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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM 10-SB
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GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR (g) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
1ST NET TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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COLORADO 33-0756798
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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LAWRENCE K. KIMBALL
CHIEF FINANCIAL OFFICER
1ST NET TECHNOLOGIES, INC.
11423 WEST BERNARDO COURT
SAN DIEGO, CALIFORNIA 92127
(858) 675-4449
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WITH COPIES TO:
KRESIMIR PEHARDA, ESQ.
MANNING MARDER & WOLFE, LLP
45TH FLOOR AT FIRST INTERSTATE TOWER
707 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90017
(213) 624-6900
Issuer's telephone number: (858) 675-4449
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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TABLE OF CONTENTS
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COVER PAGE.................................................. 1
TABLE OF CONTENTS........................................... 2
PART I
DESCRIPTION OF BUSINESS..................................... 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 23
DESCRIPTION OF PROPERTY..................................... 27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 28
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONNEL................................................. 29
EXECUTIVE COMPENSATION...................................... 30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 31
DESCRIPTION OF SECURITIES................................... 32
PART II
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS...................... 34
LEGAL PROCEEDINGS........................................... 34
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS............... 34
RECENT SALES OF UNREGISTERED SECURITIES..................... 35
INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 35
PART III
EXHIBITS AND FINANCIAL STATEMENTS........................... 37
SIGNATURES.................................................. 39
PART F/S
CONTENTS.................................................... F-1
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PART I
The issuer has elected to follow Form 10-SB, Disclosure Alternative 3.
ITEM 1. DESCRIPTION OF BUSINESS.
1st Net Technologies, Inc., a Colorado corporation (with our subsidiaries,
"1st Net" or "we"), is an Internet products and services company specializing in
enabling core technologies. These technologies support a new paradigm pioneered
by us, called "Content Based Routing and Delivery", designed to control and
monitor information, telephony and video services in a single Internet platform.
We compete for revenues from Internet commerce.
1st Net was incorporated in Colorado on May 14, 1990 as Snow Eagle
Investments, Inc. We were inactive from 1990 until 1997. On April 2, 1997, we
acquired the assets of 1st Net Technologies, LLC, a California limited liability
company. On April 22, 1997, we amended and restated our Articles of
Incorporation to change our name to 1st Net Technologies, Inc. In 1997, we
commenced business operations. In 1998, we filed a 15c-211 application with the
National Association of Securities Dealers ("NASD") for quotation of certain of
our shares on the Over-the-Counter ("OTC") Bulletin Board under the stock symbol
"FNTT". The NASD approved our application on November 12, 1998.
1st Net has four subsidiaries: Children's Technology Group, Inc., a Nevada
corporation; Spirit 32 Development Corporation, a Colorado corporation; Mariah
Communications, Inc. a Colorado corporation; and, SSP Management Corporation, a
Colorado corporation. We acquired these subsidiaries in a period from August
1998 through May 1999.
OUR COMPANY
We are a provider of E-business software, financial and business
information portals, services and solutions that enable our clients to build,
deploy and maintain Web sites on the Internet. We first established our presence
on the Internet in 1995 by creating one of the first-ever Internet malls, 1st
NetZing Mall (the "Mall"). We now offer a diverse assortment of Internet
products and services with marketplace-acknowledged database capturing
abilities. Database capturing allows us to identify consumer interest and route
relevant content. Traditionally, content was delivered to the consumer in
various forms, including television, telephone, radio and mail. We are now
focused on consolidating content delivery systems into a single medium -- the
Internet.
Our principal business is the creation of Web sites for private and
publicly-traded companies, as well as the development and marketing of
E-commerce transaction-based Internet technologies. Our Online Investor
Relations Program offers unique "Corporate Due Diligence Web Sites" that provide
worldwide dissemination of information, usually for a particular publicly-traded
company, directed toward existing or potential shareholders and the investment
community at-large. In addition to publishing valuable content, our Web site
services enable our clients to conduct E-commerce and run Web applications. Our
Web site services include personalized domain registration, the creation of a
customized and dynamic Web sites which offers information such as executive
summaries, management biographies, shareholder reports, financial information,
SEC filings, "E"-mail, and online stock quotes and charts. We also provide our
clients with the means to communicate with their constituencies through our
information management system, "Envoy Express", which allows Web site users to
opt into the site's subscription database. We manage our clients' databases by
constantly updating, sorting and maintaining online access. We believe our
database services are superior to those offered by our competition because of
our password-protected Web interfaces, our capability to run spontaneous queries
over the Internet, and our ability to provide our clients with the option of
analyzing their own database quickly over the Internet. Our methods for
developing these databases are proprietary and closely guarded by us.
We are continuing to develop a range of Internet products, including
private label community Web browsers, an E-mail database capture software
program, and technologies to develop online communities. We have also built
popular online portals, including iporoadshow.net, otcdigest.com,
smallcapdigest.com,
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otcjournal.com, Angelnetwork.com, and investmentopportunity.com that provide
financial resources to a select audience. These Web sites target communities of
individual investors and financial analysts, providing valuable information
about public companies and their upcoming online roadshows, Webcasts, and video
presentations.
Our Mall at www.1stnetmall.com offers our client companies a place to
advertise and sell their products and services. The Mall is attractive to
advertisers because of the significant number of visitors to this Web site.
Consumers can make online purchases at the Mall with a simple click of a button.
At this time, the Mall is not generating any revenue for us.
INDUSTRY OVERVIEW
GROWTH OF THE WEB
In fewer than five years, the Web has emerged as a universal, rapidly
growing online business medium enabling millions of users worldwide to share
information, conduct E-commerce, and access business applications. According to
International Data Corporation ("IDC"), the number of Web users worldwide will
grow from an estimated $50 billion at the end of 1998 to an estimated $733
billion by the end of 2002. The explosive growth of the Web as an online
business medium has been fueled by a number of factors, including an increased
awareness of the revenue, cost and performance benefits from using the Web to
conduct business, and the large and growing number of Web users. We believe this
cycle of growth will accelerate as an increasing number of consumers become Web
users and businesses respond by building and enhancing their online Web sites
which will attract more users. IDC reported that the number of Web site
addresses, or URLs, is expected to grow from 300 million in 1997 to 3.2 billion
in 2000.
As developing or enhancing a Web presence becomes increasingly important to
businesses, business Web sites are becoming more complex. As the Web's
importance has grown, businesses have applied advances in Internet technology to
convert business Web sites from static "billboards" to sophisticated E-business
Web sites where businesses can interact with customers, employees, suppliers and
distributors in a unique manner. E-business sites may contain hundreds of pages,
audio and video content, provide access to data, or "E-publishing", provide
online commerce, or "E-commerce" capabilities, and run Web applications, or
"E-applications" such as interactive forms. E-business Web sites are rapidly
becoming a strategic necessity for many companies as they discover how
conducting business online can enhance revenues, reduce costs and improve
performance.
THE CHALLENGE OF BUILDING A BUSINESS WEB SITE
Although it has become relatively easy to access the Web, it is difficult
and expensive to build an effective Web presence. The challenges of building a
successful Internet Web site require solutions that address planning, design,
building and deployment, as well as Web site promotion and maintenance after the
Web site is placed online. Companies are often also faced with a difficult "make
or buy" decision, either to build a Web site internally, through a third-party
service provider, or through available "off-the-shelf" applications. Key factors
influencing their choice of solutions include ease and flexibility of building,
construction time, and the cost and flexibility of later maintaining and
enhancing their Web site. In addition, the Web utilizes multiple standards and
platforms, including different Web browsers, database and Web servers, which
increase the complexity of building a site that operates in multiple
environments.
Virtually all businesses desire to access the opportunities presented by
the Internet, but face a difficult decision about how to construct and maintain
their own Web site. Web site building products generally require programming
expertise for hypertext mark-up language, or "HTML", and hence are technically
difficult to use. Web-building products and online services tend to target
consumers with personal "home page" building tools and casual desktop users with
the ability to publish only simple, static information. While in-house
programmers may provide technical coding, hiring internal resources is typically
expensive and may not provide the flexibility required to maintain dynamic,
evolving Web sites.
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The evolution of businesses computing through an Internet-based
infrastructure has also created enormous complexity and produced significant
challenges, similar to those faced by companies as they moved from mainframe
computing to client-server environments. At that time, the need to manage
complex client-server environments gave rise to a large market for network and
systems management solutions. Those solutions, however, were not designed for an
Internet-based infrastructure. As a result, they do not adequately address
today's new challenges, including connectivity, management of endpoints outside
of the firewall, security requirements of a public network, and massive
scalability, all of which are critically important when communicating and
delivering services across the Internet.
These challenges have created the need for a new Internet services solution
that incorporates not only the development of a corporate Web site, but supports
E-business communications and services across the extended Web network. We
believe that the majority of businesses have not yet strategically embraced the
Web. Those businesses which have a Web presence often need to upgrade their Web
sites with important, new functions like E-commerce and Internet protocol
telephony, or otherwise improve their Web site features and promotions. Public
companies have more sophisticated Web site requirements and often desire
profiles of their company over the Internet to gain exposure to financial
analysts and investors. Packaged Web-building software programs do not address
these specific needs. A third-party service provider with expertise in the
capital markets, technical Web design, programming, maintenance, and Internet
promotions, is the practical answer for public companies that want to embrace
the Internet.
1ST NET'S SOLUTION
We provide E-business products and services that enable small businesses,
as well as large enterprises, to develop and maintain Web sites and to
communicate effectively on the Internet. We are developing community Web
browsers, in addition, that enable consumers to efficiently "surf" the Internet.
Our E-business solutions help businesses develop Web sites to publish content
relevant to investors and analysts, conduct E-commerce, create a list of
visitors to their Web site, and run E-applications. We collaborate with our
client companies to offer products and professional services uniquely suited to
fulfill a client's Internet market and online needs.
Smaller businesses require practical help to build or enhance their Web
sites quickly and efficiently, to add key functions like E-commerce, Web
applications, proprietary E-mail lists, Web-interactive business cards, and
Internet telephony protocol applications, and to work with a variety of industry
standards and platforms. Our professional services group is experienced in all
facets of Web site development, maintenance, and promotion, including site
layout and design, page building, content management, and integration of sites
with existing corporate applications.
1ST NET'S STRATEGY
Our strategy is to establish ourselves as a "one-stop-shop" provider of
E-business solutions by leveraging our position as a provider of Web services,
Internet telephony protocol applications, and E-business software. As more
companies seek Internet market solutions for capturing the explosive growth of
the Web as an online business medium, we believe our E-business products,
services and resources should serve as a desirable point of departure. Our
Internet telephony protocol capabilities, Internet financial and business
portals, our proprietary E-mail lists software, and professional E-mail and Web
site development, maintenance and promotion services uniquely position us to
expand our E-business solutions. Three key beliefs underlie our business
strategy:
ENABLING INFORMATION TECHNOLOGIES ARE CONVERGING
The Internet, in general (and E-commerce, in particular), is transforming
the way we transact business. Our proprietary Content-Based Routing and Delivery
Systems represents a completely new approach to distributing information. The
entire integration of communications, the Internet, cable, fiber optics/copper,
and cellular services, will increasingly be repackaged as a bundled service, and
delivered by a single source, for less than the cost of those services purchased
separately.
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We anticipate that our subsidiaries' Internet telephony protocol system and
Wisper radio frequency wireless voice and data technology will create an
entirely new paradigm in "least cost routing", with tightly integrated
technological solutions that transcend today's telecomputing applications.
Rather than electing to pioneer technology at considerable time and expense,
like Microsoft or Intel, we acquire existing technologies and tightly integrate
them for ready market acceptance and maximum economic impact.
AT THEIR CORE, MEDIA IN THE INFORMATION AGE IS CONTENT-BASED
In their most raw form, information is comprised of nothing more than
organized patterns of 0s and 1s. This is true whether the content is video,
sound, information, or problem-solving algorithms. Until recently, these media
in general, and underlying technologies in particular, have been discrete
entities. Now, with rapid consolidation in the technology marketplace, including
the mergers of AOL/Netscape, AT&T/Time Warner, Disney/InfoSeek, Yahoo/Geocities,
USA Networks/Lycos, and @Home/Exite, we are witnessing the birth of the next
generation in communications. These mega-mergers are repackaging content for
consumers and using either size, bandwidth, vertical integration, or the
"community play" to build value for their customers and shareholders.
CONTENT IS INEXTRICABLY TIED TO A DELIVERY SYSTEM
Without exception, all content must have a delivery system to be practical.
In the past, systems were designed for a specific type of content. Television,
for instance, was delivered via television signals and required both broadcast
capability and a television set to receive the signal. Telephone services
require both switching and handset equipment. Internet services require a
computer and backbone. Suddenly, many of these delivery systems have merged
capabilities to produce a greater value-added service offering. In the
foreseeable future, we believe this trend will continue until many of the
current industries will cease to be recognizable in their current form, as
organizations become "full service content providers." In other words, telephone
companies will not be just telephone companies, Internet service providers will
not be just Internet service providers, and entertainment companies will not
just use existing delivery systems. A new industry, CBD (Content-Based
Delivery), is emerging from the economic need to be competitive and to provide
an all-inclusive blended service package. In the eyes of the consumer, it may be
unnecessary to buy services from multiple service providers when they are
conveniently available from a single provider at a more competitive price.
We have developed a unique four-step business concept that capitalizes on
the driving forces of converging technology and the importance of delivering key
content to target affinity groups. We believe this model represents the next
generation in information technology companies. Our strategy of building niche,
online communities with our proprietary Content-Based Routing and Delivery
System is set forth below:
- Capture the Desktops. The process begins by capturing the desktops
of affinity groups with community browsers. These "portals to the Internet"
contain vital information and applications that are unique and specific to
the needs of each affinity group. For example, we are developing a
community browser for the diabetics market in conjunction with MediQuik
Services, Inc., a publicly-traded medical device company.
- Build and Manage Custom Databases. With our community browsers as
the gateway to the Internet for specific online communities, we can capture
the names and other information provided by community members, and thereby
build and manage custom databases for each client constituency.
- Route Key Content. We route key content from other content providers
to a client community. This enables us to deliver select content without
requiring our clients to develop it directly. For example, we have made the
latest books on diabetes treatment from Amazon.com available directly on
our diabetic's community browser.
- Facilitating E-commerce. By facilitating E-commerce directly through
our community browsers, we use transaction-based and revenue-sharing models
to develop a revenue stream for all business
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transacted online. For example, diabetics now have the ability to join a
managed care program and purchase discounted pharmaceuticals directly
online.
PRODUCTS AND SERVICES
We provide solutions for two broad categories of customers: large and small
business enterprises requiring professional Internet services, and individual
consumers who desire to browse, obtain financial information, and communicate
over the Web.
1ST NET'S PROFESSIONAL WEB SITE AND PROMOTIONAL SERVICES
We specialize in developing online investor relations programs for
publicly-traded companies. We help public companies leverage their worldwide
exposure and improve online shareholder relations and ongoing communications by
combining our broad financial expertise with proprietary online marketing and
database management systems.
Corporate Due Diligence Web Sites. We design, develop and host corporate
due diligence Web sites for publicly-traded companies. These Web sites generally
provide the following information:
- Capitalization information
- Executive summaries
- Management biographical data
- Financial statements
- Press releases
- A photo gallery
- Reprints of relevant articles
- Current and historical stock prices
- Shareholder reports
- Audio and video streaming of select content
- Identification of the company's transfer agent
- Identification of market-makers for the company's equity
- Password-protected real time database management systems
- SEC reports
- Traffic analysis in real time, and
- Extensive proprietary online marketing
Customer Web Sites Built By Us. Our professional services group is engaged
in a wide range of Web site projects that have required a rapid Web site
building cycle, a combination of rich content and transaction processing
capability, interactivity, personalization, and deployment on a variety of Web
browsers from multiple server platforms. Set forth below are some examples of
sites we have constructed, or are constructing, which are representative of our
Web site building capabilities:
- laforza.com is the site of Laforza Automobiles, Inc., a manufacturer
of luxurious, Italian-made sports utility vehicles and its division,
Monster Motorsports, an after-market customizer of high-end,
high-performance sports cars, including Mazda Miatas. The site features
E-commerce functionality, allowing customers to view the cars, and compare
prices. The site is maintained by three people.
- lexoninc.com is the site of Lexon, Inc., a company engaged in
research and development of Ebaf assay, a proprietary blood screening test
to detect colon, ovarian and testicular cancer.
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- nofear.com is a state-of-the-art Web site presently under
development of No Fear, Inc., one of the world's largest action sports and
apparel retail companies. Constructed in cooperation with Direct Systems
Support, an IBM Premier Partner, we expect to launch this site in October
1999. It will support E-commerce transactions, allow customers to browse No
Fear's selection of products, enable No Fear personnel to contribute
up-to-the-minute content, and feature video-streaming of music and action
sports.
INTERNET MARKETING SERVICES
We specialize in online marketing campaigns of products and services which
provide our clients with a significant advantage over their competition. Some of
these specialized services include: search engine indexing, meta-tag auditing,
news-group postings, targeted marketing campaigns, and targeted E-mail programs.
We also employ other proprietary marketing strategies. To improve the marketing
effectiveness of our clients' Web sites, we typically enhance ongoing campaigns
initiated by our clients. We have identified the following eleven vital
components of a successful marketing program:
- Publicly announcing a client's Web site with Internet search engines and
directories
- Issuing press releases
- Issuing announcements in newsgroups
- Participating in E-mail lists
- Obtaining links from other Web sites
- Purchasing advertising banners on other Web sites
- Coordinating on-site events
- Publishing an E-newsletter
- Conducting a direct E-marketing campaign
- Integrating the client's traditional marketing and sales programs with
our services, and
- Measuring the results and revising accordingly
E-MAIL SERVICES AND SOFTWARE
While most companies and organizations have Web sites, they often lack the
underlying sophisticated database systems to capture the names of visitors and
then sort them by select criteria for ongoing marketing and sales efforts. This
year we developed a new line of products, called Envoy Express, specifically to
fill this need. Our first such product, Envoy Mail, is a full-featured,
Web-based E-mailing and database management system that represents the "best of
breed" functionality of any mailing list system available today. Adding Envoy
Mail to a Web site enables a company to offer visitors to its Web site the
opportunity to join the company's E-mailing list. The list can then be stored on
our secure database server or at the client's location. Through our Envoy
Express administrator Web site, a client may then send personalized
announcements about its products and services to list members. The company may
also instantly view Web interface statistics with a click of the mouse.
Eventually, we intend to develop and introduce "Envoy CD", which will provide
our clients with many of these same functions in a CD format.
E-mail is now an increasingly essential means of communication, with both
the number of E-mail users and usage levels per individual projected to increase
significantly. E-mail has the highest usage of any service on the Internet. In
an October 1998 Jupiter Communications/NFO Interactive survey, approximately 93
percent of respondents reported using E-mail regularly. According to the
Jupiter/NFO survey, there are over three times as many online users who
regularly use E-mail as there are viewing or creating a personal homepage,
visiting a sports, music or games related site, or participating in online chat.
At the end of 1998, there were approximately 325 million E-mailboxes worldwide,
an increase of 64 percent from a year before, according to a study by Electronic
Mail & Messaging Systems. Forrester Research, a publicly-traded
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independent research firm which provides analysis of a range of technology
industries, projects that daily global Internet E-mail traffic will increase
from 100 million messages per day in 1996 to 1.5 billion messages per day in
2002.
Envoy Mail offers our client companies valuable Web-based E-mail
information management tools. Envoy Mail allows subscribers to manage and
capture their database of E-mail visitors to their Web site. We are an
outsourcing enhancement to, not in competition with, traditional E-mail services
and products offered by Internet Service Providers ("ISPs") employers and
schools. We charge our subscriber companies for E-mail list management on a
three-tiered basis: (i) subscribers to our "Ambassador" class are charged a set-
up fee to establish our visitor data capture capability on their Web site, and a
monthly flat rate which varies according to the size of their E-mail list; (ii)
subscribers to the "Diplomat" class receive the same service, except that they
elect to manage and maintain the E-mail database themselves and are not charged
any continuing fees; and, (iii) subscribers to our "Courier" class receive the
same service as the "Diplomat" class, but only pay us per their use of our
proprietary software.
COMMUNITY-BASED WEB BROWSERS
We are developing proprietary, community-based Web browsers that focus on
the interests and needs of specific online affinity groups, industries and
markets. Our browsers are built on the Internet Explorer platform developed by
the Microsoft Corporation. By using Microsoft's Internet Explorer core
technology, we have developed portals that utilize highly entertaining
interfaces and state-of-the-art animated 3-D and 2-D characters.
In association with our majority-owned subsidiary, Children's Technology
Group, Inc., a Nevada corporation ("CTGI"), we have developed a secure Internet
browser, Crayon Crawler(TM), designed specifically for children and its related
subscription community. Crayon Crawler (www.crayoncrawler.com) includes
monitored chat rooms, a talking book reader, a closed E-mail system, instant
messaging, and a stream of quality content serving both educational and
entertainment purposes. In addition, we are presently developing a suite of
Web-enabling modules, MindWalker(TM), which will serve as the basis for an
upcoming browser aimed at teenage Web users. We have licensed both the Crayon
Crawler and MindWalker marketing rights to CTGI on an exclusive and
non-exclusive basis, respectively.
Crayon Crawler is an important tool for both parents and teachers concerned
with children's access to inappropriate content on the Web. This secure Internet
browser features what we believe to be the world's first talking chat room with
animated talking characters that can actually read and send messages and E-mail
to children while blocking obscenity. Crayon-Crawler provides children with
protected access to the Internet using a "White List," while blocking all
pornographic, demonic, cultic and generally most other undesirable content. In
addition, Crayon Crawler offers hyper-links to family-oriented sites. Crayon
Crawler generates revenues by providing channel bar positioning and banner
advertising, subscription fees, and links to advertisers. Crayon-Crawler's chat
rooms are monitored so that parents can avoid unwanted or unsupervised
conversations by their children. Crayon Crawler also automatically logs children
who are members of our "MindWalker Community" into its closed community server.
This allows children to find out who else is presently online with them in an
environment that is closed to the Internet at large, while enabling us to
monitor the community to prevent intruders. In this way, children can
communicate with other community members all over the world without parents
having to worry about who or what their child will encounter.
Designed for the 5 to 11 year-old age group, Crayon Crawler helps to
protect children in today's computing environment, and provides a conduit for
education, entertainment, and exploration of the Internet without the worries
associated with unsupervised browsing. Specific features include the following:
- Browser And Database. Crayon Crawler provides access only to Web
sites which are approved to be on our "White List" of sites, as opposed to
a "Black List" (which we believe cannot possibly keep apace with the
numerous undesirable Web sites which are introduced on the Internet each
day). Crayon Crawler will not allow a child to access a Web address that is
not pre-approved by either a parent or the White List of the Crayon Crawler
community. Community databases are not accessible to non-members and the
community itself is closed, thereby creating greater security for children.
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- Sound And Speech Capabilities. Microsoft's Agent(TM) technologies
provide a child with animated characters that are text-to-speech enabled.
This allows Crayon Crawler to talk with dynamic responses. For example,
characters can speak to a child and respond to "Help" questions or read a
child his or her E-mail. When logged into the community, Crayon Crawler can
deliver non-redundant responses, which we believe makes the computer more
engaging and entertaining. Additionally, Crayon Crawler is RealAudio- and
MediaPlayer-enabled for streaming video and audio.
- Instant Messaging And Who's Online. Crayon Crawler automatically
logs children who are members of the MindWalker community into the
closed-community servers. This allows children to find out if any of their
friends are online and to communicate with them by sending messages. This
system also allows the MindWalker community system administrators to track
the activities of members and keep out potential intruders.
