As Filed with the Securities and Exchange Commission on ____________, 1999
Registration No. 333-60487
- --------------------------------------------------------------------------------
Rule 424(b)(3)
Registration No. 333-60487
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Cyber Merchants Exchange, Inc. d.b.a. C-ME.com
(Name of small business issuer in its charter)
-----------------
California 95-4597370
(State or other jurisdiction) (I.R.S. Employer Identification No.)
7370
(Primary Standard Industrial Classification Code)
Frank S. Yuan
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
(626) 588-3660
(Name, Address and Telephone Number of Agent for Service)
-----------------------
Copies to:
William D. Evers, Esq.
Rafael Aguirre-Sacasa, Esq. Lynnwood Jen
Evers & Hendrickson, LLP Ace Diversified Capital, Inc.
155 Montgomery, 12th Floor 8855 E. Valley Blvd., Suite 205
San Francisco, CA 94104 Rosemead, CA 91770-1753
Phone No.: (415) 772-8100 Tel: (626) 292-3800
Fax No.: (415) 772-8101 Fax: (626) 292-3818
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
- -------------------------------- -------------------- ---------------------- ---------------------- -------------------
Proposed Maximum
Title of each class Amount to be Aggregate Offering Amount of
of Securities to be Registered Registered Price Per Share Price (1) Registration Fee
- -------------------------------- -------------------- ---------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 2,500,000 $8.00 $20,000,000 $5,900
Total $20,000,000 $5,900
- -------------------------------- -------------------- ---------------------- ---------------------- -------------------
<FN>
(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended (the "Securities Act"), solely for purposes of calculating the
registration fee.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
Prospectus
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
2,500,000 SHARES
COMMON STOCK
All of the 2,500,000 shares of common stock (the "Common Stock")
offered hereby (the "Offering") are being sold on a best efforts basis by Cyber
Merchants Exchange, Inc. d.b.a. C-ME.com ("C-ME" or the "Company"), directly and
through a selling group organized by the Company and Ace Diversified Capital,
Inc. See "Plan of Distribution." Prior to this Offering, there has been no
public market for the Company's common stock; therefore, the public offering
price has been determined by the Company. The offering price for the Common
Stock will be $8.00 per share. See "Risk Factors -- No Prior Market; Possible
Volatility of Share Price; and Arbitrary Determination of Selling Price.
Officers, directors and beneficial stockholders of the Company will be permitted
to purchase the Common Stock offered herein in order to reach the Minimum of
125,000 shares ($1,000,000) of the Company's Common Stock (the "Minimum"). See
"Risk Factors -- Eligibility of Officers, Directors, and Beneficial Stockholders
to Participate in the Offering so as to reach the Minimum Resale." The Company
has applied to have the Common Stock approved for quotation on the National
Association of Securities Dealers Automatic Quotation system under the symbol
"CMEE" and the American Stock Exchange under the symbol "ME."
Until the completion of the Offering, all subscription payments will be
deposited into an escrow account at Union Bank of California, Los Angeles,
California. If the Minimum is not obtained within one hundred and eighty (180)
days of the date of the commencement of this Offering, all proceeds deposited in
the escrow account will be promptly refunded in full with interest, without any
deduction for expenses. See "Risk Factors -- Loss of Use of Monies for up to one
hundred and eighty (180) days." The Company reserves the right to reject any
offer to purchase shares in whole or in part. See "Plan of Distribution."
The common stock offered hereby involves a high degree of risk. See
"Risk Factors."
<TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<CAPTION>
- -------------------------------------------- ------------------------- ----------------------- ---------------------
Underwriting
Discounts and Proceeds to the
Price to Public (1) Commissions (2) Company (3)
- -------------------------------------------- ------------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Per Share: $ 8.00 $ 0.56 $ 7.44
- -------------------------------------------- ------------------------- ----------------------- ---------------------
Total Minimum (125,000 Shares): $ 1,000,000 $ 70,000 $ 930,000
- -------------------------------------------- ------------------------- ----------------------- ---------------------
Total Maximum (2,500,000 Shares): $20,000,000 $1,400,000 $18,600,000
- -------------------------------------------- ------------------------- ----------------------- ---------------------
<FN>
(1) The Price to Public has been arbitrarily determined by the Company. Among
factors considered in determining the public offering price were the
Company's current financial condition, its future prospects, the state of
the markets for its services, the experience of management, and the
economics of the industry in general. See "Risk Factors -- Arbitrary
Determination of Selling Price."
(2) The shares are being sold on a best efforts basis through a selling group
organized by the Company and Ace Diversified Capital, Inc. See "Plan of
Distribution."
(3) Before deducting estimated expenses of $150,000 payable by the Company,
including registration fees, escrow agent fees, costs of printing, copying
and postage and other offering costs, in addition to legal and accounting
fees.
</FN>
</TABLE>
Ace Diversified Capital, Inc.
The date of this Prospectus is May 14, 1999
2
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this Offering other than those contained in
this Prospectus and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person in any jurisdiction in which such
offer or solicitation is unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any date subsequent to
the date hereof.
This Prospectus is available in an electronic format, upon appropriate request
from a resident of those states in which this Offering may lawfully be made. The
Company will transmit promptly, without charge, a paper copy of this Prospectus
to any such resident upon receipt of a request.
REFERENCE DATA
Upon the date of this Prospectus, the Company became subject to the
informational filing requirements of the Securities Exchange Act of 1934, as
amended ("Exchange Act") for its current fiscal year. Upon completion of this
Offering the Company may be required to register under the Exchange Act and
continue to file required annual and quarterly reports.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by an independent public accounting firm
after the end of its fiscal year. The Company's fiscal year ends on June 30. In
addition, the Company will send shareholders quarterly reports with unaudited
financial information for the first three quarters of each fiscal year.
The Company was incorporated under the laws of the state of California,
on July 16, 1996. The Company's corporate office and principal place of business
is located at 320 S. Garfield Avenue, Suite 318, Alhambra, California 91801. The
Company's telephone number is (626) 588-3660 or (888) 564-6263 (JOIN CME). The
Company's fax number is (626) 588-3655. The Company's E-mail address is
[email protected] and its World Wide Web site is http://www.c-me.com.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains certain statements of a
forward-looking nature relating to future events or future financial performance
of the Company. Prospective investors are cautioned that such statements are
only predictions and involve risks and uncertainties. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business", as well as those discussed
elsewhere in this Prospectus.
The Company
Cyber Merchants Exchange, Inc. d.b.a. C-ME.com (the "Company" or
"C-ME") is a business-to-business electronic commerce company serving the
worldwide retail industry. The Company provides its customers with an
Internet-based communications system that enables retailers and suppliers to
conduct negotiations and to facilitate electronically the purchase and sale of
merchandise on a global basis. Using proprietary software, the Company maintains
a secure yet open electronic network that enables retailers to conduct on-line
communications and transactions with their vendors and suppliers. This
communications and trading process is generally referred to in the retail
industry as "sourcing." High volumes of product and transaction data are
exchanged between retailers and their suppliers in order for buy-sell
transactions to be initiated, negotiated and closed. This critical sourcing
process typically requires a substantial amount of time and attention from both
the retail merchandise buyer and the salesperson of a manufacturer or
distributor. The Company's related software products and services are designed
to make this sourcing function substantially more effective and efficient, and
to facilitate the workflow management of retail industry buyers and sellers.
When utilized to their full capability and employed on a wide-scale
basis, the Company believes that its products are capable of reducing a
retailer's cost of sourcing and, more importantly, substantially expediting the
sourcing process and more effectively managing the quality performance of
vendors. Consequently, the Company's software products and services enable
merchandising, manufacturing and shipping decisions to be made by all parties at
dates closer to the selling season, helping such parties make better informed
and more timely business decisions. The objective is to enable clients that
source product through the Company's software products and services to obtain
lower costs, increased sales volume, faster inventory turnover, fewer
involuntary price discounts and improved margins and profitability.
