U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1999
[ ] Transition report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
.................to...................
Commission file number 333-60487
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
(Exact name of small business issuer in its charter)
California 95-4597370
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
320 S. Garfield Avenue, Suite 318, Alhambra, California 91801
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(626) 588-3660
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Number of shares outstanding of the issuer's classes of common equity, as of
March 31, 1999:
5,750,000 Shares of Common Stock (One Class)
Transitional Small Business Disclosure Format: Yes No X
--- ---
This document consists of 18 pages, excluding exhibits. The Exhibit
Index is on page 16.
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
INDEX
Part I - Financial Information
Item 1. Financial Statements ......................................3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K .........................16
Signatures ...................................................................18
2
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CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
Balance Sheets
<CAPTION>
June 30
Assets 1997 1998 March 31, 1999
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,078 81,636 17,611
Certificates of deposit -- 300,000 --
Accounts receivable 9,560 7,477 5,815
Notes receivable 419,570 -- --
Other current assets 5,901 -- --
----------- ----------- -----------
Total current assets 439,109 389,113 23,426
Property and equipment, net 97,524 78,821 54,999
Other assets 4,583 4,562 4,562
----------- ----------- -----------
$ 541,216 472,496 82,987
=========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 44,552 47,502 51,426
Deferred revenue 4,275 3,965 --
----------- ----------- -----------
Total current liabilities 48,827 51,467 51,426
Stockholders' equity:
Preferred stock, no par value. Authorized 10,000,000
shares; none issued and outstanding -- -- --
Common stock, no par value. Authorized 40,000,000
shares; issued and outstanding 4,750,000 shares
at
June 30, 1997 and 5,750,000 shares as of June 30,
1998 and as of March 31, 1999, respectively 1,050,000 1,550,000 1,550,000
Additional paid-in capital 30,000 30,000 30,000
Accumulated deficit (587,611) (1,158,971) (1,548,439)
----------- ----------- -----------
Net stockholders' equity 492,389 421,029 31,561
Commitments and contingency (note 6)
$ 541,216 472,496 82,987
=========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
4
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<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
Statements of Operations
<CAPTION>
Year ended June 30 Nine months ended March 31, 1999
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues - subscriber's fees $ 35,900 65,722 54,168 41,146
Operating costs and expenses:
Cost of revenues 123,104 139,680 106,636 85,210
General and administrative expenses 550,004 512,849 374,253 362,990
----------- ----------- ----------- -----------
Operating loss (637,208) (586,807) (426,721) (407,054)
----------- ----------- ----------- -----------
Other income (expenses):
Loss on sale of fixed assets -- (91) -- --
Interest income 50,397 16,338 10,829 17,586
----------- ----------- ----------- -----------
Loss before income taxes (586,811) (570,560) (415,892) (389,468)
----------- ----------- ----------- -----------
Income taxes 800 800 -- --
----------- ----------- ----------- -----------
Net loss $ (587,611) (571,360) (415,892) (389,468)
----------- ----------- ----------- -----------
Basic and diluted net loss per share $ (0.14) (0.11) (0.09) (0.07)
=========== =========== =========== ===========
Weighted-average shares used in
computation of net loss per share 4,223,178 5,281,889 4,793,478 5,533,944
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
Statements of Stockholders' Equity
<CAPTION>
Common stock Net
------------ Additional Accumulated stockholders'
Shares Amount paid-in capital deficit equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 -- $ -- -- -- --
Issuance of common
stock at inception 4,750,000 1,050,000 -- -- 1,050,000
Deferred compensation
related to stock options -- -- 30,000 -- 30,000
Net loss -- -- -- (587,611) (587,611)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 4,750,000 $1,050,000 30,000 (587,611) 492,389
Issuance of common stock 1,000,000 500,000 -- -- 500,000
Net loss -- -- -- (571,360) (571,360)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 5,750,000 $1,550,000 30,000 (1,158,971) 421,029
Net loss (unaudited) -- -- -- (389,468) (389,468)
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999
(unaudited) 5,750,000 $1,550,000 30,000 (1,548,439) 31,561