- Chat Clients. Crayon Crawler provides closed chat rooms for children
utilizing talking characters. We have designed Crayon Crawler not to work
with instant messaging systems, like Internet Relay Chat (IRC). This
feature provides additional security for unwanted or unsupervised Web
conversations.
- E-mail. Crayon Crawler provides a closed E-mail system for children
so that "spam," pornographic banners, links, and unwanted E-mail cannot be
sent to, or by, a child. It is designed specifically for children, and
E-mail addresses consist only of the child user's identification (i.e.
"Michael"), instead of "[email protected]", for example.
- Voice Activation. In the future, community browsers may be
voice-activated and voice-controlled. They may require only a minimum of
mouse and keyboard interaction. Additionally, they may be configured to
control the entire personal computer, if a user so desires, with a minimum
of keyboard and mouse interaction.
We are also currently developing sports, extreme sports, religious and
financial browsers. Once developed, our financial browser will enable
subscribers to monitor their financial portfolios, subscribe to different
financial news services, and register to have a Web browser that links them to
the most popular financial sites on the Internet with a simple "point and
click".
INTERNET TELEPHONY
Through our majority-owned subsidiary, Mariah Communications, Inc., a
Colorado corporation ("Mariah"), an emerging, development stage company, we are
building an international Internet Protocol telecommunications network. Mariah's
network will be capable of delivering multiple services including voice, fax,
data and video. Mariah leases capacity on existing private Internet Protocol, or
"IP", circuits from existing carriers and installs new, carrier grade Internet
Telephony equipment to enable the reliable delivery of high quality voice, data,
fax and video signals over IP-based networks on an international basis.
This type of service, known generally as Internet Protocol Telephony, or
"IP Telephony", offers significant advantages over conventional
telecommunications systems, including significantly reduced equipment costs,
improved bandwidth efficiency, direct routing of calls, lower costs and improved
ease of network administration and delivery of multi-media services over a
single network infrastructure. IP Telephony combines the low cost, global reach
of the Internet and the high quality and security of private IP-based networks
with the public telephone system's ease of access.
Our IP Telephony systems, presently under development, can replace
traditional PBX systems and redefine the role of ISPs, as well as the cost of
long distance calls and connectivity. Mariah is a PC-based telephony switch
which can be configured as a debit platform, PBX, ISP server, or for any other
telephony or Internet application. It distinguishes itself from other IP
Telephony products because it is built on proprietary open-ended architecture.
Mariah's network is based on a single central routing and authentication base
that is universally compatible. This system allows any third party IP telephony
product or major telephony switch to join the network and permits calls to be
terminated at any provider's Point of Presence ("POP") or, if necessary, to be
switched to a public telephone network. In association with our wholly-owned
subsidiary, Spirit 32 Development, Inc., Mariah is designing its switch to
supplement current ISP servers and assist in the
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development of IP Telephony networks, both private and public. Each switch will
be designed for replacement of traditional corporate PBX, which allows all calls
to be routed through the Internet. Mariah's technologies should eliminate all
inter-office long distance charges, and generate substantial revenues. We
believe that key features will include:
- Single switch configurations
- Multiple switches that will be linked for single-switch operation
- Centralized routing and billing
- Remote administration and operation capabilities
- Real-time reporting on all aspects of operations
- Least-cost routing for public switched calls
- Least latency routing for Internet switched calls, and
- "Class 5" network performance standards.
Spirit 32 Development, Inc. is presently developing proprietary I.P.
Telephony equipment. If such equipment is not capable of commercial application
in a timely manner, Mariah shall select an alternate supplier of I.P. Telephony
equipment. Mariah is presently planning the deployment of its facilities-based
I.P. network and the introduction of its services utilizing either Spirit 32
Development, Inc.'s or an alternate supplier's licensed technology.
According to industry sources, the global telecommunications market
generates annual revenues in excess of $250 billion. Internationally switched
telecommunications traffic grew from 28 billion use minutes in 1989 to 81.8
million minutes in 1997 and is projected to reach between approximately 128.7
and 158.6 billion minutes by 2001. In the United States, residential long
distance callers alone represent a $67 billion dollar market. In its infancy
today, the IP services market is estimated to increase to $1.8 billion by the
year 2001. In North America, intense competition has reduced both business and
residential long-distance rates. This is not the case, however, internationally
where callers to certain countries frequently incur high per minute rates. The
international telecommunications industry is growing rapidly due to:
- deregulation
- privatization
- expansion of telecommunications infrastructure
- technological improvements
- globalization of the world's economies, and
- free trade.
Significant improvements have occurred in the compression and transmission
of voice over the Internet over the last several years. The quality of service
of Internet Telephony is now equivalent to that of a digital cellular phone or a
quality analog cell phone connection. I.P. Telephony technology is continuously
evolving and it is expected that further improvements in technology will allow
I.P. Telephony to rival conventional telephony networks. The gateway equipment
which Mariah intends to eventually employ will be standards-based and will
utilize the newest digital signal processing and error correction technologies
for improved voice sampling and compression and reduced latency. These
technologies will enable Mariah to provide high quality, commercial voice
services with carrier class reliability (99.999% availability of service).
Unlike the transmission of telephone calls or facsimile messages over
traditional land-based electrical wires, telephone calls or other data
transmitted over I.P. networks are first converted into digital packets and then
sent by means of high-speed, land-based transmission lines, satellites or
microwave systems in packetized form. Data transmitted over the Internet is
also, prior to transmission, compressed such that much larger amounts of data
can be transmitted than over traditional circuit switched telephone lines. As a
result, the cost of telephone calls made over I.P networks are more bandwidth
efficient and each call is much less expensive to transport than calls made
through traditional long distance telephone carriers. Computer systems, known as
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gateways, act as the interconnection between the Internet or I.P. networks and
the traditional public switched telephone networks.
A telephone call made using Internet telephony begins with a telephone
connected to the lines of the local public switched telephone network operator.
The caller dials a local telephone number that connects to a gateway nearest the
caller (the "originating gateway"). The caller is then asked by an automated
voice response system to enter a personal identification number and the long
distance telephone number which the caller is attempting to reach (the
"destination number"). The originating gateway directs the call over the
Internet to the gateway that is located closest to the destination number (the
"terminating gateway"). Once the call reaches the terminating gateway, the call
is then switched to the local telephone network and is routed to the destination
numbers. The entire call completion process takes only a few seconds.
If a gateway does not exist in the local calling area from which the caller
is placing the call, the call is transferred through regular telephone lines to
the nearest originating gateway. If a gateway does not exist in the local
calling area of the destination number, the call is transferred from the
terminating gateway through regular telephone lines to the destination number.
Mariah, therefore, is able to reduce its costs and increase its profit for
calls, which originate and terminate through gateways, which are in the local
calling areas of the persons originating and receiving the call.
In order to lower costs and offer extended coverage, several corporations
have formed consortiums of Internet telephony companies. Each member of the
consortium owns and operates an Internet telephony gateway that communicates
with all other gateways in the consortium to provide subscribers with the
ability to place a voice or fax call from virtually any ordinary telephone to
any other ordinary telephone (or fax machine) at a cost that is significantly
below traditional long distance carriers. Each member agrees to share revenue
generated from calls originated or terminated through their gateway on a per
call/minute basis with other gateway operators who have accessed their gateway
to route and deliver calls. A month end settlement process occurs between all
gateway operators that reflects currency exchange rates and all call traffic
volume between each gateway operator. Each gateway operator is responsible for
setting the per minute calling rates to every other gateway in the consortium.
Mariah plans to join one or more of these consortiums.
Over the course of time, Mariah may build gateways. Initially, however,
Mariah intends to focus its efforts on designing and implementing IP Telephony
software and providing services. Mariah also plans to market its Internet
telephony services to other international long distance carriers and wholesale
customers which have a need for large blocks of long distance telephone time
between selected locations. Although margins at the wholesale level are lower
than retail margins, the sale of blocks of long distance time to other carriers
will enable Mariah to generate revenues with only a limited number of gateways
installed. Mariah has pre-marketed its services and identified several potential
wholesale opportunities.
Mariah's network may also support Web-to-Phone and "Call-Me" services.
Web-to-Phone connections enable the users of multimedia PCs to establish a
conversation with the owner of the website or their designated customer service
representative. Mariah intends to introduce this new capability to Web site
owners and developers in those markets where Mariah has owned or constructed
gateways and demand for E-commerce services has increased. Mariah believes that
this service will contribute to the development of sales made through the
Internet. Web-To-Phone enables customers to speak directly with sales people and
reservation agents while they are online and reviewing the content of a
particular website. Web-to-phone personalizes the experience of shopping over
the Internet and provides a new level of customer service.
Call-Me services enable the personal computer user to receive a telephone
call from a merchant with a Web site at any telephone number and time of day the
user designates by simply filling out an onscreen form. Call-Me services offer
businesses the opportunity to provide customers with greater convenience and
more personalized service. In addition to developing and marketing these
communications applications, Mariah will also evaluate the possibility of
investing in or acquiring companies engaged in the development of innovative
I.P. software and network applications.
Mariah plans to negotiate with international groups to form joint ventures
for the installation and operation of gateways in various domestic and
international locations. By working with local partners, Mariah
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can secure quick entry into the local marketplace. In addition, joint venture
partners can provide key services required for successful
operations -- including providing space, power, connections to the Internet and
local telephone companies as well as marketing resources and, in many cases,
access to an existing customer base that can use Internet Telephony services.
Joint venture partners also bring invaluable knowledge of local regulatory
processes and business practices. It is expected that in a typical joint venture
Mariah will install the gateway equipment and provide remote network
administration, centralized billing, finance and management functions, as well
as global marketing of services. There can be no assurance, however, that Mariah
will be successful in forming any joint venture or that any joint venture will
operate profitably.
Mariah expects that it will need approximately $10 million in capital over
the next 24 months to proceed with its business operations. Mariah does not have
any definitive agreements concerning financing and there can be no assurance
that any financing will be available on terms acceptable to Mariah. Without
financing, or some alternative source of funding, Mariah will only be able to
conduct limited operations.
INTERNET PORTALS
In association with our wholly-owned subsidiary, SSP Management, Inc., a
Colorado corporation ("SSP"), we own and maintain six Internet Web sites, which
have varying financially-related themes and content. Our OTCdigest.com Web site,
and SSP's Smallcapdigest.com, OTCjournal.com and Investmentopportunity.com Web
sites, present to individual investors clear, original and timely coverage about
public companies which generally have not yet attracted significant attention of
Wall Street or institutional money managers. In order to qualify for a profile
in our online publications, a public company must already have a complete due
diligence Web site which provides our subscribers with direct access to the
company's financial statements, SEC filings, business plan, and any available
analysts' report. Our Angelnetwork.com Web site, written exclusively for
accredited investors who must first execute an investor questionnaire to be
eligible for our subscriber base, introduces investors to companies in an early
stage of financing and educates them about alternative investment vehicles.
Membership for subscribers is free for all of our Internet publications. As of
August 25, 1999, we have approximately 228,000 opt-in subscribers to our online
financial publications.
PUBLICATIONS ON THE WEB
The Web has rapidly become a significant global medium for communications,
news, information and commerce. The Web allows content providers to deliver
information and programming in a manner not possible in the traditional
broadcast and print media. Although these traditional media can have large
audiences, they are generally limited to a specific geography, can deliver only
limited content or are not effective in a real-time basis. Broadcast media is
limited by the relatively small number of available frequencies or channels, the
rigidity of its schedules and its inherent capacity constraints, with each
channel or frequency carrying only a limited amount of information. By
comparison, the Web allows users to rapidly access, search and interact with a
rich supply of content, regardless of its location. In addition, despite the
large amount of undifferentiated information on many Web sites, users can
utilize and manipulate information more efficiently than in traditional media by
conducting real-time, customized searches.
A number of trends have led to increased demand for business and financial
news in all forms of media:
- individuals are proactively managing their money and the American
public is investing an increasing percentage of their household wealth in
securities, including investments in smaller, OTC Bulletin Board companies;
- the emergence of online trading of financial instruments has led
many investors to rely less on traditional brokers, and
- United States companies, even smaller public companies, increasingly
compete globally, requiring increased real-time knowledge of a broad range
of financial information from around the world.
Business Week reports that more than 70 firms now offer online trading, up
from approximately 30 at the end of 1997, including the majority of stockbrokers
within the United States. According to Business Week,
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Forrester Research predicts that there were over three million online investing
accounts at the end of 1997. Forrester Research predicts that this number will
increase to 14.4 million by 2002.
Driven by these factors, numerous traditional and online information
sources such as newspapers, magazines, broadcasters and specialized financial
Web sites are seeking to address the demand for timely and relevant financial
information. These companies are often unable, however, to effectively meet
consumers' needs for high-quality, compelling and relevant, real-time business
information. Newspapers and magazines cannot offer real-time data and
information, and broadcasters are limited in the depth and availability of their
content. Smaller public companies, in particular, are often ignored by media
sources altogether. While there has been a proliferation of Web sites, which
include financial and business information as part of their offerings, we
believe that most sites offering such financial and business data suffer from a
number of limitations. Frequently, these sites do not offer high quality
original content and often only cover the most highly recognized industries,
markets and companies.
We believe that a significant need exists for easy access to business and
financial information about those public companies, which tend to be overlooked
by more traditional media. Angelnetwork.com offers information over the Internet
about such companies, as well as educational and analytic tools unavailable from
more traditional media. By integrating high quality editorial content with data
about public companies, our Web-based portals and publications can enable our
audience to keep abreast of current business developments, track industry and
competitive trends, make informed investment decisions, and manage their
financial assets. We also believe that by assembling a loyal base of subscribers
who actively follow our business and financial profiles, our Web sites can
create a targeted audience that, over time, will be attractive to both financial
and non-financial advertisers.
STRATEGY FOR OUR WEB PORTALS
Our objective is to create leading branded Web sites for comprehensive
business and financial analysis of public companies, including our client
companies. We believe that this content will be both educational and will enable
investors to conduct their own analysis. Our strategy is designed to maximize
the quantity and quality of traffic on our Web sites and to develop a strong and
loyal community, thereby creating an audience which is highly attractive to
companies that are advertising and engaging in commerce over the Internet. Our
strategy to achieve this objective includes the following key elements:
Build Traffic And Subscriber Loyalty. We believe that our plans for
significantly increased marketing activities will provide us with increased
visibility among Web users and companies advertising and engaging in commerce
over the Internet. Additionally, we intend to pursue distribution relationships
with high-traffic Web sites to strategically place programming and links to our
Web sites as a key element in building traffic. We also purchase advertising
banners on other high-traffic sites. For example, we have advertised our Web
sites on Yahoo, Excite.com, Ragingbull.com and Silicon Investor.com. We are also
seeking to build our traffic with a national brand-building campaign in
traditional and other online media.
Deliver Original Data With High Editorial Value About Often Overlooked
Public Companies. Our publications will continue to cover public companies and
their financial markets, and other areas of interest to our audience, and
enhance this programming by expanding our staff of journalists, columnists and
adding selected third-party content. For example, our editorial staff for
Investmentopportunity.com, consisting of two experienced business journalists,
creates high quality news stories on a daily and weekly basis that inform,
educate and entertain our audience.
Build And Capitalize On Attractive Audience Demographics. We believe our
Web portals attract users who, as a group, are more affluent and better educated
than users of many other Web sites. Our Web sites, therefore, represent an
attractive medium for companies that advertise and engage in commerce over the
Internet. In order to attract new users and grow a loyal audience that appeals
to a broad range of advertisers and business partners, we are investing in
content, improved and expanded features, advertising, and promotional programs.
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Pursue Additional Revenue Streams. We believe that we have significant
opportunities to capitalize on our audience and content offerings to create
multiple revenue streams for future growth. In addition to revenues derived from
advertising, we intend to offer limited subscription services for certain market
data and analyst's reports, exclusive news, commentary and analytical tools. We
are also pursuing electronic commerce opportunities through strategic and
marketing relationships with retailers and service providers focused on Web
distribution. For example, we believe that our focused content and audience
provides us with excellent opportunities to build strategic commerce
relationships with financial service companies, such as marketers of credit
cards, consumer and home loan companies and insurance providers. We also believe
that an opportunity exists to leverage a unique brand of Web portals focusing on
smaller investors and smaller public companies, and to create strategic
relationships in key international markets.
Synergistic Investment Web Portals. Each of our six Internet Web sites
contains specific content. SSP has built and maintains a database of associated
subscribers who receive a particular publication associated with each individual
Web site. Collectively, the databases associated with these Web sites currently
contain approximately 200,000 opt-in subscribers. Based on current recruitment
rates, it is anticipated that by January 2000 we will own and maintain a
database of between approximately 400,000 and 500,000 opt-in subscribers. Listed
below are six commercial Web sites owned and maintained either by SSP or us,
including a brief description of their individual themes and revenue sources.
- OTC Digest (http://www.otcdigest.com). OTC Digest profiles public
companies who are clients of our Due Diligence Web Site and Database
Capture and Maintenance Services ("Due Diligence Services") and pay us (in
cash, stock or a combination of both) to be profiled. Published once each
week, this publication is free to our E-mail subscribers. In compliance
with Section 17(b) of the federal Securities Act of 1933, 1st Net's and
SSP's publications provide individual disclaimers and disclosures about
each company which pays us to profile it, including the source, form and
amount of all compensation we or SSP receive. Each issue of OTC Digest
offers a weekly update on stocks and highlights a particular company, while
also providing a "Special Situation Report" on market conditions for public
companies. When a client company subscribes to our Due Diligence Services,
we offer the company the opportunity to be profiled in the OTC Digest,
which has approximately 10,000 subscribers.
- The Angel Network (http://www.angelnetwork.com). First published in
December 1998, The Angel Network is written exclusively for our proprietary
database of accredited investors. This Web site profiles investment
opportunities, which are only available to accredited investors, and
provides educational tools for subscribers to evaluate investment
opportunities not available from traditional media. Applicable state and
federal securities laws, including the prohibition against the general
solicitation of securities under federal Regulation D, are strictly
followed. The Angel Network database has approximately 750 subscribers.
- IPO Roadshow (http://ww.iporoadshow.net). On April 18, 1999, we
introduced IPOroadshow.net to inform investors and financial market
analysts about upcoming online roadshows, Webcasts and video due diligence
presentations by companies "going public" or existing publicly-traded
companies. This Web site is developing a database of stockbrokers, money
managers, investment professionals and individual investors. By utilizing
video and audio streaming capabilities provided by INTERVU (NASDAQ:INVU),
IPOroadshow.net informs interested parties via E-mail from Envoy Express
about upcoming Web events. Customers of IPOroadshow.net acquire the ability
to conduct roadshows directly through the Internet without the time and
expense typically associated with such events.
- Small Cap Digest, OTC Journal and Investment Opportunity
(http://www.small-capdigest.com,http://www.otcjournal.com, and
http://www.investmentopportunity.com). SSP owns and maintains three
financial portals that are virtually identical in terms of theme, content,
and revenue streams. These three sites and their respective related
databases have been developed in order to create three separate and
distinct revenue streams for SSP. We generate revenues from each of these
investment portals through profiling public companies, which generally have
not captured the attention of either Wall Street or the major financial
media. Client companies are chosen after we perform due diligence on the
company. Information on the client company is sent to our subscriber base,
initially in the form of a
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"profile" by E-mail. Once a profile is released, SSP will continue to
provide timely updates with news releases and corporate developments to our
subscriber base via E-mail for a period of time which is specified in each
client contract. SSP strives to offer unique content not found at the
larger, more heavily trafficked sites in order to diversify sources of
revenues. Some examples of these Web sites' unique content include columns
by Dr. Richard Geist, Harvard PhD., Psychology, who provides a monthly
column on the psychology of investing for which Dr. Geist receives a fee
from SSP. SSP has also developed a simulated stock trading game where
players can register and buy and sell stocks in a simulated environment.
This game is currently played in beta test version, and we anticipate that
we will release the final version in mid-September 1999. SSP thereafter
anticipates having monthly contests for the best performing portfolios and
paying cash prizes to the three top performing portfolios. SSP also has a
number of other unique financially-related resources on its sites, each of
which is designed to stimulate increased and repeating traffic to the
sites. We believe that as these new and unique investment resources are
added to our sites, our traffic will increase, thereby creating an Internet
environment that may generate significant advertising revenues.
SALES, MARKETING AND DISTRIBUTION
We sell our products and services to our clients using a combination of
indirect distribution channels, our direct enterprise sales force, our online
distribution channels, and strategic relationships. We market our products and
services using a broad range of activities to generate demand and build brand
awareness. As of August 25, 1999, we have 14 employees, or approximately 22
percent of our workforce, engaged in sales and marketing activities.
INDIRECT DISTRIBUTION CHANNELS
Our indirect distribution channels and strategies include domestic and
international distributors, retail vendors, value-added resellers, and other
technology companies with whom we have and are continuing to establish strategic
relationships. To date, we have developed contractual relationships, or are
currently in negotiations, with non-exclusive distributors worldwide, including
Netcenter, Netsol International, Total Media Technologies, Cyber Vegas, and
Libretto of the United Kingdom. We are currently negotiating additional avenues
of distribution and we intend to investigate other new possible partnerships as
opportunities arise.
DIRECT ENTERPRISE SALES FORCE
Our direct enterprise sales force focuses on sales to corporate customers
domestically in the United States and, more recently, abroad in the United
Kingdom. The enterprise sales force is comprised of field representatives and
inside sales representatives. The field representatives and inside sales
representatives market and sell our products and services to corporate clients
that the inside sales team has identified as sales prospects. The inside
representatives develop and pursue leads generated from inquiries on our Web
sites, downloads of our trial products, and other direct marketing efforts. Our
sales force has increased from two employees to 14 employees in 1999, and during
that period revenues per salesperson have been rising steadily while our number
of transactions and inquiries has increased, as well.
ONLINE DISTRIBUTION CHANNELS
Our Web site, available at http://www.1stnettech.com, allows users to
download and purchase our products and services through links that reach to our
subsidiary companies' Web sites. Our subsidiaries also offer products directly
to consumers and corporate clients. In addition, we employ third-party
E-commerce and distribution sites, including netcenter.com and netsolmall.com,
where our products and services are sold. Additional online distribution
channels for the sale of our products and services include nofear.com and
totalmediatechnologies.com, which are scheduled to come online by September 30,
1999. Together, these online distribution channels provide us with a low-cost,
globally accessible, 24-hour sales channel.
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STRATEGIC RELATIONSHIPS
We have a number of strategic relationships with other technology companies
by which our products are incorporated into, or bundled with, a third party's
products. We believe that these strategic relationships significantly enhance
the opportunity for brand recognition and awareness of our products and
services, and also provide us with additional sources of revenues. Our strategic
relationships include:
INTERVU, Inc. (http://intervu.com). INTERVU is a leading service provider
for Internet video delivery solutions. This relationship encompasses our
Internet Web cast audio delivery of the "Angel Network Radio Hour", a one-hour
radio broadcast that features our interviews of various prominent business
executives, as well as video delivery services for our "IPO Roadshow.net" Web
site currently under development. We are a reseller of these Internet multimedia
delivery services through the "IPO Roadshow" Web site and the "1st Net Financial
Channel", which will also feature live and archived "IPO Roadshow" client
events. We additionally provide third party marketing services to INTERVU's
event clients in the sports and entertainment segments of INTERVU's business.
INTERVU offers powerful, turn-key solutions to deliver live and on-demand audio
and video-streaming over the Internet, from narrow-band (28.8, 56.6 and 100
Kbps) to broad band (300Kbps and higher, for near television-quality video). The
company's streaming media services are utilized for many different types of
business uses including entertainment, news reporting, corporate communications,
investor relations, and distance learning. INTERVU has developed an automated
content management system that is tied to a patent-pending, high-performance
distributed network comprised of numerous servers strategically positioned
around the United States and Europe. This distributed network architecture
allows the company to handle very high volumes of simultaneous Internet users
while ensuring first-rate delivery of audio and video to users' computers.
