% of
sales occurring in the fourth calendar quarter of each year and the present
timing of our advertising and marketing programs, we do not believe that we will
become profitable until the year 2001. We missed our opportunity for sales
through our TOYPOP Internet site in the 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 us become profitable. However, there
are no assurances that we 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.
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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.
RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenues
- --------
Total revenues for the period ended December 31, 1999 were $128,844 compared to
$37,429 for the same period in 1998, which represents an increase of $91,415 or
244%. 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 December 31, 1999 increased $70,127 or
245% to $98,669 from $28,543 in the same period in 1998. Cost of sales as a
percentage of sales remained the same at 77% in 1999 as compared to 1998. We
expect that improvement in gross profit margins will occur during 2000 as we
increase revenues.
Selling, General and Administrative Expenses
- --------------------------------------------
For the three month period ended December 31, 1999, total selling, general and
administrative expenses ("S, G & A") were $1,278,780 as compared to $454,126,
for the same period of 1998, a 181% increase. Within SG & A, selling expenses
amount to $204,809 for the year ended 1999 as compared to $66,886 for the prior
year, a 206% increase amounting to $137,923. General and administrative expense
amounted to $1,073,971 in 1999 as compared to $387,241 in the prior year. This
increase amounted to $686,730, or a 177% increase over the prior year. These
increases are attributed to the additional expense included legal expense of
$80,719, consulting fees of $324,855, officer salaries of $129,231 and other
wages of $72,500. Salaries, wages and consulting fees included payments using
common stock. In addition, development expenses associated with our Toypop.com
Internet site increased $235,144 during the year ended December 31, 1999. There
were no development expenses in the prior year. It is anticipated that these
expenses as a percentage of revenues will decrease in the future as our business
grows. We expect that S, G, & A expense as a percentage of sales will eventual
be in the 20-25% range.
Other Expenses
- --------------
We incurred losses on the sale of securities for the year ended December 31,
1999 in the amount of $271,686 that included unrealized losses of $110,558 as
compared to a $35,507 securities trading loss for the year ended December 31,
1998. This increase in loss amounted to $236,179 for 1999 over 1998. We have
discontinued investing in securities and presently deposit any operating funds
in money market accounts that bear no speculative risks.
Interest Expense
- ----------------
Interest expense decreased 14%, or $41,704 to $253,187 for the year ended
December 31, 1999 from $294,896 for 1998. This decrease is attributable to a
reduction in convertible debt because of conversion into common stock.
Net Loss
- --------
The net loss and the net loss per share before extraordinary items were
$1,844,176 and $0.24 per share respectively, for the year ended December 31,
1999, as compared to a net loss and net loss per share of $789,620 and $0.31 per
share respectively, for 1998. This loss was an increase of $1,054,556 or 134%,
over the previous year. During 1999, there was an extraordinary gain of $28,018
attributed to the forgiveness of a debt. There was no similar extraordinary item
in 1998. The net loss and the net loss per share were $1,816,176 and $0.23 per
share respectively, for the year ended December 31, 1999, as compared to a net
loss and net loss per share of $789,620 and $0.31 per share respectively, for
1998. For the year ended December 31, 1999, there were 7,771,193 shares of
common stock outstanding, on a weighted average basis, as compared to 2,528,155
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shares outstanding in 1998, on the same basis. This represents a 207% increase
in shares outstanding this year as compared to the previous year.
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 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.
Interest Expense
- ----------------
Interest expense increased 280%, or $217,229 to $294,896 for 1998 from $77,667
in 1997. This increase in interest expense is attributed to the substantial
charge for issuance of warrants at par value, a significant discount to the then
market price of the common stock, as part of the funding of $400,000 through a
convertible debenture.
Loss on disposal of impaired assets
- -----------------------------------
During 1997, we experienced a loss from a write-off of fixed assets that were no
longer being used in our business. These items consisted of dies, films, molds,
trademarks, and packaging design costs. These equipment assets previously were
used to generate income but they became of no further use in our operations
during 1997. These assets were disposed of in the year ended December 31, 1997
and there were no similar charges during the year.