========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
Statements of Cash Flows
<CAPTION>
Year ended June 30 Nine Months Ended March, 31, 1999
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (587,611) (571,360) (415,892) (389,468)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 24,632 38,623 24,718 23,823
Compensation expense related
to stock options 30,000 -- -- --
Loss on sale of fixed assets -- 91 -- --
Provision for doubtful accounts -- 3,600 -- --
Changes in assets and liabilities:
Accounts receivable (9,560) (1,517) (2,890) 1,661
Other current assets (5,901) 5,901 5,901 --
Other assets (4,583) 21 21 --
Accounts payable and accrued expenses 44,552 2,950 (19,655) 3,924
Deferred revenue 4,275 (310) (640) (3,965)
----------- ----------- ----------- -----------
Net cash used in operating activities (504,196) (522,001) (408,437) (364,024)
----------- ----------- ----------- -----------
Cash flows from investing activities
Proceeds from maturities of (payment to) -- (300,000) (400,000) 300,000
certificates of deposit
Purchase of property and equipment (122,156) (23,421) (23,991) --
Proceeds from sale of property and equipment -- 3,410 -- --
Net proceeds received from (paid to) note receivable (419,570) 419,570 419,570 --
----------- ----------- ----------- -----------
Net cash provided by
(used in) investing activities (541,726) 99,559 (4,421) 300,000
----------- ----------- ----------- -----------
Cash flows provided by financing activities
- proceeds from issuance of common stock 1,050,000 500,000 500,000 --
----------- ----------- ----------- -----------
Net increase in cash and
cash equivalents 4,078 77,558 87,142 (64,024)
Cash and cash equivalents at beginning of period -- 4,078 4,078 81,636
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,078 81,636 91,220 17,611
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 800 1,600 -- --
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
7
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
Notes to Financial Statements
(Information as of March 31, 1999 and for the nine months ended
March 31, 1998 and 1999, respectively is unaudited)
(1) Summary of Significant Accounting Policies
Cyber Merchants Exchange, Inc. d.b.a. C-ME.com (the Company and formerly
known as World Wide Magic Net, Inc.) is a developer of
business-to-business electronic commerce network, whereby a retailer can
go on-line, review product information and purchase items through the
network developed and maintained by the Company. The Company was
incorporated in July 1996 and commenced its operations in November 1996.
(a) Unaudited Interim Financial Information
The interim financial statements of the Company for the nine
months ended March 31, 1998 and 1999, included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC. Certain information and note disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations relating to
interim financial statements.
In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
financial position of the Company at March 31, 1999, and the
results of its operations and its cash flows for the nine months
ended March 31, 1998 and 1999.
(b) Liquidity and Going Concern
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the
accompanying financial statements, the Company has experienced
operating losses and negative cash flows from operating activities
since inception.
Management's plans include obtaining additional financing from
outside sources, increasing revenues through collaborative
arrangements with other companies and other marketing efforts, and
controlling operating costs and expenses. There can be no
assurance that the Company will realize such plans.
These matters raise substantial doubt about the Company's ability
to continue as a going concern. Accordingly, the accompanying
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(c) Revenue Recognition
Subscriber's fees represent revenues generated through a one-time,
nonrefundable set-up fee and monthly hosting fees. Revenues are
recognized after the services have been rendered and no
significant vendor obligation remains. Unearned but billed
revenues are deferred.
(d) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with
an original maturity of three months or less to be cash and cash
equivalents.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation of
property and equipment is calculated on the straight-line method
over the estimated useful lives of the assets, generally three to
five years. Leasehold improvements are amortized over the shorter
of the amortized useful lives or lease term.
8
<PAGE>
(f) Income Taxes
The Company accounts for income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes reflect the impact of
"temporary differences" between assets and liabilities for
financial reporting purposes and such amounts as measured by tax
law and regulations.