Netsol International, Inc. (http://www.netsolpk.com). We are developing
products and solutions in association with Netsol's offshore software
development group. Netsol employs over 100 information technology professionals
with offices in the United States, the United Kingdom and Pakistan. Netsol
International, Inc. is the parent company of Network Solutions (PVT) Ltd.
Pakistan, Netsol (U.K) Ltd. and Netsol USA, Inc. We believe this relationship
provides us with a competitive edge for our Web creation, design, and hosting
services for a variety of markets, including finance, children, and sports. For
Netsol, this alliance should generate steady revenues through our extensive
Internet marketing capabilities and help launch the first Internet-based project
developed by Netsol.
MARKETING AGREEMENTS
Laforza Automobiles, Inc. (http://www.laforza.com). We have entered into a
business arrangement with Laforza Automobiles, Inc.("LaForza") by which we
receive a cash commission for each automobile that we help to sell on the Web
site, which we developed for Laforza. Laforza Automobiles has two niches within
the automotive industry: (i) as an importer and distributor of a luxurious,
Italian-made sport utility vehicles called "Laforza"; and (ii) as an
after-market customizer of high-end, high-performance automobiles, called
"Monster Motorsports."
NO FEAR, Inc. (http://nofear.com). We recently signed an Internet marketing
and revenue sharing agreement with NO FEAR, by which we are developing an
E-commerce Web site aimed at marketing the company's line of over 500 products.
We will be paid a commission for all sales of NO FEAR products via the Internet,
and shall share in advertising revenues generated by NO FEAR's Web site.
La Jolla Fresh Squeezed Coffee Company, Inc. (http://lajollacoffee.com). La
Jolla Fresh Squeezed Coffee Company, Inc. provides unique and versatile products
to the specialty coffee market. La Jolla Coffee currently has over 32 distinct
coffee blends, including liquid coffee concentrates and cold coffee beverages,
which it manufactures and markets. At present, it is producing five blends of
cold coffee beverages in various sizes. We have entered into an agreement by
which we receive ten percent of all sales generated from La Jolla Coffee's Web
site in exchange for our Web site design, development, maintenance, and
marketing services.
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MARKETING ACTIVITIES
Since our inception, we have invested a significant percentage of our
revenues in a broad range of marketing activities to generate demand, gain
corporate brand identity, establish corporate and subsidiary Web sites, and
educate the market about our products and services. These activities have
included advertising, including print, radio, television and online, direct
marketing via E-mail, public relations, sponsoring seminars for potential
clients, participating in trade shows and conferences, and providing product and
service information through our Web sites. Our marketing programs are aimed at
informing our clients and customers of the capabilities and benefits of our
products and services, increasing brand awareness, stimulating demand across
market segments and encouraging other companies to enter into co-marketing and
distribution arrangements with us.
TARGET MARKET
E-commerce and financial services are some of the fastest growing online
segments of the Internet. 1st Net Technologies products and services target:
- Publicly-traded companies, of which there are currently over 50,000
- Corporate clients looking to enter the E-commerce environment
- High net worth investors using the Internet to gather financial
information and trading online
- Large organizations, affinity groups, schools, religious groups and other
growing virtual communities considering a single source for online
information and purchasing
- The registered broker-dealer and investment banking community, and
- Every company that wants to effectively market its products or services
on the Internet.
RESEARCH AND DEVELOPMENT
Our wholly-owned subsidiary, Spirit 32 Development Inc., a Colorado
corporation ("Spirit 32"), is currently developing an interface for major
telecommunications IP telephony switches without the need for hardware-based
routers. The purpose of this product line is to reduce the costs to major
telecommunication companies in implementing voice-over IP services. Spirit 32 is
also developing a software development kit that will allow third party
developers access to the myriad of services available in the community space, so
that they may write new community-based applications. Spirit 32 is also
developing "Starburst", a unique desktop IP Telephony application that
integrates the telephone and the computer. Starburst is a communication
management tool, which can screen and forward calls with "track-me" features. It
integrates and manages voice mail, e-mail, and faxes in a single application.
Starburst can also automatically route outbound phone calls with least
cost/highest quality parameters for IP or Public Switch Network ("PSTN")
routing. Starburst has real-time call summary and billing information and is
designed to work on the Mariah IP Telephony Network, but is compatible with any
IP telephony provider.
Spirit 32 engages in the design, development, and operation of data and
communications networks, as well as the development of content applications and
propriety software programs for those networks. These applications include
telecomputing, PC-based IP telephony, integration of major telephone switch
technologies, and community-based data information and transaction delivery
applications.
Spirit 32 operates a 10-megabit connection to the Internet in Denver,
Colorado. As of August 25, 1999, Spirit 32 has eight full-time employees. Spirit
32 has expertise in data and telephone network engineering and operation,
software development, design, Internet and Intranet application online
databases, information systems, and telephony applications, including voice-over
IP. Spirit 32 specializes in telecomputing based on Content-Based Routing and
Delivery systems. Spirit 32 is currently developing and testing a technology
based on low radio frequency broadcasts called "Wisper", a wireless voice and
data technology that can deliver up to "3 megabytes" rate connectivity
capabilities without any hard wiring and at a fraction of the cost of
conventional systems. The Wisper system can deliver up to a 45-megabit data line
throughput without hardware. This results in a substantial cost savings over
typical installations and eliminates associated costs.
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Since the technology does not require anyone on the user side to maintain the
connection, it reduces administrative and support costs substantially. This
innovative system can be used as a data delivery system, a telephone system
capable of voice-over IP, and an alternative to local telephone service.
Spirit 32 has two of these Wisper systems currently in use. The current
focus of the Wisper project is to improve the range of these systems, which at
present is two miles from the backbone termination. Using this infrastructure,
Wisper technology may deliver Content-Based Routing and Delivery with the
necessary speed and bandwidth required for a user-friendly environment at a
fraction of the cost for a standard system of this magnitude.
By obtaining a license of Internet Web technology, we are presently
marketing our 1st Net Web Card (the "Card"), a revolutionary new marketing tool
for the next millennium. This innovative technology delivers CD-ROM capability
in the shape and size of a business card that is capable of storing up to 32
megabytes of information. Information can include a multimedia presentation
combining audio and video capability including hyperlinks, a security device or
almost any other application. We are bringing this unique technology to market
as a reseller and will be bundling the Card with our Online Investor Relations
Program services.
We have incurred research and development costs in the production of Envoy
Express. Development of Envoy Express continues in 1999. Our total cost to
develop Envoy Express version 1.0 is expected to be approximately $220,000.
COMPETITION
The market for Internet services, software and products is relatively new,
intensely competitive and rapidly changing. The number of Web sites on the
Internet competing for consumers' attention and spending has proliferated and we
expect that competition will continue to intensify. We compete, directly and
indirectly, for advertisers, viewers, members and content providers with the
following categories of companies:
- publishers and distributors of traditional off-line media, such as
television, radio, and print, including those targeted to business,
finance and investing needs, which have established or may establish
Web sites, such as Marketwatch.com, The Wall Street Journal, CNN and
CNBC;
- General purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to financial and
business-related content and services;
- Online services or Web sites targeted to business, finance and
investing needs, such as Mail.com and TheStreet.com
- Web search and retrieval and other online services, such as Excite,
Inc., InfoSeek Corporation, Lycos, Inc., Yahoo! Inc., and other
high-traffic Web sites, such as those operated by Netscape
Communications Corporation, which offer quotes, financial news and
other programming and links to other business and finance related
Web sites; and
- Web site building software developers and service providers,
including Microsoft, Adobe, Macromedia, Inc., GeoCities, Inc. and
Net Objects, Inc.
- Community Web browser and online community developers and service
providers, including Microsoft, America on Line and Surf Monkey.
We anticipate that the number of direct and indirect competitors with our
online financial portals will increase in the future. Many of them do not
primarily provide real-time coverage by experienced journalists. However, many
of our existing competitors, as well as a number of potential new competitors,
have longer operating histories in the Web market, greater name recognition,
larger customer bases and higher amounts of user traffic and significantly
greater financial, technical and marketing resources. Such competitors may be
able to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies, make more attractive offers to potential employees,
distribution partners, advertisers and content providers and may be able to
respond more quickly to new or emerging technologies and changes in Web user
requirements. Further, there can be no assurance that they will not develop
services that are equal or superior to ours or that they
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achieve greater market acceptance than our product and service offerings.
Increased competition could also result in price reductions, reduced margins or
loss of market share, any of which could materially adversely affect our
business, results of operations and financial condition.
The Web, and 1st Net specifically, also must compete with traditional
advertising media, such as print, radio and television, for a share of
advertisers' total advertising budgets. Web companies and 1st Net would lose
revenue if the Web is not perceived as an effective advertising medium. In
addition, well-established traditional media companies may acquire, invest or
otherwise establish commercial relationships with our competitors. Recent
examples include NBC's recent investment in CNET's Snap service, Disney's
investment in Infoseek or USA Network's and Ticketmaster Online-Citysearch's
combination of their services with Lycos. These relationships create companies
with substantial media resources to promote and enhance their own services.
Greater competition resulting from such relationships could have a material
adverse effect on our business and, ultimately, our stock price. As a result,
there can be no assurance that we will be able to compete successfully against
our current or future competitors or that competition will not have a material
adverse effect on our business, results of operations and financial condition.
With respect to Mariah, two significant barriers to entry in the
traditional long distance telephone market are size (minimum efficient scale of
operations) and regulatory constraints which preclude smaller companies from
gaining significant market share. Internet telephony effectively eliminates or
reduces these barriers since it is presently unregulated and enjoys economies of
scope and scale by using the Internet and private I.P. networks as a common
voice video and data network. Internet telephony will decrease barriers to entry
and increase competition in the long distance industry. We believe that Mariah's
ability to compete in the Internet telephony industry successfully will depend
upon a number of factors, including the pricing policies of competitors and
suppliers; the capacity, reliability, availability and security of the Internet
telephony infrastructure; marketing; the timing of introductions of new products
and services into the industry; Mariah's ability to support existing and
emerging industry standards; Mariah's ability to balance network demand with the
fixed expenses associated with network capacity; and industry and general
economic trends.
The market for telecommunications services, in particular, is extremely
competitive and there are a growing number of competitors in the Internet
telephony industry. There are many companies that offer business communications
services and which will compete with Mariah at some level. These include large
telecommunications companies and carriers such as AT&T, MCI, and Sprint;
smaller, regional resellers of telephone line access; and other existing
Internet telephony companies. These companies, as well as others, including
manufacturers of hardware and software used in the business communications
industry, could in the future develop products and services that could compete
with those of Mariah on a direct basis. Many of these entities have far greater
financial and organizational resources than Mariah and control significant
market share in their respective industry segments. There is no assurance that
Mariah will be able to successfully compete in the Internet telephony industry.
Certain large public telephone companies are also positioning themselves to
enter the Internet telephony market to protect their dominant domestic market
from competition. Many of these companies are testing existing Internet
telephony gateway technology, which at the present time has limited call volume
capabilities. A number of companies are waiting for gateway manufacturers to
introduce advanced gateways that will be able to handle larger call volumes and
provide better quality and service. In North America, considerable discounting
has been experienced in recent years as competition has increased. In many
countries outside of North America, local telephone companies have begun
offering discounts to very large business and government customers with high
call volumes; there are few discounts available for individuals or small and
medium sized companies. It is expected that competition in the United States
will be led by carriers providing low cost but high quality Internet telephony
services at rates of $0.05 to $0.09 per minute. Smaller Internet service
providers and new carriers are expected to focus primarily on international or
niche markets.
INTELLECTUAL PROPERTY
Our success and ability to compete are dependent to a significant degree on
our proprietary technology. We rely primarily on state and federal copyright,
trade secret and trademark common law to protect its
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proprietary technology. We have several unregistered trademarks, various
unregistered copyrights and certain licenses of technology with third parties.
1st Net has no patents or other registered intellectual property, other than
certain trademarks. The source code for our proprietary software is protected as
a trade secret but not as a copyrighted work. In addition, it is our policy to
enter into confidentiality and non-competition agreements with its associates
and generally to control access to and distribution of its proprietary
technology. Notwithstanding the precautions taken by us to protect our
intellectual property rights, it is possible that third parties may copy or
otherwise obtain and use our proprietary technology without authorization or
otherwise infringe on our proprietary rights. It is also possible that third
parties may independently develop technologies similar to those of our own.
Policing unauthorized use of our intellectual property rights may be difficult,
particularly because it is difficult to control the ultimate destination or
security of information transmitted over the Internet. In addition, the laws of
foreign countries may afford inadequate protection of intellectual property
rights.
We may need to engage in litigation in order to enforce our intellectual
property rights in the future or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of management and other resources, either of which could have a
material adverse effect on our business, operating results and financial
condition. We also use certain third-party technology, such as Agent (TM)
software from Microsoft, and data and content from third parties. In these
license agreements, the licensors have generally agreed to defend, indemnify and
hold us harmless with respect to any claim by a third party that the licensed
software or content infringes any person's proprietary rights. There can be no
assurance that the outcome of any litigation between such licensors and a third
party or between us and a third party will not lead to royalty obligations for
which we are not indemnified or for which such indemnification is insufficient,
or that we will be able to obtain any additional license on commercially
reasonable terms, if at all. In the future, we may seek to license additional
technology or content in order to enhance our current features or to introduce
new services, such as certain of the community features we may introduce. There
can be no assurance that any such licenses will be available on commercially
reasonable terms, if at all. The loss of or inability to obtain or maintain any
of these technology licenses could result in delays in introduction of new
services until equivalent technology, if available, is identified, licensed and
integrated, which could have a material adverse effect on our business, results
of operations and financial condition. Because we license some data and content
from third parties, our exposure to copyright infringement actions may increase
because we must rely upon such third parties for information as to the origin
and ownership of such licensed content. We generally obtain representations as
to the origins and ownership of such licensed content and generally obtain
indemnification to cover any breach of any such representations. However, there
can be no assurance that such representations will be accurate or that such
indemnification will be sufficient to provide adequate compensation for any
breach of such representations. There can be no assurance that infringement or
other claims will not be asserted or prosecuted against us in the future whether
resulting from our internally developed intellectual property or licenses or
content from third parties. Any future assertions or prosecutions could
materially adversely affect our business, results of operations and financial
condition. Any such claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and management personnel
or require us to introduce new content or trademarks, develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on acceptable terms, if
at all. In the event of a successful claim of infringement and our failure or
inability to introduce new content or trademarks, develop non-infringing
technology or license the infringed or similar technology on a timely basis, our
business, results of operations and financial condition could be materially
adversely affected.
GOVERNMENT REGULATION
The laws and regulations applicable to the Internet and our services are
evolving and unclear and could damage our business. There are currently few laws
or regulations directly applicable to access to, or commerce on, the Internet.
Due to the increasing popularity and use of the Internet, it is possible that
laws and regulations may be adopted, covering issues such as user privacy,
defamation, pricing, taxation, content regulation, quality of products and
services, and intellectual property ownership and infringement. Such legislation
could expose us to substantial liability, as well as dampen the growth in use of
the Internet,
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decrease the acceptance of the Internet as a communications and commercial
medium, or require us to incur significant expenses in complying with any new
regulations. The European Union has recently adopted privacy and copyright
directives that may impose additional burdens and costs on international
operations. In addition, several telecommunications carriers, including
America's Carriers' Telecommunications Association, are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission ("FCC"), in the same manner as other telecommunications services.
Because the growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage have
begun to experience interruptions in phone services, local telephone carriers,
such as Pacific Bell, have petitioned the FCC to regulate the Internet and to
impose access fees. Increased regulation or the imposition of access fees could
substantially increase the costs of communicating on the Internet, potentially
decreasing the demand for our service.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce and could adversely affect us. Also, the United States
Congress ("Congress") recently enacted the Digital Millennium Copyright Act,
which is intended to reduce the liability of online service providers for
listing or linking to third-party Web sites that include materials that infringe
copyrights. Congress also recently enacted the Children's Online Protection Act
and the Children's Online Privacy Act, which will restrict the distribution of
certain materials deemed harmful to children and impose additional restrictions
on the ability of online services to collect user information from minors.
Further, Congress recently enacted the Protection of Children from Sexual
Predators Act, which mandates that electronic communication service providers
report facts or circumstances from which a violation of child pornography laws
is apparent.
We are currently reviewing this legislation, and cannot currently predict
the effect, if any, that this legislation will have on our business. There can
be no assurance that this legislation will have significant additional costs on
our business or subject us to additional liabilities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, copyright, defamation, obscenity and personal privacy is uncertain.
We may be subject to claims that our services violate such laws. Any new
legislation or regulation in the United States or abroad or the application of
existing laws and regulations to the Internet could damage our business and
cause the price of our common stock to decline. Due to the global nature of the
Internet, it is possible that the governments of other states and foreign
countries might attempt to regulate its transmissions or prosecute us for
violations of their laws. We might unintentionally violate such laws. Such laws
may be modified, or new laws may be enacted, in the future. Any such development
could damage our business.
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the Securities and
Exchange Commission (the "Commission"), the NASD, various stock exchanges, and
other regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of customers
participating in those markets. Persons functioning as broker-dealers are
subject to regulations covering all aspects of the securities business,
including sales methods, trade practices among broker-dealers, use and
safekeeping of customers' funds and securities, capital structure, record
keeping and the conduct of directors, officers and employees. Our failure to
comply with any of these laws, rules or regulations could result in censure,
fine, the issuance of cease-and-desist orders, or the barring, suspension or
expulsion of a broker-dealer or any of its officers or employees, any of which
could have a material adverse effect on our business, financial condition and
operating results.
Mariah uses the Internet for transmission of long distance telephone calls.
Presently, the does not regulate companies that provide Internet Telephony
services as common carriers or telecommunications service providers.
Notwithstanding the current state of the rules, the FCC's potential jurisdiction
over the Internet is broad because the Internet relies on wire and radio
communications facilities and services over which these regulatory authorities
have long-standing authority. Access charges are assessed by local telephone
companies to long distance companies for the use of the local telephone network
to originate and
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terminate long distance calls generally on a per minute basis. Access charges
have long been a source of dispute, with long distance companies arguing that
the access rates are substantially in excess of cost and local telephone
companies arguing that access rates are needed to subsidize lower local rates
for end user and other purposes. The FCC currently is considering whether
subscriber calls to Internet service providers should be classified as "local"
or "interstate" calls. Although the FCC to date has determined that Internet
service providers should not be required to pay interstate access charges to
local telephone companies, this decision may be reconsidered in the future if
the FCC finds these calls to be "interstate." Mariah's costs for doing business
would increase if Mariah were required to pay interstate access charges.
YEAR 2000 COMPLIANCE
We have been working on the Year 2000 ("Y2K") challenge since January 1998.
All of our operating groups implemented policies and plans to address both
critical and non-critical systems, products, factories, and suppliers. In March
1999, we achieved Y2K readiness status. Ready status means that we have
inventoried date-affected assets, and adjusted and tested the adjustment to
ensure that assets will handle Y2K dates without error. Although we believe that
our assets are Y2K compliant, our current systems and products may contain
undetected errors or defects with Y2K date functions that may result in material
costs. Operational issues caused by Y2K errors could cause us to incur
significant costs in remedial work and loss of revenue from advertisers due to
down time.
We have not incurred material costs to date in this process, and currently
do not believe that the cost of additional actions will have a material effect
on its results of operations or financial condition. We have been communicating
the importance of Y2K remediation efforts and readiness concerns with our
clients and suppliers for the past year. Even with this effort, we are unable to
definitively determine that all of our major suppliers will reach a Y2K ready
status by the year 2000.
EMPLOYEES
As of August 25, 1999, we employed 64 full-time employees. We also utilize
independent contractors for legal services and sales development, among other
functions. None of our employees are represented by a labor union. We have not
experienced any work stoppages and consider our employee relations to be
satisfactory.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion contains certain forward-looking statements that
are subject to business and economic risks and uncertainties, and our actual
results could differ materially from those forward-looking statements. The
following discussion regarding our financial statements should be read in
conjunction with our financial statements and notes thereto.
The going concern opinion of our independent accountant, as disclosed in
our Independent Auditors' Report attached to part F/S, is as follows:
The Company [1st Net] has a relatively short history of operations,
has experienced losses in the year ended December 31, 1997 (as reported
upon separately by other auditors), and the twelve months ended December
31, 1998 as reported upon above. As of December 31, 1998, the Company
maintains an excess of $435,000 in retained deficits. Therefore, the future
profitability and viability of the Company will be based in large part on
the Company's ability to attract additional numbers of web site users, and
to secure profitable operating agreements with those users. There can be no
assurance that the Company will be able to operate profitably in the future
(see Note 1(a)) and accordingly, these consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot
continue in existence.
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Note 1(a) of such Report provides, in pertinent part, as follows:
The accompanying financial statements of the Company have been
prepared in conformity with generally accepted accounting principles, which
contemplates continuation of the Company as a going concern. However, the
Company has incurred net losses of $429,013 during 1997 and 1998 resulting
in a retained deficit of $435,013 after dividends. In view of this matter,
realization of a portion of the assets in the accompanying financial
statement is dependent upon continued operations of the Company and
management believes that actions presently being taken and current revenues
being generated will provide the opportunity for the Company to continue as
a going concern.
GENERAL OVERVIEW
Our principal line of business is to provide Internet-related services and
products. These include, but are not limited to, E-commerce Web site
development, maintenance and hosting services; Internet marketing services;
Crayon Crawler(TM) Kids Safe Web Browser and Online Community; Envoy Express(TM)
database management services; IP telephony; wireless high-speed Internet access;
affinity group Web browsers and online communities; financial portals; and,
online investor relations on behalf of businesses throughout the United States.
Our overall strategy focuses on "Content-Based Routing and Delivery" using
a recurring revenue transaction-based model. Capturing desktops, managing
customer databases, routing content, and generating revenue from online
transactions are the key elements of this strategy.
THE COMPANY'S INTERNET SERVICES STRATEGY
Our Internet strategy is to leverage our position as a provider of Web
services, Internet telephony protocol applications, and E-business software. Our
strategy of building niche, online communities with our proprietary
Content-Based Routing and Delivery System and our four-step business concept
should allow us to generate recurring transaction-based revenues. We expect to
generate revenues when consumers make purchases and use our E-business software,
when consumers subscribe to our online communities, and when customers make long
distance telephone calls from their business or residential telephones using our
telephone calling cards or IP telephony. Proceeds from pre-paid subscriptions to
online communities and pre-paid telephone calling cards will be recorded as
deferred revenues when cash is received and as revenues when subscription or
telephone services are utilized. Our reserve for deferred revenues will be
carried on our balance sheet as an accrued liability. Internet-related services
are typically billed at a flat rate and are billed in advance. We recognize
revenues in the period earned.
Costs of sales include cost of merchandise sold, telecommunication service
costs, and commissions paid for customer acquisitions. Telecommunications
service costs paid by us are based on our customers' long distance usage. We pay
our carriers based on the type of call, time of call, duration of call, the
terminating telephone number, and terms of our contract in effect at the time of
the call.
General and administrative expenses consist of the cost of customer
service, billing, and cost of information systems and personnel required to
support our operations and growth. Depending on the extent of our future growth,
we may experience significant strain on our management, personnel, and
information systems. We will need to implement and improve operational,
financial, and management information systems. In addition, we are implementing
new information systems that will provide better recordkeeping, customer service
and billing. However, there can be no assurance that our management resources or
information systems will be sufficient to manage any future growth in our
business, and the failure to do so could have a material adverse effect on our
business, results of operations and financial condition.
