EXHIBIT 99.1
Netgain Development, Inc.
Index to Financial Statements
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS F-2
Unaudited Pro Forma Condensed Consolidated
Balance Sheet - December 31, 1999 F-3
Unaudited Pro Forma Condensed Consolidated
Statements of Loss for the Year ended December 31, 1999 F-4
Notes to the Unaudited Pro Forma Condensed
Consolidated Financial Statements F-5
COOLAUDIO.COM, INC. FINANCIAL STATEMENTS
Independent Auditors' Report F-6
Balance Sheets - December 31, 1999 and 1998 F-7
Statements of Loss - For the year ended December 31, 1999
and for the period from September 28, 1998 (inception)
through December 31, 1998 F-8
Statements of Cash Flow - For the year ended December 31,
1999 and for the period from September 28, 1998 (inception)
through December 31, 1998 F-9
Statements of (Deficit) Equity - For the year ended December 31,
1999 and for the period from September 28, 1998 (inception)
through December 31, 1998 F-10
Notes to the Financial Statements F-11
F-1
<PAGE>
Netgain Development, Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
Effective March 30, 2000, the Company completed its acquisition of CoolAudio, a
business-to-business e-tailing enabler and e-retailer of "best in class" home
entertainment products from around the world. The acquisition was completed
through an Agreement and Plan of Merger between NetGain, CoolAudio and a wholly
owned subsidiary of the Company pursuant to which each outstanding share of
CoolAudio was converted into .08 of a share of the Company. As a result of the
acquisition, CoolAudio.com has become a wholly owned operating subsidiary of the
Company. The total purchase price for CoolAudio was valued at approximately $8.6
million consisting of 1,795,593 shares of the Company's common stock valued at
approximately $7.3 million and options and warrants to purchase shares of the
Company's common stock valued at approximately $1.3 million. The value of the
Company's shares included in the purchase price was recorded net of a 35% market
value discount to reflect the restrictions on transferability. The Company has
accounted for this transaction under the purchase method of accounting. The
aggregate purchase price exceeded the fair value of the net assets acquired by
approximately $6.5 million.
The accompanying pro forma condensed consolidated financial statements present
the consolidated financial position of the Company as of December 31, 1999
assuming the acquisition of CoolAudio occurred on that date and present the
results of operations for the year ended December 31, 1999 assuming the
acquisition occurred on January 1, 1999. The amounts presented for the Company
have been derived from the Company's historical financial statements for the
year ended December 31, 1999. The amounts presented for CoolAudio are the
historical financial position and results of operations of CoolAudio and were
derived from the financial statements presented herein. The accompanying pro
forma statements of operations should be read in conjunction with those
historical financial statements.
Had the acquisition occurred on January 1, 1999, actual results of operations
would likely have differed from the amounts presented in these pro forma
statements. These unaudited pro forma condensed consolidated financial
statements are not necessarily indicative of the results of operations that
would have been attained had the acquisition actually taken place on the dates
indicated and do not purport to be indicative of the effects that may be
expected to occur in the future.
