SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: November 10, 2000
(Date of earliest event reported)
MYTURN.COM, INC.
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(Exact name of Registrant as specified in charter)
Delaware 000-22611 11-3344575
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(State or other jurisdiction (Commission File No.) (IRS Employer Identification
of incorporation) Number)
1080 Marina Village Parkway, 3rd Floor, Alameda, California 94501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 263-4800
<PAGE>
Item 5. Other Information.
Update of 1999 Financial Statements.
MyTurn.com, Inc., a Delaware corporation ("MyTurn.com" or the
"Company") is updating its audited financial statements for the fiscal year
ended December 31, 1999 to address MyTurn.com's requirements for additional
financing to support its operations during the 2001 fiscal year and management's
plans in that regard. These amendments are reflected in Note 16 to such audited
financial statements and are referred to in the related independent accountants'
report of PricewaterhouseCoopers LLP.
The audited financial statements of the Company as at December 31, 1999
and for the two years in the period are set forth on pages F-1 through F-32,
starting on the next page.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
Exhibit No. Description
----------- -----------
23.1 Consent of PricewaterhouseCoopers LLP,
independent accountants.
<PAGE>
MyTurn.com, Inc and Subsidiaries
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
(PricewaterhouseCoopers LLP) F - 2
Independent Auditor's Report (Lazar, Levine, & Felix, LLP) F - 3
Consolidated Balance Sheet F - 4
Consolidated Statements of Operations F - 6
Consolidated Statements of Shareholders Equity F - 7
Consolidated Statements of Cash Flows F - 9
Notes to the Financial Statements F - 10
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of MyTurn.com, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, shareholders= equity and of cash flows
present fairly, in all material respects, the financial position of MyTurn.com,
Inc. and its subsidiaries at December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company=s management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
As discussed in Note 16, subsequent to April 2000, the Company's business plan
changed resulting in a substantial increase in operating expenses and net cash
used in operations. The Company will continue to incur net operating cash
outflows through December 31, 2000 and beyond to accomplish its long term
business objectives. The Company has received a commitment from its Chief
Executive Officer and Chairman of the Board to meet any funding needs of the
Company, as determined by management, through December 31, 2000 to the extent
those needs are not covered by any other sources.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, Florida
March 24, 2000, except for Note 15 for
which the date is April 4, 2000 and Note
16 for which the date is November 10, 2000
F-2
<PAGE>
LAZAR LEVINE & FELIX LLP
Certified Public Accountants & Business Consultants
350 Fifth Avenue - Suite 6820 629 Parsippany Road
New York, NY 10118-0170 Parsipanny, NJ 07054
(212) 736-1900 (973) 428-3200
Fax (212) 629-3219 Fax (973) 428-6868
www.lazarcpa.com
INDEPENDENT AUDITORS' REPORT
To the Shareholders
MyTurn.com, Inc.
formerly Compu-DAWN, Inc.
We have audited the statements of operations, shareholders' equity and cash
flows of Compu-Dawn, Inc., now known as MyTurn.com, for the year ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Compu-Dawn,
Inc., now known as MyTurn.com, for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
/S/ LAZAR LEVINE & FELIX LLP
----------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
February 25, 1999
F-3
<PAGE>
MyTurn.com, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
1999
----
Current Assets:
Cash and cash equivalents $ 1,454,421
Interest receivable 8,889
Prepaid expenses 8,689
Inventory 222,394
Other assets 3,307
---------
Total Current Assets 1,697,700
Fixed assets, net 214,500
Goodwill, net of accumulated amortization of $73,630 10,751,200
Software development costs 2,391,338
Licenses 1,901,984
Web-site development costs, net of accumulated
amortization of $24,188 609,459
Security deposits 38,319
---------
Total Assets $ 17,604,500
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,682,582
Current portion of note payable 7,120
Net liabilities of discontinued operations 512,197
----------
Total Current Liabilities 2,201,899
Non-Current Liabilities:
Note payable, non-current portion 15,288
Other non-current liabilities 3,633
----------
Total Liabilities 2,220,820
Commitments and Contingencies (Note 13)
F - 4
<PAGE>
Shareholders' Equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized:
Series A Convertible Preferred -
Series B Convertible Preferred;
1,370 shares issued and outstanding 14
Common stock, $.01 par value, 20,000,000 shares authorized,
7,786,905 shares issued and outstanding 77,868
Additional paid-in capital 37,265,511
Accumulated deficit (21,004,206)
Less: treasury stock, 352,544 shares at cost (955,507)
------------
Total Shareholders' Equity 15,383,680
------------
Total Liabilities and Shareholders' Equity $ 17,604,500
=============
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
MyTurn.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------
1999 1998
---- ----
Revenue:
<S> <C> <C>
Interest and other income $ 233,660 $ 336,955
--------- ---------
Costs and Expenses:
Cost in excess of Internet subscription fees 116,812 -
General and administrative expenses 6,951,938 -
Depreciation and amortization 111,872 -
Interest expense 111,033 17,459
Loss on investment transaction 71,000 296,952
--------- ---------
Total Costs and Expenses 7,362,655 314,411
--------- ---------
Income (Loss) From Continuing Operations (7,128,995) 22,544
--------- ---------
Discontinued Operations:
Loss from discontinued operations (6,792,222) (2,806,096)
Gain on sale of discontinued operations 537,732 -
---------- ----------
Net Loss $(13,383,485) $ (2,783,552)
============ ===========
Basic Income (Loss) Per Common Share:
Continuing operations $ (1.75) $ .01
Discontinued operations (1.67) ( .96)
Gain on sale of discontinued operation .13 -
---------- ---------
Basic Loss per Common Share $ (3.29) $ ( .95)
========== ===========
Diluted Income (Loss) Per Common Share:
Continuing operations $ (1.75) $ .01
Discontinued operations (1.67) (.74)
Gain on sale of discontinued operations .13 -
--------- ---------
Diluted Loss per Common Share $ (3.29) $ (.73)
========== ===========
Weighted Average Number of Basic Common
Shares Outstanding 4,074,061 2,937,724
========== ==========
Weighted Average Number of Diluted
Common Shares Outstanding 4,074,061 3,814,259
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
MyTurn.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Other Total
Preferred Stock Common Stock Additional Accumulated Comprehensive Treasury Shareholders'
--------------- ------------ Paid-in
Shares Amount Shares Amount Capital Deficit Income(Loss) Stock Equity
------ ------ ------ ------ ----- ------- ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 - - 2,838,450 $28,385 8,061,443 $(4,837,169) - $(47,085) $3,205,574
Exercise of stock options - - 24,895 248 68,339 - - (47,085) 21,502
Private offering of shares
Preferred Series A 3,250 33 327,103 3,271 4,719,842 - - 4,723,146