RESULTS OF OPERATIONS
The following discussion reflects our acquisition of the majority of shares
of Mariah on August 15, 1998; our acquisition of all of the shares of SSP on
January 13, 1999; our acquisition of all of the shares of Spirit 32 on January
22, 1999; and our acquisition of the majority of shares of CTGI on April 19,
1999. Prior to the
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acquisition of 1st NetZing Mall on April 7, 1997, we had no revenues or expenses
for the fiscal year ended December 31, 1996 or the three-month period ended
March 30, 1997.
RESULTS OF OPERATIONS FROM JANUARY 1, 1999 UNTIL JUNE 30, 1999
REVENUES
Revenues for the three- and six-month periods ended June 30, 1999 were
$768,587 and $1,703,125, respectively, compared with the three- and six-month
periods ended June 30, 1998 of $170,581 and $452,509, respectively. In calendar
year 1999, we began selling our Internet services, which resulted in revenues
for the six-months ended June 30, 1999 of $673,955, generated primarily from Web
development and hosting services. Prior to calendar year 1999, our revenues for
the three- and six-month periods ended June 30, 1998 were derived solely from
Web site development and hosting services.
COST OF SALES
We incorporate our cost of sales into operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses (our operating
expenses) for the three- and six-month periods ended June 30, 1999 were $734,105
and $2,006,936, respectively, compared with $150,714 and $279,986 for the three-
and six-month periods ended June 30, 1998. For the three- and six-month periods
ended June 30, 1999, we began to realize sales from our Internet marketing
customers, thereby resulting in significantly increased SG&A expenses.
SG&A expenses for the six-months ended June 30, 1999 were comprised
primarily of employment costs of $839,676; advertising expenses of $132,675;
provision for bad debts of approximately $19,384, and $1,015,201 of other
operating expenses, rent, and legal services.
SG&A expenses of $430,700 for the six months ended June 30, 1998 were
comprised primarily of $154,224 in salaries paid to employees; and $285,476 of
other operating expenses, primarily legal services. Net (loss) profit was
$(235,755) and $192,390 for the six months ended June 30, 1999 and 1998,
respectively.
ASSETS AND LIABILITIES
Total assets were $3,185,272 as of June 30, 1999. Assets consisted
primarily of accounts receivables of $132,412; cash and marketable securities of
$1,306,880; other current assets of $974,236; equipment with a net book value of
$453,116; and other long term assets of $318,628. Liabilities were $813,329 as
of June 30, 1999. Liabilities consisted primarily of accounts payable of
$262,145, payroll and payroll related liabilities of $151,134, and other
liabilities of $400,050. Minority interests in consolidated subsidiaries was
$159,343.
STOCKHOLDERS' EQUITY
Stockholders' equity was $2,212,600 as of June 30, 1999. Stockholders'
equity consisted primarily of $3,228,099 offset primarily by our accumulated
deficit at June 30, 1999 of $1,015,498.
RESULTS OF OPERATIONS FROM APRIL 17, 1997 UNTIL DECEMBER 31, 1998
REVENUES
From the commencement of our business operations in 1997 until December 31,
1998, our revenues totaled $2,887,119. This amount originated primarily from Web
site development and hosting services.
COST OF SALES
Cost of Sales are included in our SG&A figures. SG&A for the period from
inception until December 31, 1998 totaled $1,619,007, comprised of salaries of
approximately $654,700; professional fees of approximately
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$246,149; and rent of approximately $68,312. Net loss for the period of
formation until December 31, 1998 was $435,013.
ASSETS AND LIABILITIES
Our assets as of December 31, 1998 were $803,220, with current assets of
$311,883 and long term assets of $491,337; computer equipment of $175,976; and
cash of $17,888. Liabilities as of December 31, 1998 were $309,963. Liabilities
consisted primarily of accounts payable of $187,781 and other liabilities of
$122,182.
STOCKHOLDERS' EQUITY
Stockholders' equity as of December 31, 1998 was $492,915. Stockholders'
equity consisted primarily of $927,928 raised in a private placement of equity,
offset by cumulative losses of $435,013 for the period ended December 31, 1998.
LIQUIDITY AND CAPITAL
We experienced positive cash flows of $14,891, resulting from $407,443 of
cash provided from our financing activities, offset by $355,095 of cash used in
operating activities, and $37,457 of cash used in investing activities. Net cash
used in operating activities of $355,095 was primarily due to a net loss of
$286,076. Net cash used in investing activities of $37,457 funded purchases of
computer equipment. Net cash provided by financing activities of $407,443 was
primarily due to the issuance of stock and an increase in current assets from
the purchase of Mariah.
SHORT-TERM FINANCING
We were initially capitalized by the issuance of 1,800,000 shares of our
Common Stock, at $0.001 per share, totaling $1,800, to an officer (whom has
subsequently resigned), in exchange for services related to organizing us as a
company. In June 1997, we engaged in private offering, resulting in the issuance
of 598,000 common shares, for a total of $149,500, less offering costs of
$42,250. On October 28, 1997, an additional 400,000 common shares were issued
under Regulation D, Rule 504 of the Securities Act of 1933 to a single investor
for $400,000.
On October 12, 1998, we issued an additional 450,000 common shares under
Regulation D, Rule 504 to investors for $450,000, less offering costs of
$81,387. As of December 31, 1998, we engaged in a private offering under
Regulation D, Rule 505 of the Securities Act of 1933 resulting in the issuance
of 200,000 shares of Series "A" Preferred Stock, for a total of $50,000. This
offering was subscribed in full by March 11, 1999, resulting in an aggregate
issuance of 472,400 shares of Series "A" Preferred Stock and 236,200 Common
Stock purchase warrants, at an exercise price of $5.00 per share exercisable
immediately, totaling $1,181,000, less offering costs of approximately $120,000.
All outstanding Series "A" Preferred Stock automatically converted to Common
Stock, on a one-to-one basis, in April 1999.
LONG-TERM FINANCING
We believe that our anticipated funds from operations and funds received
from our recent private offering, together with a potential future institutional
offering approximately $5,000,000 of our Common Stock, may be sufficient to fund
our capital expenditures, working capital, and other cash requirements for the
next 12 months. If we are unsuccessful, however, in raising institutional funds,
we will be required to seek other public or private funds to finance our
long-term operations ("Additional Funds"). Should we fail to raise Additional
Funds, we will probably have insufficient funds for our intended operations and
capital expenditures for the next 12 months, which will have a material adverse
effect on our long-term results of operations.
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CAPITAL EXPENDITURES
We expect to purchase approximately $750,000 of additional equipment in
connection with the expansion of our business. Because we presently do not have
the capital for such expenditures, we will have to raise these funds through an
equity offering or bank financing.
GOING CONCERN
Our independent certified public accountants have stated in their
independent auditors' report included herein that we have no current source of
revenue and, without realization of additional capital, it would be unlikely for
us to continue as a going concern. We believe that if we are successful in
raising sufficient additional funds, that our certified public accountants would
issue a going concern modification regarding our financial condition in our
upcoming Form 10-KSB. However, there can be no assurance that we will be able to
raise sufficient capital to meet our needs.
INFLATION
Management believes that inflation has not had a material effect on our
results of operations.
ITEM 3. DESCRIPTION OF PROPERTY.
We presently maintain our executive and administrative offices at 11423
West Bernardo Court, San Diego, California 92127. We lease this space, which is
approximately 4,000 square feet, from EI at a rate of $8,000 per month on a
five-year term that began on September 1, 1998.
Our property and equipment as of June 30, 1999 consists of the following:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Office Furniture and Fixtures............................. $ 22,624.00
Leasehold Improvements.................................... 22,954.00
Radio Equipment........................................... 16,073.00
Office Equipment -- Capitalized Leases.................... 207,578.00
Computer Equipment and Peripherals........................ 190,492.00
-----------
Total............................................. 459,721.00
Less Accumulated Depreciation............................. (49,994.00)
-----------
Net Property and Equipment........................ $409,727.00
===========
</TABLE>
The future minimum annual aggregate rental payments required under both
capital and operating leases that have initial or remaining non-cancelable lease
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999........................................................ $133,708.00
2000........................................................ 160,551.00
2001........................................................ 142,886.00
2002........................................................ 129,247.00
2003........................................................ 100,058.00
Thereafter.................................................. 0.00
-----------
Total............................................. $666,450.00
===========
</TABLE>
27
<PAGE> 28
ITEM 4.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets
forth information regarding the beneficial ownership of the shares of the Common
Stock (the only class of shares outstanding) of 1st Net on June 30, 1999, by
each person known by us to be the beneficial owner of more than five percent of
the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER(A) OF BENEFICIAL OWNER CLASS
- -------------- --------------------------------------- ------------------- ----------
<S> <C> <C> <C>
Common Stock Clifford J. Smith, President and Director(b) 400,000 6.5%
Common Stock Entrepreneur Investments, LLC/James H. Watson, 2,575,500 41.8%
Jr., Chief Executive Officer and Chairman (c)
</TABLE>
- ---------------
(a) All beneficial owners referenced in Item 4 are at the same address: 11423
West Bernardo Court, San Diego, California 92127. Unless otherwise
indicated, all persons listed have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
(b) Clifford J. Smith holds an option to purchase 100,000 shares of 1st Net
Common Stock at $3.00 per share. Mr. Smith's option has vested, enabling him
to exercise his right to purchase all 100,000 shares within 60 days. 300,000
of the shares owned by Mr. Smith are restricted under Rule 144 and were
issued on October 15, 1998 at $.001 par value for services rendered.
(c) Entrepreneur Investments, LLC, a Colorado limited liability company ("EI"),
of which James H. Watson, Jr., our Chief Executive Officer and Chairman, is
the sole beneficial owner, holds an option to purchase 300,000 shares of 1st
Net Common Stock at $3.00 per share. This option has vested and EI may
exercise its right to purchase all 100,000 shares within 60 days.
SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth
information regarding the beneficial ownership of the shares of the Common Stock
(the only class of shares outstanding) of 1st Net on June 30, 1999, by each
person known by us to be a director or nominee or executive officer owning a
beneficial interest in equity securities of 1st Net.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER(A) OF BENEFICIAL OWNER CLASS
- -------------- --------------------------------------- ------------------- ----------------
<S> <C> <C> <C>
Common Stock Clifford J. Smith, President and 400,000 6.5%
Director(b)
Common Stock Entrepreneur Investments, LLC 2,575,500 41.8%
James H. Watson, Jr., Chief Executive
Officer and Chairman(c)
Common Stock Gregory D. Writer, Jr., former Chief 100,000 1.6%
Executive Officer(d)
Common Stock Lawrence K. Kimball, Chief Financial 25,000 0.4%
Officer and Director(e)
Common Stock Jeffrey Chatfield, Vice President of 100,000 1.6%
Investor Relations(f)
Common Stock Gerald C. Young III, Vice President of 50,000 .8%
Sales(g)
Common Stock Neville Billimoria, Vice President of 31,000 .5%
Marketing and Communications(h)
Officers and 3,281,500 53.317%
Directors as
a Group
</TABLE>
- ---------------
(a) All beneficial owners referenced in Item 4 are at the same address: 11423
West Bernardo Court, San Diego, California 92127. Unless otherwise
indicated, all persons listed have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
28
<PAGE> 29
(b) Clifford J. Smith holds an option to purchase 100,000 shares of 1st Net
Common Stock at $3.00 per share. Mr. Smith's option is vested so he could
purchase all 100,000 shares within 60 days. 300,000 of the shares owned by
Mr. Smith are restricted under Rule 144 and were issued on October 15, 1998
at $.001 par value for past services rendered.
(c) Entrepreneur Investments, LLC, a Colorado limited liability company ("EI"),
of which James Watson, Jr., our Chief Executive Officer and Chairman, is the
sole beneficial owner, holds an option to purchase 300,000 shares of 1st Net
Common Stock at $3.00 per share. This option has vested and EI may exercise
its right to purchase all 300,000 shares within 60 days.
(d) Gregory D. Writer, Jr. served as our Chief Executive Officer until June 29,
1999. Mr. Writer holds an option to purchase 100,000 shares of 1st Net
Common Stock at $3.00 per share. Mr. Writer's option has vested, enabling
him to purchase all 100,000 shares within 60 days.
(e) Lawrence K. Kimball holds an option to purchase 150,000 shares of 1st Net
Common Stock at $5.00 per share. Mr. Kimball's option vests quarterly (pro
rata) over the three-year term of his employment agreement. It expires April
19, 2009.
(f) Jeffrey Chatfield holds an option to purchase 25,000 shares of 1st Net
Common Stock at $3.00 per share. Mr. Chatfield's option has vested, enabling
him to purchase all 25,000 shares within 60 days. He also owns 75,000 shares
of Rule 144 restricted stock at $.001 par value that was issued on October
15, 1998 for past services rendered.
(g) Gerald C. Young III was issued 50,000 shares of Rule 144 restricted stock at
$.001 par value on October 15, 1998 for past services rendered.
(h) Neville Billimoria was issued 31,000 shares of Rule 144 restricted Common
Stock at $.001 par value on October 15, 1998 for past services rendered.
CHANGES IN CONTROL. We are not aware of any arrangement which might result
in a change in control of 1st Net in the future.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES.
James H. Watson, Jr., 37, has served as our Chief Executive Officer and
Chairman of our Board of Directors since June 30, 1999. He has been a member of
our Board since 1994. Since 1994, Mr. Watson has been the General Managing
Member, and the sole owner, of EI, our largest shareholder. From 1995 until
1997, Mr. Watson has been the President of N8 Concepts, a Colorado trademark
licensing firm. He was the Vice President of Marketing for AGT Sports, Inc., a
Colorado sports marketing firm, from 1993 to 1995.
Clifford J. Smith, 39, has served as our President and a Director since
September 1997. From 1991 until 1997, Mr. Smith was a food and beverage
executive for Marriot Corporation in San Diego.
Lawrence K. Kimball, 46, has served as our Chief Financial Officer,
Secretary, Treasurer and a Director since April 1999. He is also a Director of
CTGI. From 1997 until 1999, Mr. Kimball was a private business consultant in
Hawaii and Southern California. Mr. Kimball was the Chief Financial Officer and
Chief Operating Officer of Lanai Company, Inc., a subsidiary of a publicly-held
company which owns and manages the Island of Lanai, Hawaii, from 1994 until
1997. Mr. Kimball brings over 20 years of senior operations management and
finance experience from the information technology and customer service
industries. Mr. Kimball's business experience ranges from managing a diversified
public conglomerate with assets of $325 million and 1,100 employees to start-up
and emerging growth companies.
Jeffrey Chatfield, 37, has served as our Vice President of Investor
Relations since May 1998. He is also Vice President of Investor Relations of
CTGI. Mr. Chatfield served as a Vice President of Presidential Brokerage, a NASD
broker-dealer, in La Jolla, California from 1994 until May 1998.
Gerald C. Young III, 44, has served as our Vice President of Sales since
December 1997. From 1993 until 1996, Mr. Young was Chief Operating Officer of
The Financial Power Network, Inc., a nationally broadcast financial radio show.
In 1997, Mr. Young founded Corporate Identities, Inc., a firm specializing in
the creation, printing and publication of information for publicly-traded
companies.
29
<PAGE> 30
Neville Billimoria, 39, has served as our Vice President of Marketing and
Communications since September 1998. From 1988 until 1995, Mr. Billimoria was
President of Creative Marketing Directions, an advertising firm in San Diego,
which he sold to ARK Enterprises, an advertising and marketing firm, in June
1995. From 1995 until 1997, Mr. Billimoria was Vice President of Business
Development of ARK Enterprises in San Diego. From 1995 until 1998, Mr.
Billimoria served as Managing Director of Kensho, an Internet consultancy, in
San Diego. Mr. Billimoria supervises our external sales and marketing, internal
leadership development, and organizational alignment issues.
Steven J. Santamaria, 41, has served as a Director since February 1999. Mr.
Santamaria has over 18 years of progressive operations and senior management
experience in the communications and cable industry fields, including 13 years
with Telecommunications, Inc. (TCI), a subsidiary of AT&T. From 1993 through
1998, he served as Vice President and General Manager of TCI Denver, the
company's largest regional division.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth the annualized base salary that we paid to
Gregory D. Writer, Jr., our former Chief Executive Officer from 1997 through
June, 1999. James H. Watson, Jr. became our Chief Executive Officer on June 29,
1999 and has not received any compensation for serving in such capacity. All
other compensation for our executives or directors has not exceeded $100,000 on
an annualized basis. Prior to 1997, we had not previously paid compensation to
executives, thus, information concerning cash compensation is unavailable for
fiscal year 1996 or previous years. We reimburse our officers and directors for
any reasonable out-of-pocket expenses incurred on our behalf.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION RESTRICTED SECURITIES
--------------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS OPTIONS(2) COMPENSATION
--------------------------- ---- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory D. Writer, Jr. .......... 1996 0 0 0 0 0
Chief Executive Officer from 1997 $20,000 0 0 0 0
1996 until June 29, 1999 1998 0 0 0 0 0
1999 $45,000 0 0 100,000 0
James H. Watson, Jr. ............ 1996 0 0 0 0 0
Chairman and Chief Executive 1997 0 0 0 0 0
Officer since June 29, 1999 1998 0 0 0 0 0
1999 0 0 675,500 300,000 0
</TABLE>
- ---------------
(1) We issued these restricted shares pursuant to our Stock Acquisition
Agreement dated August 15, 1998 with SSP, the majority owner of which prior
to such acquisition was EI. As noted in our audited financial statements as
of December 31, 1998, no established "market" for our Common Stock exists as
described in Financial Accounting Standards Board 123 (Accounting for Stock
Based Compensation) or for establishing fair market value for the issuance
of the Common Stock. Accordingly, the Board of Directors authorized and
determined the fair market value of the restricted stock to be par value of
$.001 per share.
(2) These options were granted on January 10, 1999. The options vested in full
on the date of the grant. The Board of Directors determined the fair market
value of each option grant on the date of such grant to be $3.00 per share.
1999 NON-QUALIFIED STOCK OPTION PLAN
We do not have any pension or profit-sharing plans. No stock options were
issued in 1996, 1997 or 1998. In January 1999, we adopted a 1999 Non-Qualified
Stock Option Plan, pursuant to which we issued 675,000 options to purchase
Common Stock to certain employees. We had no incentive plan for employees or
executives in 1997 or 1998.
30
<PAGE> 31
COMPENSATION OF DIRECTORS
When traveling from out-of-town, members of the Board of Directors are
eligible for reimbursement for their travel expenses incurred in connection with
attendance at Board meetings and meetings of committees of the Board of
Directors. Non-employee directors will be paid $1,000 for their participation in
Board or Board committee meetings. Non-employee directors will also be eligible
for initial options granted upon becoming a member of the Board and annual
option grants so long as they remain on the Board. See "1999 Incentive Plan."
Pursuant to his Outside Director's Agreement, Mr. Steven J. Santamaria is
paid an annual base salary of 25,000 shares of Common Stock of 1st Net. No other
directors have received compensation for serving on our Board of Directors.
EMPLOYMENT AGREEMENTS
On April 19, 1999, Mr. Lawrence K. Kimball entered into an employment
agreement with us that ends on April 19, 2002. Mr. Kimball's employment
agreement provides for an annual base salary of $70,000 and grants him an option
to purchase 150,000 shares of our Common Stock, having a ten-year term, at $5.00
per share, with vesting contingent upon his continued employment, in equal
quarterly installments of 12,500 options. We may grant bonuses or increase his
base salary. In addition to his cash compensation, Mr. Kimball receives an
automobile allowance of $300 per month. Mr. Santamaria and Mr. Kimball each
receive additional benefits, including those generally provided to other
employees.
1999 INCENTIVE PLAN
We have adopted an equity incentive plan ("1999 Incentive Plan"). The 1999
Incentive Plan is designed to promote the success of our business by more
closely aligning the interests of employees, officers, directors and consultants
with shareholders through the use of equity-based incentives. The total number
of shares of Common Stock that may be granted or awarded under the 1999
Incentive Plan may not exceed 1,000,000, plus 10 percent of any increase in
outstanding shares of Common Stock that occurs after December 31, 1999
(including any increase as a result of the issuance of shares under this 1999
Incentive Plan).
The 1999 Incentive Plan provides for the granting of options, including
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code, non-qualified stock options, stock appreciation rights,
restricted stock, stock bonuses, non-employee director options and other
stock-based awards (collectively "Awards"). All Awards will be evidenced by an
Award Agreement setting forth the terms and conditions applicable thereto. The
1999 Incentive Plan will be administered by a committee comprised of members of
the Board of the Directors ("Committee"). Eligibility criteria, the number of
participants and all other terms and conditions of the Plan will be determined
by the Committee. The option price payable for the shares of Common Stock
subject to each ISO shall not be less than 100 percent of the fair market value
of the Common Stock on the date such option is granted.
Pursuant to the 1999 Incentive Plan, non-employee directors are
automatically granted options to purchase 25,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the grant
date and thereafter non-employee directors will receive, on an annual basis, an
option to purchase 2,500 shares of Common Stock at the fair market value at the
time of such grant.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In March 1998, we entered into an Investment Banking Agreement with EI,
whereby EI provided $30,000 in consulting services to us, of which $15,000 is
included in the accompanying financial statements as offering costs. As of
December 31, 1997 and 1998, $12,500 and $6,162, respectively, are included in
accounts payable as a result of our activities with EI. EI advanced us
approximately $60,000 on an interest-free basis during 1997, of which we repaid
$25,000 during 1997. The remaining balance of $34,500 is included in the
accompanying financial statements as due to related parties as of December 31,
1997. This balance of the loan was repaid in full in June 1998.
31
<PAGE> 32
During the years ended December 31, 1998 and 1997, we subleased office
space from EI for total rent payments of $41,347 and $14,410, respectively.
On December 15, 1998, EI loaned us $5,400 on an interest-free basis, which
is part of the related party balance due of $44,000 as of December 31, 1998. The
remaining balance of $39,000 consists of a loan payable to CTGI of $24,000, and
loans payable to two other affiliates totaling $15,000.
On November 9, 1998, we entered into an Internet Web Site Development
Agreement with La Jolla Fresh Squeezed Coffee Company, a Washington corporation
("La Jolla Coffee"), by which we provide corporate due diligence and Web site
services to La Jolla Coffee. In exchange therefor, we received $30,000 and
approximately five percent of the issued and outstanding stock of La Jolla
Coffee, in addition to a stock option to purchase an additional three and three
tenths percent of La Jolla Coffee's outstanding shares. Mr. Gregory D. Writer,
Jr., our former Chief Executive Officer and Chairman, and Mr. Clifford Smith,
our President, are members of the Board of Directors of La Jolla Coffee.
In 1998, we had sales to related parties amounting to $622,156. In
addition, the accounts receivable balance of $134,467 is all due from related
parties, with approximately $119,000 attributable to SSP, which was acquired by
us in January 1999.
On November 5, 1997, we entered into an agreement to purchase eight
automobiles from LaForza Automobiles, Inc., a Nevada corporation ("LaForza"),
for which we paid $400,000. The vehicles were scheduled to be delivered to us by
August 30, 1998. Management had intended to resell the vehicles, but in November
1998 we renegotiated the terms of the purchase and received 200,000 shares of
LaForza Common Stock instead of the automobiles. The net market value of these
shares as of December 31, 1998 declined to $262,600 from their value of $400,000
as of December 31, 1997, and resulted in the recording of unrealized losses of
$137,400 in our financial statements. In 1998, we entered into a consulting
agreement with LaForza, whereby we provide internet consulting and Web page
design services to LaForza.