The C-ME System
The Company's Internet-based system was designed to meet the general
merchandising needs of retailers and their vendor suppliers, with an initial
emphasis placed on the bargain, or "off-price," apparel market segment. The
Company has an immediate opportunity to gain a dominant share of the bargain
apparel supply-chain automation market. To that end, the Company has developed
three interrelated services:
Virtual Trade Show ("VTS") - The Company's VTS system provides apparel
buyers and sellers with a continuous, revolving product forum showcase, and
gives the Company a dynamic gateway presence on the World Wide Web. The VTS
functions in two capacities:
1) The system houses, for general marketing purposes, vendors' products in
easily recognizable standard industry categories. The showcases contain
complete descriptions, vital information (sizes, shipping, cost, etc.), and
digital photographs of the products.
2) The system allows buyers to search for products efficiently. The VTS
features the Company's Product Driven Search Engine which retrieves
products by category, such as shoes, men's outerwear, or women's sweaters.
In addition, through the use of the Company's focused broadcasting or
"FOCASTING" software (see "Business"), retail buyers have the ability to
customize their product searches by having selected product categories
broadcasted, or "pushed," to their computers with daily-changing products.
Buyers must log on with a password in order to utilize the VTS FOCASTING
software.
Internet Sourcing Network ("ISN") - The ISN features the Company's
FOCASTING and Dynamic End-User Profile System, or DEPS, software applications
(see "Business"). The ISN is a private network which uses the Internet as its
communication medium and links the Company's retail customers with their
vendors. The ISN's primary function is to assist retail buyers in sourcing
merchandise for their product divisions. The network is accessible only by the
Company's retail customers.
The primary benefit of the ISN is that it improves retailers'
coordinated buying practices. Because the FOCASTING software allows each buyer
to create specific product profiles in the ISN, a senior buyer can set up
profiles to encompass product areas falling within the buying responsibility of
a junior buyer. For example, the General Merchandising Manager's profile would
have access to all products that are the responsibility of buyers in his
division. This would encompass a particular buyer's profile. The General
Merchandising Manager and the buyer would see the same products on their
respective computer screens. If the General Merchandising Manager sees a product
he likes which the buyer might not have noticed, he can call it to the buyer's
attention. This creates oversight and allows for coordinated buying strategies.
The ISN promotes interactivity between the retailer and vendor by
handling buyer product inquiries and vendor responses via e-mail. The buyer has
the ability to send either bulk e-mails to all vendors within an industry or
personal e-mails to selected vendors on the ISN. These may be used to apprise
vendors of the amount of merchandise a buyer can order during a given period
("Open to Buy"), of special products being sought, or to request more specific
information on a product. The ISN can also be used to announce business critical
information. Via the ISN, the retailer can apprise vendors of buying divisions'
merchandise planning and buying goals. These interactive features give the
Company's retail customers ready access to diverse merchandise and makes vendors
an active part in merchandising decisions, thus giving both the retailer and the
vendor a competitive advantage over companies not using the ISN.
The ISN provides vendors with a pro-active means of showing their
products to major retailers, in contrast to passive marketing vehicles such as
paper catalogs or samples sent to buyers by mail. The Company standardizes all
of its vendors' product line sheets and catalogs in a uniform format which
retail buyers are familiar with and will use daily. This current source of
information ensures prices, terms, styles, and materials are easy to compare
between vendors. This uniform ISN format shortens the time it takes for buyers
to view product availability and pricing. At any time, the vendor may add or
remove displayed products on its own or with the assistance of the Company. When
marketing products through the ISN, vendors will no longer have to devote
resources to supporting these retailers' formerly distinct buying formats.
Internet Electronic Data Interchange ("EDI") - The Internet EDI system,
under development by the Company, is designed to promote back-end efficiencies
between the retailer and its supply chain. Management expects the Company's
Internet EDI to supplant EDI systems currently being used by off-price retailers
and their vendors, and to complement mass merchant and national chain retailers
supply chain automation systems.
The Company will incorporate standard EDI functions into its Internet
EDI. With the Company's Internet EDI, retailers may send purchase orders to
their vendors; send invoice, packing list, and shipping information to
retailers; all done in "real-time." All of the electronic documents may be
accompanied by digitized product photos to identify the order with the product.
This feature is designed to reduce confusion and mistakes in retailers'
accounting, receiving, and returns departments. Internet EDI may also provide a
retailer with quality assurance by matching the purchased item with the item
displayed on the ISN with that on the digitally generated purchase order and
invoice.
Business Development Strategy
Initially, the Company will focus its retailer-centric approach to
target off-price retailers. The Company has focused its entire range of services
towards automating the time-intensive and costly sourcing methods still being
used by off-price retailers and providing these retailers' vendors with an
effective Web-based tool to market their products. Moreover, if the Company's
system gains a dominant share of this market, Management plans to incorporate a
transaction function into its services, thereby making the system a complete
sourcing-to-purchasing solution. This first step of the Company's business
strategy is designed to accumulate a critical mass of vendor data and product
information.
The Company's strategy is designed to enable it to provide a complete
front-end Web-based sourcing and production system for retailers and their
supply chain vendors. The Company plans to develop system enhancements that will
enable it to serve not only as a sourcing resource but also as a complete
closed-loop system that will integrate the entire supply chain architecture.
That is, the Company's services may be designed to help retailers with
distribution from planning, scheduling, delivery, freight management, trade
processing, cross-docking, receiving, processing, factoring, and warehouse
management. In addition, the Company's services may close the loop with a
complete back-end solution from order management and fulfillment to inventory
management (including administration and replenishment) to store operations to
Point-of-Sale ("POS"). Additionally, a transaction function may be built into
the system whereby a commission may be charged to retailers when they purchase
merchandise displayed by vendors on the Company's services.
The Company believes it is in the interest of the retailers' buyers to
contact their vendors and encourage their vendors to subscribe to the Company's
services because of the potential buying efficiencies gained through the
Company's services. Interested vendors may either contact the Company to
subscribe or retailers may provide the Company with their vendor contacts. The
Company's sales and marketing professionals may then contact these vendors to
offer the Company's services.
Management has established contracts with several retailers. The most
significant of these are Burlington Coat Factory Warehouse Corporation ("BCF")
and Family Bargain Corporation ("FBAR"). See "Risk Factor-Reliance on
Collaborative Retail Customers."
4
<PAGE>
The Offering
Common Stock offered by the Company 125,000 shares (Minimum)
2,500,000 shares (Maximum)
Common Stock outstanding prior
to the Offering, as of December
31, 1998 5,750,000 shares(1)
Use of Proceeds If the Company raises the Minimum, it
intends to use the proceeds for expanding
its current operations (i.e., sales and
marketing of the Company's services,
advertising, establishing ISN's, up-grade
its existing computer infrastructure and
Internet access, and working capital
purposes). If the Company raises the
Maximum, it intends to use the proceeds for
expanding its current operations on a larger
scale. Such expansion would also include
extending its sales and marketing coverage
to the Pacific Rim, where many wholesalers
and manufacturers base their operations.
(1) The Company has 5,750,000 shares of Common Stock currently outstanding and
250,000 shares of common stock reserved for issuance upon exercise of currently
exercisable stock options. See "Stock Options." The Company also granted BCF a
warrant to purchase the Company's Common Stock, on a fully diluted basis, equal
to ten percent (10%) of the Company pursuant to the Warrant Agreement dated
October 15, 1997. See "Key Contracts and Strategic Partners--Burlington Coat
Factory Warehouse Corporation" and "Warrants."