Exchange of common
shares for Preferred
Series B 1,750 17 - - 531,525 - - (531,542) -
Share issued for professional
fees - - 75,000 750 280,500 - - 281,250
Unrealized loss on investment - - - - - (150,000) - (150,000)
Net loss - - - - - (2,783,552) - - (2,783,552)
-------- ------ --------- -------- --------- ---------- -------- ------ ----------
Balance at December 31, 1998 5,000 50 3,265,448 32,654 13,661,649 (7,620,721) (150,000) (625,712) 5,297,920
Exercise of stock options - - 701,847 7,018 1,983,264 - - (504,498) 1,485,784
Grant of stock options for
consulting services - - - - 212,800 - - - 212,800
Exercise of warrants - - 101,900 1,019 304,681 - - - 305,700
Issue of warrants for
consulting services - - - - 1,691,408 - - - 1,691,408
Shares issued for
professional fees - - 797,398 7,974 2,965,598 - - 174,703 3,148,275
Sale of stock in private
placements - - 1,565,000 15,650 2,252,506 - - - 2,268,156
Change in unrealized loss
on investment - - - - - - 150,000 - 150,000
Conversion of Series A
Preferred Stock (3,250) (33) 650,000 6,500 (6,467) - - - -
F - 7
<PAGE>
Conversion of Series B
Preferred Stock (380) (3) 71,028 710 (707) - - - -
Common Shares granted
for GlobalPC acquisition - - 634,284 6,343 2,761,038 - - - 2,767,381
Class B Warrants issued for
GlobalPC acquisition - - - - 6,845,040 - - - 6,845,040
Class C Warrants issued for
GlobalPC acquisition - - - - 1,378,800 - - - 1,378,800
Warrants issued for
Geoworks license - - - - 1,395,900 - - - 1,395,900
Stock bonus to
officers and directors - - - - 1,761,550 - - - 1,761,550
Repricing of non-employee
options - - - - 58,451 - - - 58,451
Net loss - - - - - (13,383,485) - - (13,383,485)
------ ------- --------- -------- ------------ ------------ ---------- ----------- -----------
Balance at December 31, 1999 1,370 $ 14 7,786,905 $ 77,868 $37,265,511 $(21,004,206) $ - $(955,507) $15,383,680
======= ======= ========= ======== ============ ============ ========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 8
<PAGE>
MyTurn.com, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-------------------
1999 1998
---- ----
Cash Flows from Operating Activities:
Net loss $(13,383,485) $(2,783,552)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss from discontinued operations 6,792,222 1,656,096
Gain on sale of discontinued operations (537,732) -
Write-off of impaired loan - 1,150,000
Common Stock issued for consulting services 590,573 -
Warrants issued for consulting services 1,691,408 -
Stock bonus to officers and directors 1,761,550 -
Repricing of non-employee options 58,451 -
Depreciation and amortization 111,872 -
Loss on settlement of legal claim 71,000 -
Loss on sale of short-term investments 36,818 -
(2,807,323) 22,544
========== ========
Changes in assets and liabilities net of
effects from acquisitions and dispositions:
Increase in interest receivabl (8,889) -
Decrease in tax refund receivable - 29,868
Decrease in prepaid expenses and other assets 111,464 -
Increase in inventory (165,394) -
Increase in security deposits (25,569) -
Increase in accounts payable and accrued expenses 192,748 -
Decrease in other payable (18,314) -
--------- -------
86,046 29,868
--------- -------
Net cash provided by (used in) continuing operations (2,721,277) 52,412
----------- ------
Net cash used in discontinued operations (3,312,121) (1,330,626)
----------- -----------
Net cash used in operating activities (6,033,398) (1,278,214)
----------- ----------
Cash Flows from Investing Activities:
Capital expenditures of discontinued operations (124,935) (1,913,517)
Purchase of marketable securities - (2,000,000)
Proceeds from sale of marketable securities 1,963,182 -
Advances to Global PC (1,541,246) -
Proceeds from sale of public safety division 500,000 -
Proceeds from sale of network marketing customer lists 250,000 -
-------- ---------
Net cash provided by (used in) investing activities 1,047,001 (3,913,517)
--------- -----------
Cash Flows from Financing Activities:
Net cash used in discontinued operations (6,534) (105,770)
Proceeds from exercise of stock options and warrants 1,791,484 21,502
Net proceeds from private placements of common stock 2,177,468 4,723,146
Loan repayment to former officer (50,000) -
Net cash provided by financing activities 3,912,418 4,638,878
--------- ----------
Net Decrease in Cash and Cash Equivalents: (1,073,979) (552,853)
Cash and Cash Equivalents at Beginning of Year 2,528,400 3,081,253
Cash and Cash Equivalents at End of Year $ 1,454,421 $2,528,400
=========== ===========
See accompanying notes to consolidated financial statements.
F - 9
<PAGE>
NOTE 1 - DESCRIPTION OF COMPANY AND BUSINESS ACQUISITION
Coastal Computer Systems, Inc., a New York company, was formed on March
31,1983. On October 18, 1996 Coastal Computer Systems, Inc. was reincorporated
in Delaware under the name Compu-DAWN, Inc. On January 20, 2000 Compu-DAWN, Inc.
changed its name to MyTurn.com, Inc. (the "Company"). From 1983, until January
1999, the Company was primarily engaged in the business of designing,
developing, licensing, installing and servicing computer software products and
systems predominantly for public safety and law enforcement agencies.
On January 8, 1999, the Company's wholly-owned subsidiary, e.TV Commerce,
Inc. ("e.TV") acquired certain assets of LocalNet Communications, Inc.
("LocalNet") pursuant to a surrender of collateral to satisfy secured loans made
by the Company to LocalNet (see Note 3). From January 8, 1999 through June 1999,
the Company, through e.TV, operated in the Internet, e-commerce and
telecommunications business, marketing products and services primarily using a
person to person sales approach with the services of commissioned sales
representatives in a relationship-based referral marketing organization (see
Note 9).
In May 1999, the Company adopted a plan to dispose of the assets which made
up the public safety software division and ceased selling products and services
through network marketing activities. In July 1999, the Company sold primarily
all of the assets which made up its public safety software division to an
unrelated third party (see Note 9).
From July 1999 through December 1999, the Company derived revenues
primarily from Internet subscription fees, while focusing on fund raising
efforts and on finalizing the asset purchase transaction with Global PC, Inc.
On December 22, 1999 the Company acquired substantially all the tangible
and intangible assets of Global PC, Inc.("Global PC"). Global PC has developed
enhancements to GEOS, a simplified, user friendly, computer operating system
owned by Geoworks, Inc. In addition, Global PC has developed a series of
software applications. The GEOS operating software is to be embedded in a low
cost "easy to use" personal computer (the "GlobalPC Device"), along with the
application software developed by Global PC.
The purchase price consisted of 634,284 shares of Common Stock, warrants to
purchase 2,284,400 shares of Common Stock at an exercise price of $2.50 per
share, the assumption of certain liabilities, as well as $1,541,246 of cash,
previously provided to Global PC in the form of loans. The Company may be
required to provide additional contingent consideration in the form of warrants
to purchase up to 2,269,284 shares of Common Stock at a price of $2.50 per share
if certain milestones for registered users of Internet access service utilizing
the Global PC Device are achieved by March 31, 2002 (see Note 8).
