SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 0-23123
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NetGain Development, Inc.
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(Name of small business issuer in its charter)
Colorado 84-0856436
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
152 West 57th Street, 40th Floor, New York, NY 10019
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(Address of principal executive offices) (Zip code)
(212)765-2914
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, $.0001 par value per share
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(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to filed such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $0.
The aggregate market value of the issuer's Common Stock, $.0001 par
value, held by non-affiliates on April 11, 2000, was approximately $74,114,700.
As of April 11, 2000, there were 18,424,318 shares of the issuer's
Common Stock, $.0001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
PART I
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Item 1. Description of Business.................................................................................1
Item 2. Description of Property................................................................................12
Item 3. Legal Proceedings......................................................................................12
Item 4. Submission of Matters to a Vote of Security Holders....................................................12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...............................................13
Item 6. Management's Discussion and Analysis or Plan of Operation..............................................14
Item 7. Financial Statements...................................................................................16
Item 8. Changes in and Disagreements with Accounts on Accounting and Financial Disclosure......................17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act.......................................................................................18
Item 10. Executive Compensation.................................................................................19
Item 11. Security Ownership of Certain Beneficial Owners and Management.........................................20
Item 12. Certain Relationships and Related Transactions.........................................................20
Item 13. Exhibits and Report on Form 8-K........................................................................21
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains
forward-looking statements regarding the company, which represent our
expectations or beliefs including, but not limited to, statements concerning our
operations, performance, financial condition, business strategies and other
information. For this purpose, any statements contained in this report that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," believe," "anticipate," "intend," "could," "estimate"
or "continue", or the negative or other variations therefor or comparable
terminology are intended to identify forward-looking statements. The statements
by their nature involve substantial risk and uncertainties, certain of which are
beyond our control, and actual results may differ materially depending on a
variety of important factors, such as the limitations imposed by regulation
under the Investment Company Act of 1940 if it becomes necessary for the company
to register under that act as an investment company, inability to raise capital
in the future, lack of opportunities to make additional investments, as well as
other factors described in this report and in our other filings with the
Securities and Exchange Commission (the "SEC").
GENERAL
NetGain Development, Inc. was originally incorporated in the State of
Colorado in September 1981 under the name Central Oil Corporation and acted as
an agent and broker for oil and gas lease holders. From 1993 until 1999, the
company was a development stage company. In May 1999, we changed our name to
NetGain Development, Inc. and began to implement a business strategy of becoming
a technology and Internet company.
Our corporate objective is to become a major technology and Internet
company, by
(i) identifying companies that have the potential to become
industry leaders,
(ii) engaging in technology and Internet businesses through
operating subsidiaries or companies in which we have control
positions,
(iii) taking, to a limited extent, minority positions in companies
that we believe represent the next generation of Internet or
technology companies and that can facilitate the objectives of
our operating companies through synergistic relationships,
(iv) acting as an incubator providing consulting services to start
up and early stage Internet companies, and
(v) integrating all of these "partner companies" into a
collaborative network that leverages its collective knowledge
and resources.
Since May 1999, we have acquired two businesses operating in the
e-commerce industry. In addition, we have taken minority positions in several
Internet and technology companies that management believes represent the next
generation of Internet and technology companies and provide a synergistic
platform to facilitate the sales and business development of our operating
companies. We have co-invested in these companies with well-known financial and
industry
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partners such as Odeon Partners, Goldman Sachs & Co., Hambrecht & Quist and
Fleet Equity Partners.
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET
Advances in technology and functionality have led to the widespread
acceptance of the Internet as a new global medium that allows people to share
information and conduct commerce. People and businesses are increasingly relying
on the Internet to access and share information as well as to purchase and sell
products and services. The number of Internet users has grown dramatically. In
1995, International Data Corporation ("IDC"), an independent research firm,
noted that there were 19 million Internet users and predicted a new economy
built on a base of over 1 billion people connected to the Internet by 2005.
Today, IDC reports, that there are over 200 million people online - the "new
economy" predicted by IDC and others has become a reality. A rapidly growing
number of businesses use the Internet to market and sell their products and
streamline business operations. Increasing numbers of individuals are using the
Internet to communicate, participate in discussion forums, and obtain
information about and even purchase goods and services.
GROWTH OF TECHNOLOGY COMPANIES
The Internet has created a new paradigm for conducting business in the
digital age, creating new forms of commerce, communicating with prospects,
customers and business partners and for distributing products and services to
consumers. The growth in the use of the Internet has led to the creation of
numerous start-up companies seeking to take advantage of the opportunities
created by the Internet. These new companies generally employ an
Internet-focused business model or provide solutions that enable faster or more
efficient use of the Internet, and are characterized by their focus on
high-growth market segments.
STRATEGY
With the explosion of the Internet, significant opportunities have
arisen in the technology and Internet industries. However, there are also risks
associated with developing and/or investing in these private, start up or early
stage technology or Internet companies. NetGain's business focus shifted in
order to participate in the rapid growth being experienced in the Internet and
technology industries while at the same time attempting to diversify the risk
among several Internet and technology companies with different business
strategies and at various stages of development. The experience of our Board
members in the Internet, technology, computer and financial industries enhances
management's ability to identify start up or early stage technology or Internet
companies with a potential for future growth and either acquire those companies
or develop a form of strategic alliance.
Management intends to use these advantages to (i) develop a network of
operating subsidiaries and partner companies, in the technology and Internet
industries, (ii) assist these companies in their growth and development by,
among other things, promoting opportunities for synergistic business
relationships among these partner companies, and (iii) build successful
technology companies, to increase shareholder value.
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Our operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and resources.
Acting as a long-term partner, we intend to use these collective resources to
actively develop the business strategies, operations and management teams of our
partner companies. Our resources include the experience and industry
relationships of our Board members and the management of our partner companies.
Currently, our Board members consist of individuals with executive-level
experience in general management, sales and marketing and information technology
at such leading companies as Elligent Consulting Group, Inc., Computron
Software, Inc., Mastech Corp., Level 8 Systems, Merant Plc, Sapiens
International Plc and Deutsche Bank. We are, however, a start-up company, and
there are no assurances that we will successfully implement our strategy.
Our strategy is to:
o create or identify companies with the potential to become
industry leaders,
o engage in technology and Internet business through operating
subsidiaries or companies in which we have control positions
that can facilitate the objectives of our operating companies
through synergistic relationships,
o take, to a limited extent, minority positions in companies
that we believe represent the next generation of Internet or
technology companies and that can facilitate the objectives of
our operating companies through synergistic relationships,
o act as an incubator providing consulting services to start-up
and early stage Internet and technology companies, and
o integrate all of these "partner companies" into a
collaborative network leveraging the collective knowledge and
resources.
In implementing our strategy, we will leverage the collective knowledge
and experience of our partner companies, strategic investors and our Board of
Directors. Our Board consists of three experienced executives from various
backgrounds who will provide our network with strategic guidance, sales,
marketing and information technology expertise and industry contacts. Ideally,
we would like to own 25% or more of our partner companies, with management and
other shareholders owning the remaining interests, but management believes that
we can have significant influence with lower ownership levels and we may take
non-control positions in a limited number of companies.