F-2
<PAGE>
NetGain Development, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Pro Forma
NetGain CoolAudio Adjustments Pro Forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,642,245 $ 196,921 $ 3,000,000 b $ 6,839,166
Accounts receivable -- 14,602 -- 14,602
Inventory -- 613,500 -- 613,500
Prepaid expenses and other 51,000 102,573 -- 153,573
------------ ------------ ------------ ------------
Total Current Assets 3,693,245 927,596 3,000,000 7,620,841
Property and Equipment, net -- 515,857 -- 515,857
Investments at Cost 7,620,000 -- -- 7,620,000
Goodwill and Intangible Assets, net -- -- 8,933,604 a 5,933,604
(3,000,000)b
Other Assets 103,002 -- -- 103,002
------------ ------------ ------------ ------------
$ 11,416,247 $ 1,443,453 $ 8,933,604 $ 21,793,304
============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 53,006 $ 1,468,649 $ -- $ 1,521,655
Accrued expenses and other 62,275 171,786 -- 234,061
Current portion of long term debt -- 50,000 -- 50,000
------------ ------------ ------------ ------------
Total Current Liabilities 115,281 1,690,435 -- 1,805,716
Long Term Debt -- -- -- --
Commitments and Contingencies -- -- -- --
Stockholders' (Deficit) Equity:
Preferred Stock 1 -- -- 1
Common Stock 1,717 1,123 (1,123)a 1,896
179 a
Capital in excess of par - Preferred 3,277,247 -- -- 3,277,247
Capital in excess of par - Common 9,534,634 6,114,151 (6,114,151)a 18,221,077
8,686,443 a
Accumulated deficit (959,477) (6,362,256) 6,362,256 a (959,477)
Stock subscriptions receivable (7,156) -- -- (7,156)
Treasury stock, at cost (546,000) -- -- (546,000)
------------ ------------ ------------ ------------
Total Stockholders' (Deficit) Equity 11,300,966 (246,982) 8,933,604 19,987,588
------------ ------------ ------------ ------------
$ 11,416,247 $ 1,443,453 $ 8,933,604 $ 21,793,304
============ ============ ============ ============
</TABLE>
F-3
<PAGE>
NetGain Development, Inc.
Unaudited Pro Forma Condensed Statements of Loss
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Pro Forma
NetGain CoolAudio Adjustments Pro Forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ -- $ 235,650 $ -- $ 235,650
Cost of Goods Sold -- 206,328 -- 206,328
------------ ------------ ------------ ------------
Gross Profit -- 29,322 -- 29,322
Operating Expenses 948,401 5,981,128 1,977,868 c 8,907,397
------------ ------------ ------------ ------------
Operating Loss (948,401) (5,951,806) -- 8,878,075
Other Income -- 6,638 -- 6,638
Interest Income (Expense) 5,378 (17,278) -- (11,902)
------------ ------------ ------------ ------------
Net Loss $ (943,025) $ (5,962,446) $ (1,977,868) $ (8,883,339)
============ ============ ============ ============
Basic Loss per Share $ (0.08) $ (0.62)
============ ============
Weighted Average Common
Shares Outstanding 12,498,260 14,293,853
============ ============
</TABLE>
F-4
<PAGE>
NetGain Development, Inc.
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
a. The total purchase price for CoolAudio was $8,686,622. The purchase
price was allocated to the CoolAudio net assets; the excess of the
purchase price over the fair value of the net assets was recorded as
intangible assets.
b. Prior to the acquisition, but subsequent to December 31, 1999,
CoolAudio completed a private placement of its shares for an aggregate
$3,000,000. The shares issued in the private placement were exchanged
into NetGain shares in the acquisition. This transaction was a
requirement of the acquisition and therefore has been reflected in
these pro forma financial statements.
c. Goodwill in the amount of $5,933,604 is being amortized over three
years.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
CoolAudio.com, Inc.
We have audited the accompanying balance sheets of CoolAudio.com, Inc. as of
December 31, 1999 and 1998, and the related statements of loss, cash flows and
stockholders' (deficit) equity for the year ended December 31, 1999 and the
period from September 28, 1998 (inception) through 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CoolAudio.com, Inc. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the year ended December 31, 1999 and the period from September 28, 1998
(inception) through December 31, 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 discussed in Note 14 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
June 20, 2000
Woodbury, NY
F-6
<PAGE>
CoolAudio.com, Inc.