F - 10
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The acquisition was accounted for as a purchase and the related net assets
were included in the financial statements at their estimated fair values at the
date of acquisition. The excess of the purchase price over fair value of the net
assets acquired and liabilities assumed has been recorded as goodwill and is
being amortized over three years. The results of the acquired business have been
included in the consolidated financial statements since the December 22, 1999
acquisition date. The aggregate purchase price of $12,600,467, including fees
and expenses, was allocated as follows:
Software development costs $ 2,115,000
Inventory 57,000
Property, plant and equipment 113,772
Goodwill 10,824,830
Liabilities assumed (95,662)
Other liabilities (414,473)
---------
$ 12,600,467
============
Following are the Company's unaudited pro forma results for 1999 and 1998
assuming the acquisition occurred on January 1, 1998:
1999 1998
---- ----
Revenues $ 344,513 $ 342,199
Net loss $(20,544,289) $(8,758,980)
Basic loss per share $ (4.36) $ (2.45)
Diluted loss per share $ (4.36) $ (1.97)
The pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used in the preparation of the
accompanying financial statements follows:
(a) Principles of Consolidation:
The accompanying financial statements have been prepared on a consolidated
basis to include the accounts of the Company and its wholly-owned subsidiaries,
GPC Acquisition Corp., Inc., e.TV Commerce, Inc., and e.Tel, Inc. All
significant inter-company accounts and transactions have been eliminated.
(b) Use of Estimates:
In preparing financial statements in accordance with generally accepted
accounting principles, management makes certain estimates and assumptions, that
affect the reported amounts of assets and
F - 11
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statement, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(c) Financial Instruments:
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents.
At times, the Company maintains deposits in federally insured financial
institutions in excess of federally insured limits. Management monitors the
soundness of these financial institutions and feels the Company's risk is
negligible.
As of December 31,1999, the fair value of cash equivalents, receivables,
accounts payable and debt instruments approximate their carrying value.
(d) Marketable Securities:
At December 31, 1998, marketable securities have been categorized as
available for sale and, as a result, are stated at fair value in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Unrealized gains and losses are
included in shareholders' equity as other comprehensive income (loss). There
were no unrealized gains or losses at December 31, 1999.
(e) Inventories:
Inventories consist of computer components and subassemblies and are stated
at the lower of cost, as determined using the first-in first-out (FIFO) method,
or market.
(f) Fixed Assets:
Fixed assets are recorded at cost. Depreciation is provided on the
straight-line method over the following estimated useful lives:
Computer equipment 5 years
Software 5 years
Furniture and fixtures 7 years
Additions and major renewals are capitalized. Maintenance and repairs are
expensed as incurred. Leasehold improvements are amortized over the useful life
of the asset or the lease, whichever is shorter.
F - 12
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(g) Goodwill:
Cost in excess of fair value of net assets acquired (Goodwill) is being
amortized on the straight- line method over three years. If it became probable
that the projected future undiscounted cash flows associated with the acquired
assets were less than the carrying value of the goodwill, the Company would
recognize an impairment loss in accordance with the provisions of Statement of
Financial Accounting Standards No.121, Accounting for the Impairment of Long
Lived Assets to be Disposed of. "
(h) Intangibles:
The Company's intangible assets include software development costs,
licenses and certain web- site development costs. Software development costs
will be amortized on the units-of-production method based on the number of
computer devices manufactured. Amortization calculated under the
units-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any period.
Licenses are being amortized on the straight-line method over the life of the
license agreement of 5 years. Web-site development costs are being amortized on
the straight-line method over their estimated useful life of 2 years.
The Company will review the carrying value of their intangible assets on a
quarterly basis to determine if there has been an impairment. Should the review
indicate that an intangible asset is not recoverable, the Company's carrying
value of that intangible asset will be reduced. No impairment was recognized in
1999.
(i) Software Development Costs:
The Company reflects costs incurred in establishing the technological
feasibility of computer software to be leased or sold, as research and
development costs, and expenses such costs in the period incurred. Research and
development costs for the years ended December 1999 and 1998 aggregated $ 0 and
$ 515,788, respectively, and are included in the loss from discontinued
operations (Note 9).
The Company's policy is to capitalize software development costs after
technological feasibility of a product has been established. Capitalization of
computer software costs is discontinued when the product is available to be sold
or leased.
(j) Revenue Recognition:
Through July 1999, the Company generated revenues primarily from the
granting of non- exclusive, non-transferable and non-assignable licenses to use
software it has developed, through fixed price contracts. Revenues from such
fixed price contracts were recognized using the percentage of completion method
of accounting. The Company retained title to the software and warrants that it
will provide technical support and repair any defects in the software at no
charge. The warranty period for each contract was negotiated individually, for
periods ranging from 90 days to three years. To date, repair costs have been
minimal and therefore the Company has not established a reserve for such
F - 13
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
warranty costs. Additionally, the Company provided post-contract customer
support to licensees of its software. Revenues from such services were
recognized ratably over the period of performance. Fees billed and/or received
prior to performance of service were reflected as deferred revenue. For the
years ended December 31, 1999 and 1998, all such revenues and warranty costs
have been included in the loss from discontinued operations (See Note 9). In
connection with the July 1999, sale of the company's public safety software
business, the obligations associated with contracts to install, service and
maintenance of these software systems were assigned to the purchaser.
Subsequent to July 1999, revenue is being generated solely from monthly
Internet subscription fees. The Company collects monthly fees from subscribers
and currently remits 50% to a third party Internet service provider ("ISP"). For
the year ended December 31, 1999, gross revenues from subscribers totaled
$372,291 and costs to the ISP were $489,103.
(k) Advertising Costs:
Advertising costs, are expensed as incurred. For the years ended December
31, 1999 and 1998, advertising costs aggregated $21,032 and $19,449,
respectively.
(l) Income Taxes:
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and to net operating loss and tax
credit carry forwards, measured by enacted tax rates for years in which taxes
are expected to be paid or recovered. A valuation allowance is provided against
the future benefit of deferred tax assets if it is determined that it is more
likely than not that the future tax benefits associated with the deferred tax
asset will not be realized.
(m) Stock-Based Compensation:
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting For Stock
Issued to Employees." Accordingly, no compensation expense is recorded for
options issued to employees in fixed amounts and with fixed exercise prices at
least equal to the fair market value of the Company's Common Stock at the date
of measurement. The Company discloses certain pro-forma information as if the
Company used the fair value method to account for employee stock based
compensation. All stock based awards to non-employees are accounted for using
the fair value method.
On March 31, 1999, the FASB issued an Exposure Draft, "Accounting for
Certain Transactions Involving Stock Compensation". This Exposure Draft will
have an impact on the Company's accounting for certain stock option repricings
and acceleration of vestings that occurred during 1999. It is expected that the
FASB will issue a final Interpretation on these topics in the second quarter of
2000. The effects of applying the Interpretation will be recognized on a
prospective basis upon
F - 14
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
issuance of the final interpretation.
(n) Earnings (Loss) Per Share:
Basic net loss per share is computed using the weighted average number of
Common Shares outstanding for the period. For 1999, diluted net loss per share
is the same as basic net loss per share as the effects of including potentially
dilutive securities in the computation is anti-dilutive. Common Stock equivalent
shares consist of convertible Preferred Stock, stock options and warrants. For
the year ended December 31, 1999, options and warrants to purchase 4,529,148
shares of Common Stock and Preferred Stock convertible into 256,075 shares of
Common Stock were excluded from the calculation of earnings per share since
inclusion would be anti-dilutive.