In January 1999, we borrowed $138,000 from Grey Mare, LLC, a Colorado
limited liability company ("Grey Mare") on an interest-free basis. Mr. Wilford
Purcell, the stepfather of Mr. Gregory D. Writer, Jr., our former Chief
Executive Officer and Chairman, is the sole owner of Grey Mare. We repaid this
loan in full on February 19, 1999.
ITEM 8. DESCRIPTION OF SECURITIES.
COMMON STOCK
We are authorized to issue up to 40,000,000 shares of Common Stock, par
value $.001 per share. As of August 25, 1999, there were 6,154,700 shares of
Common Stock issued and outstanding. Holders of Common Stock are entitled to one
vote for each share held of record on each matter submitted to a vote of
shareholders.
Subject to the prior rights of any series of Preferred Stock which may from
time to time be outstanding, holders of Common Stock are entitled to ratably
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor and, upon the liquidation, dissolution, or
winding up of 1st Net Technologies, to share ratably in all assets remaining
after payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. The outstanding Common Stock is validly authorized and issued,
fully-paid and nonassessable.
PREFERRED STOCK
We are authorized to issue up to 10,000,000 shares of Preferred Stock, par
value $.001 per share. The Preferred Stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by shareholders, and may include voting right
(including the right to vote as a series on particular matters), preferences as
to dividends and on liquidation, conversion rights, redemption rights, sinking
funds provisions and other rights, privileges and preferences. Although it
presently has no intention to do so, the Board of Directors, without shareholder
approval, could
32
<PAGE> 33
issue Preferred Stock with voting and conversion rights that could adversely
affect the voting power of the holders of Common Stock. This provision may be
deemed to have a potential anti-takeover effect and could delay or prevent a
change of control of 1st Net.
TRANSFER AGENT
Corporate Stock Transfer, Denver, Colorado, is our transfer agent and
registrar, the address of which is Republic Plaza, Suite 2350, 370 17th Street,
Denver, Colorado 80202.
33
<PAGE> 34
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
DIVIDEND POLICY
We intend to pay annual cash dividends on our Common Stock as we earn net
revenue. Future policy with respect to the payment of dividends on our Common
Stock will be determined by the Board of Directors based upon conditions then
existing, including our earnings and financial condition, capital requirements
and other relevant factors.
PRICE RANGE OF COMMON STOCK
Our Common Stock began trading on the OTC Bulletin Board under the symbol
of "FNTT" in November 1988. Prior to that time, no public trading market existed
for any of our securities.
The following table sets forth the range of high and low bid quotations per
share for our Common Stock for the periods indicated as reported by the OTC
Bulletin Board. Such market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
YEAR CALENDAR PERIOD HIGH LOW
- ---- --------------- ---- ----
<C> <S> <C> <C>
1998 Fourth Quarter................................. $ 2 5/8 $ 1/2
1999 First Quarter.................................. $10 1/2 $ 2 3/8
Second Quarter................................. $ 7 3/4 $ 5
</TABLE>
On August 18, 1999, the last sale price of the Common Stock as reported on
the OTC Bulletin Board was 3 15/16 per share. As of August 18, 1999 there were
approximately 1,300 holders of record of our Common Stock.
ITEM 2. LEGAL PROCEEDINGS.
The Commission is presently investigating the business affairs of SSP, In
the Matter of SSP Management, Inc. (D-2107). The Commission has expressly
instructed us not to construe the investigation as an indication by the
Commission or its staff that any violations of law have occurred nor that it be
considered a reflection upon any person, entity or security. We know of no other
material legal or administrative proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
We replaced our independent accounting firm, Cordovano & Harvey, P.C.,
Denver, Colorado, in February 1999. Cordovano & Harvey P.C.'s audit report on
our 1997 financial statements did not contain an adverse opinion or disclaimer
of opinion, or modification of the type required to be disclosed in this Item 3.
The Board of Directors approved the decision to change accountants. There have
been no disagreements with Cordovano & Harvey, P.C. and our management of the
type required to be reported under this Item 3 since the date of Cordovano &
Harvey, P.C.'s engagement.
We engaged the independent accounting firm of Bewley, Argy & Company,
Fountain Valley, California, in April 1999 to review and audit our 1998
financial statements. Bewley, Argy & Company resigned in July 1999. Bewley, Argy
& Company's comparative report on our 1997 financial statements and audit report
on our 1998 financial statements did not contain an adverse opinion or
disclaimer of opinion, or modification of the type required to be disclosed in
this Item 3. The Board of Directors approved the decision to change accountants.
There have been no disagreements with Bewley, Argy & Company and our management
of the type required to be reported under this Item 3 since the date of Bewley,
Argy & Company's engagement.
We engaged the independent accountancy corporation of Corbin & Wertz,
Irvine, California, in July 1999 to review and audit our upcoming year-end 1999
financial statements. They have not been asked by us to consult on matters of
the type required to be reported under this Item 3.
34
<PAGE> 35
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On November 18, 1996, Snow Eagle Investments, Inc., a Colorado corporation
and our predecessor-in-interest ("Snow Eagle"), issued 1,800,000 shares of
Common Stock in a private sale to Mr. Derek D. Writer, then President of Snow
Eagle and brother of our previous Chief Executive Officer, Mr. Gregory D.
Writer, Jr., in exchange for his past services related to his organization and
formation of Snow Eagle. This issuance was exempt from the registration
provisions of the Securities Act of 1933, as amended (the "Act"), by virtue of
Section 4(2) and Regulation D under the Act, as a transaction by the issuer not
involving any public offering.
In June 1997, we offered and privately sold 598,000 shares of Common Stock
at $0.25 per share for a total of $149,500. No underwriters were used in
connection with the issuance of these shares and no commissions were paid to any
person. No general forms of advertising were used in connection with the
issuance of the shares. This issuance was exempt from the registration
provisions of the Act by virtue of Section 4(2) and Regulation D under the Act.
On October 12, 1998, we offered and privately sold 450,000 shares of Common
Stock at $1.00 per share for a total of $450,000. No underwriters were used in
connection with the issuance of these shares and no commissions were paid to any
person. No general forms of advertising were used in connection with the
issuance of the shares. This issuance was exempt from the registration
provisions of the Act by virtue of Section 4(2) and Regulation D under the Act.
On October 28, 1997, we offered and privately sold 400,000 shares of Common
Stock at $1.00 per share for a total of $400,000 to a single investor. No
underwriters were used in connection with the issuance of these shares and no
commissions were paid to any person. No general forms of advertising were used
in connection with the issuance of the shares. This issuance was exempt from the
registration provisions of the Act by virtue of Section 4(2) and Regulation D
under the Act.
From December 1998 to March 1999, we offered and privately sold 472,500
shares of Series "A" Preferred Stock and 236,200 common stock purchase warrants,
as a unit, at $5.00 per unit for a total of $1,181,000. No underwriters were
used in connection with the issuance of these shares and no commissions were
paid to any person. No general forms of advertising were used in connection with
the issuance of the shares. This issuance was exempt from the registration
provisions of the Act by virtue of Section 4(2) and Regulation D under the Act.
On January 13, 1999, we acquired 100 percent of the issued and outstanding
stock of SSP in exchange for 1,000,000 shares of our Common Stock. Our shares
were issued to SSP's shareholders. This issuance was exempt from the
registration provisions of the Act by virtue of Section 4(2) and Regulation D
under the Act.
On January 22, 1999, we acquired 100 percent of the issued and outstanding
stock of Spirit 32 in exchange for 450,000 shares of our Common Stock. Our
shares were issued to Spirit 32's shareholders. This issuance was exempt from
the registration provisions of the Act by virtue of Section 4(2) and Regulation
D under the Act.
On August 5, 1999, we offered and privately sold 50,000 shares of Common
Stock at $.001 per share to NetSafety Corporation USA, Inc. ("NetSafety") in
exchange for NetSafety's execution of a licensing and distribution agreement
with us. The issuance of shares to NetSafety was exempt from the registration
provisions of the Act by virtue of Section 4(2) and Regulation D under the Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles and Bylaws provide that we will indemnify to the fullest
extent permitted by the general laws of the State of Colorado our officers and
directors. The scope of indemnification includes indemnifying for expenses and
liabilities directors or officers may incur in defending, settling or satisfying
any civil or criminal action brought against them on account of their being or
having been directors or officers of 1st Net. We may indemnify officers or
directors if such person acted in good faith and in a manner reasonably believed
to be in the best interests of 1st Net and, in the case of a criminal
proceeding, had no reasonable cause to believe the conduct in question was
unlawful. In the event of a settlement, the indemnification herein shall apply
only
35
<PAGE> 36
when the Board of Directors approves such settlement and reimbursement as being
for the best interests of 1st Net. Indemnification does not extend to such
action where officers or directors are adjudged to have acted with gross
negligence or to have engaged in willful misconduct. Insofar as indemnification
for liabilities arising under the Securities Action of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (collectively, the "Acts"), may be
permitted to directors, officers or controlling persons pursuant to foregoing
provisions, we have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Acts and is,
therefore, unenforceable.
36
<PAGE> 37
PART III
ITEM 1. EXHIBITS AND FINANCIAL STATEMENTS
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Articles Of Amendment And Restatement Of 1st Net
Technologies, Inc. Filed On December 11, 1998(1)
3.2 Amended And Restated Bylaws Of 1st Net Technologies, Inc.
Dated June 24, 1999(1)
4.1 Specimen Of 1st Net Technologies, Inc.'s Common Stock
Certificate(1)
4.2 1st Net Technologies, Inc.'s Series "A" Preferred Warrant
Agreement(1)
4.3 Warrant Agreement By And Between 1st Net Technologies, Inc.
And Children's Technology Group Dated April 19, 1999(1)
*4.4 Warrant Agreement Dated April 1, 1999 By And Between 1st Net
Technologies, Inc. And No Fear, Inc.(1)
*4.5 Warrant Agreement Dated April 1, 1999 By And Between 1st Net
Technologies, Inc. And Eric Baker(1)
4.6 1st Net Technologies, Inc.'s 1999 Incentive Stock Option
Plan(1)
4.7 1st Net Technologies, Inc.'s 1999 Non-Qualified Stock Option
Plan Dated January 4, 1999(1)
10.1 Investment Banking Agreement Dated As Of March 1, 1998 By
And Between 1st Net Technologies, Inc. And Entrepreneur
Investments, LLC(1)
*10.2 Internet Marketing And Joint Venture Agreement By And
Between 1st Net Technologies, Inc. And Nicklebys.com, Inc.
Dated January 14, 1999(1)
*10.3 Web Site Development, Service And Revenue Sharing Agreement
By And Between 1st Net Technologies, Inc. And No Fear, Inc.
Dated April 1, 1999(1)
*10.4 Profit Sharing Agreement By And Between 1st Net
Technologies, Inc. And Netsol USA, Inc. Dated July 6,
1999(1)
10.5 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And MC32, Inc. Dated As Of August 15,
1998(1)
10.6 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And Spirit 32 Development Corporation
Dated As Of January 22, 1999(1)
10.7 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And SSP Management Corporation Dated As
Of January 26, 1999(1)
10.8 Technology License Agreement By And Between 1st Net
Technologies, Inc. And Children's Technology Group, Inc.
Dated As Of April 19, 1999(1)
10.9 Technology License Agreement By And Between 1st Net
Technologies, Inc. And Children's Technology Group, Inc.
Dated As Of May 1, 1999(1)
10.10 Employment Agreement By And Between 1st Net Technologies,
Inc. And Lawrence K. Kimball Dated April 19, 1999(1)
10.11 Outside Director's Agreement By And Between 1st Net
Technologies, Inc. And Steven J. Santamaria Dated May 1,
1999(1)
10.12 Standard Industrial/Commercial Multi-Tenant Lease By And
Between 1st Net Technologies, Inc. And Entrepreneur
Investments, LLC Dated June 1, 1998(1)
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 Stock Option Agreement Dated January 10, 1999 By And Between
1st Net Technologies, Inc. And Entrepreneur Investments,
LLC, Gregory D. Writer, Jr., Clifford J. Smith And Jeffrey
Chatfield(1)
10.14 Consulting Agreement By And Between 1st Net Technologies,
Inc. And Mariah Communications, Inc. Dated As Of August 15,
1998(1)
10.15 Internet Web Site Development Agreement Dated November 9,
1998 By And Between 1st Net Technologies, Inc. And La Jolla
Fresh Squeezed Coffee, Inc.(1)
11 Statement Re: Computation Per Share Earnings(1)
16.1 Letter From Cordovano & Harvey, P.C. Regarding Change In
Certifying Accountant(1)
16.2 Letter From Bewley, Argy & Company Regarding Change In
Certifying Accountant(1)
21 Subsidiaries Of 1st Net Technologies, Inc.(1)
23.1 Consent Of Corbin & Wertz(1)
24 Power Of Attorney(1)
27 Financial Data Schedule(2)
</TABLE>
- ---------------
* Confidential Treatment Requested. These exhibits omit certain confidential
information that has been filed separately with the Commission.
(1) Previously filed.
(2) Filed herewith.
38
<PAGE> 39
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: September 8, 1999 1ST NET TECHNOLOGIES, INC.,
a Colorado corporation
/s/ JAMES H. WATSON, JR.
--------------------------------------
James H. Watson, Jr.,
Chairman and Chief Executive Officer
39
<PAGE> 40
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Twelve months ended December 31, 1998
Independent auditors' report.............................. F-3
Consolidated balance sheets -- assets..................... F-4
Consolidated balance sheets -- liabilities and
shareholders' equity................................... F-4
Consolidated statements of operations..................... F-5
Consolidated statements of changes in shareholders'
equity................................................. F-6
Consolidated statements of cash flows..................... F-7
Notes to consolidated financial statements................ F-9
CONSOLIDATED BALANCE SHEET -- Year Ended June 30, 1999 and
1998...................................................... F-20
CONSOLIDATED BALANCE SHEET -- Year Ended June 30, 1999 and
December 31, 1998......................................... F-21
CONSOLIDATED STATEMENT OF OPERATIONS -- Year Ended June 30,
1999
and 1998.................................................. F-22
CONSOLIDATED STATEMENT OF OPERATIONS -- Year Ended June 30,
1999 and December 31, 1998................................ F-23
CONSOLIDATED STATEMENT OF CASH FLOWS -- Year Ended June 30,
1999 and 1998............................................. F-24
CONSOLIDATED STATEMENT OF CASH FLOWS -- Year Ended June 30,
1999 and December 31, 1998................................ F-25
1st NET TECHNOLOGIES, INC.
As of and for the year ended December 31, 1997
Independent Auditors' Report.............................. F-26
Balance Sheet............................................. F-27
Statement of Operations................................... F-28
Statement of Shareholders' Equity......................... F-29
Statement of Cash Flows................................... F-30
Summary of Significant Accounting Policies................ F-31
Notes to Financial Statements............................. F-33
THE CHILDREN'S TECHNOLOGY GROUP, INC.
For the period from July 30, 1998 (Date of Inception)
Through April 30, 1999
Independent Auditors' Report.............................. F-37
Balance Sheet as of April 30, 1999........................ F-38
Statement of Operations for the period from July 30, 1998
(Date of Inception) through April 30, 1999............. F-39
Statement of Stockholders' Equity for the period from July
30, 1998 (Date of Inception) through April 30, 1999.... F-40
Statement of Cash Flows for the period from July 30, 1998
(Date of Inception) through April 30, 1999............. F-41
Notes to Financial Statements............................. F-42
</TABLE>
F-1
<PAGE> 41
<TABLE>
<S> <C>
THE CHILDREN'S TECHNOLOGY GROUP, INC
For the period from July 30, 1998 (Date of Inception)
Through April 30, 1999
Independent Auditors' Report................................ F-37
Balance Sheet as of April 30, 1999.......................... F-38
Statement of Operations for the period from July 30, 1998
(Date of Inception) through April 30, 1999................ F-39
Statement of Stockholders' Equity for the period from July
30, 1998 (Date of Inception) through April 30, 1999....... F-40
Statement of Cash Flows for the period from July 30, 1998
(Date of Inception) through April 30, 1999................ F-41
Notes to the Financial Statements........................... F-42
</TABLE>
F-2
<PAGE> 42
[BEWLEY, ARGY & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
1st Net Technologies, Inc.
11423 West Bernardo Court
San Diego, California 92127
We have audited the accompanying consolidated balance sheet of 1st Net
Technologies, Inc. (a Colorado corporation) and Subsidiary, as of December 31,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test-basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
1st Net Technologies, Inc., and Subsidiary as of December 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The Company is affiliated with other companies in the same line of
business, all of which are controlled by a common control group with the ability
to influence the volume of business done by each company. As discussed in Note
3, the Company and its affiliates have engaged in significant transactions with
each other.
The Company has a relatively short history of operations, has experienced
losses in the year ended December 31, 1997 (as reported upon separately by other
auditors), and the twelve months ended December 31, 1998 as reported upon above.
As of December 31, 1998, the Company maintains an excess of $435,000 in retained
deficits. Therefore, the future profitability and viability of the Company will
be based in large part on the Company's ability to attract additional numbers of
web site users, and to secure profitable operating agreements with those users.
There can be no assurance that the Company will be able to operate profitability
in the future (see Note 1a) and accordingly, these consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
/s/ BEWLEY, ARGY & COMPANY
--------------------------------------
Bewley, Argy & Company
Fountain Valley, California
May 21, 1999
F-3
<PAGE> 43
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash (Note 1c)............................................ $ 17,888 $ 2,997
Accounts Receivable, due from related parties, net of
allowance for doubtful accounts of $20,285 and $-0-
(Notes 1f & 3)......................................... 134,467 140
Marketable Securities (Note 1e)........................... 78,496 167,402
Investments (Note 3)...................................... 40,620 -0-
Prepaid Expenses.......................................... 10,186 50
Related Party Loans Receivable (Note 3)................... 30,226 -0-
--------- ---------
Total Current Assets.............................. 311,883 170,589
Restricted Securities (Note 3).............................. 262,600 400,000
Property and Equipment, at cost, net of accumulated
depreciation of $23,246 and $2,369 (Notes 1i & 5)......... 175,976 14,692
Intangible Assets, net of accumulated amortization of $9,323
and $3,000 (Notes 1i & 1j)................................ 13,000 17,000
Organization Costs, net of accumulated amortization of
$13,593 and $519 (Note 1i)................................ 11,270 3,932
Research and Development (Note 1i).......................... 28,491 -0-
--------- ---------
Total Assets...................................... $ 803,220 $ 606,213
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities.................. $ 187,781 $ 11,698
Accounts Payable, Related Party (Note 3).................. 6,162 12,500
Current Portion of Long Term Debt (Notes 1l & 6).......... 15,878 43,900
Due to Related Parties (Note 3)........................... 44,000 71,900
Demand Notes and Customer Deposits (Note 6)............... 10,000 -0-
Dividends Payable (Note 8)................................ 6,000 -0-
Deferred Revenues (Note 6)................................ 11,122 100,102
Income Taxes Payable (Notes 1k & 6)....................... 2,400 -0-
--------- ---------
Total Current Liabilities......................... 283,343 240,100
Long Term Debt, Net of Current (Note 1l).................... 26,620 -0-
Commitments and Contingencies (Note 6)...................... -- --
--------- ---------
Total Liabilities................................. 309,963 240,100
--------- ---------
Minority Interest in Subsidiary (Notes 1b & 2).............. (342) -0-
--------- ---------
Stockholders' Equity:
Preferred Stock, $ .001 Par Value; 10,000,000 shares
authorized:
Series A -- $2.50 participating, convertible, voting,
cumulative; 400,000 shares authorized; issued and
outstanding, 20,000 shares at December 31, 1998 and -0- at
December 31, 1997 (Notes 1b, & 8)......................... 50,000 -0-
Common Stock, $ .001 Par Value. Authorized 50,000,000
shares; issued and outstanding, 3,513,000 shares at
December 31, 1998 and 2,798,000 at December 31, 1997
(Notes 1b & 7)............................................ 3,513 2,798
Additional Paid-In Capital (Notes 1b, 7 & 8)................ 874,415 506,252
Retained (Deficit) (Note 1a)................................ (435,013) (142,937)
--------- ---------
Total Stockholders' Equity........................ 492,915 366,113
--------- ---------
Total Liabilities and Stockholders' Equity........ $ 803,220 $ 606,213
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 44
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED:
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
REVENUES (Notes 1a, 1f & 3)
Web Page Design........................................... $ 497,062 $ 19,923
Web Page Design in Exchange for Stock..................... 237,660 -0-
Internet Marketing Services............................... 97,000 -0-
Consulting and Internet Hosting........................... 810 26,057
Consulting in Exchange for Stock.......................... 90,480 95,368
Realized Gain/(Loss) on Stocks derived from earnings...... 28,177 -0-
Unrealized Gain/(Loss) on Stocks derived from earnings.... (11,613) -0-
Realized Gain/(Loss) on Stock Sales....................... 96,177 -0-
Other Service Income...................................... 6,893 -0-
---------- ---------
TOTAL REVENUES.................................... 1,042,646 141,348
---------- ---------
OPERATING EXPENSES
Salaries, Wages, Benefits and Payroll Taxes (Note 4)...... 496,190 158,510
Advertising and Promotional............................... 206,307 46,399
Bad Debts (Note 1f)....................................... 25,572 -0-
Interest.................................................. 2,930 -0-
Internet Access and Other Fees............................ 59,621 31,232
Insurance................................................. 6,390 -0-
Office and Administrative Costs........................... 34,333 -0-
Outside Services, Contractors and Referral Fees........... 211,889 -0-
Professional Fees......................................... 13,535 20,725
Rent, Paid to an Affiliate (Note 3)....................... 53,902 14,410
Telephones................................................ 26,792 8,717
Travel.................................................... 25,985 -0-
Depreciation and Amortization (Notes 1i & 1j)............. 27,457 5,888
Gain on Sale of Marketable Securities (Notes 1e & 3)...... -0- (34,981)
Other..................................................... 2,174 32,765
---------- ---------
TOTAL OPERATING EXPENSES.......................... 1,193,077 283,665
---------- ---------
NET (LOSS) FROM OPERATIONS........................ (150,431) (142,317)
OTHER INCOME (EXPENSE)
Unrealized Loss on Decline of Restricted Stock Investment
(Note 3)............................................... (137,400) -0-
Interest and Dividends.................................... 853 (620)
---------- ---------
NET (LOSS) BEFORE TAXES ON INCOME AND SHARE OF MINORITY
INTEREST IN LOSS OF SUBSIDIARY TAXES ON INCOME (Notes 1k &
6)........................................................ (286,978) (142,937)
Minimum State Corporate Tax............................ 1,600 -0-
Current Benefit........................................ (87,364) (47,104)
Deferred Expense....................................... 87,364 47,104
---------- ---------
NET (LOSS) BEFORE MINORITY INTEREST'S SHARE IN LOSS OF
SUBSIDIARY................................................ (288,578) (142,937)
Minority Interest in Undistributed Loss................ 2,502 -0-
---------- ---------
NET (LOSS).................................................. $ (286,076) $(142,937)
========== =========
EARNINGS PER SHARE (EPS) (Note 1n)
BASIC EPS (Note 1n)....................................... $ (.0904) $ (.0684)
========== =========
DILUTED EPS (Note 1n)..................................... $ (.0902) $ (.0684)
========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC EPS................................................. 3,165,500 2,090,333
========== =========
DILUTED EPS............................................... 3,170,500 2,090,333
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 45
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED COMMON
------------------------ ------------------------ ADDITIONAL TOTAL
NUMBER OF ($0.001 PAR) NUMBER OF ($0.001 PAR) PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES $ AMOUNT SHARES $ AMOUNT CAPITAL DEFICIT EQUITY
--------- ------------ --------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... -0- $ -0- 1,800,000 $1,800 $ -0- $ -0- $ 1,800
Shares Issued (Note 1b).......... -0- -0- 998,000 998 548,502 -- 549,500
Offering Costs................... -- -- -- -- (42,250) -- (42,250)
Net Loss December 31, 1997....... -- -- -- -- -- (142,937) (142,937)
------ ------- --------- ------ -------- --------- ---------
Balance at December 31, 1997..... -0- -0- 2,798,000 2,798 506,252 (142,937) 366,113
Shares Issued (Note 3)........... -- -- 265,000 265 -- -- 265
Reg. D Offerings:
Common Stock (Notes 1b & 7).... -0- -0- 450,000 450 449,550 -- 450,000
Preferred -- Series A (Note
8)........................... 20,000 50,000 -- -- -- -- 50,000
Offering Costs................. -- -- -- -- (81,387) -- (81,387)
Dividends on Preferred (Note
8)............................. -- -- -- -- -- (6,000) (6,000)
Net (Loss) December 31, 1998..... -- -- -- -- -- (286,076) (286,076)
------ ------- --------- ------ -------- --------- ---------
Balance at December 31, 1998..... 20,000 $50,000 3,513,000 $3,513 $874,415 $(435,013) $ 492,915
====== ======= ========= ====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 46
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED:
---------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) In Cash And Cash Equivalents:
Cash Flows from OPERATING Activities:
Net (Loss)................................................ $(286,076) $(142,937)
--------- ---------
Adjustments to Reconcile Net (Loss) to Net Cash (Used) By
OPERATING Activities:
Transactions not requiring cash:
Depreciation and Amortization (Notes 1i, 1j & 5)..... 27,457 5,888
Issuance of Stock to Employees (Note 3).............. 265 -0-
Minority Interest in Subsidiary Acquisition (Notes 1b
& 2)................................................ 342 -0-
Provision for Doubtful Accounts (Note 1f)............ 20,285 -0-
Unrealized Loss on Marketable Securities (Note 1e)... 11,013 (34,981)
Changes in operating assets and liabilities net of
effects from purchase of Mariah:
(Increase) in Accounts Receivables, Marketable
Securities, and Other Current Assets................ (157,701) (167,592)
Increase in Accounts Payable and Accrued
Liabilities......................................... 29,320 240,100
--------- ---------
Total Adjustments.................................... (69,019) 43,415
--------- ---------
NET CASH (USED) BY OPERATING ACTIVITIES........... (355,095) (99,522)
--------- ---------
Cash Flows from INVESTING Activities:
Unrealized Loss and Deposit Paid for Auto Purchase (Note
3)..................................................... 137,400 (400,000)
Purchases of Property and Equipment (Notes 1i & 5)........ (127,224) (18,330)
Payments for Organizational Costs (Notes 1j & 5).......... (9,142) (2,651)
Payments for Intangible Assets (Notes 1j & 2)............. (10,000) (10,000)
Payments for Research and Development (Note 1i)........... (28,491) -0-
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES........... (37,457) (430,981)
--------- ---------
Cash Flows from FINANCING Activities:
Principal Payments on Capital Lease Obligations (Note
5)..................................................... (11,170) -0-
Proceeds from Issuance of Common Stock (Notes 1b, 2 &
7)..................................................... 450,000 549,500
Proceeds from Issuance of Preferred Stock (Notes 1b &
8)..................................................... 50,000 -0-
Costs Associated with Stock Offerings..................... (81,387) (16,000)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 407,443 533,500
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 14,891 2,997
Cash and cash equivalents at the beginning of the
year............................................ 2,997 -0-
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 17,888 $ 2,997
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 47
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED:
---------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest............................................... $ 2,930 $ -0-
========= =========
Income Taxes........................................... $ 1,600 $ -0-
========= =========
</TABLE>
Acquisition Note: In connection with the acquisition of 97.12% of the
common stock of Mariah Communications, Inc. (Mariah), the Company acquired
assets with a fair value of $34,821 (including cash of $1,766) and assumed
liabilities of $32,420, for consideration of granting exclusive proprietary
technology rights to IP Telephony Technology, with a book value of $75,000.