CREATE OR IDENTIFY COMPANIES WITH THE POTENTIAL TO BECOME MARKET LEADERS
We believe our expertise with technology companies allows us to build
or identify companies that are positioned to succeed. When we evaluate whether
to enter a particular market, we weigh the following industry and partner
company factors:
Industry Criteria
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o Inefficiency - We consider whether the industry suffers from
inefficiencies that may be alleviated through better technology.
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o Competition - We evaluate the amount of competition that a
potential partner company faces from other technology companies, e-commerce
and traditional businesses.
o Market Potential - We consider the size and potential of the
market.
Partner Company Criteria
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o Industry Leader - We will partner with a company only if we
believe that the potential partner has the technology, products and skills to
become a leader in an industry.
o Management Quality - We will assess the overall quality and
industry expertise of a potential partner company's management.
o Significant Ownership - We will consider whether we will be
able to obtain a significant position in the company or exert influence over
the company and play a role in planning and directing its business activities.
o Network Synergy - We will consider the degree to which a
potential partner company may contribute to our network, and benefit from our
network and operational resources.
ACQUIRE PARTNER COMPANIES
After we have identified an attractive potential partner company, we
will determine whether we are best suited to acquire the partner company, to
provide management and or other consulting services, or to take a minority
position in the company. During management's negotiations with potential partner
companies, we emphasize the value of our collaborative network, which we believe
gives us a competitive advantage over other acquirors in successfully
consummating transactions. Our partner companies, strategic investors and Board
members assist in these discussions and assist in other stages of the
acquisition process, including the initial evaluation of potential partner
companies and due diligence.
TAKING MINORITY POSITIONS IN CERTAIN COMPANIES
We believe that because of our experience in the Internet and
technology industries, we are better able to identify Internet or technologies
with the potential to become leaders. While our preference is to acquire these
entities as operating subsidiaries or to acquire control positions, in many
cases, this may not be feasible because of our limited resources or may not be
necessary if there is already a strong management team and infrastructure in
place. We will monitor the progress of these companies through meetings with
existing management, requests for periodic reports on progress and, in some
cases and where appropriate, a seat on the Board of Directors. Furthermore, we
may initially take a minority position and provide the opportunity in the future
to increase our position when our financial resources expand, when our comfort
level with the partner company increases and when planned synergistic
opportunities with our operating companies are being realized.
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PROVIDE STRATEGIC GUIDANCE AND OPERATIONAL SUPPORT TO PARTNER COMPANIES
For some of our partner companies, we take an active role in the
partner company's affairs. We seek to accelerate the ability of partner
companies to succeed by providing them with strategic guidance on marketing,
operational support and business development. We also provide partner companies
with financial and business development guidance.
o Strategic Guidance - We provide strategic guidance to our partner
companies regarding market positioning, business model development and
market trends. In addition, we will advise partner company management and
directors on day-to-day management and operational issues. Our exclusive
focus on high technology and Internet companies and the knowledge base of
our partner companies, strategic investors, and Board give us valuable
experience that we share with the partner company network.
o Operational Support - Technology companies often have difficulty
obtaining senior executive level guidance in the many areas of expertise
that successful companies need. We intend to assist our partner companies
by providing access to skilled managers who will guide our partner
companies in the areas of sales and marketing, executive recruiting and
information technology.
o Business Development - Technology companies may be involved in
evaluating, structuring and negotiating joint ventures, strategic
alliances, joint marketing agreements, acquisitions or other transactions.
We provide assistance to our partner companies in all these areas.
PROMOTE COLLABORATION AMONG PARTNER COMPANIES
One of the principal goals of our network is to promote innovation and
collaboration among our partner companies, which management expects will result
in shared knowledge and business contacts among partner companies and the
formation of numerous strategic alliances. Through the network, we expect to
identify prospective alliances, make introductions and assist in strategic
planning among our partner companies. We intend to encourage and regulate the
information flow among our partner companies. We also intend to control the
information flow by determining the composition of the network. If we believe
that a partner company is not contributing to the network or has lost its
strategic importance, we may sell our interest in that partner company.
OVERVIEW OF CURRENT PARTNER COMPANIES
OPERATING SUBSIDIARIES
Forsalebyowner.com Corp.
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In January 2000, we acquired the domain name, www.forsalebyowner.com,
and related website and technology for $835,000 in cash. Forsalebyowner.com
provides consumers the ability to sell their homes without the cost of a real
estate agent. The site currently attracts approximately 1,000,000 hits per
month from consumers wishing to sell their homes. According to the United States
Department of Commerce, over 900,000 homes are sold every
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year without the involvement of a real estate broker - or 30% of all home sales.
We believe this number will grow as the number of Internet users grows.
Currently, forsalebyowner.com has approximately 2,700 monthly
subscribers who pay $39 per month or $99 for three months to list their homes on
the website. The website has achieved this level of interest without any type of
advertising or marketing. We are currently evaluating opportunities to fully
exploit this website and domain name by marketing it for its currently
established purpose of selling homes and/or modifying the website for the sale
of additional products.
CoolAudio.com Corp.
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Effective March 27, 2000, we acquired all of the issued and outstanding
capital stock of CoolAudio.com Corp., a Delaware corporation, in exchange for
2,057,671 shares of our common stock. Headquartered in New York City's Silicon
Alley, CoolAudio.com began operations in early 1999 and sells audio and video
systems, along with components, including home theatre systems, stereo systems
and components, televisions, and DVD/VCR equipment through its website
www.coolaudio.com. CoolAudio.com's selection of audio/video components features
many well-known brands. In addition, CoolAudio.com has established exclusive
distribution agreements with a select group of European-made audio and video
components. CoolAudio.com's distribution center is located in Charlottesville,
Virginia. CoolAudio's website attracts approximately 60,000 unique visitors
per month.
CoolAudio.com is attempting to redefine the consumer shopping
experience. Through its online audio experts, CoolAudio provides customer
service 5 days a week, supported by a nationwide network of "CoolDealers" and
"CoolInstallers," including free in-home set-up and product familiarization for
systems. This carefully crafted network illustrates CoolAudio's commitment to
delivering the best in customer care before, during, after and beyond the sale.
CoolAudio.com is attempting to develop joint venture/affiliate
relationships to allow consumers to access CoolAudio through a network of
websites that target the home entertainment market. These include software
retailers, major record labels, professional sports sites, and entertainment
sites. In order to increase site "stickiness" and repeat visitation, CoolAudio
is also attempting to establish venture/affiliate arrangements with partners
that provide CoolAudio with co-branded contests. In addition, CoolAudio is also
attempting to create relationships with sites that offer purchase incentives to
consumers.
OTHER PARTNER COMPANIES
We hold investments in each of the following companies as of April 10,
2000.
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APPROXIMATE
% OF
NAME OWNERSHIP BUSINESS
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Advanced Media Group, Inc. 5% A provider of a completely interactive web site
designed to provide an advertising, promotional and
distribution network directed at college students.
The website is
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designed to deliver a fully integrated advertising,
promotional and distribution network directed at the
college student's life experience, while simultaneously
bridging the transition from traditional mass media and
distribution, to a completely interactive
environment.
AsiaNet Corp. Ltd. * A holding company formed for the purpose of
acquiring and managing various Internet and, in some
cases, Internet-related assets and operations across
Asia. AsiaNet's objective is to selectively
develop, acquire, or invest into Internet media and
e-commerce properties throughout Asia with a focus
on developing strong brand name recognition in
content delivery and business-to-business and
business-to-consumer e-commerce services. AsiaNet
intends to concentrate its developments,
acquisitions, and investments in Internet start-ups
and mid-development stage interactive portal
businesses created in Asia or targeting an Asia
audience.