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 196,921 $ 11,368
Accounts receivable 14,602 1,277
Inventory 613,500 43,900
Note receivable 72,222 --
Advances and deposits 30,351 26,002
----------- -----------
Total Current Assets 927,596 82,547
Property and Equipment, net 515,857 3,215
----------- -----------
$ 1,443,453 $ 85,762
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable $ 1,468,649 $ 8,099
Accrued expenses 171,786 5
Current portion of long term debt 50,000 --
----------- -----------
Total Current Liabilities 1,690,435 8,104
Long Term Debt -- 50,000
----------- -----------
Total Liabilities 1,690,435 58,104
Commitments and Contingencies -- --
Stockholders' (Deficit) Equity:
Preferred Stock -- $0.0001 par value; none
issued and outstanding -- --
Common Stock -- $0.0001 par value;
20,000,000 shares authorized; 11,236,248
and 7,007,000 shares issued and outstanding
at December 31, 1999 and 1998 1,123 700
Capital in excess of par 6,114,151 426,768
Accumulated deficit (6,362,256) (399,810)
----------- -----------
Total Stockholders' (Deficit) Equity (246,982) 27,658
----------- -----------
$ 1,443,453 $ 85,762
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
CoolAudio.com, Inc.
Statements of Loss
For the Year ended December 31, 1999 and the Period from September 28, 1998
(inception) through December 31, 1998
1999 1998
----------- -----------
Revenue $ 235,650 $ 5,292
Cost of Goods Sold 206,328 2,461
----------- -----------
Gross Profit 29,322 2,831
Selling, General & Administrative Expenses 5,981,128 402,910
----------- -----------
Operating Loss (5,951,806) (400,079)
Other Income 6,638 269
Interest Expense (17,278) --
----------- -----------
Net Loss $(5,962,446) $ (399,810)
=========== ===========
Basic Loss per Common Share $ (0.61) $ (0.09)
=========== ===========
Weighted Average Number of Common Shares
Outstanding 9,741,172 4,452,000
=========== ===========
The accompanying notes are an integral part of these financial statements
F-8
<PAGE>
CoolAudio.com, Inc.
Statements of Cash Flows
For the Year ended December 31, 1999 and the Period from September 28, 1998
(inception) through December 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows used in operating activities:
Net Loss $(5,962,446) $ (399,810)
Non cash items:
Common stock issued for services 137,200 --
Common stock issued for interest expense 22,500 --
Warrants and option issued for compensation 281,521 --
Warrants issued for services 552,856 --
Warrants issued in connection with financings 1,369,250 --
Depreciation and amortization 33,430 114
Changes in assets and liabilities:
Increase in:
Accounts receivable (13,325) (1,277)
Inventory (569,600) (43,900)
Note receivable (72,222) --
Advances and deposits (4,349) (26,002)
Accounts payable 1,460,550 8,099
Accrued expenses 171,781 5
----------- -----------
Total adjustments 3,369,592 (62,961)
----------- -----------
Total cash flows used in operating activities (2,592,854) (462,771)
----------- -----------
Cash flows used in investing activities:
Capital expenditures (546,072) (3,329)
----------- -----------
Total cash flows used in investing activities (546,072) (3,329)
----------- -----------
Cash flows from financing activities:
Proceeds from debt 1,000,000 50,000
Proceeds from issuance of common stock 2,321,979 427,468
Proceeds from warrant exercise 2,500 --
----------- -----------
Total cash flows from financing activities 3,324,479 477,468
----------- -----------
Net increase in cash 185,553 11,368
Cash, beginning of year 11,368 --
----------- -----------
Cash, end of year $ 196,921 $ 11,368
=========== ===========
</TABLE>
Non-cash items:
During 1999, the Company converted debt and related interest
expense into 511,250 shares of Common Stock.
During 1999, the Company issued 176,940 shares of Common Stock as
compensation for services.
The accompanying notes are an integral part of these financial statements
F-9
<PAGE>
CoolAudio.com, Inc.