Net Loss
- --------
The net loss and the net loss per share were $789,620 and $0.31 per share
respectively, for 1998, as compared to a net loss and net loss per share of
$495,232 and $0.26 per share respectively, for 1997. The loss was an increase of
$294,388, or 59%, over the previous year. The loss per share was about 19% more
than the previous year. In 1997, we benefited from the settlement of an
outstanding payable that resulted in a $0.02 per share extraordinary gain. For
1998, there were 2,528,155 shares of common stock outstanding, on a weighted
average basis, as compared to 1,917,013 shares outstanding in 1997, on the same
basis. This represents a 32% increase in shares outstanding in 1998 over the
previous year.
18
<PAGE>
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 December 31, 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 December 31, 1999, we have
issued 9,034,104 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 $0.01 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 year ended December 31, 1999. We have since
January 1, 1999, issued 1,101,000 shares of common stock and raised $693,851 in
cash and converted debentures in the face amount of $361,161 for 3,250,061
shares of common.. These funds were used to further develop our product line,
the hiring of key personnel, and for working capital purposes.
For the year ended December 31, 1999 we used $687,039 in cash used by operating
activities as compared to $418,719 in the year ended December 31, 1998.
Investing activities for the present year included the acquisition of equipment
in the amount of $115,441. During 1999, we has a loss from securities
transactions in the amount of $271,686. In the prior year, we had a gain of
$116,437. Financing activities for 1999 provided $668,362 that included $693,851
from the issuance of common stock. Cash decreased $405,804 for the year 1999 as
compared to a decrease of $372,092 in the prior year.
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 the working
capital needed 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
19
<PAGE>
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.
During the first quarter of this calendar year 2000, we issued 2,087,000 shares
of our common stock as restricted securities to raise $641,500 in additional
capital. We have an obligation to register these shares to provide the investors
future liquidity of their investment.
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 a successful implementation of this Internet
opportunity. We believe that we will arrange for all the financial resources
needed to properly execute our plan.
We do not presently have sufficient cash to operate for more than the next 90
days. We will need capital to promote our toy products during this year's toy
selling season, to provide product availability for our Hearthside Treasures,
and to development our Internet projects. We will need this capital to provide
for our anticipated working capital needs over the next twelve months. We are
presently seeking $500,000 in equity to allow us to sustain ourselves until we
can benefit from the Swartz investment agreement. We cannot provide any
assurance that we will be successful in raising such capital as such
undertakings are difficult to complete. Should our Internet endeavors become
highly successful, it will require more capital. Should this occur, the funding
availability in the Swartz placement, if available, that 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
as other participants.
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
20
<PAGE>
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 third 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 December 31, 1999.
Common Stock Market Price
<TABLE>
<CAPTION>
$.50(1) % $1.00(1) % $1.11(2) % $2.00(3) % $5.00(3) %
- -----------------------------------------------------------------------------------------------
Dollars Converted
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$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
21
<PAGE>
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;
(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.
22
<PAGE>
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
re-sales 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.
RIGHT OF FIRST REFUSAL
Swartz has a right of first refusal to purchase any variable priced securities
offered by us in any private transaction that 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.
YEAR 2000
To the best of our knowledge and belief, the Company has not experienced any
disruption in data processing on our financial reporting and operational systems
or malfunction in equipment containing microprocessors or significant delays in
receiving goods or services from key vendors and service providers or
delinquency in the receipt of payments from significant customers for services
provided by the Company as a result of the year 2000 issue. We cannot be sure
that some condition relating to the year 2000 exists, but has not been
identified.
23
<PAGE>
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company believes it will experience stronger demand for its products in the
spring, summer and fall of each year. By directing its marketing efforts to the
warmer states, the Company feels that fluctuations resulting from seasonality
will be minimized.