(o) Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
(p) Comprehensive Loss:
The components of comprehensive loss were as follows:
1999 1998
---- ----
Net loss $ (13,383,485) $ (2,783,552)
Unrealized holding losses
on marketable securities - (150,000)
------------- ------------
Comprehensive loss $ (13,383,485) $ (2,933,552)
============= =============
NOTE 3 - LOAN RECEIVABLE
Through December 1998, the Company loaned an aggregate of $1,900,000 to
LocalNet, an unaffiliated Florida corporation in the telecommunications and
Internet services marketing business. LocalNet entered into 12%, collateralized
promissory notes due in one year, at which time all interest and principal was
payable. The notes were collateralized by an interest in all of LocalNet's
tangible and intangible assets and a pledge of the Common Stock owned by its
Chief Executive Officer and the Chairman of its Board, which represented a 63.1%
ownership interest in LocalNet, in the aggregate.
F - 15
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
At December 31, 1998, the Company determined that the fair value of the
assets collateralizing the loan was $736,318. Accordingly the loan receivable
was written down by $1,150,000 in 1998. On January 8, 1999, LocalNet surrendered
the assets representing the collateral underlying this loan. In March 1999, the
Company determined that the fair value of the assets received by the Company was
$244,000 and accordingly wrote-off the remaining loan balance of $592,318 in
1999 which included additional advances of $100,000 made to LocalNet in 1999
prior to the surrender of assets. The write off of the loan balance in 1999 and
1998 is included in discontinued operations in the respective year.
NOTE 4 -FIXED ASSETS
Fixed assets consist of the following at December 31, 1999:
1999
----
Computer equipment $ 183,962
Furniture and fixtures 31,269
Software 11,772
Leasehold improvements 1,551
-----
228,554
Less: accumulated depreciation (14,054)
-------
$ 214,500
=========
Depreciation expense for the years ended December 31, 1999 and 1998 aggregated
$14,054 and $82,674, respectively. Depreciation expense for the year ended
December 31, 1998 is included in the loss from discontinued operations (Note 9).
NOTE 5 - NOTE PAYABLE
In April 1997, the former Chairman of the Board of the Company agreed to
extend the Company a $500,000 credit line for a period of two years,
collateralized by all the assets of the Company. At December 31, 1998 the
balance outstanding on this credit line was $50,000, which was payable in
quarterly installments of $25,000 plus interest at 10% per annum. This credit
line was paid in full during 1999.
In January 1999, the Company assumed a LocalNet note payable to a bank as
part of the surrender of certain assets by LocalNet (see Note 3). At December
31, 1999, the balance outstanding on this note payable was $22,408 with
principal and interest payable monthly at an interest rate of 11.13% per annum.
For the years ended December 31, 1999 and 1998, the interest expense
relating to these loans aggregated $4,760 and $10,208, respectively.
F - 16
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Annual maturities of the note payable are as follows at December 31, 1999:
2000 $ 7,120
2001 7,954
2002 7,334
----------
$ 22,408
==========
NOTE 6 - CAPITAL STOCK
The Company's capital stock consists of Common Shares ("Common Stock") with
a $.01 par value and Convertible Preferred Shares ("Preferred Stock") with a
$.01 par value. Holders of Common Stock have one vote per Common Share and are
entitled to receive dividends when, and if declared by the Board of Directors.
The Company has not declared or paid dividends to date.
The Preferred Stock consists of:
(a) Series A Preferred Stock which are convertible in whole or in part, at
the option of the holders thereof, into shares of Common Stock at a conversion
price which is determined at the date of conversion as 85% of the average of the
five lowest closing bid prices of the Company's Common Stock for the 25
consecutive trading days immediately preceding the date of determination not to
exceed $8.025 per share. The number of Common Shares issuable upon conversion is
determined by a formula based on the market price at the time of conversion.
Holders of Series A Preferred Stock have no voting rights and are not entitled
to receive dividends. During 1999, all shares of Series A Preferred Stock were
converted into shares of Common Stock.
(b) Series B Preferred Stock which are convertible in whole or in part, at
the option of the holders thereof, into 327,103 shares of Common Stock at a
conversion price of $5.35 per Common Share, subject to certain adjustments.
Holders of Series B Preferred Stock have no voting rights and are not entitled
to receive dividends unless, dividends are declared on the Common Stock. During
1999, 380 shares of Series B Preferred Stock were converted into shares of
Common Stock.
On June 5, 1998, the Company completed a private offering of its
securities, whereby it sold to the purchasers the following:
(a) 3,250 shares of the Company's Series A Preferred Stock;
(b) 327,103 Common Shares of the Company; and
(c) warrants to acquire an aggregate of 90,207 Common Shares at an
exercise price of $8.025 per share, subject to adjustment
under certain circumstances.
The aggregate purchase price for the foregoing securities was $5,000,000;
net proceeds from this private placement aggregated approximately $4,723,000.
F - 17
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
On September 26, 1998, pursuant to a Securities Exchange Agreement between
the Company and the purchasers, the Company issued to the purchasers 1,750
shares of Series B Preferred Stock, par value $.01 per share, in exchange for
the 327,103 shares of Common Stock previously issued.
During 1998, options were exercised to acquire 24,895 shares of Common
Stock, for which the Company received $21,502 in cash proceeds and 4,380 shares
of Company Common Stock with a fair market value of $47,085.
In January 1999, holders of 1,575 Series A Preferred Stock and 270 Series B
Preferred Stock, converted such shares into 315,000 and 50,467 common shares,
respectively.
In February 1999, the Company issued the following:
(a) 10,000 shares of Common Stock to a consultant for services
rendered in October 1998. The value of these services, $15,000, was
accrued at December 31, 1998;
(b) 117,398 shares of Common Stock to a supplier of inventory to e.TV
as an inducement to enter into a contract with the Company. These
shares were valued at the market price at the date of issuance, for an
aggregate of $606,815; and
(c) 30,000 shares of Common Stock in connection with a consulting
contract. These shares were valued at $168,750, the aggregate market
value at the date of issuance.
In May 1999, the Company issued 62,500 shares of Common Stock to a former
officer out of the Company's treasury as consideration for consulting services
valued at $312,500. In June 1999, in connection with an amended and restated
termination agreement, this former officer received an additional 75,000 shares
of Common Stock, valued at $365,625.
In May and June 1999, options and warrants were exercised to purchase
97,500 and 8,000 shares of Common Stock, respectively for which the Company
received $384,000 in cash proceeds.
In June 1999, holders of 600 Series A Preferred Stock converted such shares
into 120,000 shares of Common Stock.
In July 1999, the Company issued 75,000 shares of Common Stock, valued at
$389,063, to an unaffiliated party in consideration of such party's agreement to
provide certain support and administrative services to the Company after the
acquisition of the e.TV business.
In July and August 1999, options and warrants were exercised to purchase
9,250 and 18,100 shares of Common Stock, respectively for which the Company
received $87,050 in cash proceeds.
In August 1999, the Company issued 62,500 shares of Common Stock in a
private placement for cash proceeds of $96,875.