(g) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
(h) Stock Options
SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income disclosure
for employee stock option grants over the vesting period as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma disclosure provisions of SFAS
No. 123.
(i) Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of financial
statements for earlier periods to be provided for comparative
purposes. The Company has not determined the manner in which it
will present the information required by SFAS No. 130 in its
annual financial statements for the year ending June 30, 1999. The
Company's total comprehensive loss for all periods presented
herein would not have differed from those amounts reported as net
loss in the statements of operations.
In June 1997, the FASB issued SFAS No. 131,"Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards for the way companies report information
about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The disclosures
prescribed by SFAS No. 131 will be effective for the year ending
June 30, 1999. The Company has determined that it does not have
any separately reportable business segments as of June 30, 1998.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 98-1,
"Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company
does not expect that the adoption of SOP No. 98-1 will have a
material impact on its financial statements.
(j) Net Loss per Share
Basic and diluted net loss per share are computed using the
weighted average number of outstanding shares of common stock.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration,
prior to the anticipated effective date of an initial public
offering, are included in the calculation of basic and diluted net
loss per share as if they were outstanding for all periods
presented.
Net loss per share for the nine months ended March 31, 1999 and
the year ended June 30, 1998, respectively does not include the
effect of 145,000 stock options and 160,000 stock options,
respectively, and 658,889 common stock warrants because their
effects are anti-dilutive.
Net loss per share for the nine months ended March 31, 1998 does
not include the effect of 155,000 stock options and 638,889 common
stock warrants because their effects are anti-dilutive.
9
<PAGE>
Net loss per share for the year ended June 30, 1997 does not
include the effect of 155,000 stock options because their effects
are anti-dilutive.
(2) Property and Equipment
A summary of property and equipment, at cost is as follows:
June 30
-----------------------
1997 1998 March 31, 1999
--------- --------- ---------
(Unaudited)
Leasehold improvements $ 4,351 4,351 4,351
Furniture and fixtures 20,026 20,844 20,844
Computer equipment and software 81,509 98,579 98,579
Office equipment 16,270 16,270 16,270
--------- --------- ---------
122,156 140,044 140,044
Less accumulated depreciation
and amortization (24,632) (61,223) (85,046)
--------- --------- ---------
$ 97,524 78,821 54,998
========= ========= =========
(3) Notes Receivable
At June 30, 1997, the notes receivable represent $417,020 due from the
Company's President, bearing an interest rate at 8% and $2,550
interest-free loans to other employees. All of the notes receivable were
repaid in fiscal year 1998.
(4) Income Taxes
Income tax expense is comprised of the minimum state franchise tax. The
difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. Federal statutory
rate of 34% is due to a valuation allowance for any benefit from net
operating losses.
The Company has gross deferred tax assets relating principally to tax
effects of net operating loss carryforwards. In assessing the
recoverability of deferred tax assets, management considers whether it is
more likely than not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods in which the deferred tax items are recognizable for tax
reporting purposes, management does not believe it is more likely than
not the Company will realize the benefits of these differences at March
31, 1999, June 30, 1998 and 1997. As such, management has recorded a
valuation allowance for the full amount of deferred tax assets at March
31, 1999, June 30, 1998 and 1997.
At March 31, 1999, the Company has available net operating losses of
approximately $1,400,000 for Federal income tax purposes to offset future
taxable income, if any, and expire at various dates through the year
2013. However, the utilization of net operating losses may be subject to
certain limitations as prescribed by Section 382 of the Internal Revenue
Code.
(5) Stockholders' Equity
On January 29, 1998, the Company's Board of Directors approved a 1-for-2
reverse split of the Company's common stock. All common share amounts in
the accompanying financial statements have been adjusted for all periods
presented. On March 24, 1998, the Company amended its articles of
incorporation to have authorized capital stock of 40,000,000 shares of
common stock and 10,000,000 shares of preferred stock.