Leases Note: During 1998, the Company incurred a capital lease obligation
of $53,668 in connection with lease agreements to acquire equipment.
Related Party Note: During 1998 the Company received net $30,226 and repaid
$27,900 to related parties in relation to short term loans. In addition, as
discussed further in Note 3, the Company had sales of $622,156 with related
parties.
Non Cash Financing Note: As discussed further in Note 1b, the Company has
issued warrants with the preferred stock offering which are associated with the
$50,000 financing activity listed above.
Sales Note: During 1998, the Company recorded sales of $328,140 that were
paid in customers' stock.
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 48
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
1st Net Technologies, Inc. ("The Company"), was originally organized as
Snow Eagle Investments, Inc. under the laws of the State of Colorado, on May 14,
1990. In April 1997, the Company initiated operations with the purchase of
certain assets, and tradename of an internet shopping mall doing business as 1st
NetZing Mall (NetZing). Subsequent to the acquisition of NetZing, the Company
changed its name to 1st Net Technologies, Inc.
The Company is primarily in the Internet commerce and services business,
specializing in Internet services to publicly traded companies and high net
worth investors, offering a diverse range of goods and services. In 1998, those
services included "due diligence web sites", custom database systems management,
investment opportunity profiling, information resourcing, and developing and
supporting a new paradigm of technological development to control and monitor
information, telephony, and video to Internet consumers based upon content.
On August 15, 1998 the Company acquired a controlling interest in Mariah
Communications, Inc. (Mariah) (formerly, MC32, Inc.). (See Note 2). Accordingly,
the accompanying consolidated financial statements of the Company include the
results of operations, financial position and cash flows of Mariah. This
majority owned subsidiary is in a related Internet commerce activity, developing
Internet protocol telephony technologies, wherein voice is converted into data
and then reassembled once received after transmission on the Internet.
Subsequent to December 31, 1998, the Company acquired three additional
related entities as follows: 1) SSP Management Corp. (SSP), an entity which
provides internet public relations and internet newsletters, was purchased in
exchange for 1,000,000 common shares in the Company. 2) The Children's
Technology Group, Inc. (CTG), (formerly Tummybusters, Inc.), was purchased by
the Company in exchange for the exclusive licensing and marketing rights to the
Crayon Crawler Web Browser suite of modules. 3) Spirit 32 Development
Corporation (SP32), (formerly Renaissance Financial Clearing Corporation), an
entity that provides Internet related research and development services, was
purchased in exchange for 450,000 common shares in the Company. All three
acquired entities had shareholders in common with the Company, or with other
family members of the Company's management. (See also Notes 2 & 3).
The accompanying financial statements of the Company have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
incurred net losses of $429,013 during 1997 and 1998 resulting in a retained
deficit of $435,013 after dividends. In view of this matter, realization of a
portion of the assets in the accompanying financial statement is dependent upon
continued operations of the Company and management believes that actions
presently being taken and current revenues being generated will provide the
opportunity for the Company to continue as a going concern.
(b) Capitalization
The Company was initially capitalized by the issuance of 1,800,000 shares
of its common stock, at $0.001 per share, totaling $1,800, to an officer (whom
has subsequently resigned), in exchange for services related to organizing the
Company. In June, 1997 the Company circulated a self written confidential
offering memorandum, resulting in the issuance of 598,000 common shares, for a
total of $149,500, less offering costs of $42,250. On October 28, 1997, an
additional 400,000 common shares were issued under Regulation D, Rule 504 of the
Securities Act of 1933 and California Code 25102(f) to a single investor for
$400,000.
F-9
<PAGE> 49
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
On October 12, 1998, the Company issued an additional 450,000 common shares
under Regulation D, Rule 504 to investors for $450,000, less offering costs of
$81,387. As of December 31, 1998, the Company circulated an additional self
written confidential offering memorandum under Regulation D, Rules 501 through
508 of the Securities Act of 1933 and California Code 25102(f), resulting in the
issuance of 20,000 shares of Series A Preferred Stock, for a total of $50,000.
This offering was subscribed in full by March 11, 1999 resulting in an aggregate
issuance of 472,400 shares of Series A Preferred Stock and 236,200 warrants,
totaling $1,181,000, less offering costs of approximately $120,000. (See also
Notes 6 & 8).
Mariah was capitalized by a self written confidential offering memorandum
under Regulation D, Rule 504 of the Securities Act of 1933 and California Code
25102(f), resulting in the issuance of 118,600 common shares for a total of
$118,700, less costs of $20,000. Majority control was acquired by the Company on
August 15, 1998, with the issue of 4,000,000 of its common shares in exchange
for the proprietary rights to the Mariah IP telephony technology. The aggregate
cost of developing these rights at August 15, 1998 was $75,000. (See also Note
2).
(c) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. There were no cash equivalents as of
December 31, 1998 and 1997.
(d) Principles of Consolidation and Basis of Accounting
The accompanying consolidated financial statements include the accounts of
the Company and of its majority owned subsidiary, Mariah. The acquisition has
been reported as a purchase business combination. Inter-company transactions and
balances have been eliminated in consolidation. All transactions are recorded on
the accrual basis, at historical cost.
(e) Marketable Securities & Investments
Marketable securities consists of equity securities, or the rights to
obtain equity securities (options), in common stock traded in major market
listings, and for stock in some companies who are traded over-the-counter. All
equity securities are considered "trading" under the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Accordingly, unrealized gains and losses on the
equity securities are reflected in operations. The Company also owns restricted
stocks in several companies which are recorded at nominal fair value amounts or
on the equity method.
(f) Revenues and Accounts Receivable
Consulting and service revenues are recorded upon billing of the completed
contract for services. Web page development revenues are recorded in accordance
with AICPA Statement of Position 97-2. Accounts receivable are recorded at
realizable value, net of reasonable and adequate reserves for potential
uncollectible amounts. The entire balance of receivables as of December 31, 1998
is due from related parties.
(g) Related Parties
On February 23, 1999, the Financial Accounting Standards Board (FASB)
issued a news release proposing a new Statement updating FASB Statement 94, that
would require a controlling entity to
F-10
<PAGE> 50
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
consolidate all entities that it controls, unless control is temporary, even
when control exists in forms other than a majority voting interest.
The proposed Statement would be effective for financial statements for
annual periods beginning after December 15, 1999, although earlier application
is encouraged. The Company has not yet elected to adopt application of this
standard and the affect of such accounting treatment is indeterminable. The
application of this standard could have a material impact on the user's
conclusions as to the Company's financial position and results of operations and
cash flows. As reported in the auditors' opinion, the Company is affiliated with
other companies in the same line of business, all of which are controlled by a
common control group, with the ability to influence the volume of business done
by each company. See also, Note 3 for further discussion on related parties.
The balance of related party loans receivable are from various related
entities, is interest free and has no fixed terms of repayment. (See also Note
3).
(h) Deposits and Other Assets
This balance consists primarily of equipment and premises security
deposits.
(i) Property and Equipment, Research and Development, Organizational
Expenditures and Trademarks
Property and equipment is stated at cost and is depreciated using the
straight line method over their estimated useful lives, currently five years,
with a mid-year convention in the year of acquisition. In accordance with
FASB -- 86 and AICPA Statement of Position 98-1 requirements, the Company has
established the technological feasibility of their internet web site directory,
and accordingly all costs incurred for the planning, product design, detail
program design and establishing technical feasibility are capitalized as
research and development, and are amortized upon enhancement completion on a
project by project basis, using the straight line method, over their expected
useful lives. Additionally, periodic evaluations of unamortized research and
development costs are made to determine the net realizable value on the
Company's balance sheet. Any resulting write downs are charged to periodic
operations. Trademarks are amortized using the straight line method, over five
years. Organizational expenditures for the Company were paid as completed,
totaling $15,916, as of December 31, 1998, and will be amortized over a period
of five years. Betterment's and improvements are capitalized and depreciated
over their estimated useful lives, while repairs and maintenance costs are
expensed when incurred.
(j) Intangible Assets
Intangible assets, resulting from the differences between acquisition
purchase price and the fair value (or net book value, in the case of related
parties) of net assets acquired are being amortized using the straight line
method, over 15 years. Amortization expense for the years ended December 31,
1998 and 1997 were $9,323 and $3,519, respectively.
(k) Income Taxes
The Company has applied the Financial Accounting Standards Board Statement
109, Accounting for Income Taxes (SFAS 109), to all operations since inception,
for all periods disclosed in this financial examination, and all other
disclosures of information for periods prior to acquisitions of the operating
subsidiary, Mariah.
SFAS 109 "Accounting for Income Taxes" requires the liability method in
accounting for income taxes. Deferred tax assets and liabilities arise from the
difference between the tax basis of an asset or liability and its
F-11
<PAGE> 51
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
reported amount on the financial statements. Deferred tax amounts are determined
by using the tax rates expected to be in effect when the taxes will actually be
paid or refunds received, as provided under currently enacted laws. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense or benefit is the tax payable
or refundable, respectively, for the period, plus or minus the change during the
period, in deferred tax assets and liabilities. The Company has experienced
operating losses during its period of existence, and future profitability cannot
be assured, resulting in reserves for the valuation allowance of the entire
amount of the determined deferred tax assets. (See also Note 6).
(l) Long-Term Debt
Long-term debt of $26,620 as of December 31, 1998 represents the amount of
capital lease obligations due in periods beyond December 31, 1999, and is,
accordingly, stated net of the current portion of $15,878.
(m) Transactions in Capital Stock
All securities issued by the Company and Mariah have not been registered
under the Securities Act of 1933, as amended. They may not be sold, offered for
sale, transferred, pledged or hypothecated, in the absence of a registration
statement in effect with respect to the securities under such act, or an opinion
of counsel or other evidence satisfactory to the Company that such registration
is not required, or unless sold pursuant to Rule 144 under such act. The
Company's free trading stock is currently involved in limited trading on the
OTC: Bulletin Board under the symbol FNTT. The trading price at December 31,
1998 was $3.25 and has been consistently trading at slightly above $5.00 in
limited transactions, as of and before the date of this report. This activity
does not however illustrate an established "market" for the Company's stock as
described in FASB 123 (Accounting for Stock Based Compensation) or for
establishing fair value in the acquisitions involving issuance of the Company's
stock.
(n) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128). SFAS
128 specifies the computation, presentation, and disclosure requirements of
earnings per share and supersedes Accounting Principles Board Opinion 5,
"Earnings Per Share". SFAS 128 requires dual presentation of basic and, where
applicable, diluted earnings per share. Basic earnings per share, which excludes
the impact of common stock equivalents, replaces primary earnings per share.
Diluted earnings per share which utilizes the average market price per share or
ending market price per share when applying the treasury stock method in
determining common stock equivalents, replaces fully-diluted earnings per share.
SFAS 128 is effective for the Company in 1998 and 1997. However, there were no
common stock equivalents during the year ended December 31, 1997 and, therefore,
there is no effect on the earnings per share presented for that year, due to the
Company's adoption of SFAS 128. In the year ended December 31, 1998, however,
this adoption is effective in the presentation of Diluted earnings per share for
that period. Basic earnings per share have been computed using the weighted
average number of common shares and common share equivalents outstanding.
Diluted earnings per share were calculated using the weighted number of common
shares and common share equivalents, including all options and warrants as if
exercised at the beginning of the periods.
F-12
<PAGE> 52
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
(2) ACQUISITIONS
Acquisition of 1st NetZing Mall
On April 7, 1997, the Company acquired certain assets which included the
tradename, trademarks, clients and programming code of an internet shopping mall
known as 1st NetZing Mall, for $10,000 in cash and a promissory note payable to
the seller for $10,000, for a total purchase price of $20,000. At December 31,
1997, the promissory note was paid in full. The transaction was recorded as a
purchase in accordance with Accounting Principles Board Opinion No. 16. Upon
determining the fair value of tangible and intangible assets acquired, the full
purchase price was allocated to the acquisition of the tradename, trademarks,
and technology associated with the internet shopping mall. The $20,000 was
recorded as an intangible asset, and is being amortized over five years, on a
straight-line basis.
Acquisition of Mariah
On August 15, 1998, Mariah's board of director's approved the issuance of
4,000,000 shares of common stock of Mariah, to 1st Net Technologies
(representing 100.00% of the outstanding common stock as of December 31, 1998),
in a business combination accounted for as a purchase, in accordance with the
terms of Accounting Principles Board Opinion No. 16, with an effective date of
December 31, 1998. The price paid was $75,000 (the net book value of the
technology rights). The results of operations of Mariah are included in the
accompanying consolidated financial statements since the date of acquisition.
The total net book value (approximated to equal fair value) of the net assets of
Mariah at December 31, 1998, amounted to $11,799. The excess purchase price was
accordingly allocated to goodwill, with a subsequent reduction in full due to
the Company's interest in Mariah's losses. As of December 31, 1998 Mariah
incurred net losses of $86,901 and as a result, the Company recorded a reduction
of Mariah's non-current assets acquired on a prorated basis by $9,398. (See also
Notes 1b & 1j).
The following is a summary of the financial position of the Company and
Mariah at December 31, 1998, without the consolidating and eliminating
adjustments:
<TABLE>
<CAPTION>
1ST NET MARIAH COMBINED
-------- ------- --------
<S> <C> <C> <C>
Current assets...................................... $323,257 $ 1,766 $325,023
Property and equipment, net......................... 168,470 14,753 183,223
Other assets........................................ 302,191 27,700 329,891
-------- ------- --------
$793,918 $44,219 $838,137
======== ======= ========
Current liabilities................................. $274,381 $32,420 $306,801
Long Term Debt...................................... 26,620 -0- 26,620
Shareholders' equity................................ 492,917 11,799 504,716
-------- ------- --------
$793,918 $44,219 $838,137
======== ======= ========
</TABLE>
Included in consolidated results of operations for the year ended December
31, 1998 are the following results of the previously separate companies for the
period from August 16, 1998 to December 31, 1998:
<TABLE>
<CAPTION>
1ST NET MARIAH CONSOLIDATED
---------- -------- ------------
<S> <C> <C> <C>
Net sales....................................... $1,042,646 $ -0- $1,042,646
========== ======== ==========
Net income (Loss)............................... $ (199,175) $(86,901) $ (286,076)
========== ======== ==========
</TABLE>
F-13
<PAGE> 53
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
Acquisition of SSP Management Corp.
On January 13, 1999, the Company acquired a 100% interest in SSP for
1,000,000 shares and relief of debt between the two companies. As discussed in
Note 3, the former majority shareholder in SSP, Entrepreneur Investments, LLC
(EI), is a controlling shareholder in the Company and, accordingly, the
acquisition was recorded at net book value.
Acquisition of Spirit 32 Development Corporation
On January 22, 1999, the Company purchased all of the issued and
outstanding stock of Spirit 32 Development Corporation in exchange for 450,000
shares of the Company's common stock. The acquisition was between related
parties and, accordingly, the business combination has been recorded as a
purchase at net fair values.
Acquisition of The Children's Technology Group
On April 19, 1999, the Company announced the sale of exclusive licensing
and marketing rights for the Crayon Crawler Web Browser suite and the Next
Generation Web Browser to the Children's Technology Group (CTG) for $400,000
cash, 5% royalty on sales and an option to purchase 4,000,000 shares of CTG
bringing the Company's ownership percentage in CTG to approximately 86% on May
1, 1999 when the options were exercised. The transaction is being recorded as a
purchase, in accordance with Accounting Principles Board Opinion No. 16.
The following pro forma information illustrates the Company's unaudited
financial position as of December 31, 1998 as if the three acquisitions in 1999
had occurred on December 31, 1998, for consolidated balance sheet purposes, and
as of January 1, 1998 for consolidated income statement purposes. The pro forma
information also illustrates the completion of the Reg. D offering for the
preferred stock (see Note 1b), since that offering was essential in completing
the acquisitions. There were minor adjustments necessary for depreciation,
amortization and interest, for comparison purposes. The pro forma statements may
not be indicative of the results that would have occurred if the acquisition had
been effective on the date indicated, or of the results that may be obtained in
the future.
UNAUDITED PRO FORMA CONSOLIDATED AND CONDENSED BALANCE SHEET AS OF 12/31/98
<TABLE>
<S> <C>
Current assets.............................................. $1,426,032
Property and equipment, net................................. 230,777
Other assets................................................ 301,188
----------
$1,957,997
==========
Current liabilities......................................... $ 242,789
Long Term Debt.............................................. 26,620
Minority Interest........................................... 233,308
Shareholders' equity........................................ 1,455,280
----------
$1,957,997
==========
</TABLE>
F-14
<PAGE> 54
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
UNAUDITED PRO FORMA CONSOLIDATED, CONDENSED AND
COMBINED RESULTS OF OPERATIONS AS OF 12/31/98
<TABLE>
<S> <C>
Sales....................................................... $1,319,733
==========
Net (Loss).................................................. $ (347,611)
==========
Net (Loss) per common share**............................... $ (.05764)
==========
Net (Loss) per common share***.............................. $ (.05345)
==========
</TABLE>
- ---------------
** After giving affect to recapitalization, 1999 stock issues and conversion of
preferred shares.
*** Also including dilution of outstanding warrants.
(3) RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS
During the period ended December 31, 1997, the Company entered into an
agreement with Entrepreneur Investments, Inc. (EI), whereby EI would provide
$30,000 in consulting services to the Company, of which $15,000 is included in
the accompanying financial statements as offering costs. As of December 31, 1997
and 1998, $12,500 and $6,162 respectively, are included in accounts payable as a
result of trade activities with EI. EI advanced the Company approximately
$60,000 during 1997, of which the Company repaid $25,500 during 1997. The
remaining balance of $34,500 is included in the accompanying financial
statements as due to related parties as of December 31, 1997. This loan was
repaid in full by June of 1998.
Further, in 1997 the Company entered into an agreement with an employee to
sell to the employee certain investments the Company holds in marketable
securities. At December 31, 1997 the securities were not delivered to the
employee, and the amount received for the securities, $25,000, was recorded as a
current liability, due to related parties. This liability was paid in full by
June 15, 1998.
During the period ended December 31, 1997, an officer advanced the Company
a total of $3,900, of which, $1,500 and $2,400 was repaid in 1997 and 1998,
respectively. The December 31, 1997 balance outstanding of $2,400 was included
in the accompanying financial statements as due to related parties.
In 1997, the Company issued a note payable to a shareholder. The note was
due on demand and included interest at an annual rate of 12%. The amount
outstanding on the note at December 31, 1997 was $10,000 and was recorded in due
to related parties. This loan was repaid in full during 1998.
On November 5, 1997, the Company entered into an agreement to purchase
eight automobiles from LaForza Automobiles, Inc. ("LaForza") (formerly Celebrity
Networks, Inc.) for which the Company paid $400,000. The vehicles were to be
delivered to the Company beginning no later than March 30, 1998, with final
delivery no later than August 30, 1998. Management had intended to resell the
vehicles, but in 1998, the Company renegotiated the terms of the purchase, and
received 200,000 shares of LaForza common stock instead of the automobiles. The
net market value of these shares as of December 31, 1998 has declined to
$262,600 from their value of $400,000 as of December 31, 1997, and has resulted
in the recording of unrealized losses of $137,400 in the accompanying financial
statements. In addition to this stock investment, in 1997 the Company entered
into a consulting agreement with LaForza, whereby the Company would provide
internet consulting and web page design services to LaForza. (See also Note 6).
On December 15, 1998, EI loaned the Company $5,000 which is part of the due
to related party balance of $44,000 as of December 31, 1998. The remaining
balance of $39,000 consists of a loan payable to CTG of $24,000, which was later
acquired (see Note 2), and loans payable to two other affiliates totaling
$15,000. In addition, during the years ended December 31, 1998 and 1997, the
Company subleased office space from affiliates, for total rent payments of
$41,347 and $14,410.