CarePackages.com, LLC * An e-commerce company predominantly targeting women
and first-time web shoppers, which allows consumers
to build/create their own personalized care package
consisting of low cost/low consideration products in
an entertaining format.
CreditLand.com Inc. * A Internet financial superstore offering a choice of the
best financial products from trusted brands, such as MBNA
and Bank of America, in a fast and easy comparison-shopping
environment
Enikia, LLC 3% An Internet bandwidth infrastructure company that is
developing high-speed home networking technologies,
using a home's pre-existing electrical wiring, in
order to integrate and network together PC printers,
telephones, information appliances, network-ready
consumer products and communication devices, and
provide easy access to the Internet, without having
to expensively rewire a home. In short, Enikia
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has discovered a way to deliver data over lines that
previously delivered only electricity.
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Mr. Andreas Typaldos, our Chairman of the Board and Chief Executive
Officer, is an investor in Enikia from its inception, as well as its founder,
largest shareholder and Chairman.
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Freeride Media, LLC * An Internet media and portal company that operates a
unique online marketing and loyalty program to help
other Internet companies shift from an initial focus
on "customer acquisition" to a longer term focus on
"customer retention and customer satisfaction" by
allowing members and visitors to FreeRide's web site
to earn and accumulate "points," whose effective
dollar value they can then spend at over 1,300
online and offline sponsors to purchase merchandise
such as CD's, free monthly Internet service, movie
tickets, books, flowers and other products and
services.
Fusion Networks, Inc. * Owns and operates, a Latin American portal and
e-commerce site designed specifically for the Latin
American population. The company previously
launched a site in Bogota, Columbia, and recently
launched its website in Miami, Florida, where
approximately 60% of the population is Hispanics.
The company intends to launch an additional 14
websites during 2000, including sites in key markets
in the United States, Latin America, Spain and
Portugal. Fusion Networks has signed an agreement
with IDM Corp. (Nasdaq: IDM) for both entities to
merge into Fusion Networks Holdings, Inc., a company
which has filed an application to be quoted on The
Nasdaq Stock Market. A merger proxy statement has
been filed with the SEC, however, there can be no
assurance that the merger will be consummated.
Linux Fund Inc. 5% A holding company/incubator for Linux-based software
companies. Linux, renowned for its speed,
reliability and efficiency, runs on as many as 10
million computer systems around the world,
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including large organizations like Wells Fargo and the U.S.
Postal Service, and has a user base growing at an
estimated 40% per year. Linux Fund's officers,
directors and investors include leaders in the Linux
world who use their knowledge and experience to
identify and invest in companies that they believe
will be leaders in this industry in the future.
Microcast Incorporated * Has established a proprietary network to deliver
millions of TV shows daily to the Internet, and has
entered into strategic alliances with RealNetworks,
Inc. and Savvis Corporation to develop a
proprietary high-speed digital communications
network to enable it to multicast television
programming for computer access worldwide.
Novix Media, LLC 8% A media, entertainment, and e-commerce site aimed at
the "Digital Generation," the 45 million young
adults between the ages of 18-29. With a majority
of young adults already online, Novix will provide a
one-stop source of information, broadband and
friendly entertainment and services to effectively
captivate this important audience.
OrbitTravel.com Inc. * This value added service provider specializes in
e-commerce applications and providing essential
distribution and on-line marketing solutions to the
travel industry worldwide. OrbitTravel.com is a
unique and innovative provider of on-line travel
marketing and sales services. The company functions
primarily as a "business-to-business" service
provider selling its services to a wide variety of
travel industry clients that seek global online
distribution. The company also provides travel
services directly to consumers.
Perform.com LLC 1.5% Has developed and is marketing and hosting web-based
business-to-business management tools to help
transform the business management process by
providing software tools that bring the power of Web
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technology to manage organizations, projects and
people.
ShareMax.com, Inc. 5% A comprehensive strategic e-procurement site and
trading and exchange community in its early stages
of development. With a database of over 12 million
supplier records, ShareMax.com combines the powerful
procurement process of Strategic Sourcing with the
reach, speed and power of the Internet. It provides
buyers unlimited access to markets and an automated
process to identify, evaluate and select suppliers
from its large database. ShareMax.com provides
suppliers easy access to buyers, as well as the
ability to conduct sales analysis to determine the
sources of their business.
Solutions Media, Inc. * Licenses, develops, and markets musical recordings
(d/b/a SpinRecords.com) for direct file transfer, or "downloading," to
consumers over the Internet. In addition, it serves as a
"community site" in which music enthusiast chat about artist
and other music related issues as well as an e-commerce site
that sells music related merchandise.
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* Less than 1%
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
Currently, the company is not subject to any direct governmental
regulation other than the securities laws and regulations applicable to all
publicly owned companies and other general regulations imposed on corporations.
However, because of the increased use and popularity of the Internet, it is
likely that new laws and regulations will be adopted at the state, local,
national or international levels. These laws and regulations may cover issues
such as the collection of and use of data from web site visitors and related
privacy issues, pricing, content, copyrights, online gambling, distribution and
the quality of goods and services. The enactment of these or regulations may
impede the growth of the Internet and business to business e-commerce, which
could decrease the revenue of our partner companies and place additional
financial burdens on them.
Due to the fact that investment securities may be deemed to constitute
a significant portion of our non-cash assets, the company may be required to
register as an investment company under the Investment Company Act of 1940. This
would make the company subject to various regulatory requirements that could
adversely affect the operations of the company and our ability to pursue our
business plan. See Item 6. "Management's Discussion and Analysis or Plan of
Operations."
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COMPETITION
COMPETITION FOR INVESTMENTS
We face competition from other capital provider, consolidators and
companies seeking to acquire Internet and technology companies, including
publicly traded Internet companies, venture capital companies and large
corporations seeking to acquire Internet-related businesses. Many of these
competitors have greater financial resources and brand name recognition than us.
These competitors may limit our opportunity to acquire interests in new partner
companies. If we cannot acquire interests in attractive companies, our strategy
to build a collaborative network of partner companies may not succeed.
COMPETITION WITHIN OUR NETWORK
We may compete with our partner companies for Internet-related
opportunities. In addition, we may compete with our partner companies to acquire
interests in technology companies, and our partner companies may compete with
each other for technology opportunities. We do not have any contracts or other
understandings with our partner companies that would govern the resolution of
these potential conflicts. Such competition, and the complications posed, may
deter companies from partnering with us and may limit our business
opportunities.
COMPETITION FACING OUR PARTNER COMPANIES
Competition for Internet products and services is intense. As the
market for Internet technology and business grows, we expect that competition
will intensify. Barriers to entry are minimal, and competitors can offer
products and services at a relatively low cost.
In addition, some of our partner companies compete to attract and
retain a critical mass of buyers and sellers. Several companies offer
competitive solutions that compete with one or more of our partner companies. We
expect that additional companies will offer competing solutions on a stand-alone
or combined basis in the future. Furthermore, our partner companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our partner companies. If our
partner companies are unable to compete successfully against their competitors,
the partner companies may fail.