INFLATION
Inflation has not proven to be a factor in the Company's business since its
inception and is not expected to have a material impact on the Company's
business in the foreseeable future.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 7 appears at page F-1, which appears after
this page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on AUGUST 15, 2000.
ITEM 10: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on AUGUST 15, 2000.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on AUGUST 15, 2000.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on AUGUST 15, 2000.
24
<PAGE>
PART IV
ITEM 13. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1)(2) CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
A list of the Consolidated Financial Statements filed as part of this
Report is set forth in Item 8 and appears at Page F-1 of this Report;
which list is incorporated herein by reference. The Financial
Statement Schedules and the Report of Independent Auditors as to
Schedules follow the Exhibits.
(a)(3) EXHIBITS.
All of the items below are incorporated by reference to the Registrant's General
Form 10SB and amendments for Registration of Securities as previously filed.
EXHIBITS AND SEC REFERENCE NUMBERS
<TABLE>
<S> <C>
Number Title of Document
------ -----------------
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
2(f) ByLaws (2)
3(a) Amended and Restated Certificate of Designation, Preferences
3(b) Convertible Debenture Agreement by and between
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
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
6(f) Amended Registration Rights Agreement by and between
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
6(g) Stock Option Plan of Alottafun! dated May __, 1999 (3)
</TABLE>
(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
(b) Reports on Form 8-K
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 14, 2000 By: /s/ Michael Porter
----------------------------
Michael Porter
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
DATE SIGNATURE / TITLE
Dated: April 14, 2000 By: /s/ Michael Porter
----------------------------------
Michael Porter
Chief Executive Officer
Dated: April 14, 2000
By: /s/ David Bazalel
----------------------------------
David Bazalel
Executive Vice President
Dated: April 14, 2000 By: /s/ Gerald Couture
----------------------------------
Gerald Couture
Chief Financial Officer, Principal
Accounting Officer
27
<PAGE>
<PAGE>
Financial Statements
Alottafun!, Inc.
Years Ended December 31, 1999 and 1998
Independent Auditors' Report
<PAGE>
Alottafun!, Inc.
Financial Statements
Years Ended December 31, 1999 and 1998
Contents
Independent Auditors' Report on Financial Statements.......................F-1
Financial Statements:
Balance Sheet..........................................................F-2
Statements of Operations...............................................F-3
Statements of Changes in Stockholders' Deficit...................F-4 - F-5
Statements of Cash Flows.........................................F-6 - F-7
Notes to Financial Statements...................................F-8 - F-19
<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, 1999 and the related statements
of operations, changes in stockholders' deficit, and cash flows for the years
ended December 31, 1999 and 1998. 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,
1999 and the results of its operations and its cash flows for the years ended
December 31, 1999 and 1998 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 Note 2 to
the financial statements, the Company has sustained substantial losses since
inception that total approximately $4,700,000 and has used cash in operations of
approximately $687,000 and $418,700 for the years ended December 31, 1999 and
1998. respectively. The Company also has a negative working capital of $558,000
at December 31, 1999, negative tangible net worth of approximately $455,000 at
December 31, 1999, 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.
Certified Public Accountants
Tampa, Florida
March 31, 2000
F-1
<PAGE>
Alottafun!, Inc.
Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash $ 5,310
Accounts receivable 2,685
---------------
Total current assets 7,995
Property and equipment, net of accumulated depreciation 102,397
Other assets, trademark, net of accumulated amortization 3,043
---------------
$ 113,435
===============
Liabilities and Stockholders' Deficit Current liabilities:
Current maturities of long-term debt $ 132,691
Accounts payable 325,128
Accrued expenses 108,384
---------------
Total current liabilities 566,203
Stockholders' deficit:
Preferred stock; par value of $.0001 per share; 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; 9,034,104 shares issued and
outstanding 90,341
Additional paid-in capital 4,750,988
Accumulated deficit (4,715,397)
---------------
126,132
Deferred financing costs (455,400)
Stock subscription receivable (123,500)
Total stockholders' deficit (452,768)
$ 113,435
===============
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
F-2
<PAGE>
Alottafun!, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Sales, net of allowance and discounts $ 128,844 $ 37,429
Cost of sales 98,669 28,543
----------------------------------
Gross profit 30,175 8,886
----------------------------------
Operating expenses:
Selling 204,809 66,886
General and administrative 1,073,971 387,241
Depreciation and amortization 51,801 13,976
----------------------------------
1,330,581 468,103
----------------------------------
Loss from operations (1,300,406) (459,217)
----------------------------------
Other expenses:
Net realized loss on sale of securities, trading (161,128) (35,507)
Net unrealized loss on trading securities (110,558)
Interest expense (253,187) (294,896)
Other expense (18,897)
----------------------------------
Total other expenses (543,770) (330,403)
----------------------------------
Net loss before extraordinary gain (1,844,176) (789,620)
Extraordinary gain on forgiveness of debt 28,018
----------------------------------
Net loss $ (1,816,158) $ (789,620)
==================================
Loss per common share:
Loss before extraordinary gain $(.24) $(.31)
Extraordinary gain .01
----------------------------------
Net loss per common share $(.23) $(.31)
==================================
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
F-3
<PAGE>
Alottafun!, Inc.
Statements of Changes in Stockholders' Deficit
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- -------------------------
$.0001 $.01
Shares Par Shares Par
Issued Value Issued Value
---------------------- -------------------------
<S> <C> <C>
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
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
Conversion 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 Stock Deferred
Paid-In Accumulated Treasury Subscription Financing
Capital Deficit Stock Receivable Costs Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 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
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>
F-4
<PAGE>
Alottafun!, Inc.
Statements of Changes in Stockholders' Deficit
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- -------------------------
$.0001 $.01
Shares Par Shares Par
Issued Value Issued Value
--------------------- -------------------------
<S> <C> <C> <C> <C>
Stock issued for subscription and debt 249,007 2,490
Issuance of common stock for services 621,700 6,217
Issuance of preferred stock for services 2,000,000 $ 200
Issuance of common stock for cash 1,100,100 11,002
Issuance of common stock from
conversion of debentures and interest 3,250,621 32,506
Conversion of mandatorily redeemable
equity instruments 4,643 46
Intrinsic value of conversion feature on
detachable warrants
Retirement of treasury stock
Net loss for year
------------------------------------------------------------
Balance, December 31, 1999 2,000,000 $ 200 9,034,104 $ 90,341
============================================================
</TABLE>
Read independent auditors' report. The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Additional Stock Deferred
Paid-In Accumulated Treasury Subscription Financing
Capital Deficit Stock Receivable Costs Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
146,111 $ (123,500) 25,101
307,288 313,505
200
682,849 693,851
328,655 361,161
22,668 22,714
455,400 $ (455,400)
(67,888) 67,888
(1,816,158) (1,816,158)
- -------------------------------------------------------------------------------------------------------------------
$ 4,750,988 $ (4,715,397) $ 0 $ (123,500) $ (455,400) $ (452,768)
===================================================================================================================
</TABLE>
F-5
<PAGE>
Alottafun!, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Operating activities
Net loss $ (1,816,158) $ (789,620)
------------------------------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 51,801 13,976
Loss on sale of marketable securities 161,128 35,507
Unrealized loss on marketable securities 110,558
Interest on conversion of convertible debentures 192,043 223,529
Interest on warrants 25,377
Preferred stock issued for services 200
Common stock issued for services 313,505 154,455
Loss on disposal of assets 20,626
(Increase) decrease in:
Accounts receivable (2,685)
Inventory 4,914 8,086
Other assets 3,204 (1,013)
Deposits 19,450 (19,250)
Increase (decrease) in:
Accounts payable 226,007 (96,218)
Accrued expenses 28,368 26,452
------------------------------