Statements of Stockholders' (Deficit) Equity
For the Year ended December 31, 1999 and the Period from September 28, 1998
(inception) through December 31, 1998
<TABLE>
<CAPTION>
Common Stock
-------------------------- Total
Stockholders'
Capital in Accumulated (Deficit)
Shares Amount excess of Deficit Equity
par
------------- ------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance - September 28, 1998 -- $ -- $ -- $ -- $ --
Stock issued for cash 770,742 77 96,938 -- 97,015
Stock issued for services 6,236,258 623 329,830 -- 330,453
Net loss for period -- -- -- (399,810) (399,810)
------------- ------------ ------------- --------------- --------------
Balance - December 31, 1998 7,007,000 $ 700 $ 426,768 $ (399,810) $ 27,658
Stock issued for cash 3,291,058 329 2,321,650 -- 2,321,979
Stock issued for services 176,940 18 137,182 -- 137,200
Stock issued for debt conversion 511,250 51 1,022,449 -- 1,022,500
Stock issued from warrant exercises 250,000 25 2,475 -- 2,500
Warrants and option issued
for compensation -- -- 281,521 -- 281,521
Warrants issued for services -- -- 552,856 -- 552,856
Warrant issued in connection --
with financings -- -- 1,369,250 -- 1,369,250
Net loss for period -- -- -- (5,962,446) (5,962,446)
------------- ------------ ------------- --------------- --------------
Balance - December 31, 1999 11,236,248 $ 1,123 $ 6,114,151 $ (6,362,256) $ (246,982)
============= ============ ============= =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-10
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business
CoolAudio.com, Inc. (the "Company"), a Delaware corporation, was
incorporated in 1998 for the purpose of selling consumer electronics via
the World Wide Web. The company sells consumer electronics related to home
entertainment (principally home theater systems, stereo components,
speakers and televisions). The Company has developed relationships where it
is the exclusive distributor and/or authorized retailer of select premier
brands, primarily from Europe. The Company also sells popular brands that
are widely available. The accompanying financial statements include the
period from September 28, 1998 (inception) through December 31, 1998 and
the year ended December 31, 1999.
Inventory
Inventory consists primarily of finished goods and is valued at the lower
of cost or market, cost being determined on a specific identification
method.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred; costs of major additions and betterments
are capitalized. When property and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Depreciation and Amortization
Depreciation is provided for using the straight-line and accelerated
methods over the estimated useful lives of the related assets.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method
deferred tax liabilities and assets are determined based upon the
differences between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
F-11
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 1 - Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to
be cash equivalents.
As of December 31, 1999, the Company had cash deposits at a bank in excess
of the maximum amounts insured by the FDIC.
Advertising Costs
Advertising costs are expensed as incurred.
Use of Estimates in the Financial Statements
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.
Comprehensive Income
During the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of certain financial information that historically
has not been recognized in the calculation of net income. The adoption of
SFAS 130 had no impact on the accompanying financial statements.
Loss per Common Share
Basic loss per common share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding during
the reported periods. Diluted loss per common share reflects the potential
dilution that could occur if stock options and warrants to issue common
stock were exercised. During the year ended December 31, 1999 and the
period from September 28, 1998 (inception) through December 31, 1998, such
options and warrants were anti-dilutive and were excluded from the weighted
average share computation for purposes of calculating diluted loss per
common share. Because of the anti-dilutive effects diluted earnings per
common share is not reflected in the accompanying financial statements.
F-12
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 1 - Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS 123 requires compensation expense to be recorded (i) using the
new fair value method or (ii) using the existing accounting rules
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations with pro forma
disclosure of what net income and earnings per share would have been had
the Company adopted the new fair value method. The Company accounts for its
stock based compensation in accordance with the provisions of APB 25 and
provides proforma disclosure as if such compensation had been recorded
under the fair value requirement of SFAS No. 123.
Start-Up Costs
In April 1998, State of Position 98-5, "Reporting on the Costs of Start-up
Activities" was issued. It requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998.
The Company adopted SOP No. 98-5 at its inception.
Computer Software Developed or Obtained for Internal Use
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use", effective for fiscal years beginning after
December 15, 1998. SOP No. 98-1 requires that certain costs of computer
software developed or obtained for internal use be capitalized and
amortized over the useful life of the related software. The Company adopted
SOP 98-1 at its inception. The adoption of SOP 98-1 has no material impact
on the accompanying financial statements.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that fair values be
disclosed for most of the Company's financial instruments. The carrying
amounts of the Company's financial instruments, which include cash, other
current assets, and current liabilities are considered to be representative
of their respective fair values.