On October 15, 1997, the Company entered into an agreement with
Burlington Coat Factory Warehouse Corporation (BCF). Under the agreement,
the Company and BCF will jointly develop a network whereby participants
of the network can do business through Internet. BCF agrees to assist in
marketing and promoting this
10
<PAGE>
network service to its vendors. In return, BCF is free to use the network
designed and maintained by the Company and will share a certain portion
of the fee revenue generated by this network with the Company. In
addition, the Company granted a warrant to BCF to allow BCF to purchase
up to 10% of the outstanding shares of common stock of the Company on a
fully diluted basis, subject to certain conditions as defined in the
warrant agreement. The common stock if issued to BCF will have a
registration right same as other shares may be issued in a public
offering.
The Company's stock option plan provides for the granting of stock
options to employees. The Company has reserved 250,000 shares of common
stock for issuance under the plan. The terms and conditions of grants of
stock options are determined by the Board of Directors. Generally,
one-half of the granted option is exercisable after the employee's second
year of employment. The remaining option is exercisable after the end of
the employee's third year of employment.
A summary of stock option activity is as follows:
Weighted average
Number of shares exercise price
---------------- --------------
Balance at June 30, 1996 -- $ --
Options granted 155,000 .21
Options terminated -- --
Options exercised -- --
-------- ----
Balance at June 30, 1997 155,000 .21
Options granted 15,000 .40
Options terminated (10,000) .40
Options exercised -- --
-------- ----
Balance at June 30, 1998 160,000 .21
Options granted (unaudited) 15,000 .40
Options terminated (unaudited) (30,000) .40
Balance at March 31, 1999 (unaudited) 145,000 .19
======== ====
At March 31, 1999 , there were 112,500 shares of options exercisable.
As of March 31, 1999, all options, except for options granted to 2
employees for 75,000 shares of common stock, were granted at an exercise
price equal to the fair value of the common stock, and accordingly, no
compensation cost has been recognized for these stock options in the
financial statements. Compensation expense aggregating $30,000 was
recorded for the issuance of the options with an exercise price below
fair market value of the common stock.
The Company applies APB Opinion No.25 in accounting for its Plan. Had the
Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No.123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
March 31
----------------------
1999 1998
--------- ---------
As reported $(389,468) (415,892)
Proforma (395,000) (422,000)
========= =========
11
<PAGE>
The compensation cost was calculated under the minimum-value method using
the assumptions of a three-year weighted average expected life of the
options and a 6% risk-free interest rate.
(6) Commitments and Contingency
The Company leases office space under a noncancelable operating lease
that expires on October 27, 1999.
Future minimum lease payments under noncancelable operating leases as of
March 31, 1999 are as follows:
Year ending June 30:
1999 $ 9,492
2000 12,248
-------
Total minimum lease payments $ 21,740
=======
The Company has been named as a defendant, along with Burlington Coat
Factory Warehouse (BCF), in a lawsuit brought by Stanley Rosner (Rosner),
an individual. In March 1998, Rosner commenced an action in the Supreme
Court of the State of New York alleging breach of oral and written
contracts between the Company and Rosner and between BCF and Rosner in
1997. Rosner claims that he is due certain fees from both the Company and
BCF for services allegedly rendered in connection with certain
transactions involving the Company and BCF. These transactions and
alleged transactions relate to the Internet services that the Company may
provide to BCF, and contemplated transactions arising from vendors of
BCF. Rosner claims that he is due damages in an amount not less than
$5,000,000 plus unspecified punitive damages from both the Company and
BCF. The Company intends to vigorously defend this action. The Company
believes that it is not obligated to make any payments to Rosner and has
meritorious defenses to all of Rosner's allegations.
However, if held liable for the entire amount, this would have a
materially adverse effect upon the Company.