Many of our partner companies' competitors have greater brand
recognition and greater financial, marketing and other resources than our
partner companies. This may place our partner companies at a disadvantage in
responding to their competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
EMPLOYEES
As of March 31, 2000, we had three full-time employees and one
part-time employee. We consider our relationships with our employees to be good.
None of our employees are covered by collective bargaining agreements.
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ITEM 2. DESCRIPTION OF PROPERTY.
Our business office is currently located at 152 West 57th Street, 40th
Floor, New York, New York 10019. These facilities, along with certain office
equipment and services are provided to us pursuant to a services agreement
between the company and Peak Communications Technology, LLC (a company with
which Mr. Typaldos is affiliated) dated June 1, 1999, which was subsequently
amended on January 1, 2000. Under the revised agreement, we pay $6,000 per month
for office equipment and secretarial support. We also reimbursed Peak or its
affiliate for 1/2 of the security deposit it placed with the landlord and pay
1/2 of its monthly obligations with respect to the lease. These facilities are
suitable for our operations.
ITEM 3. LEGAL PROCEEDINGS.
We have been named as a defendant in a lawsuit filed in federal court
in New Jersey by two individuals who, pursuant to a merger agreement, sold their
stock in Conversion Services International, Inc. ("CSI") to Elligent Consulting
Group, Inc. ("Elligent"), a company for which Andreas Typaldos acts as Chairman,
CEO and President. The plaintiffs have added to their original complaint,
purportedly brought derivatively on behalf of Elligent, a claim that Mr.
Typaldos and another Elligent board member diverted to the company business
opportunities of Elligent, namely the strategy and opportunity of offering
technology and consulting services to, and investing in, early stage Internet
companies. We are alleged to have been unjustly enriched by being the recipient
of the purported opportunities. Management believes that the claim made against
the company is without merit and intends to vigorously defend itself against
this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held a special meeting of shareholders on October 29, 1999 for the
purpose of considering and voting on a proposal to amend our Articles of
Incorporation to change our name to "NetGain Development, Inc."
There were a total of 7,545,075 votes cast at the meeting in person or
by proxy. Of this total, 7,544,400 were in favor and 675 were against the
proposal. In addition, there were 0 abstentions and broker non-votes.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR OUR COMMON STOCK
Our Common Stock has been trading on the OTC Bulletin Board since May
1998. From May 1998 through September 13, 1999, the Common Stock was quoted
under the symbol "CEOL." Since September 14, 1999, the Common Stock has been
quoted under the symbol "NTGN." The following table sets forth the high and low
sale prices as furnished by the OTC Bulletin Board for the calendar quarter
indicated. These bid prices reflect inter-dealer prices without retail markup,
markdown or commission, and may not represent actual transactions.
Quarter Ended High Low
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June 30, 1998 $3.06 $1.50
September 30, 1998 $3.02 $2.00
December 31, 1998 $2.87 $2.00
March 31, 1999 $3.00 $2.00
June 30, 1999 $8.38 $2.50
September 30, 1999 $8.31 $3.00
December 31, 1999 $6.38 $4.50
As of April 11, 2000, there are approximately 121 record holders of our
Common Stock.
We have never declared or paid dividends on our Common Stock and do not
intend to do so in the near future. We plan to retain any earnings for use in
the operations of our business and to fund future growth.
SALES OF UNREGISTERED SECURITIES
We effected a private financing of Series A Convertible Preferred Stock
to "accredited investors" pursuant to Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended, for the sale of 3,277 shares of Series A
Convertible Preferred Stock at a price of $1,000 per share. The private
financing resulted in gross proceeds to us of approximately $3,277,000. No fees
or commissions were paid to brokers in connection with such transaction. As of
December 31, 1999, we had used these proceeds for operations, to acquire
operating entities and to purchase equity positions in a number of Internet
private companies.
On October 25, 1999, we received $4,025,000, from netbreeders.com LLC,
a New York limited liability company, in exchange for 2,350,000 shares of common
stock. As part of this transaction, we also entered into a consulting agreement
with netbreeders.com, LLC (the "Consultant") pursuant to which the Consultant
will provide strategic services to us and/or our partner companies in
consideration for receiving warrants to purchase 750,000 shares of Common Stock
at an exercise price of $2.00 per share. These securities were sold to an
"accredited investor" pursuant to Rule 506 of Regulation D promulgated under the
Securities Act. No fees or commissions were paid to brokers in connection with
such transaction. These proceeds have been or will be used for working capital,
to acquire operating entities and/or to purchase equity positions in a number of
Internet private companies.
13
<PAGE>
On November 12, 1999, we entered into agreements with several foreign
entities and individuals to sell 1,849,998 shares of common stock at a purchase
price of approximately $2.92 per share resulting in gross proceeds of
$5,400,000. These securities were sold to "accredited investors" pursuant to
Regulation D promulgated under the Securities Act. No fees or commissions were
paid to brokers in connection with such transaction. These proceeds have been or
will be used for working capital, to acquire operating entities and/or to
purchase equity positions in a number of Internet private companies.
In February 2000, we sold 333,333 shares of common stock for a purchase
price of $1,500,000. These securities were sold to a foreign investor pursuant
to Regulation S promulgated under the Securities Act. No fees or commissions
were paid to brokers in connection with such transaction. These proceeds have
been or will be used for working capital, to acquire operating entities and/or
to purchase equity positions in a number of Internet private companies.
In March 2000, we acquired all of the issued and outstanding capital
stock of CoolAudio.com Corp. in exchange for 2,057,671 shares of our common
stock and options and warrants to purchase shares of our common stock. These
securities were issued in a private transaction exempt from registration under
Section 4(2) of the Securities Act. No fees or commissions were paid to brokers
in connection with such transaction.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
PLAN OF OPERATIONS
We generated no revenues from our operations in recent years as we were
a development stage company from 1993 through May 20, 1999. A change in control
occurred on May 20, 1999. On May 20, 1999, Charles L. Mattis, President, a
director and the holder of approximately 8,000,000 shares of our Common Stock
sold 7,700,000 shares of Common Stock to various individuals for $50,000. Mr.
Mattis and all of the existing officers and directors of the company tendered
their registrations. Simultaneously, Andreas Typaldos was appointed interim
Chairman of the Board and Chief Executive Officer of the company. New officers
and directors of the company took office after the expiration of ten days from
the date we filed with the SEC and mailed to our stockholders of record an
Information Statement required by Section 14(f) of the Securities Exchange Act
of 1934 (the "Exchange Act").
This change in control was the first step in a change in our business
focus. We plan to provide services and capital to young and promising Internet
companies and to take both majority and minority equity positions in
consideration for such services and capital, and to also develop various
Internet business activities of our own. We believe that we can develop such
Internet business activities, including e-commerce and content portals, either
through acquisitions of majority owned subsidiaries or through internal
development.
Our management team is actively seeking companies in which to acquire a
controlling interest and play an active role in the management of such company's
business. Our commitment to this plan is evidenced by our recent acquisition of
the forsalebyowner.com domain name and related website and technology as well as
the acquisition of CoolAudio.com Corp. Management believes that if it continues
with such plan of action, the Company will not have to register under the
Investment Company Act of 1940. The Investment Company Act of 1940 will become
applicable, however, if the investment securities we hold continue to exceed
14
<PAGE>
40% of the value of our assets, excluding U.S. government securities and cash
items, on an unconsolidated basis. There can be no assurances that management's
plan will be effective to avoid registration under the Investment Company Act of
1940.