Total adjustments 1,129,119 370,901
------------------------------
Net cash used by operating activities (687,039) (418,719)
------------------------------
Investing activities
Acquisition of equipment and intangible assets (115,441) (34,969)
Proceeds from sale of marketable securities 6,466,046 1,320,231
Purchase of marketable securities (6,737,732) (1,203,794)
------------------------------
Net cash (used) provided by investing activities (387,127) 81,468
------------------------------
Financing activities
Proceeds from collection of stock subscription 126,213
Proceeds from common stock and related paid-in capital 693,851 221,699
Purchase of treasury stock (6,755)
Principal reductions of long-term debt (25,489) (27,688)
Issuance of convertible debentures 400,489
Reduction in mandatorily redeemable equity instruments (4,615)
------------------------------
Net cash provided by financing activities 668,362 709,343
------------------------------
Net (decrease) increase in cash (405,804) 372,092
Cash at beginning of year 411,114 39,022
------------------------------
Cash at end of year $ 5,310 $ 411,114
==============================
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
F-6
<PAGE>
Alottafun!, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Supplemental disclosures of cash flow information
and noncash financing activities
Cash paid during the year for interest $ 30,494 $ 14,821
==============================
</TABLE>
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 were convertible into common stock. The Company 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. During December 31,
1999, $361,161 of the balance of the debentures was converted into 3,250,621
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 was recorded as other intangible assets. The Company used the
Black-Scholes pricing model to value these warrants. These debentures were
converted in December 1999 and the intangible asset fully amortized.
During 1999, the Company issued 249,007 shares of common stock for
satisfaction of a note payable totaling $25,101 and a stock subscription
totaling $123,500 to a stockholder of the Company.
The Company reclassified the remaining 4,643 shares of the mandatorily
redeemable equity to common stock.
In connection with the equity line commitment, the Company issued warrants
to purchase 700,000 shares of common stock. The Company used the
Black-Scholes pricing model to value the options, which were valued at
$455,400. This intrinsic value has been recorded as capital in excess of par
value.
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
F-7
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
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 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 plans to distribute the product line through toy retailers and over the
Internet.
During 1999, the Company increased the number of authorized common shares of
stock to 50,000,000.
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 $4,700,000 and has
used cash in operations of approximately $687,000 and $419,000 for the years
ended December 31, 1999 and 1998, respectively. The Company has a negative
working capital of $558,000 at December 31, 1999 and has negative tangible net
worth of approximately $455,000 at December 31, 1999. 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.
F-8
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
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.
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 for the years ended December 31,
1999 and 1998 amounted to $32,390 and $549, respectively.
The Company records revenue and related profit when the product is
shipped to the customer.
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 marketable
securities with a fair market value of $100 at December 31, 1999.
Read independent auditors' report.
F-9
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
3. Significant Accounting Policies (continued)
The costs of the trademark acquired are being amortized using the
straight-line method over the estimated useful life of five years. The
useful life of the trademark is evaluated annually and adjusted, if
necessary.
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.
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.
Read independent auditors' report.
F-10
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
3. Significant Accounting Policies (continued)
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 expensed 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. During 1999, these debentures were converted into 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 was recorded as other intangibles. The Company
used the Black-Scholes pricing model to value these warrants. The value
of these warrants was being amortized over the five-year life of the
convertible debentures. The conversion of the debentures into stock
accelerated the amortization of the warrants, which amounted to $192,043
for the year ended December 31, 1999.
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted average number of common shares outstanding
for the period. Common stock equivalents are not considered because
their effect would be anti-dilutive.
Advertising costs are charged to operations when incurred and amounted
to $96,298 and $1,321 for the years ended December 31, 1999 and 1998,
respectively.
Read independent auditors' report.