F - 18
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
In October 1999, the Company issued the following:
(a) 10,000 shares of Common Stock to option holders, upon exercise,
for which the Company received $10,000 in cash proceeds;
(b) 50,000 shares of Common Stock, valued at $109,375, to a consultant
for services rendered in 1999;
(c) 25,000 shares of Common Stock, valued at $71,000, as part of a
litigation settlement (See Note 14); and
(d) 740,000 shares of Common Stock for proceeds of $844,345, net of
offering costs, in connection with a private placement.
In November 1999, the Company issued the following:
(a) 260,200 and 22,400 shares of Common Stock to option and warrant
holders, respectively, upon exercise, for which the Company received
$626,150 in cash proceeds;
(b) 15,000 shares of Common Stock valued at $43,125, plus $10,000 in
cash, to an entity in consideration for all rights, title, interest,
and trademark for "MyTurn" and the domain name "MyTurn.com";
(c) 675,000 shares of Common Stock and warrants to purchase 337,500
shares of Common Stock, at an exercise price of $3.00 per share, for
the investment of $1,100,623 net of offering costs, in connection with
a private offering;
(d) 400,000 shares of Common Stock issued to investment advisers, for
investment banking services rendered in 1999, valued at approximately
$950,000; and
(e) 200,000 shares of Common Stock in connection with the development
of the web-site, valued at approximately $804,000.
In December 1999, the Company issued the following:
(a) 324,897 and 53,400 shares of Common Stock to option and warrant
holders, respectively, upon exercise, for which the Company received
$684,284 in cash proceeds;
(b) 32,954 shares of Common Stock, valued at $205,960, to a vendor for
extinguishment of $187,237 of debt;
(c) 87,500 shares of Common Stock issued in a private offering for the
investment of $135,625; and
F - 19
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(d) 634,284 shares of Common Stock in connection with the net assets
acquired from Global PC (See Note 1).
In December 1999, the Board approved a stock bonus of 277,000 shares to be
issued out of the Company's treasury stock, valued at $1,761,550.
In December 1999, holders of 1,075 Series A Preferred Stock converted such
shares into 215,000 shares of Common Stock and holders of 110 Series B Preferred
Stock converted such shares into 20,561 shares of Common Stock.
NOTE 7 - STOCK OPTIONS
In October 1996, the Company established a Stock Option Plan under which
options to purchase 2,000,000 Common Shares may be granted to eligible persons.
Options under this plan expire in ten years and vest over service periods
ranging from immediately to ten years. A summary of the activity in the
Company's stock option plan, excluding options granted in 1999 in excess of the
Plan, is presented below:
Number Weighted Average
of Exercise Price
Shares Per Share
Balance at January 1, 1997 491,950 $ .45
Options granted 278,311 4.04
Options exercised (410,417) .32
Options canceled/forfeited (55,000) 1.69
-------------------------------------------------------------------
Balance at December 31, 1997 304,844 3.69
Options granted 490,100 5.82
Options exercised (24,895) 2.76
Options canceled/forfeited (265,083) 6.65
-------------------------------------------------------------------
Balance at December 31, 1998 504,966 4.22
Options granted 1,059,722 2.64
Options exercised (701,847) 2.12
Options canceled/forfeited - -
------------------------------------------------------------------
Balance at December 31, 1999 862,841 $ 2.97
======= ============
In 1998, no compensation expense related to the options was recorded since
the options were granted at an exercise price equal to or greater than the
market value of the Common Stock on the grant date.
In 1999, certain employee stock options, granted in 1999, were repriced to
a price equal to the market price on the day of repricing. Additionally, in
1999, vesting periods related to certain stock
F - 20
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
options previously granted were accelerated. As a result of a recent FASB
Exposure Draft, "Accounting for Certain Transactions Involving Stock
Compensation", the Company expects to recognize a significant stock compensation
charge, beginning July 1, 2000, in connection with these modifications to the
extent the options have not been exercised.
During 1999, the Company granted 4,058,083 options in excess of the
2,000,000 options grantable under the 1996 Stock Option Plan. The measurement
date for these options is January 20, 2000, the date the Shareholders approved
an increase in the number of shares available for granting under the Plan to
10,000,000. Accordingly, no compensation expense associated with these options
was recognized in 1999. During 1999, 220,700 of these options were exercised and
146,500 were canceled/forfeited (see Note 15).
A summary of stock options outstanding and exercisable, excluding options
granted in excess of the Plan, as of December 31, 1999 follows:
Number Weighted Average Number
Outstanding Remaining Exercisable at
Exercise at December 31, Contractural December 31,
Price 1999 Life (years) 1999
----- ---- ------------ ----
$2.00 1,666 7 1,666
2.50 669,605 5 297,250
3.00 63,500 7 60,168
3.25 44,770 4 44,770
5.00 83,300 6 84,968
------ ------
862,841 488,822
======= =======
In January 1999, the Company granted options to purchase 70,000 shares of
Common Stock to a non-employee for consulting services at an exercise price of
$3.25, valued at $212,800. These options were subsequently repriced to the
market price of $2.50.
On January 8, 1999, the Company granted options to employees to purchase
989,722 shares of Common Stock, at market, with an exercise price of $3.25, of
which 934,555 shares were subsequently repriced to the market price of $2.50.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method prescribed by that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999 and 1998, respectively: risk-free interest rates of 6.46%
and 5.0%; dividend yields of 0% and 1.5%; volatility factors of the expected
market price of the Company's Common Stock of 107% and 60%; and a
weighted-average expected life of the options of seven years.
F - 21
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company's pro forma information for the years ended December 31, 1999
and 1998, prepared in accordance with SFAS 123 is provided below. For purposes
of pro-forma disclosures, stock-based compensation is amortized to expense on a
straight-line basis over the vesting period.
1999 1998
---------------------------- ---------------------- --------------------------
Net Loss:
As reported $ (13,383,485) $ (2,783,552)
Pro forma $ (17,147,216) (3,140,736)
---------------------------- ---------------------- --------------------------
Basic loss per share
As reported $ (3.29) $ (0.95)
Pro forma $ (4.21) (1.07)
---------------------------- ---------------------- --------------------------
NOTE 8 - STOCK WARRANTS:
In 1998, the Company completed a private offering of its securities,
whereby it sold warrants to acquire an aggregate of 90,207 shares of Common
Stock at an exercise price of $8.025 per share.
In June 1999, the Company entered into a consulting agreement, whereby upon
execution of the agreement, the Company issued warrants valued at $108,030 to
purchase 30,000 Shares of Common Stock at a price of $5.219 per share. The
warrants were fully vested in 1999 and will expire May 31, 2002. The holder is
entitled to additional warrants to purchase 45,000 Common Shares if it
introduces the Company to a source of funding. These warrants will have an
exercise price equal to the sale price per share in such funding and will be
exercisable for three years from the date of issuance. The Company recorded the
expense in 1999.
In November 1999, the Company issued warrants to purchase 337,500 shares
of Common Stock at an exercise price of $3.00 per share in connection with a
private offering. These warrants expire on November 5, 2004 and vested on the
date of the agreement.