In December 1998, the Company obtained a written commitment to extend
line of credit from a bank. The bank committed to provide a $300,000 line
of credit, bearing an interest at the bank's prime rate plus 1.5%. The
line of credit will expire on June 30, 1999. The Company committed to
issue a warrant of 20,000 shares of the Company's common stock to the
bank. The warrant will have a term of five years and an exercise price
equal to the initial public offering price of the Company's common stock.
12
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this quarterly
report for the nine months ended March 31, 1999. This quarterly report contains
certain forward-looking statements and the Company's future operation results
could differ materially from those discussed herein.
Introduction
The Company was formed in July, 1996 to develop, establish, and market
web-based E-commerce solutions for retailers and their supply chains. These
solutions take the form of three interlocking services: (1) a Virtual Trade Show
("VTS"), (2) an Internet Sourcing Network ("ISN"), and (3) Internet EDI (which
is still in the developmental stages). The business strategy of the Company is
focused on establishing collaborative relationships with U.S.-based retailers
wherein the Company will provide the retailer with an ISN in return for their
assistance in marketing the ISN to their supply chains vendors. After
establishing ISN's for these collaborative retail customers, the Company intends
to use the Internet's near-global accessibility to expand these retailers'
supply chains to foreign producing countries, primarily in the Pacific Rim.
During the development stage of the Company, the Company's primary
activities have involved developing its VTS and ISN software and database (the
"Software"), organizing its sales force, and marketing its VTS and ISN. Research
and development costs are expensed as incurred. Selling expenses consist
primarily of salaries, commissions, and administrative costs associated with the
Company's payroll and marketing personnel. General and administrative expenses
include the costs of consultants and other administrative functions of the
Company.
Financial Condition and Results of Operations:
The Company has had two years and nine months of operation.
Nine months ended March 31, 1998 and 1999
The following discussion sets forth information for the nine months
ended March 31, 1999 compared with the nine months ended March 31, 1998. This
information has been derived from unaudited interim financial statements of the
Company contained elsewhere in the quarterly report and reflects, in
Management's opinion, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
these periods. Results of operations for any interim period are not necessarily
indicative of results to be expected from the full fiscal year.
For the nine months ended March 31, 1999, the Company had revenues
totaling $41,146 representing a decrease of $13,022 from the same period a year
ago, consisting primarily of fees paid by users of the Company's VTS, web design
services and ISN's users. The Company's operating expenses for the nine months
ended March 31, 1999, totaling $448,200, consisted of $85,210 for the cost of
revenue and $362,990 for general administration and selling expenses,
representing a decrease of $32,689 from the nine months ended March 31, 1998.
Consequently, the Company experienced a net loss of $389,468 for the nine months
ended March 31, 1999.
Status of Operations
Originally, the Company's business model was to solicit vendors to
display products on its VTS. Accordingly, the Company solicited approximately
1,800 vendors who had shown some interest in joining the Company's VTS program.
The Company was able to complete 600 websites for the vendors who showed
interest in the VTS; however, only 250 of the 600 vendors eventually committed
to the Company's services. Based on this experience, the Company
13
<PAGE>
decided to change its business model. The Company's current business model
focuses on the retailer and forming strategic retail relationships. Pursuant to
this new business model, the Company plans to utilize the marketing power of its
retail customers to attract subscriptions from vendors. Under this new business
model, the Company believes that the collection rate for any accounts will
improve.
Participation Agreements
On October 15, 1997, the Company entered into a Participation Agreement
with Burlington Coat Factory Warehouse Corporation ("BCF"). Under the terms of
the Participation Agreement, BCF would assist the Company in marketing the ISN
to BCF's vendors in return for a portion of the monthly hosting fees. The
Company is required to pay BCF 50 percent of the monthly hosting fees collected
from vendors who join BCF's ISN as well as 50 percent of the additional monthly
hosting fees collected from vendors who decide to join BCF's ISN as a secondary
ISN. The Company is also required to pay BCF 33 percent of the monthly hosting
fees collected from vendors who appear on BCF's vendor list but wish to join
another ISN the Company has created for a different retailer as well as 33
percent of monthly hosting fee collected from foreign (non-US) vendors who join
BCF's ISN. Moreover, the Company is required to pay BCF 5 percent of all monthly
hosting fees collected from US vendors of products in the apparel, linens,
juvenile furniture, and footwear industries who did not join BCF's ISN.