We may be required to register as an investment company as a
consequence of investments that we have made subsequent to our change of control
to the extent that we presently hold "investment securities" (as defined by the
Investment Company Act) which constitute more than 40% of the value of our
assets (exclusive of U.S. government securities and cash items) on an
unconsolidated basis, unless we restructure or reduce the proportion of our
assets that is comprised of investment securities within a reasonable period of
time. Although it is our intention to take the actions necessary to avoid
investment company status, no assurance can be given that we will be able to
take such actions. The Investment Company Act of 1940 imposes a comprehensive
scheme of regulation which would require a substantial restructuring of our
operations to permit us to comply with applicable regulations. Applicable
regulations may also operate to impose significant restrictions on the
permissible activities and transactions. If we cannot restructure our operations
or reduce the proportion of our non-cash assets that is comprised of investment
securities to avoid the need for investment company registration, the Board of
Directors will consider taking such actions as may be necessary or appropriate
under the circumstances.
RESULTS OF OPERATION
In light of the change in control and change in our business focus,
which was effective in June 1999, an analysis of our results of operations for
the twelve months ended December 31, 1999, compared to December 31, 1998, is not
indicative of the results of operations in future periods.
For the twelve months ended December 31, 1999, we had no revenue. For
the twelve months ended December 31, 1998, we also had no revenues. Management
expects to generate revenues from our operating companies and with the
implementation and development of our business plan. However, no assurance can
be given that this will in fact occur or, if we do generate revenues, that they
will be significant.
General and administrative expenses were $948,401 for the twelve months
ended December 31, 1999. During the comparable period in 1998, these expenses
were not meaningful. The significant increase in expenses results from the start
up of our new business plan.
We experienced a net loss of $943,025 for the twelve months ended
December 31, 1999, versus a negligible loss in the comparable 1998 period. The
significant increase in losses results from us incurring additional expenses in
connection with the implementation of our business plan. Management expects
these losses to continue and possibly increase unless and until we are able to
successfully implement our business plan.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had working capital of approximately
$3,577,964. Working capital reflects money received in connection with the
private financing but not yet utilized. Management intends to utilize these
funds to acquire additional equity positions in
15
<PAGE>
Internet companies and to develop its business plan. Management expects that
general and administrative expenses will continue to increase. Moreover, in
order to fully develop our business plan, we will need to make significant
investments of additional capital. Management believes that sufficient funds
exist to cover our current working capital needs. However, management intends
to raise additional monies in order to enable it to continue to develop its
business plan.
ITEM 7. FINANCIAL STATEMENTS.
16
<PAGE>
NETGAIN DEVELOPMENT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
Auditors' Reports....................................................................................................F-1
Balance Sheet - as of December 31, 1999..............................................................................F-3
Statements of Loss - for the years ended December 31, 1999 and 1998..................................................F-4
Statements of Cash Flows - for the years ended December 31, 1999 and 1998............................................F-5
Statements of Stockholders' Equity - for the years ended December 31, 1999 and 1998..................................F-6
Notes to the Financial Statements....................................................................................F-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
NetGain Development, Inc.
We have audited the accompanying balance sheet of NetGain Development, Inc. as
of December 31, 1999, and the related statements of loss, cash flow and
stockholders' equity for the year then ended. 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. The statements of
loss, cash flow and stockholders' equity for the year ended December 31, 1998 of
NetGain Development, Inc. (formerly known as Central Oil Corporation) were
audited by other auditors whose report dated March 5, 1999 expressed an
unqualified opinion on those statements.
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 financial position of NetGain Development, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Marcum & Kliegman LLP
March 21, 2000
Woodbury, NY
F-1
<PAGE>
Janet Loss, C.P.A., P.C.
Certified Public Accountant
1780 S. Bellaire Street, Suite 500
Denver, Colorado 80222
(303) 782-0878
Board of Directors
NetGain Development, Inc.
I have audited the statements of loss, cash flow and stockholders' equity for
the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on the financial statements based upon my audit.
I conducted my audit in accordance with generally accepted accounting standards.
These standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flow for the year ended
December 31, 1998, in conformity with generally accepted accounting principles
applied on a consistent basis.
/s/ Janet Loss, C.P.A., P.C.
March 5, 1999
F-2
<PAGE>
NETGAIN DEVELOPMENT, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $3,642,245
Prepaid expenses 18,000
Due from related parties 33,000
----------
Total Current Assets 3,693,245
INVESTMENTS AT COST 7,620,000
OTHER ASSETS 103,002
----------
$11,416,247
==========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 53,006
Accrued expenses 46,174
Due to related parties 7,466
Due to stockholders 8,635
---------
Total Current Liabilities 115,281
COMMITMENTS & CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Preferred Stock -- $0.0001 par value; 10,000,000 shares
authorized; 5,000 shares designated Series A; liquidation
preference value $1,000 per share; 3,277 1
shares issued & outstanding
Common Stock -- $0.0001 par value; 20,000,000 shares
authorized; 17,170,998 shares issued and outstanding 1,717
Capital in excess of par - Preferred 3,277,247
Capital in excess of par - Common 9,534,634
Accumulated deficit (959,477)
Stock subscriptions receivable (7,156)
Treasury stock, at cost (420 shares of Preferred) (546,000)
-----------
Total Stockholders' Equity 11,300,966
-----------
$11,416,247
===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETGAIN DEVELOPMENT, INC.
STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
------ ------
Revenue $ - $ -
General & Administrative Expenses 948,401 9,444
--------- -------
Operating Loss (948,401) (9,444)
Interest Income 5,376 -
--------- -------
Net Loss $ (943,025) $ (9,444)
=========== ==========
Basic Loss per Common Share $ (0.08) $ -
=========== ==========
Weighted Average Number of Common
Shares Outstanding 12,498,260 10,021,000
========== ==========
The accompanying notes are in integral part of these financial statements.
F-4
<PAGE>
NETGAIN DEVELOPMENT, INC.