<TABLE>
Summary Financial Data:
<CAPTION>
Statement of Operations Data: Year Ended June 30, Six months ended December 31,
-------------------------- -----------------------------
1997 1998 1997 1998
----------- ----------- ------------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 35,900 $ 65,722 $ 38,640 $ 29,380
Operating Loss (637,208) (586,807) (261,658) (262,933)
Interest Income(1) 50,397 16,338 9,963 17,066
Loss Before Income Taxes (586,811) (570,560) (251,695) (245,867)
Net Loss (587,611) (571,360) (251,695) (245,867)
Basic and Diluted Net Loss Per Share(2) (0.14) (0.11) (0.05) (0.04)
Weighted Average Shares Used in
Computation of Net Loss Per Share(3) 4,223,178 5,281,889 4,793,478 5,533,944
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data: June 30, 1998 December 31, 1998
--------------------------------------------- ---------------------------------------------
(Audited) (As Adjusted) (Unaudited) (As Adjusted)
Actual Minimum(4) Maximum(4) Actual Minimum(4) Maximum(4)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital .............. $ 337,646 $ 1,117,646 $18,787,646 $ 107,660 $ 887,660 $18,557,660
Total assets ................. $ 472,496 $ 1,252,496 $18,922,496 $ 208,244 $ 988,244 $18,658,244
Stockholders' Equity ......... $ 421,029 $ 1,201,029 $18,871,029 $ 175,162 $ 955,162 $18,625,162
<FN>
(1) Interest income from loan to Frank Yuan. See "Certain Transactions."
(2) See Note 1 of Notes to Financial Statements for the determination of shares
used in computed basic and diluted net loss per share.
(3) Based on shares outstanding as of December 31, 1998, excludes, as of
December 31, 1998, (i) 170,000 shares of common stock issuable upon
exercise of options outstanding under the Company's 1996 Stock Option Plan
at a weighted average exercise price of $0.22 per share and 80,000 shares
reserved for future issuance thereunder and (ii) 680,555 (if the Minimum is
sold) or 944,444 (if the Maximum is sold) shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted exercise price of $4.00
per share. See "Management -- Stock Options" and Notes 1 and 5 of Notes to
Financial Statements.
(4) Adjusted based upon the net proceeds to the Company from the sale of the
Shares. After deducting offering expenses and underwriting discounts and
commissions, the net proceeds are estimated to be approximately $780,000 if
the Minimum is sold and $18,450,000 if the Maximum is sold.
</FN>
</TABLE>
RISK FACTORS
An investment in the Shares being offered hereby involves a high degree
of risk as these are speculative securities. Consequently, in addition to the
other information set forth in this Prospectus, the following risk factors
should be considered carefully by potential investors in evaluating an
investment in the Company's Shares.
Future Capital Needs - Additional Funding Requirements
From its inception in July 1996, the Company funded its operations
primarily by raising $1,050,000 through the private sale of 9,500,000 shares of
common stock to a limited group of investors. In addition, prior to this
Offering, the Company raised approximately $500,000 through the private sale of
an additional 2,000,000 shares. In March 1998, the Board of Directors and
shareholders effected a 1-for-2 reverse stock split such that after the reverse
split a total of 5,750,000 issued shares and 250,000 shares reserved for stock
options, remain outstanding. Management believes that the Minimum amount
($1,000,000) together with cash flows from the sale of its Internet services are
sufficient to fund operations for the next 12 months and will enable the Company
to market its ISN and pursue additional strategic retail customers. If the
Maximum ($20,000,000) is raised, the Company expects to fund its current
operations, pursue the development of ISN's with Internet EDI capabilities, and
expand its operations into the Pacific Rim. Any excess funds will be held in
reserve until needed. Because this Offering is being conducted on a best-efforts
basis there can be no assurance that either the Minimum or Maximum amounts will
be raised. If the Minimum is not achieved, the Company will have to curtail
present operations significantly and seek alternative funding sources. In the
event the Company is unable to reach the Minimum within one hundred and eighty
(180) days of the date of the commencement of this Offering, the Company will
promptly refund all proceeds to the investors, with interest and without any
deduction for expenses. See "Use of Proceeds."
In the event the Company requires additional financing, it may seek
such financing through bank borrowing, debt or other equity financing. There can
be no assurance that such financing will be available to the Company on
acceptable terms, if at all. Any future equity financing may involve the sale of
additional shares of the Company's Common Stock on terms that have not yet been
established. These terms may be more favorable than those contained herein and
would result in dilution to the investors in this Offering.
6
<PAGE>
Limited Operating History; History of Losses
Although incorporated in July 1996, the Company started its operations
in November, 1996. The process of establishing and operating an early stage
Internet venture required the Company to incur substantial development costs at
a time when revenue sources were limited. As a result, the Company incurred
operating losses of $637,208 and $586,807 in the fiscal year ended June 30, 1997
and June 30, 1998, respectively. The revenues from the sale of the Company's
services prior to June 30, 1997 and June 30, 1998 totaled $35,900 and $65,722,
respectively. See "Selected Financial Data" and "Financial Statements." Because
the Company has only recently begun to market its ISN and collect subscription
fees, it is difficult to predict when, if ever, it will produce an operating
profit.
Viability of Company as Going Concern
Based on its proposed development strategy, and in the event the
Company only raises the Minimum, the Company anticipates that the net proceeds
from this Offering will be adequate to satisfy the Company's capital and
operational requirements for approximately twelve (12) months from the
termination of the Offering, at which time it may seek to raise additional
capital. If the Company is unable to raise the Minimum, it may seek to raise
capital through other means or it may be unable to continue as a going concern.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Note 1 to Notes to Financial Statements and Independent
Auditors' Report.
Reliance on Collaborative Retail Customers
The Company's present strategy is to seek collaborative partners,
mainly retailers, for the purpose of creating ISN's for them in exchange for
their co-marketing efforts. Such collaborative arrangements, if entered into,
may provide the Company with additional revenues and make it easier for the
Company to attract subscribers. Although the Company has successfully secured
such relationships with BCF and FBAR, there can be no assurance that the Company
will be successful in finding other suitable collaborative retail customers to
establish ISN's, nor can there be any assurance as to the timing or terms of any
such collaboration.
If the Company is unable to enter into favorable collaborative
arrangements, the Company may not have sufficient resources to develop further
the ISN's or to market its services to a sufficient number of vendors. The
amount and timing of resources devoted to convincing vendors to join the ISN's
will be controlled by the retailer. Should the retailer fail to perform any
essential functions, the Company's business and results could be materially
adversely affected. Moreover, BCF has informed the Company that BCF's vendors
have responded negatively to participating in the Company's programs. BCF views
its prospects for revenue from the participation agreement as exceedingly dim.
As of the date hereof, only a handful of BCF's vendors have agreed to join BCF's
ISN, and the system is being used by BCF on a limited basis only. In addition,
although the Company will seek exclusive agreements with its collaborative
retail customers, there can be no assurance that any of the Company's
anticipated collaborative retail customers would not pursue alternative
technologies or develop alternative methods on their own or in collaboration
with others, including the Company's competitors.
Eligibility of Officers, Directors and Beneficial Stockholders to Participate in
the Offering so as to reach the Minimum
The terms of this Offering permit Officers, Directors and Beneficial
Stockholders of the Company to purchase the Shares offered herein in order to
reach the Minimum. The purchase of the Shares by the Company's Officers,
Directors and Beneficial Stockholders to reach the Minimum would indicate that
the Company could experience difficulties in selling the balance of the Shares
beyond the Minimum. Any difficulties in fully subscribing the Offering could
have a material adverse effect on the value of the investor's interest in the
Company. Moreover, in the event that Officers, Directors and Beneficial
Stockholders do purchase any Shares offered herein, the percentage ownership of
these persons (see "Principal Stockholders") will increase thus decreasing the
ownership percentages of any new investors.
Immediate and Substantial Dilution
The price at which the Shares are to be sold in the Offering is
significantly higher than the price per share that was paid by the Company's
current shareholders. Investors participating in this Offering will incur
immediate and substantial dilution in that the net tangible book value per share
of Common Stock after the Offering will be substantially less than the per share
offering price of Common Stock. The investors in this Offering will suffer
immediate dilution of approximately $7.84 (or 98% of the Offering Price) if the
Minimum is sold, and approximately $5.74 (or 72% of the Offering Price) if the
Maximum is sold. To the extent outstanding options or warrants to purchase the
Common Stock are exercised, new investors will incur further dilution. See
"Dilution."