F-11
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
4. Property and Equipment
Property and equipment consist of:
Office equipment $ 26,439
Warehouse equipment, dies, files, and molds 107,420
-----------
133,859
Less accumulated depreciation 31,462
-----------
$ 102,397
===========
5. Notes Payable and Long-Term Debt
Notes payable and long-term debt consist of:
<TABLE>
<S> <C>
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
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 10.0% per
annum; due on demand 21,648
-----------
132,691
Less current maturities 132,691
-----------
$ 0
===========
</TABLE>
Read independent auditors' report.
F-12
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
6. Stock
The Company issued $400,000 in convertible debentures in December 1998. The
debentures paid interest at two percent per annum and matured on December 8,
2003. The debentures were convertible into shares of common stock at the option
of the holder and could be converted at any time commencing on the issue date.
The conversion price for each debenture at the date of conversion is 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. The Company has recorded interest of approximately $223,500 in 1998 to
reflect the intrinsic value of the conversion feature of these debentures.
During 1999, the debentures were converted into 3,250,621 shares of common
stock.
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 was amortized over the five-year life of the
convertible debentures; however, the conversion of debentures to stock
accelerated this amortization. The Company has amortized $25,377 of the
intrinsic value during the year ended December 31, 1998. During the year ended
December 31, 1999, these warrants were exercised and the balance of the
intangible asset of $192,043 was expensed as interest.
On June 4, 1999, the Company 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.
Read independent auditors' report.
F-13
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
6. Stock (continued)
On each put right, 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
percent of the aggregate daily reported trading volume for 20 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 percent 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. These warrants were valued at $292,757
using the Black-Scholes pricing model and recorded as deferred financing costs
in the financial statements. Following each purchase of common stock, the
Company is obligated to issue to Swartz, a warrant to purchase shares of common
stock equal to 15 percent of the common shares issued in each put right. Each
warrant is to be exercisable at a price equal to 110 percent of the market
price. In addition, the Company issued warrants to acquire up to 250,000 shares
of common stock at an exercise price of $1.00625 to Dunwoody Brokerage Services,
Inc., an affiliate of Swartz. These warrants were valued at $162,643 and are
also recorded as deferred financing costs in the financial statements. No shares
of the Company's common stock have been issued under this agreement as of
December 31, 1999.
The Company has authority to issue up to 5,000,00 shares of preferred stock
pursuant to action by the board of directors. In February 1999, the Company
entered into an agreement with two stockholders/directors that granted them
1,000,000 shares each of Series A voting preferred stock. These shares were
issued for nominal consideration and were valued at $.0001 par value. Each share
of the Series A preferred stock has the right to cast 25 votes per share on each
and any matter that the common stock is entitled to vote. Accordingly, the two
stockholders/directors are able to control the affairs and operations of the
Company 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, Series A preferred stockholders have the right to convert each share of
the Series A preferred stock into common stock based on the Company attaining
specified annual revenue limits.
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.
Read independent auditors' report.
F-14
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
6. Stock (continued)
The Company grants options and warrants to purchase shares of the Company's
common stock to individuals under various agreements. The following is a summary
of stock option and warrant activity during the year ended December 31, 1999:
<TABLE>
<CAPTION>
Options Warrants
--------------------------------- -------------------------------
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
December 31, 1997 0 $ .00 0 $ .00
---------------------------------------------------------------
Granted in 1998 0 .00 411,000 .001
Exercised in 1998 0 .00 (411,000) (.001)
-----------------------------------------------------------------
Outstanding at
December 31, 1998 0 .00 0 .00
Granted in 1999 5,500,000 .15 700,000 1.01
Exercised in 1999 0 .00 0 .00
---------------------------------------------------------------
Outstanding at
December 31, 1999 5,500,000 $ .15 700,000 $1.01
===============================================================
</TABLE>
The following table summarizes the status of outstanding options and warrants at
December 31, 1999:
Weighted Average
Exercise Number Remaining
Price of Shares Contractual Life
---------------------------------------------------------------------
$ 0.15 5,500,000 9.08
$ 1.01 700,000 4.50
--------------
6,200,00
==============
As of December 31, 1999, all of the above were exercisable, the options expire
10 years after the date granted, and the warrants expire five years after the
date of grant.