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
------ ------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $ (943,025) $ (9,444)
Non cash items:
Consulting fees paid with common stock 81,000 -
Changes in assets & liabilities:
(Increase) decrease in:
Prepaid expenses (18,000) -
Due from related parties (33,000)
Other assets (103,002) -
Increase (decrease) in:
Accounts payable 53,006 -
Accrued expenses 46,174 -
Due to related parties 7,466 -
Due to stockholders 8,635 -
---------- ---------
Total adjustments 42,279 -
---------- ---------
Total cash flows used in operating activities (900,746) (9,444)
---------- ---------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Investments (7,620,000) -
Deferred offering costs - 4,057
----------- ---------
Total cash flows (used in) from investing activities (7,620,000) 4,057
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 9,431,696 -
Proceeds from issuance of preferred stock 3,277,247 -
Purchase of treasury stock (546,000) -
----------- ----------
Total cash flows from financing activities 12,162,943 -
----------- ----------
NET INCREASE (DECREASE) IN CASH 3,642,197 (5,387)
Cash, beginning of year 48 5,435
----------- ----------
CASH, END OF YEAR $ 3,642,245 $ 48
------------ ----------
Non Cash Items:
On May 21, 1999, the Company issued 900,000 shares of Common Stock to certain
directors, officers and individuals as compensation for services.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETGAIN DEVELOPMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
Preferred Stock Common Stock
--------------------- -----------------------
Capital in Capital in
excess of excess of Accumulated
Shares Amount Shares Amount par par Deficit
- Preferred - Common
---------- ---------- ------------ ---------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JAN 1, 1998 - $ - 10,021,000 $ 1,002 $ - $ 15,498 $ (7,008)
Net loss for period - - - - - - (9,444)
---------- ---------- ------------ ---------- ------------- ------------- --------------
BALANCE - DEC 31, 1998 - $ - 10,021,000 $ 1,002 $ - $ 15,498 $ (16,452)
Common issued for services - - 900,000 90 - 80,910 -
Common issued for cash - - 6,249,998 625 - 9,438,226 -
Preferred issued for cash 3,277 $ 1 - - 3,277,247 - -
Treasury stock purchase - - - - - - -
Net loss for period - - - - - - (943,025)
---------- ---------- ------------ ---------- ------------- ------------- --------------
BALANCE - DEC 31, 1999 3,277 $ 1 17,170,998 $ 1,717 $3,277,247 $9,534,634 $(959,477)
========== ========== ============ ========== ============= ============= ==============
Total
Stock Treasury Stockholders'
Subscriptions Stock Equity
-------------- ---------- -------------
<S> <C> <C> <C>
BALANCE - JAN 1, 1998 $ - $ - $ 9,492
Net loss for period - - (9,444)
-------------- ---------- -------------
BALANCE - DEC 31, 1998 $ - $ - $ 48
Common issued for services - - 81,000
Common issued for cash (7,156) - 9,431,695
Preferred issued for cash - - 3,277,248
Treasury stock purchase - (546,000) (546,000)
Net loss for period - - (943,025)
------------ ------------ ---------------
BALANCE - DEC 31, 1999 $ (7,156) $ (546,000) $ 11,300,966
============ ============ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NETGAIN DEVELOPMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
------------------
NetGain Development, Inc. (the "Company"), a Colorado corporation, was
incorporated in 1981 for the purposes of gas exploration. From 1981 until
1993, the Company acted as an agent for oil and gas leaseholders. From 1993
until May 21, 1999, the Company was inactive. On May 21, 1999, a change of
control and corporate objectives occurred. In connection with the change of
control, all of the officers and directors resigned and new management and
directors were appointed. The new corporate objective is to become a major
technology and internet company (i) by operating its own subsidiaries, (ii)
by acting as an incubator providing consulting services and (iii) to a
limited extent, by taking minority positions in companies.
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all
short-term investments purchased with a remaining maturity of three months
or less to be cash equivalents.
The Company has cash deposits at a bank in excess of the maximum amounts
insured by the FDIC at December 31, 1999.
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.
Investments
-----------
The Company's investments for which ownership does not exceed 20% and are
not significantly influenced or controlled by the Company are accounted for
using the cost method. Under the cost method, the Company does not record
any changes in underlying value of the Company's investments.
F-7
<PAGE>
NETGAIN DEVELOPMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
As of December 31, 1999, none of the Company's investments have readily
determinable fair values. It is not practicable to calculate fair value for
the following, among other, reasons: (a) most of the companies in which the
Company has invested are private companies and there is no readily
available market for the securities, and (b) where the companies are
public, there are restrictions on the Company's ability to sell the
securities, both under federal and state securities laws as well as, in
some cases, contractually.
There is numerous information that would be relevant to an analysis of fair
value including, but not limited to, the industry, the stage of development
or maturation, the valuations of companies of comparable size operating in
the same industry, the market or lack of market for the securities, the
risks associated with the investment, etc.
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 other commitments to issue
common stock were exercised. During the years ended December 31, 1999 and
1998, warrants to purchase 750,000 and 0 common shares, respectively, and
common stock underlying shares of convertible preferred stock 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 of convertible securities, diluted earnings per
common share is not reflected in the accompanying financial statements.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Accounting Standards 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-8
<PAGE>
NETGAIN DEVELOPMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts and hedging activities. In June
1999, SFAS No. 137 was issued which delayed the effective date of SFAS No.
133 to January 1, 2001. The Company's management has not yet determined
the impact of adopting SFAS No. 133, as amended.
NOTE 2 - INVESTMENTS
At December 31, 1999, the Company carried its investments in its partner
companies at cost as follows:
Investments
as of
Partner Company Dec. 31, 1999
--------------- -----------------
Advanced Media Group, Inc. $ 50,000
AsiaNet Corp. Ltd. 1,000,000
CarePackages.com LLC 200,000
CreditLand.com Inc. 200,000
Enika, LLC 900,000
Freeride Media, LLC 700,000
Fusion Networks, Inc. 1,500,000
Microcast Incorporated 200,000
Novix Media LLC 1,000,000
OrbitTravel.com Inc. 500,000
Perform.com LLC 250,000
ShareMax.com 1,000,000
Solutions Media, Inc. 120,000
------------
$ 7,620,000
============
<PAGE>
NETGAIN DEVELOPMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - INCOME TAXES
The Company has a deferred tax asset of $375,000, resulting from net
operating loss carryforwards. The deferred tax asset has been fully
reserved due to the uncertainty of utilization. This is the primary reason
the amount of income tax benefit recorded is less than the amount of income
tax benefit calculated using the U.S. federal statutory rate of 35% for the
years ended December 31, 1999 and 1998.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $900,000, which may be used to offset future taxable income.
The net operating loss carryforwards generally expire beginning in 2019, if
not used. Should certain changes in the Company's ownership occur, there
could be a limitation on the utilization of its net operating losses.
NOTE 4 - RELATED PARTY TRANSACTIONS
During 1999, the Company invested in a partner company, Enkia, LLC, which
may be considered a related party due to common stockholders and executive
officers. At December 31, 1999, the Company's investment in such company
was a total of $900,000.
Effective June 1, 1999, the Company entered into a Services Agreement with
Peak Communications Technology LLC ("Peak"), an entity with which the
Company's Chairman is affiliated. Pursuant to this agreement, Peak provides
the Company with office space, computer and office equipment and
administrative services. In the years ended December 31, 1999 and 1998, the
Company paid $58,000 and $0, respectively, under this agreement.
Under an amendment to the services agreement referred to above, the Company
paid a security deposit for Peak's office space to Peak or its affiliates.
The Company carries the security deposit as other long-term assets.
From time to time during the year ended December 31, 1999, the Company made
and received certain advances from related parties.
F-10
<PAGE>
NETGAIN DEVELOPMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Litigation
----------
The Company has been included as a defendant in a lawsuit filed in federal
court in New Jersey by two individuals who, pursuant to a merger agreement,
sold their stock in a company named Conversion Services International, Inc.
("CSI") to Elligent Consulting Group, Inc. ("ECGI"), an entity in which the
Company's chairman is an officer, director and principal stockholder. The
plaintiffs have added to their original complaint charges purportedly
brought derivatively on behalf of ECGI. Those added claims are to the
effect that the Company's Chairman and another Elligent board member
diverted business opportunities of ECGI, namely the strategy and
opportunity of offering technology and consulting services to, and
investing in, early stage internet companies. The Company is alleged to
have been unjustly enriched by being the recipient of those purported
opportunities. Management believes that the claim made against the Company
is without merit and intends to vigorously defend the Company.