F-13
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 2 - Inventories
Inventories are stated at the lower of cost or market value and consisted
only of finished goods at December 31, 1999 and 1998.
NOTE 3 - Property and Equipment
Property and equipment at December 31, 1999 and 1998 consisted of the
following:
Estimated
1999 1998 Useful
---------- --------- Lives
Technology Assets $ 455,037 $ 2,221 3 - 5 years
Furniture and fixtures 63,162 1,108 5 - 7 years
Equipment 31,202 -- 5 - 7 years
---------- ---------
549,401 3,329
Less: accumulated depreciation
and amortization 33,544 114
---------- ---------
Property and Equipment, net $ 515,857 $ 3,215
========== =========
Depreciation and amortization expense for the years ended December 31, 1999
and 1998 was $33,430 and $114, respectively.
NOTE 4 - Note Receivable
Note receivable at December 31, 1999 consisted of a note due from an
officer. Such note is due January 1, 2000 and is non-interest bearing.
F-14
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 5 - Debt
Debt at December 31, 1999 and 1998 consisted of the following:
1999 1998
------- -------
Non-interest bearing note payable to stockholder,
due on or before December 30, 2000 $50,000 $50,000
Less current portion 50,000 --
------- -------
Long Term Debt $ -- $50,000
======= =======
During 1999, the Company issued a three month convertible note in the
amount of $1,000,000 bearing interest at a rate of 9%. On November 26, 1999
this note was converted into 500,000 shares of common stock and the accrued
interest payable of $22,500 was converted to an additional 11,250 shares of
common stock.
NOTE 6 - Income Taxes
The Company has a deferred tax asset resulting from net operating loss
carry forwards which has been fully reserved in the accompanying financial
statements since utilization of the carry forwards is uncertain.
Furthermore, the Company was acquired subsequent to December 31, 1999 (see
Note 13) resulting in limitations of any tax carry forward benefits.
NOTE 7 - Economic Dependency
Major Suppliers
The Company has relationships with Wilson Benesch, Roksan Audio Ltd, Audes,
IAG, Chord Electronics and BC Acoustique to supply product for which the
Company is the exclusive distributor and/or internet reseller. During 1999,
the Company purchased $446,230 from these vendors and the amounts payable
at December 31, 1999 was $10,335. A loss of these suppliers would not have
a material impact on the results of the Company as replacement products are
available. Subsequently, as of March 28, 2000, Wilson Benesch has
terminated its relationship with the Company.
The Company purchased a substantial portion of its popular product from
three domestic suppliers. During the year ended December 31, 1999,
purchases from these suppliers were $343,620 and at December 31, 1999, the
amounts due these suppliers included in accounts payable were $20,485. A
loss of these suppliers would not have a material impact on the results of
the Company, as the products are widely available.
F-15
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 8 - Benefit Plans
Employee Leasing
The Company does not have employees. The Company leases its employees from
the PEO provider EPIX. In this arrangement, EPIX bills the company for each
employee and bears the responsibility for paying all taxes and managing the
employee benefit plans. Through EPIX the Company provides Health and Life
Insurance. The Company has entered into an agreement with EPIX in which it
pays a lease fee equal to employee salaries, taxes and a management fee on
a bimonthly basis. The agreement can be terminated at anytime by the
Company with 30 days notice or by EPIX, with 60 days notice, after which
the Company has no additional liability.
Defined Contribution Plan
Through its leased employee provider EPIX, leased employees may participate
in a 401(k) Savings Plan covering all eligible leased employees of the
Company. Contributions to the plan are at the discretion of the Board of
Directors. During 1999 and 1998, there were no employer contributions.