F-15
<PAGE> 55
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
In 1998, the Company had sales to related parties amounting to $622,156. In
addition, the accounts receivable balance of $134,467 is all due from related
parties, with approximately $119,000 attributable to SSP, which was acquired
subsequent to December 31, 1998. (See also Note 2).
The Company issued 265,000 shares of common stock to employees during 1998
as bonuses for the 1997 year. Since the stock is restricted for a one year
period and there is no established market for the shares, the issuance of shares
was recorded at par for a total of $265. The Company issued 595,300 additional
shares of common stock to management and key employees during 1999, as
incentives and bonuses for the 1998 year. These shares issued are likewise
restricted for a one year period, with no established market for trading and,
accordingly, the issuance of such shares were recorded at par.
EI is the largest percentage owner in the Company (see Note 4) and also
owns a majority interest in Probook, Inc. EI also has 1,500,000 options in the
stock of Mariah and the sole shareholder of EI serves on the board of Mariah.
The Company and/or EI also has officers or directors in common with various
other entities.
In 1998, sales to one customer, SSP, which was subsequently acquired,
accounted for approximately 42% of the Company's total revenues. In 1997, sales
to one customer amounted to 53% of the Company's total revenues. Further, in
1998 and 1997, approximately 31% and 67%, respectively, of the Company's revenue
was in the form of common stock received as payment for services. During the
year ended December 31, 1997, the Company received approximately $109,243 in
cash for the sale of the securities. The excess of the proceeds received for the
stock, over the Company's recognized revenue originally recorded for such stock,
totaled $13,875, and is included as a gain in sale of marketable securities.
During the year ended December 31, 1998, the Company received approximately
$410,140 in cash for the sale of securities. The excess of proceeds received for
the stock over the Company's recognized revenue for which stock was the payment,
totaled $28,177 and is listed separately under revenues on the statement of
operations.
(4) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following is a list of the officers and directors of the Company, along
with all other shareholders owning directly or indirectly at least 5% of the
Company's shares as of December 31, 1998. There were no salaries greater than
$100,000 paid to any one employee during the 1998 year.
<TABLE>
<CAPTION>
SHAREHOLDER/POSITION/TITLE SHARES HELD OWNERSHIP
-------------------------- ----------- ---------
<S> <C> <C>
Gregory D. Writer Jr. -- CEO and Chairman of the Board...... -0- 0.0%
Clifford J. Smith -- President.............................. 50,000 1.4
Grey Mare, Inc./Mary E. Writer -- Secretary and Treasurer... 163,000 4.6
Jeffrey Chatfield -- V.P. Investor Relations................ -0- 0.0
Gerald Young -- V.P. Sales and Marketing.................... -0- 0.0
Alex Ramia -- V.P. Network and Systems Operations........... -0- 0.0
EI/James H. Watson Jr. -- Director.......................... 1,600,000 45.5
Cede & Co. -- Investor...................................... 778,200 22.2
Mark Lair -- Investor....................................... 400,000 11.4
--------- -----
Total listed...................................... 2,991,200 85.1%
========= =====
Total shares authorized, issued and outstanding... 3,513,000 100.0%
========= =====
</TABLE>
F-16
<PAGE> 56
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31,
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Office Furniture and Fixtures............................... $ 5,641 $ 3,701
Leasehold Improvements...................................... 22,954 -0-
Radio Equipment............................................. 4,178 -0-
Office Equipment -- Capitalized Leases...................... 53,668 -0-
Computer Equipment and Peripherals.......................... 112,781 13,360
-------- -------
Total.................................................. 199,222 17,061
Less Accumulated Depreciation.......................... (23,246) (2,369)
-------- -------
Net Property and Equipment........................ $175,976 $14,692
======== =======
</TABLE>
(6) LIABILITIES, COMMITMENTS AND CONTINGENCIES, SUBSEQUENT EVENTS, AND OFF
BALANCE SHEET RISK
Demand Notes Payable and Customer Deposits
Demand notes, non-related parties, consisted of the following at December
31
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Notes payable(2), 12%, unsecured............................ $ -0- $35,000
Notes payable(2), no stated interest, unsecured............. 5,000 8,900
Customer Deposits........................................... 5,000 -0-
------- -------
Total Demand Notes Payable and Customer
Deposits........................................ $10,000 $43,900
======= =======
</TABLE>
Deferred Revenues
On November 5, 1997, the Company received, in advance, payment for an
eighteen month consulting contract with LaForza, beginning August 13, 1997.
Payment was in the form of an option, fully exercisable at $.50 per share, to
purchase 150,000 free-trading shares of LaForza Automobiles, Inc. During the
period August 13, 1997 through December 31, 1997, the Company exercised 50,000
of the options, for which it sold the shares for approximately $56,745. After
further contract negotiations, the remaining options were exercised in 1998. The
LaForza common stock is thinly traded, over-the-counter. The determination of
the value of the options, in management's opinion, was more readily determinable
than the value of the services to be provided. Therefore, based on the cash
proceeds from the sale of the common stock received from the exercise of the
options, the 150,000 options have been valued at $133,470. During the years
ended December 31, 1998 and 1997, approximately sixty-seven and twenty-five
percent of the consulting contract was completed for each year, respectively.
Accordingly, the Company has recorded revenue of $89,425 and $33,368,
respectively for those years, and has deferred the remaining $11,122 until the
earnings process has been completed.
Income Taxes
As of December 31, 1998, the Company had income taxes payable to the State
of California Franchise Tax Board totaling $2,400.
At December 31, 1998 and 1997 deferred taxes consisted of a net tax assets
due to operating loss carryforwards of $371,187 and $47,104, respectively, which
were fully offset by valuation allowances since there is no assurance of
recovery. The net operating loss carryforwards will expire beginning in 2012.
F-17
<PAGE> 57
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
A reconciliation of the U. S. statutory federal income tax rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
U.S. federal statutory graduated rate....................... 34.00% 26.08%
State income tax rate, net of federal benefit............... 9.30% 6.87%
Net operating loss for which no tax benefit is currently
available................................................. (43.30)% (32.95)%
------ ------
-0- -0-
====== ======
</TABLE>
Commitments and Contingencies
The future minimum annual aggregate rental payments required under both
capital and operating leases that have initial or remaining non-cancelable lease
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
1999........................................................ $164,705
2000........................................................ 146,979
2001........................................................ 139,493
2002........................................................ 129,247
2003........................................................ 100,058
Thereafter.................................................. -0-
--------
Total....................................................... $680,482
========
</TABLE>
The Company is not currently involved in any litigation.
Subsequent Events
The three 1999 acquisitions and the completion of the preferred stock
offering have been discussed in Notes 1b & 2, and are illustrated in the pro
forma information. The pro forma information does not reflect any asset for
1,000,000 restricted common shares in Nicklebys.com, Inc. that were obtained in
1999 for services rendered.
Additionally, the Company has signed various operating and employment
agreements granting restrictive shares, stock options and warrants totaling
1,592,400 as of the date of this report.
Off Balance Sheet Risk
As of December 31, 1998, the Company maintained no cash accounts in excess
of the $100,000 federally insured limits. Additionally, the Company is primarily
involved in Internet services, for which the approaching year 2000 computer
dilemma may have significant and unknown affects. Due to the limited operating
history of the Company, there is no assurance that the Company will be able to
raise sufficient equity capital or generate profits to sustain its existence.
The Company could also be affected by the inability to establish a market
for their shares of stock. The Company has many related parties and could be
subject to a conflict of interest with the directors. Last, the Company has
issued shares to employees and principal founders for no cash consideration, and
may issue additional shares of common stock or preferred stock in the future,
resulting in the dilution in the underlying book value and earnings per share.
F-18
<PAGE> 58
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
(7) COMMON STOCK
The Company is authorized to issue 50,000,000 common shares with a $0.001
par value. Each common share is entitled to one vote and there are no other
preferences. No dividends have been paid by the Company since inception.
(8) PREFERRED STOCK
The Company is authorized to issue 10,000,000, $0.001 par value preferred
shares, with varying voting rights and other preferences. As of December 31,
1998, the Company had issued 20,000 shares of its Series A -- $2.50
participating, convertible, voting, cumulative preferred stock. The Series A
preferred stock is not subject to discretionary redemption by the Company, has
equal voting to common shares, and is automatically converted into common shares
when the Company's stock price reaches $5.00. This threshold was achieved
subsequent to the balance sheet date, and all of the preferred shares as of the
date of the audit report have been converted into common. The preferred stock
offering was sold in $5.00 units. Each unit consisting of two shares of the
Series A, preferred stocks, and one warrant to purchase one share of common
stock of the Company at $5.00 per share, exercisable immediately, and expiring
upon the one year anniversary date of the closing of an underwritten public
offering. If not expired or exercised prior thereto, the warrants automatically
shall expire on October 31, 2002. As of December 31, 1998, preferred dividends
at $.30 per share were accrued, resulting in dividends payable of $6,000.
F-19
<PAGE> 59
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and Marketable Securities............................ $1,306,880 $340,696
Other Current Assets...................................... 1,106,648 418,541
---------- --------
Total Current Assets.............................. 2,413,528 759,237
Other Assets................................................ 771,744 112,534
---------- --------
Total Assets...................................... $3,185,272 $871,771
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities......................................... $ 695,628 $100,850
Other Liabilities........................................... 117,701
---------- --------
Total Liabilities................................. 813,329 100,850
Minority Interest in Consolidated Subsidiaries.............. $ 159,343
Stockholder's Equity:
Common Stock, $.001 par value; 40,000,000 shares
authorized, issued and outstanding as of June 30....... 5,581 2,798
Preferred Stock, $.001 par value; 10,000,000 shares
authorized, issued and outstanding as of June 30....... -- --
Additional Paid-In Capital................................ 3,222,518 739,502
Retained Earnings......................................... (1,015,498) 28,621
---------- --------
Total Stockholder's Equity........................ 2,212,600 770,921
---------- --------
Total Liabilities and Stockholder's Equity........ $3,185,272 $871,771
========== ========
</TABLE>
F-20
<PAGE> 60
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
AS OF
---------------------------
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets:
Cash and Marketable Securities............................ $ 1,306,880 $ 96,384
Other Current Assets...................................... 1,106,648 215,499
-----------
Total Current Assets........................................ 2,413,528 311,883
Other Assets................................................ 771,644 491,337
----------- ---------
Total Assets...................................... $ 3,185,272 $ 803,220
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities......................................... $ 695,628 $ 283,343
Other Liabilities........................................... 117,701 26,962
-----------
Total Liabilities........................................... 813,329 310,305
----------- ---------
Minority Interest in Consolidated Subsidiary................ $ 159,343 --
Stockholder's Equity:
Common Stock, $.001 par value; 40,000,000 shares
authorized, issued and outstanding as of June 30....... 5,581 3,513
Preferred Stock, $.001 par value; 10,000,000 shares
authorized, issued and outstanding as of June 30....... -- 50,000
Additional Paid-In Capital................................ 3,222,518 874,415
Retained Earnings......................................... (1,015,498) (435,013)
----------- ---------
Total Stockholder's Equity........................ 2,212,600 492,915
----------- ---------
Total Liabilities and Stockholder's Equity........ $ 3,185,272 $ 803,220
=========== =========
</TABLE>
F-21
<PAGE> 61
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................... $1,703,125 $ 623,090
Operating Expenses.......................................... 2,006,936 435,716
Net Income (Loss) from Operations........................... (303,811) 187,374
Other Income (Expense)...................................... 53,098 5,016
Net Income (Loss)........................................... (250,713) 192,390
Earnings Per Share (EPS)
Basic earnings (loss) per share........................... $ (.0407) $ 0.0688
Diluted earnings (loss) per share......................... $ (.0289) $ 0.0688
Basic Shares Outstanding.................................... 6,154,700 2,798,000
Diluted Shares Outstanding.................................. 8,663,100 2,798,000
</TABLE>
F-22
<PAGE> 62
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS
ENDED ENDED
JUNE 30, DECEMBER 31,
1999 1998
----------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Revenues.................................................... $1,703,125 $1,042,646
Operating Expenses.......................................... 2,006,936 1,193,077
Net Income (Loss) from Operations........................... (303,811) (150,431)
Other Income (Expense)...................................... 53,098 (135,645)
Net Income (Loss)........................................... (250,713) (286,076)
Earnings Per Share (EPS)
Basic earnings (loss) per share........................... $ (.0407) $ (0.090)
Diluted earnings (loss) per share......................... $ (.0289) $ (0.090)
Basic Shares Outstanding.................................... 6,154,700 3,165,500
Diluted Shares Outstanding.................................. 8,663,100 3,170,500
</TABLE>
F-23
<PAGE> 63
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income.................................................. $ (250,713) $ 192,390
Adjustments to Reconcile net income to net cash provided by
operating activities:
Depreciation and Amortization............................. 23,114
Changes in Accounts Receivable............................ 119,187 (30,050)
Changes in Other Assets................................... 84,750 (59,781)
Changes in Trade Payables and Other Liabilities........... 412,285 (139,250)
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 388,623 (36,691)
Cash Flows from Investing Activities:
Additions to Property and Equipment....................... (301,261) (76,916)
Other Additions........................................... (1,136,935)
NET CASH USED IN INVESTING ACTIVITIES............. (1,438,196) (76,916)
Cash Flows from Financing Activities:
Principal Payments on Capital Lease Obligations........... 91,081
Minority Interest in Subsidiaries......................... 159,000 --
Proceeds from Issuing Common Stock........................ 1,612,525 212,418
Proceeds from Issuing Preferred Stock..................... (50,000)
NET CASH USED IN FINANCING ACTIVITIES............. 1,812,606 212,418
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 763,033 98,811
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...... 17,888 2,997
CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 780,921 $ 101,808
</TABLE>
F-24
<PAGE> 64
1ST NET TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS
ENDED ENDED
JUNE 30, DECEMBER 31,
1999 1998
----------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income.................................................. $ (250,713) $(286,076)
Adjustments to Reconcile net income to net cash provided by
operating activities:
Depreciation and Amortization............................. 23,114 27,457
Changes in Accounts Receivable............................ 119,187 (157,701)
Changes in Other Assets................................... 84,750 31,995
Changes in Trade Payables and Other Liabilities........... 412,285 29,230
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 388,623 (355,095)
Cash Flows from Investing Activities:
Additions to Property and Equipment....................... (301,261) (127,224)
Other Additions........................................... (1,136,935) 89,767
NET CASH USED IN INVESTING ACTIVITIES............. (1,438,196) (37,457)
Cash Flows from Financing Activities:
Principal Payments on Capital Lease Obligations........... 91,081 (11,170)
Minority Interest in Subsidiaries......................... 159,000 --
Proceeds from Issuing Common Stock........................ 1,612,525 450,000
Proceeds from Issuing Preferred Stock..................... (50,000) (31,387)
NET CASH USED IN FINANCING ACTIVITIES............. 1,812,606 407,443
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 763,033 14,891
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...... 17,888 2,997
CASH AND CASH EQUIVALENTS, END OF YEAR............ 780,921 17,888
</TABLE>
F-25
<PAGE> 65
[CORDOVANO AND HARVEY, P.C. LETTERHEAD]
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
1ST NET TECHNOLOGIES, INC.
INDEPENDENT AUDITORS' REPORT
We have audited the balance sheet of 1st Net Technologies, Inc. as of
December 31, 1997 and the related statements of operations, shareholders' equity
and cash flows 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.
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 1st Net Technologies, Inc.
as of December 31, 1997 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Cordovano and Harvey, P.C.
Cordovano and Harvey
Denver, Colorado
March 31, 1998
F-26
<PAGE> 66
1ST NET TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash...................................................... $ 2,997
Accounts receivable....................................... 140
Marketable securities (Note C)............................ 167,402
Automobiles held for sale (Note F)........................ 400,000
Prepaid expenses.......................................... 50
---------
TOTAL CURRENT ASSETS.............................. 570,589
---------
PROPERTY AND EQUIPMENT,
net of accumulated depreciation of $2,369 (Note D)........ 14,692
ORGANIZATION COSTS,
net of accumulated amortization of $519................... 3,932
INTANGIBLE ASSETS,
net of accumulated amortization of $3,000 (Note E)........ 17,000
---------
$ 606,213
=========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable, related party (Note B).................. $ 12,500
Accounts payable.......................................... 5,263
Accrued expenses.......................................... 6,435
Demand notes payable (Note G)............................. 43,900
Due to related parties (Note B)........................... 71,900
Deferred revenue (Note G)................................. 100,102
---------
TOTAL CURRENT LIABILITIES......................... 240,100
---------
COMMITMENTS (Note H)........................................ --
SHAREHOLDER'S EQUITY
Common stock, $.001 par value, 50,000,000 shares
authorized, 2,798,000 shares issued
and outstanding........................................ 2,798
Capital paid in excess of par............................. 506,252
Retained deficit.......................................... (142,937)
---------
TOTAL SHAREHOLDER'S EQUITY........................ 366,113
---------
$ 606,213
=========
</TABLE>
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-27
<PAGE> 67
1ST NET TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUE
Consulting and internet hosting........................... $ 26,057
Web page design........................................... 19,923
Consulting in exchange for stock (Notes H & I)............ 95,368
----------
TOTAL REVENUE..................................... 141,348
----------
OPERATING EXPENSES
Salary, wages and payroll taxes........................... 158,510
Advertising............................................... 46,399
Internet.................................................. 31,232
Professional fees......................................... 20,725
Rent, paid to an affiliate (Note B)....................... 14,410
Telephone................................................. 8,717
Depreciation and amortization............................. 5,888
Gain on sale of marketable securities (Note C)............ (34,981)
Other..................................................... 32,765
----------
283,665
----------
(LOSS) FROM OPERATIONS............................ (142,317)
----------
OTHER INCOME (EXPENSE)
Interest.................................................. (620)
----------
(620)
----------
NET (LOSS) BEFORE INCOME TAXES.................... (142,937)
INCOME TAXES (NOTE J)
Current benefit........................................... (47,104)
Deferred expense.......................................... 47,104
----------
$ (142,937)
==========
Basic loss per common share................................. $ (0.07)
==========
Basic weighted average common shares outstanding............ 2,090,333
==========
</TABLE>
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-28
<PAGE> 68
1ST NET TECHNOLOGIES, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL
------------------ PAID IN EXCESS RETAINED
SHARES AMOUNT OF PAR DEFICIT TOTAL
--------- ------ -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996................ 1,800,000 $1,800 $ -- $ -- $ 1,800
Shares issued for cash in public stock
offering (Note K)....................... 598,000 598 148,902 -- 149,500
Costs associated with public stock
offering................................ -- -- (42,250) -- (42,250)
Shares issued for cash (Note K)........... 400,000 400 399,600 -- 400,000
Net loss for the year ended December 31,
1997.................................... -- -- -- (142,937) (142,937)
--------- ------ -------- --------- ---------
BALANCE, DECEMBER 31,1997....... 2,798,000 $2,798 $506,252 $(142,937) $ 366,113
========= ====== ======== ========= =========
</TABLE>
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-29
<PAGE> 69
1ST NET TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net (loss)................................................ $(142,937)
Transactions not requiring cash:
Depreciation and amortization.......................... 5,888
Gain on sale of marketable securities (Note C)......... (34,981)
Changes in current assets and current liabilities:
Receivables, marketable securities, and other current
assets................................................ (167,592)
Accounts payable, working capital advances and accrued
expenses.............................................. 240,100
---------
NET CASH (USED IN) OPERATING ACTIVITIES........... (99,522)
---------
INVESTING ACTIVITIES
Deposit paid for purchase of automobiles (Note F)......... (400,000)
Purchases of property and equipment....................... (18,330)
Payments for organization costs........................... (2,651)
Payments for intangible assets (Note E)................... (10,000)
---------
NET CASH (USED IN) INVESTING ACTIVITIES........... (430,981)
---------
FINANCING ACTIVITIES
Proceeds from the issuance of common stock (Note K)....... 549,500
Costs associated with public stock offering............... (16,000)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 533,500
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,997
Cash and cash equivalents, beginning of year................ --
---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 2,997
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest and income taxes................... $ --
</TABLE>
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-30
<PAGE> 70
1ST NET TECHNOLOGIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1997
CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the useful lives, estimated to be five years,
beginning at the time the assets are placed in operation.
Upon retirement or disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations. Repairs and maintenance are charged to expense
as incurred and expenditures for additions and betterments are capitalized.
INTANGIBLE ASSETS
Intangible assets, recorded at cost, consist of the tradename, internet
shopping mail, and organizational costs associated with the formation of the
Company. Amortization is calculated by the straight-line method over a period of
five years for all. intangible assets. Amortization expense for the year ended
December 31, 1997 was $3,519.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue upon delivery of the product or completion
of the services. Bad debt expense for the year ended December 31, 1997 was
minimal and management believes all accounts receivable recorded at December 31,
1997 will be collected, therefore no allowance for bad debts was established at
December 31, 1997.
INCOME TAXES
The Company reports income taxes in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes", which requires the
liability method in accounting for income taxes. Deferred tax assets and
liabilities arise from the difference between the tax basis of an asset or
liability and its reported amount on the financial statements.
INCOME TAXES CONCLUDED
Deferred tax amounts are determined by using the tax rates expected to be
in effect when the taxes will actually be paid or refunds received, as provided
under currently enacted law. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Income tax
expense or benefit is the tax payable or refundable, respectively, for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
MARKETABLE SECURITIES
Marketable securities consist of equity securities, or the rights to obtain
equity securities (options), in the common stock of three different publicly
traded companies, whose common stock is thinly traded over-the-
F-31
<PAGE> 71
1ST NET TECHNOLOGIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DECEMBER 31, 1997
counter. All equity securities are considered "trading" under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, unrealized gains and
losses on equity securities are reflected in operations.
Market value, as of the balance sheet date, is determined by management's
estimate, which is based on quoted market prices, percentage of trading volume
and the most recent prices the Company has received for sales of the security.
Net realized gains or losses are determined on the specific identification cost
method and are charged to operations.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128). SFAS
128 specifies the computation, presentation, and disclosure requirements of
earnings per share and supersedes Accounting Principles Board Opinion No. 5,
"Earnings Per Share". SFAS 128 requires dual presentation of basic and, where
applicable, diluted earnings per share. Basic earnings per share, which excludes
the impact of common stock equivalents, replaces primary earnings per share.
Diluted earnings per share, which utilizes the average market price per share or
ending market price per share when applying the treasury stock method in
determining common stock equivalents, replaces fully-diluted earnings per share.
SFAS 128 is effective for the Company in 1997. However, the Company has a simple
capital structure for the period presented and, therefore, there is no effect on
the earnings per share presented due to the Company's adoption of SFAS 128.
F-32
<PAGE> 72
1ST NET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A: NATURE OF ORGANIZATION
1st Net Technologies, Inc. ("the Company") was originally organized as Snow
Eagle Investments, Inc. under the laws of the State of Colorado on May 14, 1990.
In April 1997, the Company purchased certain assets, and tradename of an
internet shopping mall doing business as 1st NetZing Mall. Subsequent to the
acquisition of the assets and tradename of 1st NetZing Mall, the Company changed
its name from Snow Eagle Investments, Inc. to 1st Net Technologies, Inc. Prior
to its acquisition of 1st NetZing Mall the Company had no operations.
The Company is in the Internet commerce and services business offering
goods and services to Internet consumers except, during 1997, the purchase of
automobiles for resale, was not in the Company's ordinary course of business.
See Note F.