In November 1999, the Company entered into an investment banking agreement
pursuant to which warrants to purchase 60,000 shares of Common Stock at a price
of $1.50 per share, valued at $156,840, were issued. These warrants expire on
November 12, 2004 and vested on the date of the agreement. The Company recorded
the expense in 1999.
In December 1999, the Company entered into a consulting agreement, whereby
the Company issued warrants to purchase 100,000 shares of Common Stock at a
price of $6.50 per share, valued at $505,200. These warrants expire on December
14, 2004 and vested on the date of the agreement. The Company recorded the
expense in 1999. The Company agreed to issue additional warrants upon reaching
certain performance goals.
In December 1999, the Company entered into a consulting agreement, whereby
the Company issued warrants to purchase 75,000 shares of Common Stock at a
price of $3.187, valued at $410,400. These warrants
F - 22
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
expire on December 14, 2004 and vested on the date of the agreement. The Company
recorded the expense in 1999.
In December 1999, the Board authorized warrants to purchase 50,000 Common
Shares at a price of $13.62 to be issued on January 24, 2000 for consulting
services performed in 1999. These warrants, valued at $510,938, will expire on
January 23, 2005 and fully vest on January 24, 2000. The Company recorded the
expense in 1999.
In December 1999, the Company entered into a license agreement, whereby the
Company agreed to pay $541,084 in cash and issued warrants to purchase 250,000
shares of Common Stock at a price of $4.50, valued at $1,360,900 in exchange for
a license to certain technology to be embedded in the GlobalPC device. These
warrants expire on December 21, 2004 and vested on the date of the agreement.
In connection with the December 1999, Global PC acquisition (Note 1), the
Company agreed to issue warrants to purchase Common Stock of the Company as
follows:
1. exercisable into 2,269,284 shares of Common Stock at a price of $2.50
per share exercisable from April 1, 2002 through June 30, 2004
contingent upon the Company achieving certain milestones for
registered users of Internet access service utilizing the GlobalPC
Device by March 31, 2002.
2. exercisable into 1,901,400 shares of Common Stock at $2.50 per share.
The Class B warrants may be exercised through June 30, 2004 as
follows: (a) up to 30% of the shares underlying the Class B warrants
on and after 90 days from the date of grant and (b) another 23 1/3% of
the shares underlying the Class B warrants on and after each of the
first, second, and third anniversary of the date of grant.
3. Class C Common Stock purchase warrants exercisable into 383,000
shares of Common Stock at a price of $2.50 per share. The Class C
warrants may be exercised at any time one year from the date of grant
through June 30, 2004.
The Class A, B and C warrants become exercisable to purchase all of the
shares under warrant upon a change in control event, as defined.
Notwithstanding the foregoing, the Class A, B and C Warrants are only
exercisable to the extent they would not violate the rules of the Nasdaq Stock
Market relating to the requirement for stockholder approval for the issuance of
securities in certain instances.
The Class A, B, and C warrants provide for adjustments of the exercise
price and the number of shares issuable in the event of future dilution.
F - 23
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
A summary of the status of the Company's stock purchase warrants as of December
31, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted Number
Number Average Exercisable
Outstanding Remaining at
at December Contractual December Weighted Average
Exercise Price 31, 1999 Life (years) 31, 1999 Exercise Price
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.50 60,000 5 60,000 $1.50
2.50 2,284,400 5 - 2.50
3.00 726,700 3 624,800 3.00
3.19 75,000 5 75,000 3.19
4.50 250,000 5 250,000 4.50
5.22 30,000 3 30,000 5.22
6.50 100,000 5 100,000 6.50
8.03 90,207 4 90,207 8.03
13.62 50,000 5 - 13.62
------ ---------
3,666,307 1,230,007
========= =========
</TABLE>
NOTE 9 - DISCONTINUED OPERATIONS
In May 1999, the Company decided to divest itself of its public safety
software business and on July 2, 1999 the Company consummated the sale of this
division to Admit Computer Services, Inc. The Company received $500,000 in cash,
for a net gain of $287,732, and is entitled to receive software royalty payments
for five years ranging from 6.25% to 10% from future sales of products
containing the Company's technology or former customers of the Company's public
safety software business. To date, royalty payments have been inconsequential.
On June 29, 1999, the Company discontinued its network referral marketing
operations, the e.TV subsidiary. In July 1999, the Company sold its independent
representative database and assigned its long distance business to another
network marketer of telecommunication products for $250,000 in cash.
As a result of the events and transactions described above, the financial
statements of the Company have been restated to report separately the net assets
(liabilities) and operating results of the discontinued businesses. Components
of amounts reflected in the statements of operations, balance sheets and cash
flow statements are presented in the following table.
F - 24
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C>
Income statement data 1999 1998
----------------------------------------------------------- ----------------------------- -----------------------------
Revenues $ 2,774,949 $ 911,534
----------------------------------------------------------- ----------------------------- -----------------------------
Cost and expenses (9,567,171) (3,717,630)
------------ -----------
----------------------------------------------------------- ----------------------------- -----------------------------
Loss from discontinued operations before
income tax expense (benefit) $ (6,792,222) $ (2,806,096)
----------------------------------------------------------- ----------------------------- -----------------------------
Income tax expense (benefit) - -
------------- -------------
----------------------------------------------------------- ----------------------------- -----------------------------
Loss from discontinued operations $ (6,792,222) $ (2,806,096)
============ ============
----------------------------------------------------------- ----------------------------- -----------------------------
Balance sheet data December 31, 1999
$ (512,197)
==========
-----------------------------------------------------------
Net liabilities of discontinued operations
----------------------------------------------------------- ----------------------------------------------------------
December 31,
----------------------------------------------------------- ------------------------------------------------------------
Cash flow data 1999 1998
----------------------------------------------------------- ----------------------------- -----------------------------
Loss from discontinued operations $ (6,792,222) $ (2,806,096)
----------------------------------------------------------- ----------------------------- -----------------------------
Gain on sale 537,732 -
----------------------------------------------------------- ----------------------------- -----------------------------
Stock options granted for consulting services 212,800 -
----------------------------------------------------------- ----------------------------- -----------------------------
Common Stock issued for consulting services 1,919,315 -
----------------------------------------------------------- ----------------------------- -----------------------------
Change in net assets of discontinued
operations 810,254 1,475,470
------- ---------
----------------------------------------------------------- ----------------------------- -----------------------------
Net cash used in operations (3,312,121) (1,330,626)
----------------------------------------------------------- ----------------------------- -----------------------------
Net cash used in investing activities (124,935) (1,913,517)
----------------------------------------------------------- ----------------------------- -----------------------------
Net cash used in financing activities (6,534) (105,770)
------ --------
----------------------------------------------------------- ----------------------------- -----------------------------
Net cash used in discontinued operations $ (3,443,590) $ (3,349,913)
============ ============
----------------------------------------------------------- ----------------------------- -----------------------------
</TABLE> F - 25
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 10 - SUPPLEMENTAL STATEMENTS OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------ ------------------- ------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during year for interest $12,930 $17,459
Income tax refund received - 29,868
------------------------------------------------------------------------ ------------------- ------------------
Supplemental schedule of non-cash investing and
financing activities:
Acquisition of GlobalPC assets in exchange for
Common Stock and warrants 10,991,221 -
Liabilities assumed in connection with the acquisition
of Global PC assets (510,135) -
Purchase of Geoworks license agreement through
issuance of warrants 1,395,900 -
Liability in connection with purchase of Geoworks
license agreement 506,084 -
Amount capitalized in connection with development of
the Company's web-site through issuance of Common
Stock 580,522 -
Amount capitalized in connection with purchase of
web-site domain through issuance of stock 43,125 -
Common Stock issued to investment advisors for
investment banking services 950,000 -
------------------------------------------------------------------------ ------------------- ------------------
</TABLE>
NOTE 11 - TERMINATION OF INVESTMENT TRANSACTION:
On April 22, 1998, the Company entered into an agreement to acquire an
indrect 50% beneficial interest in Press-Loto, a Russian company which has the
right to operate the first national on-line lottery in Russia pursuant to a
license from the Russian Ministry of Finance to the Union of Journalists of
Russia (the "Union"). The agreement provided that, at the closing, 40% of
Press-Loto was to be owned by the Union and its charity with a private group
holding a minority interest.