Consulting Agreement
--------------------
Effective May 24, 1999, the Company entered into a Consulting Agreement
with Andreas Typaldos, Chairman of the Board and Chief Executive Officer of
the Company. Pursuant to this Agreement, Mr. Typaldos is paid $25,000 per
month for acting as Chairman of the Board and Chief Executive Officer of
the Company. Commencing on the first anniversary of the Agreement and each
anniversary thereafter during the term, the base compensation may be
increased by an amount determined by the President but shall, in no event,
be decreased. Mr. Typaldos is also entitled to reimbursement of reasonable
and necessary business expenses and performance or merit bonuses as
determined by the President, the Board of Directors or the Company's
compensation committee. The Agreement is for a term of three years;
however, may be terminated by the Company sooner for "cause" (as defined in
the Agreement). The Agreement may be terminated by Mr. Typaldos upon 60
days prior written notice.
Warrant
-------
Pursuant to the Consulting Agreement dated October 25, 1999 by and between
the Company and netbreeders.com LLC, the Company granted to netbreeders.com
a warrant to purchase 750,000 shares of the Company's common stock at an
exercise price of $2.00 per share. The warrants are exercisable commencing
upon the earlier of the date (i) the Company receives $30,000,000 in equity
investments and/or (ii) the Company reports $40,000,000 in shareholders'
equity and shall expire five years from the date hereof. In addition, upon
the earlier of the date (i) the Company receives $30,000,000 in equity
investments and/or (ii) the Company reports $40,000,000 in shareholders'
equity, netbreeders.com will receive $1,500,000 for services rendered
during the term of this Agreement; provided, however, netbreeders.com and
the Company agree that the $1,500,000 shall only be used to exercise the
warrants described above.
F-11
<PAGE>
NETGAIN DEVELOPMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES (continued)
Investment Company Act
----------------------
The Company does not intend to engage primarily in the business of
investing, reinvesting or trading in securities so as to be an investment
company required to register under the Investment Company Act of 1940.
Although it is the intention of the Company to take such actions necessary
to be able to avoid investment company status, no assurance can be given
that the Company will be able to take such actions. The Investment Company
Act of 1940 imposes a comprehensive scheme of regulation which would
require a substantial restructuring of the operations of the Company to
permit the Company to comply with applicable regulations.
NOTE 6 - SHAREHOLDERS' EQUITY
Preferred Stock
---------------
On May 25, 1999, the Company amended it Articles of Incorporation to
designate 5,000 shares of Preferred Stock as Series A Convertible Preferred
Stock, $0.0001 par value per share ("Series A Preferred"). The holders of
the Series A Preferred are entitled to a 3% dividend, when, if and as
declared by the Board of Directors. The holders of the Series A Preferred
are entitled to convert their shares into that number of Common Stock equal
to $1,000 divided by the lesser of (i) 65% of the average market price of
the Common Stock for the five trading days immediately prior to the
conversion date or (ii) $7.00, subject to adjustment. The holders of the
Series A Preferred are entitled to a liquidation preference of $1,000 per
share, plus a sum equal to all unpaid dividends, if any have been declared.
During the year ended December 31, 1999, the Company sold 3,277 shares of a
Series A Preferred to investors for an aggregate consideration of
$3,277,247. In December 1999, the Company repurchased as treasury shares a
total of 420 shares of the Series A Preferred for $546,000.
Common Stock
------------
On May 20, 1999, a change of control of the Company occurred. On that date,
the then President, Director and holder of approximately 8,000,000 shares
of the Company Common Stock sold 7,700,000 shares of that Common Stock to
various individuals and entities. Coincidental with the change of control,
on May 21, 1999, the Company issued 900,000 shares of Common Stock to
certain directors, officers and individuals as compensation for services.
These shares were valued at $0.09 or $81,000 in the aggregate.
F-12
<PAGE>
NETGAIN DEVELOPMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 - SHAREHOLDERS' EQUITY (continued)
On May 21, 1999, the Company issued 2,050,000 shares of Common Stock to
various individuals and entities for $0.0067567 per share or $13,851 in the
aggregate. In October 1999, the Company issued 2,350,000 shares of Common
Stock to an entity for approximately $1.71 per share or $4,025,000 in the
aggregate. In addition, in November 1999, the Company issued 1,849,998
shares of Common Stock for approximately $2.92 or $5,400,000 in the
aggregate.
Warrant
-------
As of December 31, 1999, the Company has outstanding a warrant to purchase
750,000 shares of its common stock. The warrant expires on October 25, 2004
and is exercisable at $2.00 per share commencing upon the earlier of the
date (i) the Company receives $30,000,000 in equity investments or (ii) the
Company reports $40,000,000 in stockholders' equity. For additional
information on the warrant, see Note 5 - Commitments and Contingencies,
above.
NOTE 7 - SUBSEQUENT EVENTS
In January 2000, we acquired the domain name www.forsalebyowner.com and
related website in an asset purchase transaction. These assets were
purchased for $835,000 in cash.
In February 2000, the Company sold 333,333 shares of common stock for a
purchase price of $1,500,000. These securities were sold to a foreign
investor pursuant to Regulation S promulgated under the Securities Act. No
fees or commissions were paid to brokers in connection with such
transaction. These proceeds have been or will be used to purchase equity
positions in Internet companies.
Effective March 27, 2000, the Company acquired 100% of the issued and
outstanding capital stock of CoolAudio.com Corp., a corporation which sells
audio and video systems, home theatre systems, stereo systems and
components, televisions and DVD/VCR equipment through its website
www.coolaudio.com. In connection with this acquisition, the Company issued
2,057,671 shares of common stock as well as warrants and options to
purchase shares of common stock.
F-13
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 12, 1999, we changed our independent auditor for the fiscal
year ended December 31, 1999 from Janet Loss, C.P.A., P.C. ("Loss") to Marcum &
Kliegman LLP as part of our transition activities following the change in
control.
Our financial statements prepared by Loss contained no adverse opinion
or disclaimer of opinion, and were not qualified as to uncertainty, scope or
accounting principals. The decision to change accountants was recommended by our
new Board of Directors.
We believe there were no disagreements with Loss within the meaning of
Instruction 4 of Item 304 of Regulation S-B on any matters of accounting
principals or practices, financial statement disclosure or auditing scope or
procedures in connection with audits of our financial statements for the fiscal
year ended December 31, 1998, which disagreements, if not resolved to the
satisfaction of Loss would have caused that firm to make reference in connection
with its reports to the subject matter of the disagreement(s) or any reportable
events.
17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
The following is a list of our executive officers, key employees and
directors, their ages and their positions as of March 31, 2000.