On January 27, 1998, the Company entered into a similar Participation
Agreement with Family Bargain Corporation ("FBAR"). Under the terms of the
Participation Agreement, FBAR would assist the Company in marketing the ISN to
FBAR's vendors in return for a portion of the monthly hosting fees. Unlike the
Company's Participation Agreement with BCF, FBAR will only receive 33 percent of
the monthly hosting fees collected from vendors who join FBAR's ISN.
Income Taxes
Since its inception, the Company has been taxed as a C corporation.
Accordingly, the Company has available as of March 31, 1999 approximately
$1,548,439 in net operating loss carry forwards which can be used to offset
future federal taxable income. However, the utilization of net operating losses
may be subject to certain limitations as prescribed by Section 382 of the
Internal Revenue Code.
Liquidity and Capital Resources
Since its inception, the Company's principal source of capital has been
private placements of equity. Specifically, through the use of private
placements, the Company was able to raise $1,550,000 in capital through the
issuance of 11.5 million shares of Common Stock described as follows:
a. From August, 1996 to January, 1997, the Company raised $1,050,000 in
an initial private placement of 9.5 million shares of Common Stock. 4.5 million
shares were sold to Frank S. Yuan, founder and President of the Company, for
$50,000. The remaining 5 million shares were sold at $0.20 per share.
b. From November, 1997 to March, 1998, the Company raised an additional
$500,000 through a second private placement of 2 million shares of Common Stock.
All the shares were sold for $0.25 per share.
In March, 1998, the Board of Directors and majority of the shareholders
approved a 1-for-2 reverse stock split. The reverse stock split would also
affect the stock options held by key employees. After giving effect to the
1-for-2 reverse stock split, the Company had a total of 5.75 million shares of
Common Stock outstanding.
The Company experienced losses from operations of $389,468 for the nine
months ended March 31, 1999. As of March 31, 1999, the Company had $17,611 in
cash and cash equivalents, and $31,561 in net stockholders' equity. In December
1998, the Company obtained a written commitment for a line of credit from a
bank. The bank committed to provide a $300,000 line of credit, bearing interest
at the bank's prime rate plus 1.5%. The line of credit will expire on June 30,
1999. The Company committed to issue a warrant of 20,000 shares of the Company's
common stock to the bank. The warrant will have a term of five years and have an
exercise price equal to the initial public offering price of the Company's
common stock. Since December 31, 1998, the Company has continued to experience
losses from operations
14
<PAGE>
and increases in net deficit. Management estimates the Company's monthly burn
rate to be between $20,000 and $40,000. As for February and March, 1998, the
Company's burn rate was $75,497 and $41,049, respectively. Accordingly, the
Company needs to raise capital to continue its development strategy. Management
expects this capital requirement to be met from the proceeds of the upcoming IPO
if an amount greater than the Minimum is raised. If the Company is unable to
raise the Minimum amount in the upcoming IPO1, it may look to raise capital
through other means, or it may be unable to continue as a going concern.
In the event of unanticipated developments during the next 12 months,
or to satisfy future funding requirements, the Company will fund its operation
through public or private offerings of securities, with collaborative or other
arrangements with corporate partners or from other sources. Additional financing
may not be available when needed or on terms acceptable to the Company. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate certain of its development programs and curtail its
development strategy. To the extent the Company raises additional capital by
issuing securities, dilution to investors purchasing shares in the upcoming IPO
may result.