On On September 1, 1998, the Company terminated the aforementioned
agreement after conditions to close, were not satisfied. In connection with the
termination of the agreement, the Company forgave a loan in the amount of
$297,000 in 1998.
Also see Note 14 - Litigation.
F - 26
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 12 - INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." A reconciliation between the provision for income
taxes and the expected tax benefit using the federal statutory rate of 34% for
the year ending December 31, 1999 is as follows:
1999
---------------------------------- --------------------
Tax benefit at statutory rate $(4,550,385)
State tax benefit (485,821)
Increase in valuation allowance 5,017,290
Other 18,916
------
Total $ -
===========
---------------------------------- --------------------
The Company's deferred tax assets and liabilities relate to the following
sources and differences between financial accounting and the tax bases of the
Company's assets and liabilities at December 31, 1999:
1999
---------------------------------- --------------------
Current deferred taxes:
Current deferred tax assets:
Vacation accrual $ 26,981
Accrued settlement costs 107,622
Depreciation 8,787
-----
143,390
Less valuation allowance (143,390)
--------
Total current deferred tax assets $ -
==========
---------------------------------- --------------------
Non-current deferred taxes:
Non-current deferred tax assets:
Net operating loss carry forward $7,204,640
Research and development credit 152,163
-------
Less: valuation allowance 7,356,803
Total noncurrent deferred tax assets (7,356,803)
----------
$ -
==========
---------------------------------- --------------------
The Company has recorded a valuation allowance to state its deferred tax
assets at estimated net realizable value due to the uncertainty related to
realization of these assets through future taxable income.
F - 27
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
At December 31, 1999, the Company has net operating loss carry forwards for
1999 and 1998 for income tax purposes of approximately $12,952,000, which expire
beginning in 2011. The Company also has research and development tax credits of
$152,163 that expire beginning in 2011. The Company's ability to benefit from
the net operating loss carry forwards and general business credit could be
limited under certain provisions of the Internal Revenue Code if ownership of
the Company changes by more than 50%, as defined.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
On December 28, 1999, the Company entered into a lease agreement, for
executive office space in Florida, which provides for base annual rental
payments of approximately $49,000. This lease, which is for a term of five
years, has scheduled annual increases of 3% and is renewable. No rent expense
associated with this lease was recorded for the year ended December 31, 1999.
In conjunction with the acquisition of Global PC on December 22, 1999, the
Company assumed an existing office lease agreement, for office space in
California, which provides for monthly lease payments of $10,000. This lease
agreement is on a month-to-month basis.
In October 1996, the Company entered into a lease, for executive office
space in New York, which provides for base annual rental of $85,000. This lease,
which is for a term of five years, is being subleased. The present value of the
future monthly minimum lease payments has been accrued and charged to the loss
on discontinued operations. Rent expense for the years ended December 31, 1999
and 1998, aggregated $86,590 and $78,354, respectively, is included in
discontinued operations.
At December 31, 1999, future minimum rentals for office space are as
follows:
2000 $ 49,000
2001 50,470
2002 51,984
2003 53,544
2004 55,150
------
$ 260,148
=========
Effective October 1, 1996, the Company entered into a three-year employment
agreement with the Chief Executive Officer ("CEO") of the Company. This
agreement provided for annual compensation of $250,000 and a performance bonus.
On May 11, 1999 the Company and the CEO entered into a termination agreement
while simultaneously entering into a consulting agreement. Pursuant to the terms
of the consulting agreement, the Company paid the CEO $66,666 in cash and issued
him 62,500 Common Shares out of treasury stock. On July 2, 1999, both such
agreements were terminated. In connection with the termination of these
agreements, the Company paid the CEO $100,000 in cash and issued 75,000 Common
Shares to him. Such shares have not been
F - 28
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
registered under the Securities Act of 1933, as amended, and the Company is
under no obligation to register them at any time in the future. The Company is
obligated to pay the CEO eighty percent (80%) of the royalty payable by Admit
Computer Services, Inc., ("Admit") to the Company. Such royalty is based upon
the revenues derived by Admit from the sale or licensing of products and/or
assets acquired by Admit from the Company in connection with its purchase of the
public safety business (See Note 9 ).
Effective October 1, 1996, the Company entered into a three-year employment
agreement with its President and Chief Operating Officer. This agreement
provided for annual compensation of $125,000 and a signing bonus of $15,000. On
March 17, 1998 the Company and this officer entered into an agreement
terminating his employment agreement. Under the termination agreement, the
officer received severance pay of approximately $216,000.
In January 1997, the Company entered into a three-year Employment Agreement
with an employee to serve as the Company's Chief Technology Officer ("CTO"). The
agreement provided for an annual base salary of $200,000, $225,000 and $250,000
in the first, second and third years, respectively. On July 31, 1999, the CTO
and the Company entered into a Termination Agreement. Pursuant to the terms of
the Termination Agreement, the Company paid the CTO $107,500 in cash and granted
stock options to purchase 50,000 Common Shares. The former CTO resigned as
Class III Director of the Company on April 4, 2000.
As of December 31, 1999, the Company maintained employment agreements with
four officers of the Company. The employment agreements contain provisions
requiring each of the officers to receive full salary for the unexpired term of
such agreement, in the event of termination for any reason other then death,
disability or cause. The maximum payments under these agreements in such event
is approximately $1,593,000. The employment agreements also provide for
severance benefits as well as disability and death benefits. Two of the
employment agreements provide for a bonus up to 50% of base annual compensation
each year if certain performance thresholds are met. One of the employment
agreements provides for the future granting of five year stock options to
purchase 33,250 common shares each year at market price for each one year period
that the officer's salary remains at a reduced rate.
In December 1999, the Company purchased exclusive rights to the GEOS
license, from Geoworks Corporation for $541,084 in cash and 250,000 warrants to
purchase Common Stock at $2.50 per share, valued at $1,360,900. GEOS is a
simplified, user friendly, low cost computer operating system owned by Geoworks,
Inc. Pursuant to the conditions of the licensing agreement, the Company is
obligated to pay royalties on a per unit basis over the term of the licensing
agreement which expires December 31, 2004.