NOTE B: RELATED PARTY TRANSACTIONS
During the period ended December 31, 1997, the Company entered into an
agreement with an affiliate whereby the affiliate would provide $30,000 in
consulting services to the Company, of which $15,000 is included in the
accompanying financial statements as offering costs. As of December 31, 1997,
$12,500 for services, related to the consulting agreement, is included in
accounts payable. The affiliate also advanced the Company approximately $60,000
during 1997, of which the Company repaid $25,500 during the year. The remaining
balance of $34,500 is included in the accompanying financial statements as due
to related parties. In addition, during the year ended December 31, 1997 the
Company subleased office space from the affiliate, for total rent payments of
$14,410.
Further, in 1997 the Company entered into an agreement with an employee to
sell to the employee certain investments the Company holds in marketable
securities. At December 31, 1997 the securities were not delivered to the
employee, and the amount received for the securities, $25,000 is recorded as a
current liability, due to related parties.
During the period ended December 31, 1997, an officer advanced the Company
a total of $3,900 of which $1,500 was repaid. The remaining $2,400 is included
in the accompanying financial statements as due to related parties.
The Company issued notes payable to a shareholder. The note is due on
demand and bears interest at 12%. The amount outstanding on the note at December
31, 1997 was $1 0,000 and is recorded in due to related parties.
In 1996, prior to the Company commencing operations, the Company issued
1,800,000 shares of its $.001 common stock to an officer (whom has subsequently
resigned) of the Company for services related to the organization of the
Company. The services were valued at $1,800 and are included in the accompanying
financial statements as part of organization costs.
NOTE C: MARKETABLE SECURITIES
The Company's marketable securities are considered trading and had a fair
market value of $167,402 on December 31, 1997. The following is a summary of the
marketable securities at December 31, 1997:
<TABLE>
<S> <C>
Equity securities........................................... $ 78,422
Common stock options (Note H)............................... 88,980
Gross unrealized gains...................................... --
Gross unrealized losses..................................... --
--------
Equity securities at fair value................... $167,402
========
</TABLE>
F-33
<PAGE> 73
1ST NET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The following is a summary of investment earnings recognized in income
during the year ended December 31, 1997:
<TABLE>
<S> <C>
Realized gains.............................................. $ 57,818
Realized (losses)........................................... (23,337)
--------
Dividends earned............................................ 500
--------
Gain (loss) on marketable securities........................ $ 34,981
========
</TABLE>
NOTE D: PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997, consists of:
<TABLE>
<S> <C>
Computer Equipment.......................................... $13,360
Office furniture & equipment................................ 3,701
-------
Total............................................. 17,061
Accumulated depreciation.................................... (2,369)
-------
14,692
=======
</TABLE>
Depreciation expense for the year ended December 31, totaled $2,369.
NOTE E: ACQUISITION OF 1ST NETZING MALL
On April 7, 1997, the Company acquired certain assets of 1st Net
Technologies, LLC which included the tradename, trademarks, clients and
programming code of an internet shopping mall known as 1st NetZing Mall for
$10,000 in cash and a promissory note payable to the seller for $1 0,000 for a
total purchase price of $20,000. At December 31, 1997 the promissory note was
paid in full.
The transaction was recorded as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Once determining the fair value of tangible and
intangible assets acquired, the full purchase price was allocated to the
acquisition of the tradename, trademarks and technology associated with the
internet shopping mall. The $20,000 is recorded as an intangible asset and is
being amortized over five years on a straight-line basis.
NOTE F: AUTOMOBILES HELD FOR SALE
On November 5, 1997 the Company entered into an agreement to purchase eight
automobiles from Laforza Automobiles, Inc. ("LaForza") for which the Company
paid $400,000. The vehicles are to be delivered to the Company beginning no
later than March 30, 1998, with final delivery no later than August 30, 1998.
Management plans to resell the vehicles. Further, the Company entered into a
consulting agreement with Laforza whereby the Company would provide internet
consulting and web page design services to Laforza. -- See Note H.
F-34
<PAGE> 74
1ST NET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE G: DEMAND NOTES PAYABLE
Demand notes, non-related parties, consisted of the following at December
31, 1997:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Note payable, twelve percent interest rate, unsecured....... $20,000
Note payable, twelve percent interest rate, unsecured....... 15,000
Note payable no interest rate, unsecured.................... 5,000
Note payable no interest rate, unsecured.................... 3,900
-------
Total demand notes payable........................ $43,900
=======
</TABLE>
NOTE H: COMMITMENTS AND CONTINGENCIES
OPERATING LEASE -- The Company entered into an operating lease, whereby it
subleases office space from an affiliate. The sublease commenced February 1,
1997 and expires February 1, 1998. Rent during 1997 was $14,409. Future minimum
lease payments total $4,780 due in 1998.
DEFERRED REVENUE -- As discussed in Note F, the Company received, in
advance, payment for an 18-month consulting contract with LaForza, beginning
August 13, 1997. Payment was in the form of an option, fully exercisable at $.50
per share, to purchase 150,000 free-trading shares of Laforza Automobiles, Inc.
During the period August 13, 1997 through December 31, 1997, the Company
exercised 50,000 of the options, for which it sold the shares for approximately
$56,745. The Laforza common stock is thinly traded over-the-counter. The
determination of the value of the options, in management's opinion was more
readily determinable than the value of the services to be provided over eighteen
months. Therefore, based on the cash proceeds from the sale of the common stock
received from the exercise of the options, the 150,000 options have been valued
at $133,470. At December 31, 1997, approximately twenty-five percent of the
consulting contract was completed, therefore the Company has recorded revenue of
$33,368 and has deferred the remaining $100,102 until the earnings process has
been completed.
In accordance with SFAS No. 115, the Company evaluated the market value of
the unexercised options at December 31, 1997 and determined that market
approximated the Company's recorded book value.
NOTE I: SIGNIFICANT CUSTOMERS
During 1997, sales to one customer accounted for approximately 53% of the
Company's total revenue. Further, 67% of the Company's revenue was in the form
of common stock received for payment versus cash sales. During the year, the
Company received approximately $109,243 in cash received for the sale of the
securities. The excess of the proceeds received for the stock over the Company's
recognized revenue for which stock was the payment, totaled $13,875 and is
included in gain on the sale of marketable securities.
NOTE J: INCOME TAXES
A reconciliation of the U.S. statutory federal income tax rate to the
effective tax rate is as follows:
<TABLE>
<S> <C>
U.S. federal statutory graduated rate....................... 26.08%
State income tax rate, net of federal benefit............... 6.87%
Net operating loss for which no tax benefit is currently
available................................................. (32.95)%
------
--%
======
</TABLE>
At December 31, 1997 deferred taxes consisted of a net tax asset due to
operating loss carryforwards of $47,104 which was fully allowed for in the
valuation allowance of $47,104. The valuation allowance offsets the
F-35
<PAGE> 75
1ST NET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
net deferred tax asset for which there is no assurance of recovery. The change
in the valuation allowance for the year ended December 31, 1997 totaled $47,104.
Net operating loss carryforwards will expire in 2012.
The valuation allowance will be evaluated at the end of each year,
considering positive and negative evidence about whether the asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax asset is no longer
impaired and the allowance is no longer required.
NOTE K: PUBLIC OFFERING
Beginning on June 5, 1997 the Company circulated a confidential offering
memorandum whereby it offered the sale of a maximum of 600,000 shares of its
$.001 par value common stock at $.25 per share. The Company offered its stock on
a best efforts basis. The Company sold 598,000 shares for proceeds of $149,500.
The offering was self-underwritten. The shares were sold pursuant to an
exemption from registration provided by Rule 504 of Regulation D under the
Securities Act of 1933.
On October 28, 1997, the Company's board of directors approved the issuance
of an additional 400,000 shares of the Company's common, stock, to be sold at an
offering price of $1.00 per share. The offering was made under Regulation D,
Rule 504 of the Securities Act of 1933 and California Code 25102(f). The shares
were sold to one shareholder for $400,000.
F-36
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Children's Technology Group, Inc.
We have audited the accompanying balance sheet of The Children's Technology
Group, Inc. R Tummy Busters, Inc. (a development stage company) (the "Company")
as of April 30, 1999, and the related statements of operations, stockholders'
equity and cash flows for the period from July 30, 1998 (date of inception)
through April 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 the Company as of April 30,
1999, and the results of its operations and its cash flows for the period from
July 30, 1998 (date of inception) through April 30, 1999 in conformity with
generally accepted accounting principles.
As discussed in Note 1, the Company has been in the development stage since
its inception on July 30, 1998. Realization of a major portion of the assets is
dependent upon the Company's ability to raise funds through debt or equity
offerings, and the success of future operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
CORBIN & WERTZ
Irvine, California
September 20, 1999
F-37
<PAGE> 77
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
APRIL 30, 1999
ASSETS
<TABLE>
<S> <C>
Cash........................................................ $ 465,650
Computer equipment.......................................... 1,007
Licenses.................................................... 8,000,000
Other assets................................................ 15,000
----------
Total assets...................................... $8,481,657
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued liabilities....................................... $ 176,000
----------
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 630,000 shares issued and outstanding...... 630
Additional paid-in capital................................ 8,353,484
Deficit accumulated during the development stage.......... (48,457)
----------
Total stockholders' equity........................ 8,305,657
----------
Total liabilities and stockholders' equity........ $8,481,657
==========
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-38
<PAGE> 78
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JULY 30, 1998 (DATE OF INCEPTION)
THROUGH APRIL 30, 1999
<TABLE>
<S> <C>
Selling, general and administrative expenses................ $ 47,657
Provision for taxes......................................... 800
--------
Net loss.................................................... $(48,457)
========
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-39
<PAGE> 79
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 30, 1998 (DATE OF INCEPTION)
THROUGH APRIL 30, 1999
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
----------------- PAID-IN DURING THE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEVELOPMENT STAGE EQUITY
-------- ------ ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, July 30, 1998.............. -- $ -- $ -- $ -- $ --
Issuance of common stock to founders
on August 30, 1998................. 870,000 870 2,480 -- 3,350
Common stock issued in connection
with a private placement for $0.40
per share dated August 10, 1998:
December 1998................... 77,750 78 31,022 -- 31,100
January 1999.................... 5,500 5 2,195 -- 2,200
February 1999................... 79,250 79 31,621 -- 31,700
Common stock issued in connection
with a private placement for $2.00
per share dated March 3, 1999, less
offering costs of $249,236......... 467,500 468 685,296 -- 685,764
Fair market value of warrants issued
on April 19, 1999.................. -- -- 7,600,000 -- 7,600,000
Surrender of common stock from
founders on April 22, 1999......... (870,000) (870) 870 -- --
Net loss............................. -- -- -- (48,457) (48,457)
-------- ----- ---------- -------- ----------
Balances, April 30, 1999............. 630,000 $ 630 $8,353,484 $(48,457) $8,305,657
======== ===== ========== ======== ==========
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-40
<PAGE> 80
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JULY 30, 1998 (DATE OF INCEPTION)
THROUGH APRIL 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (48,457)
Increase in accrued liability............................. 20,000
---------
Net cash used in operating activities..................... (28,457)
---------
Cash flows from investing activities:
Purchases of computer equipment........................... (1,007)
Purchases of licenses..................................... (400,000)
Other assets.............................................. (15,000)
---------
Net cash used in investing activities..................... (416,007)
---------
Cash flows provided by financing activities:
Net proceeds from issuance of stock, net of offering costs
of $93,236............................................. 910,114
---------
Net increase in cash........................................ 465,650
Cash at beginning of period................................. --
---------
Cash at end of period....................................... $ 465,650
=========
Supplemental disclosure of cash flow information --
Cash paid during period for:
Interest............................................... $ --
=========
Income and franchise taxes............................. $ --
=========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the current period ended April 30, 1999, the Company issued warrants to
purchase 4,000,000 shares of common stock to a third party valued at
$7,600,000, in connection with a license agreement (see Notes 2 and 3).
The Company accrued offering costs of $156,000, which were paid after April
30, 1999 through the issuance of shares and options (see Note 6).
See independent auditors' report and accompanying notes to financial statements
F-41
<PAGE> 81
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JULY 30, 1998 (DATE OF INCEPTION)
THROUGH APRIL 30, 1999
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and Operations
The Children's Technology Group, Inc. f.k.a. Tummy Busters, Inc. (a
development stage company) (the "Company"), a Nevada corporation, was
incorporated on July 30, 1998. The Company has been in the development stage
since its formation and is primarily engaged in raising capital, obtaining
financing, advertising and promoting the Company, and administrative functions.
The Company intends to develop and operate online communities for children.
Basis of Presentation
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the normal
course of business. The Company's losses from operations through April 30, 1999
and lack of operational history, among other matters, raise substantial doubt
about its ability to continue as a going concern. The Company intends to fund
operations through debt and equity financing arrangements which management
believes will be sufficient to fund its capital expenditures, working capital
requirements and other cash requirements for the fiscal year ending December 31,
1999 (see Note 6).
Use of Estimates
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
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management include the
realizability of mergers of other long-lived assets. Actual results could differ
from those estimates.
Risks and Uncertainties
The Company is a start up company subject to the substantial business risks
and uncertainties inherent to such an entity, including the potential risk of
business failure.
Computer Equipment
Computer equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful life of 3 years.
Betterments, renewals, and extraordinary repairs that extend the lives of
the assets are capitalized; other repairs and maintenance charges are expensed
as incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and the gain or loss on disposition is
recognized in current operations.
Licenses and Other Assets
Licenses and other assets are stated at cost. Amortization is computed
using the straight-line method over the estimated useful lives of the related
agreements ranging from 3 to 10 years.
F-42
<PAGE> 82
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JULY 30, 1998 (DATE OF INCEPTION)
THROUGH APRIL 30, 1999
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)
Long Lived Assets
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,"
which requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In accordance with the provisions of SFAS No. 121, the Company
regularly reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Based on its analysis, the Company believes that no impairment of
the carrying value of its long-lived assets existed at April 30, 1999.
Common Stock -- Reverse Stock Splits
In April 1999, the Company's board of directors approved a one-for-four
reverse stock split. Par value remained at $0.001 per share. All references
throughout these financial statements to number of shares, per share amounts,
stock option data and market prices of the Company's common stock have been
restated to reflect the reverse stock split.
Stock-Based Compensation
During 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which defines a
fair value based method of accounting for stock-based compensation. However,
SFAS 123 allows an entity to continue to measure compensation cost related to
stock and stock options issued to employees using the intrinsic method of
accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting method of APB 25 must make pro forma disclosures of net income
(loss), as if the fair value method of accounting defined in SFAS 123 had been
applied. The Company has elected to account for its stock-based compensation to
employees under APB 25.
Revenue Recognition
The Company will recognize revenue during the month in which services are
provided.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
NOTE 2 -- LICENSES
In April 1999, the Company entered into an exclusive license agreement with
1st Net Technologies, Inc. ("1st Net") whereby 1st Net granted to the Company a
worldwide exclusive license to use the Crayon
F-43
<PAGE> 83
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JULY 30, 1998 (DATE OF INCEPTION)
THROUGH APRIL 30, 1999
NOTE 2 -- LICENSES (CONTINUED)
Crawler web browser and community software programs for $400,000 in cash and a
5% royalty on related sales (not less than $25,000 per month). The license
agreement expires April 2002.
In April 1999, the Company entered into a non-exclusive license agreement
with 1st Net whereby 1st Net granted to the Company a worldwide non-exclusive
license agreement to use the Mindwalker Series web browser and community
software programs in exchange for a warrant to purchase 4,000,000 shares of the
Company's common stock valued at $7,600,000 (see Note 3), a 5% royalty on
related sales and an exclusive license to the Company's R-Site web site. The
license agreement expires April 2002.
NOTE 3 -- WARRANTS
From time to time, the Company issues warrants pursuant to various
agreements. Under the terms of a license agreement (see Note 2), the Company
granted 1st Net a warrant to purchase 4,000,000 shares of the Company's stock at
an exercise price of $.10 per share (fair market value at the date of warrant
was granted estimated by the Company to be $2.00 at April 19, 1999 based on
recent stock sales to third parties). The warrants vested on the date of grant
and were exercised subsequent to the period ended April 30, 1999 (see Note 6).
The fair value of the warrant granted during the period ended April 30, 1999 to
1st Net was estimated using the Black-Scholes option-pricing model on the date
of grant using the following assumptions: (i) no dividend yield, (ii) average
volatility of 0%, (iii) weighted-average risk-free interest rate of
approximately 6.2% and (iv) expected life of one month. As a result the Company
capitalized $7,600,000 pursuant to the license agreement at April 19, 1999.
NOTE 4 -- STOCKHOLDERS' EQUITY
In August 1998, the Company issued to its founder 870,000 shares of common
stock for $3,350. These shares were subsequently surrendered to the Company on
April 22, 1999.
In August 1998, the Company issued 162,500 shares of its common stock for
$65,000 in cash.
In March 1999, the Company issued 467,500 shares of its common stock for
$685,764 in cash, net of offering costs of $249,236.
NOTE 5 -- INCOME TAXES
The provision for income taxes for the period ended April 30, 1999 consists
of minimum state taxes only.
Significant reconciling items between the Company's reported income tax
provision and the benefit computed by applying the U.S. Federal income tax rate
of 34% to loss before provision for income taxes result primarily from changes
in the valuation allowance for deferred tax assets and state income taxes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at April 30, 1999 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 16,500
Less valuation allowance.................................. (16,500)
--------
Net deferred tax assets................................ $ --
========
</TABLE>
F-44
<PAGE> 84
THE CHILDREN'S TECHNOLOGY GROUP, INC.
F.K.A. TUMMY BUSTERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JULY 30, 1998 (DATE OF INCEPTION)
THROUGH APRIL 30, 1999
NOTE 6 -- SUBSEQUENT EVENTS
In May 1999, 1st Net exercised its warrant to purchase 4,000,000 shares of
common stock at $0.10 per share in connection with a License Agreement (see
Notes 2 and 3) and acquired an 86% interest in the Company.
In May 1999, the Company entered into an agreement with an executive
recruiting firm (the "Firm") whereby the Firm will offer its services for
recruiting key management personnel in exchange for $30,000 in cash and common
stock valued at $30,000 upon completion of the agreement.
In September 1999, the Company is contemplating an offering of 1,000,000
units at $4.00 per unit. Each unit may consist of one share of Series A
convertible preferred stock and warrant to purchase one share common stock at an
exercise price of $8.00 per share, subject to approval by the stockholders.
In August 1999, the Company issued 10,000 shares of common stock (with a
fair market value at $2.00 per share) to a third party for consulting services
rendered and accrued at April 30, 1999.
In August 1999, the Company issued 25,000 shares of common stock (with a
fair market value of $2.00 per share) to an officer for fund raising activities
rendered and accrued at April 30, 1999.
In August 1999, the Company issued options to purchase 100,000 shares of
common stock (at a price of $1.00 per share) for fund raising activities
rendered and accrued at April 30, 1999.
In August 1999, pursuant to an employment agreement, the Company issued
options to purchase 100,000 shares of common stock (at a price of $1.00 per
share) to an officer.
F-45
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Articles Of Amendment And Restatement Of 1st Net
Technologies, Inc. Filed On December 11, 1998(1)
3.2 Amended And Restated Bylaws Of 1st Net Technologies, Inc.
Dated June 24, 1999(1)
4.1 Specimen Of 1st Net Technologies, Inc.'s Common Stock
Certificate(1)
4.2 1st Net Technologies, Inc.'s Series "A" Preferred Warrant
Agreement(1)
4.3 Warrant Agreement By And Between 1st Net Technologies, Inc.
And Children's Technology Group Dated April 19, 1999(1)
*4.4 Warrant Agreement Dated April 1, 1999 By And Between 1st Net
Technologies, Inc. And No Fear, Inc.(1)
*4.5 Warrant Agreement Dated April 1, 1999 By And Between 1st Net
Technologies, Inc. And Eric Baker(1)
4.6 1st Net Technologies, Inc.'s 1999 Incentive Stock Option
Plan(1)
4.7 1st Net Technologies, Inc.'s 1999 Non-Qualified Stock Option
Plan Dated January 4, 1999(1)
10.1 Investment Banking Agreement Dated As Of March 1, 1998 By
And Between 1st Net Technologies, Inc. And Entrepreneur
Investments, LLC(1)
*10.2 Internet Marketing And Joint Venture Agreement By And
Between 1st Net Technologies, Inc. And Nicklebys.com, Inc.
Dated January 14, 1999(1)
*10.3 Web Site Development, Service And Revenue Sharing Agreement
By And Between 1st Net Technologies, Inc. And No Fear, Inc.
Dated April 1, 1999(1)
*10.4 Profit Sharing Agreement By And Between 1st Net
Technologies, Inc. And Netsol USA, Inc. Dated July 6,
1999(1)
10.5 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And MC32, Inc. Dated As Of August 15,
1998(1)
10.6 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And Spirit 32 Development Corporation
Dated As Of January 22, 1999(1)
10.7 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And SSP Management Corporation Dated As
Of January 26, 1999(1)
10.8 Technology License Agreement By And Between 1st Net
Technologies, Inc. And Children's Technology Group, Inc.
Dated As Of April 19, 1999(1)
10.9 Technology License Agreement By And Between 1st Net
Technologies, Inc. And Children's Technology Group, Inc.
Dated As Of May 1, 1999(1)
10.10 Employment Agreement By And Between 1st Net Technologies,
Inc. And Lawrence K. Kimball Dated April 19, 1999(1)
10.11 Outside Director's Agreement By And Between 1st Net
Technologies, Inc. And Steven J. Santamaria Dated May 1,
1999(1)
10.12 Standard Industrial/Commercial Multi-Tenant Lease By And
Between 1st Net Technologies, Inc. And Entrepreneur
Investments, LLC Dated June 1, 1998(1)
10.14 Consulting Agreement By And Between 1st Net Technologies,
Inc. And Mariah Communications, Inc. Dated As Of August 15,
1998(1)
10.15 Internet Web Site Development Agreement Dated November 9,
1998 By And Between 1st Net Technologies, Inc. And La Jolla
Fresh Squeezed Coffee, Inc.(1)
11 Statement Re: Computation Per Share Earnings(1)
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
16.1 Letter From Cordovano & Harvey, P.C. Regarding Change In
Certifying Accountant(1)
16.2 Letter From Bewley, Argy & Company Regarding Change In
Certifying Accountant(1)
21 Subsidiaries Of 1st Net Technologies, Inc.(1)
23.1 Consent Of Corbin & Wertz(1)
24 Power Of Attorney(1)
27 Financial Data Schedule(2)
</TABLE>
- ---------------
* Confidential Treatment Requested. These exhibits omit certain confidential
information that has been filed separately with the Commission.
(1) Previously filed.
(2) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 780,921 17,888
<SECURITIES> 525,959 78,496
<RECEIVABLES> 139,207 154,752
<ALLOWANCES> (6,795) (20,285)
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,413,528 311,883
<PP&E> 503,110 199,222
<DEPRECIATION> (49,984) (23,246)
<TOTAL-ASSETS> 3,185,272 803,220
<CURRENT-LIABILITIES> 695,628 283,343
<BONDS> 117,701 26,962
0 0
0 50,000
<COMMON> 5,581 3,513
<OTHER-SE> 3,222,518 874,415
<TOTAL-LIABILITY-AND-EQUITY> 3,185,272 803,220
<SALES> 0 0
<TOTAL-REVENUES> 1,703,125 1,042,646
<CGS> 0 0
<TOTAL-COSTS> 2,006,936 1,193,077
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 53,098 (135,645)
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (250,713) (286,076)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (250,713) (286,076)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (250,713) (286,076)
<EPS-BASIC> (.041) (.090)
<EPS-DILUTED> (.029) (.090)
</TABLE>