Arbitrary Determination of Selling Price
The $8.00 per share offering price for the Shares offered herein was
determined by the Company. The $8.00 per share offering price assumes the
Company's valuation to be: (i) approximately $75,555,552 based on a total of
9,444,444 shares to be outstanding upon completion of the Offering if the
Maximum (2,500,000 shares) is sold and assuming the exercise of 250,000 options
to purchase Common Stock (of which 80,000 have not been issued) and the exercise
of BCF's warrant to purchase Common Stock (ten percent (10%) of the total
outstanding number of shares which in the case of the Maximum would equal
944,444 shares of Common Stock); and (ii) approximately $54,444,448 based on a
total of 6,805,556 shares to be outstanding upon completion of the Offering if
the Minimum (125,000 shares) is sold and assuming the exercise of 250,000
options to purchase Common Stock (of which 80,000 have not been issued) and the
exercise of BCF's warrant to purchase Common Stock (ten percent (10%) of the
total outstanding number of shares which in the case of the Minimum would equal
680,556 shares of Common Stock). The offering price does not necessarily bear
any relationship to the Company's asset value or net worth. Factors considered
by the Company in setting the purchase price include the Company's current
financial condition, its future prospects, the state of the markets for its
services, the experience of management, and the economics of the industry in
general, among others. Each prospective investor should make an independent
evaluation of the fairness of the purchase price.
Impact of "Year 2000" Problem.
The Company and its affiliates may be adversely affected by the "Year
2000" problem, which is a result of computer programs being written using two
digits rather than four to define the applicable year. As a result of this
problem, the Company's date-sensitive computer programs that use a two digit
dating system may recognize a date using "00" as the year 1900 rather than 2000.
The impact of this problem is difficult to assess at this time, but this problem
could result in a system failure or miscalculation causing disruptions of
operations, including a temporary inability to process transactions, send
invoices, retain accurate data, or engage in normal business activities. The
Year 2000 problem could also affect the operations of clients, vendors, and
others with whom the Company does business, thereby adversely affecting the
Company as well. Management is undertaking an evaluation of its computer
programs for Year 2000 problems and plans to make appropriate corrections to or
substitutions of software if necessary. Based on its current evaluation of its
computer software, Management does not believe that the Company's operations
will be significantly affected by the Year 2000 problem. However, if
modifications or substitutions of software prove to be necessary and are not
made, or if others with whom the Company does business (including suppliers,
contractors and utility companies) suffer more significant Year 2000 problems,
the Year 2000 problem could have an adverse effect upon the operations of the
Company.
Intellectual Property Protection.
The Company believes that its proprietary technology has significant
value and will be important to the marketing of its services and products. The
Company has no patents and relies primarily on copyright and trade secret laws
to protect its proprietary technology. The Company has no trademarks registered
anywhere. It is possible that competitors of the Company or others will adopt
product or service names similar to the Company's, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversions of
resources, either of which could have a material adverse effect on the Company's
business, financial condition, and operating results.
Best Efforts.
The Company is offering the Shares on a "best efforts" basis through a
selling group organized by the Company. Accordingly, there can be no assurance
that any or all of the Shares will be sold.
Loss of Use of Monies for up to One Hundred and Eighty (180) Days.
The Shares are offered directly by the Company through a selling group
subject to the subscription and payment for not less than 125,000 Shares,
offered by the Company during the "Holding Period," which shall begin with the
commencement of the Offering and terminate upon the earlier of (i) the date upon
which the escrow agent, Union Bank of California, confirms that it has received
the Minimum in deposited funds in a specified escrow account, (ii) within 180
days of the date of the commencement of this Offering, (iii) the date upon which
the Company terminates the Offering prior to the sale of the Minimum, or (iv)
the date upon which the Company announces the completion of the Offering at any
time after the sale of the Minimum. All subscription payments received during
the Holding Period will be deposited into an interest bearing escrow account.
Accordingly, the investors could lose the use of their monies for up to a period
of 180 days if the Minimum has not been reached. If the Minimum has not been
reached, all proceeds will be promptly returned to subscribers without deduction
for commissions or expenses.
7
<PAGE>
Dependence on the Internet
Because the Company's products and services are directly marketed over
the Internet, the future success of the Company will depend in large part on
whether the Internet proves to be a viable commercial marketplace. Whether
because of inadequate development of the necessary infrastructure or as a result
of fraud, or any other cause, if retailers lack confidence in sourcing products
over the Internet the Company's business, operating results and financial
condition will be materially adversely affected.
Rapid Technological Change; Dependence on New Product Development
The Internet market in which the Company intends to compete is
characterized by rapid and significant technological developments, frequent new
product introductions and enhancements, continually evolving business
expectations and swift changes. To compete effectively in such markets, the
Company must continually improve and enhance its existing products and services
and develop new technologies and products that incorporate technological
advances, satisfy increasing customer expectations and compete effectively on
the basis of performance and price. The Company's success will also depend
substantially upon its ability to anticipate, and to adapt its products and
services to its collaborative retail customers preferences. There can be no
assurance that technological developments will not render some of the Company's
products and services obsolete, or that the Company will be able to respond with
improved or new products, services, and technology that satisfy evolving
retailer and vendor expectations. Failure by the Company to develop or introduce
new products, services, and enhancements in a timely manner could have a
material adverse effect on the Company's business, financial condition and
operations. Also, to the extent one or more of the Company's competitors
introduces products that better address the retailer's needs, the Company's
business would be materially adversely affected.
Delays in New Product and Service Development and Introduction
The process of developing products and services such as those offered
by the Company is extremely complex and it is highly likely that the Company
will experience delays in developing and introducing new products and services
in the future. If the Company is unable to develop and introduce new products,
services or enhancements to existing products and services in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, operating results and financial conditions would be materially
adversely affected. Also, announcements of currently planned or other new
products and services may cause customers to delay their subscription decisions
in anticipation of such products and services, which could have a material
adverse effect on the Company's business, operating results and financial
condition, especially if the introduction of such products and services is
delayed.
Flaws and Defects in Products and Services
Products and services as complex as those offered by the Company may
contain undetected flaws or defects when first introduced or as new versions are
released. Any inaccuracy or defects may result in adverse products and service
reviews and a loss or delay in market acceptance. There can be no assurance that
flaws or defects will not be found in the Company's products and services. If
found, flaws and defects would have a material adverse effect upon the Company's
business operations and financial condition.
Management of Potential Growth
The Company's ability to manage its future growth, if any, will require
it to continue to implement and improve its operational, financial and
management information systems and control and to hire and train new
8
<PAGE>
employees, including management, marketing and technical personnel, and also to
motivate and manage its new employees and to integrate them into its overall
operations and culture. Although the management team has successfully grown
other companies, there can be no assurance that the Company will be able to
perform such actions successfully. The Company's failure to manage growth
effectively would have a material adverse effect on the Company's results of
operations and its ability to execute its business strategy.
No Prior Market; Possible Volatility of Share Price
Prior to this Offering, there has not been a public market for the
Shares and none is anticipated to develop in the near future. It is unlikely
that a regular trading market will develop in the near term or that, if
developed, it will be sustained. In the event a regular public trading market
does not develop, any investment in the Company's Common Stock would be highly
illiquid. Accordingly, an investor in the Shares may not be able to sell the
Shares readily.
Although the Company intends to apply for quotation on the Nasdaq
National Market, if the Common Stock is listed, there can be no assurance as to
the development or liquidity of any trading market for the Common Stock or that
investors in the Common Stock will be able to resell their shares at or above
the initial public offering price. The initial public offering price for the
shares of Common Stock has been determined by the Company and may not be
indicative of the market price of the Common Stock after the Offering.