NOTE 9 - Related Party Transactions
John McNicholas, a shareholder and member of the Board of Directors of the
Company, is also a Managing Director of The Blackstone Group
("Blackstone"), an investment bank and financial advisor. The Company
entered into an Engagement Letter, dated May 28, 1999, pursuant to which
the Company engaged Blackstone to raise financing on behalf of the Company.
The Engagement Letter has been terminated and the Company has a payable to
Blackstone for $300,000.
In the third quarter of 1999, the Company advanced certain legal fees and
other payments for professional services rendered in connection with a
joint effort by (a) the Company, on the one hand, to either acquire Carver
Corporation (a manufacturer and distributor of electronic equipment) out of
bankruptcy or obtain a Distribution Agreement to sell Carver equipment on
the Internet, and (b) an ad hoc shareholders' committee (the "Ad Hoc
Committee"), on the other hand, to obtain a percentage of the reorganized
Carver Corporation. Raj Bhatia, the Company's Chairman of the Board and
Chief Executive Officer, is also a member of the Ad Hoc Committee. The
Company, for its own account and as guarantor for the Ad Hoc Committee,
issued, in the aggregate, warrants to purchase 89,160 shares of common
stock of the Company at an exercise price of $0.01 per share and paid
$28,000 for legal fees and expenses to Schultze Asset Management and still
owes $9,085 as of December 31, 1999 in connection with the Carver
Corporation matter.
F-16
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 10 - Commitments and Contingencies
Operating Lease Arrangements
The Company maintains its corporate office at a facility in New York City
that is leased under a five (5) year noncancelable operating lease expiring
in October 2004. The Company pays property taxes, insurance, maintenance
and other expenses related to the leased properties. The Company conducts
its operations from facilities located in Earlysville, Virginia that are
leased under a five (5) year non-cancelable operating lease expiring in
August 2004. The Company pays property taxes, insurance, maintenance and
other expenses related to the leased properties. During 1999 the company
also operated a retail facility in Seattle, Washington which it vacated and
canceled the lease as of August 1999, with no further obligations. Rental
expense in 1999 and 1998 amounted to $134,695 and $5,290, respectively.
The Company leases its web servers and various computers under (3) year
operating lease expiring in during 2001.
Future minimum rental payments under the above noncancelable operating
leases as of December 31, 1999 are as follows:
Year Ending
December 31, Amount
------------ -----------
2000 $ 343,175
2001 303,317
2002 281,350
2003 281,350
2004 223,525
-----------
Total $ 1,432,717
===========
Litigation
The Company is involved in litigation through the normal course of
business. The Company believes that the resolution of these matters will
not have a material adverse effect on the financial position of the
Company.
F-17
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 11 - Stock Option Plans
The Company provides incentive stock option plans for directors, officers,
and key employees of the Company and others. During 1999, the Board of
Directors approved the 1999 Equity Compensation Plan, ("ECP") under which
"non-qualified" stock options ("NQSOs") to acquire shares of common stock
may be granted to non-employee directors and consultants of the Company,
and "incentive" stock options ("ISOs") to acquire shares of common stock
may be granted to employees. The ECP provides for the issuance of up to a
maximum of 6.0 million shares of common stock and is currently administered
by the Board of Directors. Under the ECP, the option price of any grant may
not be less than the fair market value of a share of common stock on the
date on which the option is granted. The option price of an NQSO may be
less than the fair market value on the date of the NQSO is granted if the
Board of Directors so determines. An ECP may not be granted to a "ten
percent stockholder" (as such term is defined in section 422A of the
Internal Revenue Code) unless the exercise price is at least 110% of the
fair market value of the common stock and the term of the option may not
exceed five years from the date of grant. The maximum term of each stock
option granted to persons other than ten percent stockholders is ten years
from the date of grant. The Company applies the provisions of APB No. 25 in
accounting for its Stock Incentive Plan. An expense of $50,505 has been
recorded in 1999 related to the issuance of stock options for which the
exercise price was below fair market value at the time of grant. No cost
has been recognized for the remaining stock options in the financial
statements since the exercise price was equal to or greater than the fair
market value at the date of grant. Had the provisions of SFAS No. 123 been
applied, the impact of recording fair market value of options would have
been immaterial and accordingly no pro forma disclosure under SFAS No. 123
has been provided.