Name Age Position
-------------------- --------- ----------------------------------
Andreas Typaldos 53 Chairman of the Board, Chief
Executive Officer and Director
Michel Berty 60 Director
Hermann Seiler 51 Director
ANDREAS TYPALDOS has been our Chief Executive Officer, Chairman of the
Board and a director since May 1999. In August 1998, Mr. Typaldos founded
Elligent Consulting Group, Inc., an information technology and e-commerce
consulting company currently trading on the OTC Bulletin Board. Since August
1998, he has served as the Chairman of the Board, Chief Executive Officer and
President of Elligent. From 1996 to 1998, he was a private investor. In June
1997, he also founded, Enikia, LLC, an Internet bandwidth and infrastructure
company, in which we have acquired an equity position. Since June 1997, he has
served as Chairman of the Board of Enikia. He was also the founder, President
and CEO of Computron Software, Inc. ("Computron"), an international public
software and consulting company trading on the American Stock Exchange until
1996. Mr. Typaldos remains a principal shareholder of Computron.
MICHEL BERTY has been a director since June 15, 1999. Mr. Berty is
currently a member of the Board of Directors of Elligent (for which Mr. Andreas
Typaldos is Chairman and CEO); Mastech Corp., a large public consulting services
company; Level 8 Systems, a public software and services company; Merant Plc, a
public software and services company, and Sapiens International Plc, a public
software and services company. He is also a member of the Board of Directors of
Ascent Logic Corporation, a risk management systems engineering private company,
and Buysmart, Inc., a start-up company in the Internet business. From 1992 until
1997, he was the Chief Executive Officer of Cap Gemini America, a $700 million
consulting services company, and member of the executive committee of Cap
Gemini, a $5 billion international consulting services company. Mr. Berty has
been retired since 1997.
HERMANN SEILER has been a director since June 15, 1999. Mr. Seiler is
currently Senior Vice President of Deutsche Bank with whom he has been employed
for over the past five years. His responsibilities include overseeing technology
for smart card and e-commerce. Prior
18
<PAGE>
responsibilities included overseeing the Global Information Technology area for
Deutsche Bank's Worldwide Investment Banking Operations. Mr. Seiler sits on the
Technology Board of the German Stock Exchange and has a degree in mathematics
and physics.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and holders of more than 10% of our Common Stock,
to file reports of ownership and changes in ownership with the SEC. They are
required to furnish the company with copies of all Section 16(a) forms they
file.
Based solely on management's review of the copies of such forms
received by the company, we believe that, with respect to the fiscal year ended
December 31, 1999, our executive officers, directors and holders of 10% or more
of our Common Stock complied with all applicable filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for
1999 received by Andreas Typaldos, our Chief Executive Officer. No other
executive officer's annual salary and bonus exceeded $100,000 for 1999.
<TABLE>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
RESTRICTED
NAME AND PRINCIPAL FISCAL SALARY BONUS STOCK ALL OTHER
POSITION YEAR ($) ($) AWARD ($) COMPENSATION
- ------------------- --------- --------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C>
Andreas Typaldos 1999 175,000 0 22,500(1) 0
President and CEO
</TABLE>
(1) Effective May 21, 1999, we issued 250,000 shares of Common Stock
to Andreas Typaldos as additional compensation for services to be
rendered.
Effective May 24, 1999, we entered into an agreement with Andreas
Typaldos whereby we agreed to pay Mr. Typaldos $25,000 a month for his services
as Chairman of the Board and Chief Executive Officer. Mr. Typaldos is also
entitled to reimbursement of reasonable expenses and performance or merit
bonuses. The agreement is for a term of three years; however, may be terminated
by the company sooner for "cause" (as defined in the Agreement).
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of April 11, 2000, by (i) each person (or group
of affiliated persons) who is known by the company to be the owner of more than
five percent of the outstanding shares of our common stock; (ii) each of our
directors and executive officers; and (iii) all of our executive officers and
directors as a group.
BENEFICIALLY OWNED PERCENT OF CLASS
NOMINEES FOR DIRECTOR, NAMED OFFICERS (1)(2) OUTSTANDING
- -------------------------------------- ------------------ ----------------
Andreas Typaldos 1,930,000(3) 10.5%
Michael Berty 100,000 *
Hermann Seiler 150,000 *
All directors and executive officers 2,180,000 11.8%
As a group (3 persons)
*Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is 152
West 57th Street, 40th Floor, New York, New York 10019.
(2) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock listed,
which include shares of Common Stock that such persons have the right to acquire
within 60 days.
(3) Includes shares held by Mr. Typaldos, individually, as trustee and by four
entities controlled or owned by Mr. Typaldos or his family.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Until May 24, 1999, our office was located at 6000 East Evans Ave.,
Bldg #1, Suite 22, Denver, Colorado 80222, the office of Mr. Stephen R. Levy,
our previous Secretary-Treasurer. We did not pay rent for such office space.
Our business office is currently located at 152 West 57th Street, 40th
Floor, New York, New York 10019, the office of Andreas Typaldos, our Chairman of
the Board and Chief Executive Officer. We use these facilities, along with
certain office equipment and services pursuant to a service agreement between
the company and Peak Communications Technology LLC (a company with which Andreas
Typaldos is affiliated). Under this agreement, we pay $6,000 per month for
office equipment and secretarial support. We also reimbursed Peak or its
affiliate for 1/2 of the security deposits paid to the landlord and pay Peak 1/2
of its monthly obligations with respect to the lease.
20
<PAGE>
Effective May 24, 1999, we acquired 700,000 common units of Enikia,
LLC for $700,000. Enikia is an advanced home networking and communications
company. Mr. Typaldos is the Chairman of the Board, founder and major
shareholder of Enikia.
From time to time, our directors and officers may make investments in
companies we acquire as operating subsidiaries or in which we take a minority
position. Such investments may be made on similar or better terms than the terms
by which we made our investment.
All transactions between the company and our directors, executive
officers and principal shareholders will be on terms no less favorable than
could be obtained from unaffiliated third parties and have been and will be
approved by a majority of our independent outside directors.
ITEM 13. EXHIBITS AND REPORT ON FORM 8-K.
(A) EXHIBITS:
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -----------------------------------------------------------------
3 Articles of Amendment to Articles of Incorporation
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K:
We have not filed any reports on Form 8-K during the last quarter of fiscal
1999.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETGAIN DEVELOPMENT, INC.
Date: April 13, 2000 By: /s/ Andreas Typaldos
-----------------------------------------
Andreas Typaldos, Chairman of the Board
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Dated: April 13, 2000 By: /s/ Andreas Typaldos
----------------------------------------
Andreas Typaldos (Chief Executive
Officer and Chairman of the Board of
Directors (Principal executive and
financial officer)
Dated: April 13, 2000 By: /s/ Michel Berty
----------------------------------------
Michel Berty, Director
Dated: April 13, 2000 By: /s/ Hermann Seiler
----------------------------------------
Hermann Seiler, Director
EXHIBIT 3
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
CENTRAL OIL CORPORATION
The undersigned, Andreas Typaldos, Chairman of the Board and Chief
Executive Officer, of CENTRAL OIL CORPORATION, a Colorado corporation, pursuant
to the provisiosn of the Colorado Business Corporation Act, adopts the following
Articles of Amendment to its Articles of Incorporation as filed with the
Colorado Department of State on September 8, 1981:
FIRST: The name of the corporation is Central Oil Corporation.
SECOND: The following amendment to the Articles of Incorporation was
adopted on October 29, 1999, by a vote of the shareholders. The number of shares
voted for the amendment was sufficient for approval.
THIRD: The following provision of the Articles of Incorporation of
the Corporation is amended in the following particular:
ARTICLE I is deleted and replaced with the following:
ARTICLE I: The name of the Corporation is NetGain Development,
Inc.
IN WITNESS WHEREOF, the undersigned Chairman of the Board and Chief
Executive Officer of the corporation has executed these Articles of Amendment
this 3rd day of November, 1999.
CENTRAL OIL CORPORATION, a
Colorado corporation
By: /s/ Andreas Typaldos
---------------------------------
Andreas Typaldos, Chairman of the
Board and Chief Executive Officer
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