Furthermore, the trading price of the Common Stock is likely to be
highly volatile and could be subject to wide fluctuations in response to factors
such as actual or anticipated variations in the Company's quarterly operating
results, announcements of technological innovations, or new services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the market valuations of other Internet or online service companies,
announcements by the Company or its competitors of significant acquisitions,
strategic relationships, joint ventures or capital commitments, additions or
departures of key personnel, sales of Common Stock or other securities of the
Company in the open market and other events or factors, many of which are beyond
the Company's control. Further, the stock markets in general, and the Nasdaq
National Market and the market for Internet-related and technology companies in
particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect valuations substantially above historical
levels. There can be no assurance that these trading prices and valuations will
be sustained. These broad market and industry factors may materially and
adversely affect the market price of the Common Stock, regardless of the
Company's operating performance. Market fluctuations, as well as general
political and economic conditions such as recession or interest rate or currency
rate fluctuations, may also adversely affect the market price of the Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class-action litigation has often been
instituted against such company. Such litigation, if instituted, could result in
substantial costs and a diversion of Management's attention and resources, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Adverse Effect on Market Price of Shares by Shares Eligible for Future Sale
All 5,750,000 shares of Common Stock issued by the Company and 250,000
shares reserved for stock options, after taking into account the 1-for-2 reverse
stock split prior to this Offering, were offered and sold by the Company in
private transactions in reliance on an exemption from registration under the
Securities Act. Accordingly, all of such securities are "restricted securities"
within the meaning of Rule 144 and cannot be resold without registration, except
in reliance on Rule 144 or another applicable exemption from registration.
In general, Rule 144 imposes a minimum holding period of one year for
restricted securities. Thereafter, if restricted or other securities are sold
for the account of a person (or persons whose shares are required to be
aggregated), including any affiliate of the Company, the amount of securities
sold, together with all sales of restricted securities and other securities of
the same class for the account of such person within the preceding three months
shall not exceed the greater of: (i) one percent of the shares or other units of
the class outstanding as shown by the most recent report or statement published
by the issuer, or (ii) the average weekly reported volume of trading in such
securities on all national securities exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the filing of the required notice, or if no such
notice is required, the date of receipt of the order to execute the transaction
by the broker or the date of execution of the transaction directly with a market
maker, or (iii) the average weekly volume of trading in such securities reported
through the consolidated transaction reporting system contemplated by Rule
11Aa3-1 under the Securities Exchange Act of 1934 during the four-week period
specified in (ii) above. The seller also must comply with the notice and manner
of sale requirements of Rule 144, and there must be current public information
available about the Company. In addition, any person (or persons whose shares
are aggregated) who is not, at the time of the sale, nor during the preceding
three months, an affiliate of the Company, and who has beneficially owned
restricted shares for at least two years, can sell such shares under Rule 144
without regard to notice, manner of sale, public information or the volume
limitations described above.
Future sales of Shares of Common Stock by the Company could materially
adversely affect the prevailing market price, if any, of the Company's Common
Stock. In addition, there are 250,000 shares reserved for future issuance under
the Company's stock option plan for grants to management and employees. The
shares of Common Stock underlying these options would represent 4.2% of the
Company's outstanding Common Stock prior to this Offering, assuming all the
options were exercised. The Company is unable to predict the effect those sales
by the Company, if any, or potential sales under any future stock option plan,
may have on the market price of the Common Stock prevailing at the time of any
such sales.
Additionally, BCF owns a warrant (the "Warrant") to purchase the
Company's Common Stock, on a fully diluted basis, equal to ten percent (10%) of
the Company pursuant to the Warrant Agreement dated October 15, 1997. The
Warrant is currently exercisable at $4.00 per share. The Warrant expires upon
the earlier of the following dates: (i) October 15, 2002 or (ii) 30 days after
the closing of a firm
9
<PAGE>
underwritten public offering of the Company's securities with which the
aggregate gross proceeds to the Company are at least $5,000,000 and the offering
price is at least $4.00 per share. The exercise of the Warrant would result in a
substantial amount of shares being issued which could dilute the investors in
this Offering if the Warrant was exercised at a time when the shares of the
Company were trading at a price above this Offering price.
Dividends
The Company has not paid any dividends or made distributions to its
investors and is not likely to do so in the foreseeable future. The Company
presently intends to retain earnings for use in its business. Additionally, the
Company may fund a portion of its future expansion through debt financing, and a
condition of such financing may prohibit the payment of dividends while the debt
is outstanding. Therefore, investors should purchase Shares with the
understanding that Management's goal is to build value by increasing the size of
the business and not by paying dividends. See "Dividend Policy."
Control
Regardless of whether the Minimum or Maximum number of the Shares are
sold pursuant to this Offering, control of the Company will remain with the
present equity owners after the completion of the Offering. As a result, these
stockholders will be able to control the Company and its operations, including
the election of at least a majority of the Company's Board of Directors and
thus, the policies of the Company. See "Principal Stockholders."
Competition
With the popularity of the Internet growing daily and as computer
hardware (i.e., servers) and creating/maintaining web sites becomes more
affordable, other on-line services may appear or are already established which
will try to create an electronic link between vendors (wholesalers and
manufacturers) on one side and retailers on the other. Some of those businesses
may have far greater financial and marketing resources, operating experience and
name recognition than the Company. Potential competitors include AT-Net
(http://www.at-net.com), Apparel Exchange (http://aparelex.com), RagNet
(http://www.ragnet.com), XMNet (http://www.xmnet.com), E.R.I.C Worldwide
Enterprises (http://ericww.com), ICES, Inc. (http://www.icesinc.com), The Mart
(http://www.themart.com), Apparel.Net (http://www.apparel.net), and Global
Textile Network (http://www.g-t-n.com). All these web sites take different
approaches ranging from creating "yellow page" type listing to acting as a
middleman in transactions. To the best of the Company's knowledge, all of them
charge membership and transaction fees higher than those charged by the Company
to join its VTS. Moreover, as far as the Company is aware, some of these
companies charge buyers a monthly access fee to view products over the Internet.
Most importantly, the Company believes that none of these web sites focus on the
retailers. It is Management's belief that an important factor that vendors
consider in joining an Internet service is whether retail buyers will actually
see their products. Management also believes that buyers will be less inclined
to visit a web site where they have to pay to visit if there are no assurances
that the web site will include substantive product information. As such,
Management believes that these competing web sites will have difficulty
attracting and maintaining subscribers as well as attracting buyers. The Company
seeks to address this potential drawback by offering services which are
retailer-centric. See "Business: Sales and Marketing." Notwithstanding, these
potential competitors, as well as the entry of more competitors offering similar
web sites, could have a material adverse effect upon the Company's business,
operating results and financial condition.
Dependence on Founder and Key Personnel
The Company's business depends to a large extent on retaining the
services of its founder, Frank S. Yuan (Chief Executive Officer and President),
as well as James Zheng (Chief Technology Officer) and David Rau (Chief Financial
Officer). Frank S. Yuan is a principal stockholder in the Company. The Company's
operations could be materially adversely affected if, for any reason, one or
more of the above officers ceases to be active in the Company's management. The
Company has sought to minimize the possible
10
<PAGE>
loss of Mr. Rau to competitors by having each of them execute employment
agreements containing non-competition and non-disclosure covenants. It is
important to note that the ability of the Company, or a State court, to enforce
or partially enforce the non-competition covenant in the employment agreements
may be limited by State law. The Company has no key-person life insurance policy
on any of the above-mentioned key personnel. See "Management" and "Principal
Stockholders."
Lack of Full-Time Systems Administrator
Currently, the Company utilizes the services of James Zheng and his
assistant, Joseph Sloan, who both function as the Company's Systems
Administrator. However, neither of them are working in that capacity on a
full-time basis. Rather, Mr. Zheng is working on an on-call basis and devotes at
least one day a week to maintaining the Company's system, network, and database.
Mr. Sloan works solely on an on-call basis. Depending on the success of this
Offering, the Company expects to hire a full-time Systems Administrator.
Pending Litigation
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.