Read independent auditors' report.
F-15
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
6. Stock (continued)
FASB No. 123 requires disclosure of pro forma net income as if the fair value
based methods had been applied in measuring compensation costs for common stock
options and warrants granted. Pro forma net income and net income per common
share are as follows for the year ended December 31, 1999:
As reported:
Net loss $ (1,816,158)
==============
Basic loss per common share $ (.23)
==============
Pro forma:
Net loss $ (2,606,658)
==============
Basic loss per common share $ (.34)
==============
The weighted average fair value of the options and warrants at their grant date
during year ended December 31, 1999 was $.20. The estimated fair value of each
option granted is calculated using the Black-Scholes option pricing model. The
following summarizes the weighted average of the assumptions used in the model:
Risk-free interest rate 5.072%
Expected years until exercise 8.23 Years
Expected dividend yield --
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.
7. Operating Leases and Related Party Transactions
The Company is obligated under various month-to-month operating leases for the
rental of space and related equipment. For 1999 and 1998, total rent amounted to
$11,960 and $6,600, respectively.
The Company has use of offices in Hong Kong, Germany, and New York. The space in
Hong Kong is provided by one of the Company's suppliers free of charge. The
space in New York and Germany is provided by a stockholder at no cost.
The above amounts are not necessarily indicative of the amounts that would have
been incurred had comparable transactions been entered into with independent
parties.
Read independent auditors' report.
F-16
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
8. 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, 1999 and are
as follows:
Deferred tax assets $ 1,634,000
Allowance (1,634,000)
-------------
$ 0
=============
The difference between the provision for income taxes and the amounts obtained
by applying the statutory U.S. federal income tax rate to the net loss before
income taxes is as follows:
1999 1998
-----------------------
Tax benefit at statutory rate $(691,300) $ (300,100)
Extraordinary gain on forgiveness of debt 10,600
Valuation allowance on net operating loss 680,700 300,100
-----------------------
Tax expense $ 0 $ 0
=======================
The Company has available at December 31, 1999 approximately $4.3 million of
unused operating loss carryforwards that may be applied against future taxable
income, which would reduce taxes payable by approximately $1.6 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.
9. Extraordinary Gain
During 1999, 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 of
$28,018.
Read independent auditors' report.
F-17
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
10. Earnings Per Share
The following data shows the amounts used in computing earnings per share:
1999 1998
----------------------------
Net loss $ (1,816,158) $ (789,620)
================================
Weighted average number
of common shares
used in basic EPS 7,771,193 2,528,155
================================
11. 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.
12. 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.
Read independent auditors' report.
F-18
<PAGE>
Alottafun!, Inc.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
12. Employment Agreements (continued)
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.
13. Joint Venture Agreement
In May 1999, the Company joint ventured with E-Commerce Fulfillment, LLC (ECF),
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 percent by ECF and 67.7 percent by the Company. 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 that do not exceed the prices charged to ECF's typical
customers. ECF will provide its products based on regular availability. ECF will
also merchandise the toys on a website and make decisions as to what 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.
Subsequent to December 31, 1999, M.W. Kasch Company, on behalf of ECF,
terminated its interest in the joint venture.
14. Contingencies
The Company's past website host and e-commerce provider has terminated the
Company's website and refused to provide additional e-commerce support services.
This dispute involves a claim that the Company has failed to timely pay for past
services rendered. However, there is no executed written contract between the
parties. Also, the website provider is refusing to turn over the HTML web pages
that comprise the Company's website and has asserted certain copyright
infringement and trade secret misappropriation claims. No lawsuit has been
filed. If necessary, and litigation is instituted, the Company plans to
vigorously defend and assert substantial counterclaims. Management of the
Company and its legal counsel indicate that the likelihood of an unfavorable
outcome, as well as the maximum potential loss, if any, is impossible to assess
at this time.
Read independent auditors' report.
F-19
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