As of December 31, 1999, 1,158,500 options to purchase common stock of the
Company at strike price of $0.75 and 751,600 options to purchase common
stock at a strike price of $2.00 had been granted. 70,663 options at $0.75
and 423,501 options at $2.00 were vested. No options were exercised in
1999.
NOTE 12 - Warrants
During 1999, the Company issued warrants to purchase 3,508,392 shares of
the Company's common stock with an aggregate value of $2,153,121. The
warrants were valued using the Black-Scholes option pricing model with the
following assumptions: (1) a risk free interest rate ranging from 5.2% to
6.2%, (2) an expected life of 2.5 years, and (3) stock price at the fair
market value an the date of grant. All warrants expire five years from the
date of grant.
The Company granted warrants to purchase 453,000 and 2,200,392 shares of
the Company's common stock, at exercise prices of $0.75 and $0.01,
respectively. The company recognized $1,369,250 in financing costs.
F-18
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 12 - Warrants (continued)
Pursuant to consulting agreements, the Company granted warrants to purchase
100,000 shares of the Company's common stock, at an exercise price of
$0.75. The Company recognized $10,251 in professional service fees.
For services related to securing senior management for the Company, the
Company granted warrants to purchase 250,000 shares of the Company's common
stock, at an exercise price of $0.01. The warrants were immediately
exercised and the Company recognized $497,500 in professional service fees.
As a fee related to a litigation issue with the Carver Corporation, the
Company granted a warrant to purchase 75,000 shares of the Company's common
stock, at an exercise price of $0.01. The Company recognized $45,105 in
legal expense.
As compensation for joining the Company's Board of Directors, the Company
granted certain Board Members warrants to purchase 100,000 and 300,000
shares of the Company's common stock, at exercise prices of $0.75 and
$0.01, respectively. The Company recognized $190,480 in compensation
expense.
Pursuant to a separation agreement, the Company granted a warrant to
purchase 30,000 shares of the Company's common stock, at an exercise price
of $0.75. The Company recognized $40,536 in compensation expense.
NOTE 13 - Subsequent Events
Purchase of Company
Effective March 31, 2000, one hundred percent (100%) of the issued and
outstanding capital stock of the Company was acquired by NetGain
Development, Inc. in a transaction in which each outstanding share of the
Company was exchanged for 0.08 shares of NetGain. The Company's stock
options and warrants were converted into options and warrants that may be
exchanged for purchase of NetGain shares at the rate of 0.127 and 0.08 per
option and warrant respectively.
Securities Offering
On March 30, 2000, the Company issued 10,874,917 shares of common stock for
$0.28 per share resulting in total proceeds of $3,044,978.
F-19
<PAGE>
CoolAudio.com, Inc.
Notes to the Financial Statements
NOTE 14 - Going Concern Uncertainty
As shown in the accompanying financial statements, the Company incurred a
net loss of $5,942,46 during the year ended December 31, 1999, and, as of
that date, the Company's current liabilities exceeded its current assets by
$762,839, and its total liabilities exceeded its total assets by $246,982.
These factors create an uncertainty as to the Company's ability to continue
as a going concern. The Company is developing a plan to reduce its
liabilities through possible the restructuring of it operations and fixed
overhead expenses. Additionally, the funding of the company is dependant on
the ability of its parent's, NetGain Development, Inc., ability to raise
additional capital through the issuance of common stock. The ability of the
Company to continue as a going concern is dependent upon the success of the
plan and its parent's success in raising additional capital. The financial
statements do not include any adjustments to the financial statements that
might be necessary should the Company be unable to continue as a going
concern.
F-20