USE OF PROCEEDS
<TABLE>
The net proceeds to the Company from the sale of the Shares in this
Offering are estimated to be approximately $780,000 if the Minimum is sold, and
$18,450,000 if the Maximum is sold, after offering expenses. The Company expects
to use the net proceeds for the purposes outlined below.
<CAPTION>
Minimum Up To Up To Up To Maximum
$780,000 $5,000,000 $10,000,000 $15,000,000 $18,450,000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
UNITED STATES OPERATIONS
Marketing
Staff
Director of Marketing $ 75,000 $ 75,000 $ 75,000 $ 75,000
Retailer-Focused Marketers $ 75,000 $ 150,000 $ 225,000 $ 300,000
Vendor-Focused Marketers $ 100,000 $ 250,000 $ 400,000 $ 500,000 $ 600,000
Marketing Materials (printed
brochures, etc.) $ 50,000 $ 200,000 $ 400,000 $ 500,000 $ 600,000
Advertising
Print Ads (trade publications,
Internet, etc.) $ 200,000 $ 2,000,000 $ 4,000,000 $ 6,000,000 $ 8,000,000
Trade Shows (attendance, booth, etc.) $ 60,000 $ 200,000 $ 500,000 $ 750,000 $ 1,000,000
Technical
Staff
Chief Technology Officer $ 120,000 $ 120,000 $ 120,000 $ 120,000
Technical Support $ 50,000 $ 100,000 $ 150,000 $ 150,000 $ 150,000
Customer Service $ 20,000 $ 40,000 $ 60,000 $ 80,000
R&D Internet EDI $ 50,000 $ 150,000 $ 200,000 $ 300,000 $ 400,000
Upgrade Computers Hardware/Internet Access $ 40,000 $ 75,000 $ 100,000 $ 125,000 $ 150,000
Working Capital
LA Office Expansion $ 50,000 $ 100,000 $ 150,000 $ 200,000 $ 250,000
NY Office Set-Up $ 100,000 $ 200,000 $ 300,000 $ 400,000
Reserve $ 180,000 $ 535,000 $ 1,515,000 $ 1,695,000 $ 1,725,000
FOREIGN OPERATIONS
Office Set-Up (fixtures, computers, etc.) $ 100,000 $ 200,000 $ 400,000 $ 600,000
Marketing/Advertising (print ads,
marketing materials, etc.) $ 400,000 $ 800,000 $ 1,600,000 $ 2,000,000
Working Capital (payroll, rent,
utilities, etc.) $ 500,000 $ 1,000,000 $ 2,000,000 $ 2,000,000
TOTAL $ 780,000 $ 5,000,000 $10,000,000 $15,000,000 $18,450,000
</TABLE>
11
<PAGE>
Description of Use of Proceeds
Minimum: If the minimum amount of shares are subscribed to as part of
this Offering, the Company intends to use the proceeds for the expansion of its
current operations (i.e., sales and marketing of the Company's services,
advertising, establishing ISN's, up-grading its existing computer infrastructure
and Internet access, and working capital purposes).
Maximum: If the maximum amount of shares are subscribed to as part of
this Offering, the Company will use all proceeds received as noted above.
The Company does not contemplate changes in the proposed allocation of
estimated net proceeds of this Offering. However, the foregoing are estimates
and events may require changes. Therefore, the Company reserves the right to
make changes, if appropriate. Pending application of the net proceeds as
described herein, the Company intends to invest the net proceeds in short-term,
interest bearing, investment-grade securities.
DIVIDEND POLICY
The Company has not declared or paid dividends since its inception. The
Company presently intends to retain all earnings to facilitate growth and does
not anticipate paying cash dividends in the foreseeable future. Although the
Company has no present plans to pursue additional financing through bank
borrowing, debt or other equity financing, the pursuit of such financing may
prohibit the payment of dividends. See "Description of Capital Stock."
CAPITALIZATION
The following table sets forth the actual unaudited capitalization of
the Company on December 31, 1998, and also provides the pro forma capitalization
of the Company as of December 31, 1998, after giving effect to the sale of the
Minimum (125,000 Shares) and the Maximum (2,500,000 Shares) number of Shares
offered hereby at the public offering price of $8.00 per share and the
application of the estimated net proceeds:
12
<PAGE>
December 31, 1998
------------------
Pro Forma As Adjusted
---------------------
Actual Minimum Maximum
------------ ------------ ------------
Stockholders' Equity:
Common Stock, No Par Value,
40,000,000 Shares Authorized
5,750,000 (Actual) 5,875,000 (Minimum)
8,250,000 (Maximum) Shares
Issued and Outstanding $ 1,550,000 $ 2,330,000 $ 20,000,000
Additional Paid-In Capital: 30,000 30,000 30,000
Accumulated Deficit (1,404,838) (1,404,838) (1,404,838)
------------ ------------ ------------
Total Stockholders' Equity: $ 175,162 $ 955,162 $ 18,625,162
============ ============ ============
In reliance upon the registration exemption provided for in Section
4(2) of the Securities Act of 1933, as amended, the Company raised working
capital through two separate private offerings. The Company initially raised
$1,050,000 through the first private offering resulting in the issuance of
9,500,000 shares of the Company's Common Stock. Thereafter, pursuant to the
approval of the Board of Directors, the Company raised an additional $500,000
through the second private offering resulting in the issuance of 2,000,000
shares of the Company's Common Stock. As a result of the two private offerings
the Company had issued a total of 11,500,000 shares of the Company's Common
Stock, excluding 500,000 shares that have been issued or are held in reserve as
stock options. Subsequently, in March 1998, the Board of Directors and
shareholders effected a 1-for-2 reverse stock split such that a total of
6,000,000 shares, including stock options, remain outstanding.
DILUTION
On December 31, 1998, the Company had an unaudited net tangible book
value of $175,162 or $0.03 per share. The net tangible book value per share is
equal to the Company's total assets less total liabilities, divided by the total
number of outstanding shares of Common Stock. After giving effect to the sale of
the Minimum and Maximum number of shares offered hereby at the public offering
price of $8.00 per share, and the application by the Company of the estimated
net proceeds after deducting expenses, the pro forma net tangible book value of
the Company as of December 31, 1998, would have been $955,162 and $18,625,162
respectively, or $0.16 per share and $2.26 per share, respectively. This
represents an immediate increase in net tangible book value of $0.13 and $2.23
per share, respectively, to existing shareholders and an immediate dilution of
$7.84 per share and $5.74 per share to new investors purchasing shares in this
Offering. The following table illustrates the per share dilution in net tangible
book value per share to new investors at the Minimum and Maximum Offering:
Minimum Maximum
-------- --------
Public Offering Price Per Share $ 8.00 $ 8.00
Net Tangible Book Value Per Share as
of December 31, 1998 $ 0.03 $ 0.03
Increase in Net Tangible Book Value
Per Share attributed to New Investors $ 0.13 $ 2.23
Pro Forma Net Tangible Book Value Per
Share after this Offering: $ 0.16 $ 2.26
Net Tangible Book Value Dilution Per
Share to New Investors $ 7.84 $ 5.74
13
<PAGE>
<TABLE>
The following table sets forth, on a pro forma basis, as of December
31, 1998, the difference between existing stockholders and the purchasers of
Shares at the Minimum and Maximum amounts sold in this Offering with respect to
the number of shares purchased, the total consideration paid, and the average
price paid per share:
<CAPTION>
Shares Purchased Total Consideration
---------------------- -------------------------
Number Percent Amount Percent Average Price Per Share
------ ------- ------ ------- -----------------------
<S> <C> <C> <C> <C> <C>
Minimum Sold
Existing Shareholders (1) 6,000,000 98% $ 1,620,020 62% $0.27
New Investors 125,000 2% $ 1,000,000 38% $8.00
----------- -----
Total: 6,125,000 100% $ 2,620,020 100% $0.43
========= === =========== === =====
Maximum Sold
Existing Shareholders(1) 6,000,000 71% $ 1,620,020 8% $0.27
New Investors 2,500,000 29% $20,000,000 92% $8.00
--------- --- ----------- --- -----
Total 8,500,000 100% $21,620,020 100% $2.54
========= === =========== === =====
<FN>
(1) As used herein, the 6,000,000 shares purchased by existing shareholders
assumes 5,750,000 shares of issued Common Stock plus the grant and exercise of
175,000 shares of stock reserved for stock options at $0.40 per share, and
75,000 shares for $20.