Future minimum royalty payments required to maintain the right of
exclusivity under the licensing agreement, at December 31, 1999, are as follows:
F - 29
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
2000 $ 75,000
2001 1,275,000
2002 1,200,000
2003 2,250,000
2004 3,000,000
---------
$7,800,000
==========
In connection with the 1999 Private Placement of Common Stock and warrants,
the Company committed to file a Registration Statement for the shares issued in
this offering with an effective date for the Registration Statement no later
than February 1, 2000. As the Company has not yet undertaken to file a
Registration Statement for these shares, the Company is subject to pay a penalty
of approximately $95,000 per month until this requirement is met.
NOTE 14 - LITIGATION:
In July 1999, the Company was notified of a claim for amounts allegedly
owed to a third party manufacturer of products previously sold by its
discontinued subsidiary, e.TV. The Company disputes this claim. If an action is
ultimately brought against the Company, the Company believes it has meritorious
defenses and will vigorously defend itself against such an action. The Company
has accrued for potential settlement costs estimated to be sufficient to cover
the resolution of this claim.
The Company is a party to an indemnification agreement dated January 8,
1999 (the "Indemnification Agreement") with the Company's President. Pursuant to
the Indemnification Agreement, the Company agreed to indemnify this officer up
to $170,000 for any liability incurred by him out of an action brought against
him and LocalNet. During 1999, the Company paid $21,000 in legal fees pursuant
to this Indemnification Agreement. At December 31, 1999, the Company has accrued
a liability in the discontinued business caption for $149,000. On January 4,
2000, the Company paid $232,000 on the officer's behalf in settlement of this
legal action. In connection with the January 4, 2000 payment in excess of the
cap, the officer signed a note payable to the Company for $83,000, bearing
interest at 10% per annum with interest and principal payable in one balloon
payment due on February 3, 2002.
On October 27, 1999, the Company settled litigation associated with the
failed Press-Loto investment transaction (Note 11). As part of the settlement
agreement, the Company issued 25,000 Common Shares, valued at $71,000, and
forgave a $297,000 loan to Rugby National Corp., an unrelated third party, which
the Company had written off in 1998. Both charges are reported in continuing
operations.
F - 30
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 15 - SUBSEQUENT EVENTS
During 1999, the Company granted options to purchase 4,058,083 Common
Shares in excess of the 2,000,000 Common Shares authorized for issuance upon the
exercise of options grantable under the Company's 1996 Stock Option Plan. These
options, 68,000 of which were granted to non- employee consultants, had exercise
prices ranging from $1.00 per share to $6.38 per share. Options to purchase
3,508,083 Common Shares were granted at the then market price, and the remainder
were non-qualified options granted at below market price. Substantially all of
these options vested on April 4, 2000.
On January 1, 2000, the Company granted options to purchase 2,072,500
Common Shares at an exercise price of $2.50 per share, to certain employees who
were retained in connection with the acquisition of assets of Global PC which
closed on December 22, 1999. These options were also for shares in excess of the
2,000,000 shares originally authorized for issuance under the Company's 1996
Stock Option Plan. These employees were former employees of Global PC who the
Company determined were integral to the Company's development, enhancement and
sale of the Global PC and related products and services. These options vest in
one-third increments in July 2000, January 2001 and January 2002.
On January 20, 2000, the shareholders approved an amendment to the 1996
Stock Option Plan which increased the number of options available to be granted
to 10,000,000. In accordance with generally accepted accounting principles, the
Company is required to recognize a non-cash compensation charge measured by the
difference between the exercise price of the options granted to purchase such
excess 6,133,583 Common Shares, and the then market price of the Company's
Common Shares on January 20, 2000. As a result, the Company will recognize a
non-cash stock compensation charge commencing in the first quarter of 2000 and
extending over the vesting period of those options of approximately $85,000,000.
This non-cash earnings charge will not impact the Company's cash flows or net
stockholders' equity.
On January 21, 2000, the Company issued warrants to purchase 1,000,000
Common Shares to a Director who subsequently became the Company's Interim Chief
Executive Officer and Chairman of the Board. The Warrants to purchase 500,000
Common Shares vested immediately and the warrants for the remaining 500,000
Common Shares were vested on April 4, 2000. Of these warrants, 500,000 were
issued below market with an exercise price of $5.00 per share and 500,000 were
issued below market at various prices ranging from $5.00 to $15.00. The Company
will recognize a stock compensation charge in the first and second quarters of
2000 related to the warrants which vested on January 21, 2000 and April 4, 2000
of approximately $5,300,000 and $4,600,000, respectively. On April 4, 2000, the
Company issued warrants to purchase 500,000 Common Shares at market with an
exercise price of $20.25 per share to this Director at the time he became the
Company's Interim Chief Executive Officer and Chairman of the Board. The 500,000
warrants issued on April 4, 2000, which vested immediately, were granted in
connection with the individual's personal commitment to provide the Company up
to $6,000,000, to support ongoing capital requirements of the Company, if
necessary, and his
F - 31
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
posting of $3,500,000 as security for the Company's line of credit with a
manufacturer. All 1,500,000 warrants described above are exercisable for a
period expiring 5 years from the date of issuance.
In the opinion of the Company's management, the funding committed to by the
Interim Chief Executive Officer and Chairman of the Board, and the funds that
would be generated from the exercise of options which certain members of
management have committed to, will be sufficient to meet the Company's working
capital needs, and allow it to meet its obligations on a timely basis, for the
next 12 months.
NOTE 16 - SUBSEQUENT EVENTS - LIQUIDITY
As discussed in Note 15, on April 4, 2000, based on the Company's then
existing business plan, the Chief Executive Officer and Chairman of the Board
made a financial commitment to fund the Company's working capital deficits of up
to $500,000 per month for the 12 months beginning April 2000. Subsequent to that
commitment, the Company's business plan changed, resulting in a substantial
increase in operating expenses and net cash used in operations. During the nine
months ended September 30, 2000, the Company has incurred a net loss of
approximately $128.36 million and has used cash of approximately $17.89 million
in operations. Additionally, the Company has determined that it will continue to
incur net operating cash outflows through December 31, 2000 and beyond in order
to achieve its currently contemplated business objective of rolling out its
GlobalPC product on a national and international basis. Through September 30,
2000 the Chief Executive Officer and Chairman of the Board provided the Company
$12.86 million pursuant to, and exceeding, his initial $6 million financial
commitment. He has committed to provide funding to the Company through December
31, 2000 to meet the Company's requirements, as determined by management, to the
extent funding is not available from any other source.
The Company is in the process of exploring additional third party financing
opportunities, however, the Company cannot assure that it will obtain such
financing either before or after December 31, 2000. If the Company is unable to
obtain the financing it is seeking, it may not be able to achieve its currently
contemplated business objectives, or the timing in reaching those objectives may
be delayed.
F - 32
<PAGE>
MyTurn.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MYTURN.COM, INC.
Dated: November 13, 2000 By: /s/ Steven Burleson
-----------------------------
Steven Burleson, Chief Financial
Officer and Chief Operating
Officer
<PAGE>