LEGAL PROCEEDINGS
The Company has been named as a defendant, along with BCF, in a lawsuit
brought by Stanley Rosner ("Rosner"), an individual. In March 1998, Rosner
commenced an action in the Supreme Court of the State of New York, Nassau
County, New York, (Index No. 98-006524). Rosner alleges breach of oral and
written contracts between the Company and Rosner and between BCF and Rosner in
1997. Rosner claims that he is due certain fees from both the Company and BCF
for services allegedly rendered in connection with certain transactions and
alleged transactions involving the Company and BCF. Such transactions and
alleged transactions relate to the Internet services that the Company may
provide to BCF and contemplated transactions arising from vendors of BCF. Rosner
claims that he is due damages in an amount not less than $5,000,000 plus
unspecified punitive damages from both the Company and BCF. Rosner's attorney
has agreed that the Company and BCF are entitled to have the venue of the
lawsuit transferred from Nassau County, New York to New York County (Manhattan),
New York; Rosner's attorney also agreed to arrange for the transfer. Rosner's
attorney also agreed that the Company's and BCF's responsive papers would be due
no later than ten (10) days after notice of such transfer had been served. To
date, the Company has not received notice of the proposed transfer of venue and
has not filed its responsive papers or otherwise moved against the complaint.
The Company intends to vigorously defend this action. The Company
believes that it is not obligated to make any payments to Rosner and has
meritorious defenses to all of Rosner's allegations. However, if the Company
does not prevail and a significant damage award against the Company is granted,
this would have a material adverse effect upon the Company.
- --------
1 As of July 9, 1999, the Company has raised approximately $2.6 million in the
IPO.
15
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
1.1 Best Efforts Compensation Agreement with Ace Diversified Capital,
Inc.*
1.2 Best Efforts Compensation Agreement with Drake & Co.*
1.3 Best Efforts Compensation Agreement with U.S. Pacific Financial
Services*
1.4 Best Efforts Compensation Agreement with Travis Morgan
Securities*
1.5 Best Efforts Compensation Agreement with Corporate Investment
Group*
1.6 Best Efforts Compensation Agreement with AM Razo & Company
Securities, Inc.*
1.7 Best Efforts Compensation Agreement with the Malachi Group*
1.8 Best Efforts Compensation Agreement with Tradeway Securities
Group, Inc.*
1.9 Supplements to Best Efforts Compensation Agreements*
1.10 Form of Warrant for Best Efforts Compensation Agreements*
3.1 Articles of Incorporation*
3.2 Bylaws*
4.1 Article II of Bylaws (Reference is made to Exhibit 3.2)*
4.3 Warrant held by Burlington Coat Factory Warehouse Corporation*
10.2 Lease of registrant's facilities*
10.2 Participation Agreement with Burlington Coat Factory Warehouse
Corporation*
10.3 Contract with Family Bargain Corporation*
10.4 Employment contract with David Rau*
10.5 Escrow Agreement with Union Bank of California*
10.6 1996 World Wide Magic Net, Inc. Stock Option Plan*
27.1 Financial Data Schedule (included herein)
(b) Reports on Form 8-K
None
*Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
Amendment No. 5 dated May 6, 1999, and incorporated herein by this reference.
16
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
(Registrant)
Date: 7/12/99 /s/ Frank S. Yuan
------------------------------------ -----------------------------------
Frank S. Yuan, President, CEO
Date: 7/12/99 /s/ David Rau
------------------------------------ -----------------------------------
David Rau, Chief Financial Officer
17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 17,611
<SECURITIES> 0
<RECEIVABLES> 5,815
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,426
<PP&E> 140,044
<DEPRECIATION> 85,046
<TOTAL-ASSETS> 82,987
<CURRENT-LIABILITIES> 51,426
<BONDS> 0
0
0
<COMMON> 31,561
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 82,987
<SALES> 41,146
<TOTAL-REVENUES> 41,146
<CGS> 85,210
<TOTAL-COSTS> 85,210
<OTHER-EXPENSES> 362,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (389,468)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (389,468)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