</FN>
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
The selected financial data presented below, for the years ended June
30, 1997 and 1998, respectively have been derived from the Financial Statements
of the Company which have been audited by KPMG, LLP, independent certified
public accountants. The Financial Statements and the independent auditors'
report therein are included elsewhere in this Prospectus. The selected financial
data for the six months ended December 31, 1997 and 1998, respectively, are
derived from unaudited financial statements of the Company. In the opinion of
Management, the unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements, and, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of operations for such periods. The financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in the Prospectus.
<CAPTION>
Statement of Operations Data: Year Ended June 30, Six months ended December 31
-------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ------------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 35,900 $ 65,722 $ 38,640 $ 29,380
Operating Loss (637,208) (586,807) (261,658) (262,933)
Interest Income(1) 50,397 16,338 9,963 17,066
Loss Before Income Taxes (586,811) (570,560) (251,695) (245,867)
Net Loss (587,611) (571,360) (251,695) (245,867)
Basic and Diluted Net Loss Per Share(2) (0.14) (0.11) (0.05) (0.04)
Weighted Average Shares Used in
Computation of Net Loss Per Share 4,223,178 5,281,889 4,793,478 5,533,944
<FN>
(1) Interest income from loan to Frank Yuan, see "Certain Transactions".
(2) See Note 1 of Notes to Financial Statements.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data: June 30, 1998 December 31, 1998
--------------------------------------------- ---------------------------------------------
(Audited) (As Adjusted) (Unaudited) (As Adjusted)
Actual Minimum Maximum Actual Minimum Maximum
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital .............. $ 337,646 $ 1,117,646 $18,787,646 $ 107,660 $ 887,660 $18,557,660
Total assets ................. $ 472,496 $ 1,252,496 $18,922,496 $ 208,244 $ 988,244 $18,658,244
Stockholders' equity ......... $ 421,029 $ 1,201,029 $18,871,029 $ 175,162 $ 955,162 $18,265,162
</TABLE>
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 Prospectus.
This Prospectus contains certain forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to those discussed in "Risk Factors"
and elsewhere in this Prospectus.
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 chain 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. If
the Maximum amount is raised, the Company intends to use a substantial portion
of the proceeds from this Offering to implement its business strategy.
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 and one-half years of operation.
Fiscal Years Ended June 30, 1997 and 1998
The following discussion sets forth information for the fiscal year
ended June 30, 1998 compared with the fiscal year ended June 30, 1997. This
financial information has been derived from audited financial statements of the
Company contained elsewhere in the Prospectus.
For the fiscal year ended June 30, 1998, the Company had revenues
totaling $65,722 representing an increase of $29,822 from 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 year ended
June 30, 1998, totaling $652,529 consisted of $139,680 for the cost of revenue
and $512,849 for general administration and selling expenses, representing a
decrease of $20,579 from the year ended June 30, 1997. Consequently, the Company
experienced a net loss of $571,360 for the year ended June 30, 1998.
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Six months ended December 31, 1997 and 1998
The following discussion sets forth information for the six months
ended December 31, 1998 compared with the six months ended December 31, 1997.
This information has been derived from unaudited interim financial statements of
the Company contained elsewhere in the Prospectus 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 six months ended December 31, 1998, the Company had revenues
totaling $29,380 representing a decrease of $9,260 from 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 six months
ended December 31, 1998, totaling $292,313 consisted of $60,361 for the cost of
revenue and $231,952 for general administration and selling expenses,
representing a decrease of $7,985 from the six months ended December 31, 1997.
Consequently, the Company experienced a net loss of $245,867 for the six months
ended December 31, 1998.
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 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. See
"Risk Factors--Reliance on Collaborative Retail Customers," and "Key Contracts
and Collaborative Retail Customers."
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 December 31, 1998 approximately
$1,300,000 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.
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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. See "Stock Options." 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 $571,360 for the year
ended June 30, 1998 and $245,867 for the six months ended December 31, 1998.
From the inception of the Company in July 1996, the Company has incurred
substantial costs for the development of its software. These software costs are
the main reasons for the Company's losses in year one. In years two and three,
the Company incurred substantial costs for its overhead and marketing programs
to launch the Company's services. The marketing costs and overhead are the
primary reasons for the costs relating to operations for these two years. As of
December 31, 1998, the Company had $133,227 in cash and cash equivalents and
$175,162 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 operation
and increases in net deficit. Management estimates the Company's monthly burn
rate to be between $20,000 and $40,000. As for November and December, 1998, the
Company's burn rate was $18,451 and $44,579 respectively. Accordingly, the
Company needs to raise capital to be continue its development strategy.
Management expects this capital requirement to be met from the proceeds of the
Offering if an amount greater than the Minimum is raised. If the Company is
unable to raise the Minimum amount in this Offering, it may look to raise
capital through other means, or it may be unable to continue as a going concern.
See "Risk Factors -- Limited Operating History; History of Losses" and Note 1 of
Notes to Financial Statements and Independent Auditors' Report.
Based on its development strategy, the Company anticipates that the net
proceeds of this Offering, if the Minimum is raised, will be adequate to satisfy
the Company's capital and operation requirements for approximately 12 months
from the consummation of this Offering, at which time the Company may seek to
raise additional capital. The Minimum net proceeds of this Offering prior to the
deduction of offering expenses are estimated to be approximately $780,000
($18,450,000 if the Maximum amount is raised), assuming an estimated initial
public offering price of $8.00 per share. The Company's future capital
requirements may vary materially from those now planned because of results of
operation, retailer and wholesaler acceptance of the Company's services, among
other factors. See "Risk Factors -- Reliance on Collaborative Retail Customers;
Dependence on the Internet."
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 this Offering may
result.
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BUSINESS
Overview
Cyber Merchants Exchange, Inc. d.b.a. C-ME.com (the "Company" or
"C-ME") is a business to business electronic commerce company serving the
worldwide retail industry. The Company provides its customers with an
Internet-based communications system that enables retailers and suppliers to
conduct negotiations and to facilitate electronically the purchase and sale of
merchandise on a global basis. Using proprietary software, the Company maintains
a secure yet open electronic network that enables retailers to conduct on-line
communications and transactions with their vendors and suppliers. This
communications and trading process is generally referred to in the retail
industry as "sourcing." High volumes of product and transaction data are
exchanged between retailers and their suppliers in order for buy-sell
transactions to be initiated, negotiated and closed. This critical sourcing
process typically requires a substantial amount of time and attention from both
the retail merchandise buyer and the salesperson of a manufacturer or
distributor. The Company's related software products and services are designed
to make this sourcing function substantially more effective and efficient, and
to facilitate the workflow management of retail industry buyers and sellers.
When utilized to their full capability and employed on a wide-scale
basis, the Company believes that its products are capable of reducing a
retailer's cost of sourcing and, more importantly, substantially expediting the
sourcing process and more effectively managing the quality performance of
vendors. Consequently, the Company's software products and services enable
merchandising, manufacturing and shipping decisions to be made by all parties at
dates closer to the selling season, helping such parties make better informed
and more timely business decisions. The objective is to enable clients that
source products through the Company's software products and services to obtain
lower costs, increased sales volume, faster inventory turnover, fewer
involuntary price discounts and improved margins and profitability.
Services Offered
Overview of the C-ME System
The Company's Internet-based system was designed to meet the general
merchandising needs of retailers and their vendor suppliers, with an initial
emphasis placed on the bargain, or "off-price," apparel market segment. To that
end, the Company has developed three interrelated services:
Virtual Trade Show ("VTS") - The Company's VTS system provides apparel
buyers and sellers with a continuous, revolving product forum showcase, and
gives the Company a dynamic gateway presence on the World Wide Web. The VTS
functions in two capacities:
1) The system houses, for general marketing purposes, vendors'
products in easily recognizable standard industry categories.
The showcases contain complete descriptions, vital information
(sizes, shipping, cost, etc.), and digital photographs of the
products.
2) The system allows buyers to search for products efficiently.
The VTS features the Company's Product Driven Search Engine
which retrieves products by category, such as shoes, men's
outerwear, or women's sweaters. In addition, through the use
of the Company's focused broadcasting or "FOCASTING" software,
retail buyers have the ability to customize their product
searches by having selected product categories broadcasted, or
"pushed," to their computers with daily-changing products.
Buyers must log on with a password in order to utilize the
VTS FOCASTING software.
To join the VTS, vendors pay $300 to place up to 15 product listings on
the system and a $30 monthly maintenance fee; a significant savings compared to
standard trade show booths which can cost up to $10,000 for a 10' x 10' booth.
Each additional product displayed by the vendor increases the monthly
maintenance fee by $1. If the vendor requires C-ME to input text and upload
graphics for a product, the vendor is charged $5 per product. A member's
contract is valid as long the vendor maintains its subscription. As an added
benefit, vendors who join the VTS receive a detailed home page along with a
shared domain name.
The VTS is dynamic by nature. As such, vendors who display products on
the VTS have the ability to change or update their product information
independently from any computer with Internet access. The changes can be viewed
immediately by buyers logged into the system.
The VTS serves to build a critical mass of products accessible to all
retail buyers and other interested parties. This critical mass creates the
potential for the Company to establish a frequently visited Web marketplace that
will attract advertisers and other fee-paying retail customers. Two hundred and
fifty vendors are currently listed in the VTS.
Internet Sourcing Network ("ISN") - The ISN features the Company's
FOCASTING and Dynamic End-User Profile System, or DEPS, software applications.
The ISN is a private network which uses the Internet as its communication medium
and links the Company's retail customers with their vendors. The ISN's primary
function is to assist retail buyers in sourcing merchandise for their product
divisions. The network is accessible only by the Company's retail customers, and
vendors who join the ISN.
The primary benefit of the ISN is that it improves retailers'
coordinated buying practices. Because the FOCASTING software allows each buyer
to create specific product profiles in the ISN, a senior buyer can set up
profiles to encompass product areas falling within the buying responsibility of
a junior buyer. For example, the General Merchandising Manager's profile would
have access to all products that are the responsibility of buyers in his
division. This would encompass a particular buyer's profile. The General
Merchandising Manager and the buyer would see the same products on their
respective computer screens. If the General Merchandising Manager sees a product
he likes which the buyer might not have noticed, he can call it to the buyer's
attention. This creates oversight and allows for coordinated buying strategies.
The ISN also serves as an effective time management tool for all buying
divisions. For example, if a buyer normally spends 30 hours each week sifting
through product catalogs, making phone calls, and reviewing samples, the ISN can
reduce this time dramatically. All the buyer has to do is review a product
profile on a daily basis to see ever-changing product availability,
specifications, quantities, etc. The buyer can then mark those products he is
interested in and discard (remove from the profile) those products that are of
no interest. The discarded products provide subscribing vendors with important
feedback relating to the demand for their products and allows them to tailor
more relevant product offerings based on buyers' preferences.
The ISN enables retail buyers to customize their product searches by
merchandise category, and receive on their computer displays only those products
for which they have buying responsibility. For instance, a retailer's shoe buyer
may tune his profile to the shoe "channel," which FOCASTs (broadcasts) product
profiles of shoe vendors which are members of the ISN.
Each retail buyer accesses the ISN via any computer with Internet
access. The buyer then keys in his password, and is prompted to his personal
profile. The buyer's profile has pre-set product categories based on the buyer's
purchasing responsibilities. Each level of management has varying levels of
access to the merchandise it can preview. For instance, if a buyer has the Men's
General Merchandise Manager profile, the ISN will display all product categories
within the Men's division with no access restrictions.
Through the DEPS software, the ISN updates each buyer individually when
a "new" product in the buyer's profile has been submitted for display by the
vendor. When a buyer views his product profile, notifications of "New" or
"Close-out" items that have been added to the profile are displayed
automatically. The automatic notification system facilitates quick decision
making on the buyer's part. Once the buyer has seen the new item, the
notification icon disappears and the product will remain available for viewing
unless discarded.
In addition, the DEPS software enables the buyer to delete any products
from his database. When a product is deleted from the ISN, an e-mail message is
automatically transmitted to the vendor stating that the vendor's product has
been deleted and provides the reason for its deletion. The vendor can
immediately respond to the buyer if the reason for deletion can be negotiated or
simply replace the deleted product with a new product. The buyer may restore the
deleted product to his database for future consideration.
The ISN promotes interactivity between the retailer and vendor by
handling buyer product inquiries and vendor responses via e-mail. The buyer has
the ability to send either bulk e-mails to all vendors within an industry or
personal e-mails to selected vendors on the ISN. These may be used to apprise
vendors of the amount of merchandise a buyer can order during a given period
("Open to Buy"), of special products being sought, or to request more specific
information on a product. The ISN can also be used to announce business critical
information. Via the ISN, the retailer can apprise vendors of buying divisions'
merchandise planning and buying goals. These interactive features give the
Company's retail customers ready access to diverse merchandise and makes vendors
an active part in merchandising decisions, thus giving both the retailer and the
vendor a competitive advantage over companies not using the ISN.
The ISN provides vendors with a pro-active means of showing their
products to major retailers, in contrast to passive marketing vehicles such as
paper catalogs or samples sent to buyers by mail. The Company standardizes all
of its vendors' product line sheets and catalogs in a uniform format which
retail buyers are familiar with and will use daily. This current source of
information ensures prices, terms, styles, and materials are easy to compare
between vendors. This uniform ISN format shortens the time it takes for buyers
to view product availability and pricing. At any time, the vendor may add or
remove displayed products on its own or with the assistance of the Company. When
marketing products through the ISN, vendors will no longer have to devote
resources to supporting these retailers' formerly distinct buying formats.
As part of the Company's contracts with its retail customers, the
retailer's management may mandate that its buyers view their ISN profiles on a
periodic basis. The frequent review of the ISN by qualified buyers inspires
vendor confidence in the ISN. The vendor is certain that its products are being
viewed by highly targeted buyers actively searching for deals. Retailers' use of
the ISN will play a key part in the Company's marketing strategy. After a time,
vendors will expect sales to result from their participation in the ISN. The
Company is developing a system to gauge vendor sales attributable to retailers'
use of the system. The Company will use the flow of data to demonstrate the
efficacy of the ISN to new vendor prospects.
The first ISN a vendor joins (the primary ISN) costs $300 to set-up 15
product listings and a $150 monthly maintenance fee. Each additional ISN
(secondary ISN) increases the monthly maintenance fee paid by the vendor by only
$20. The same fees apply to added services as for those offered to VTS members.
Membership continues for as long as the vendor maintains its subscription.
Vendors who join an ISN receive a free listing and home page on the VTS.
The Company installs, configures and customizes ISNs for its retail
customers. In order to forge all-important relationships with large retailers,
and achieve a buy-side critical mass quickly, the Company has not charged
retailers to use the ISN. The Company has valued its ISN development,
implementation and training for retailer clients at $50,000 to $100,000 per
retailer, depending on the retailer's size and product lines.
Internet Electronic Data Interchange ("EDI") - The Internet EDI system,
under development by the Company, is designed to promote back-end efficiencies
between the retailer and its supply chain.
The Company will incorporate standard EDI functions into its Internet
EDI. With the Company's Internet EDI, retailers may send purchase orders to
their vendors; vendors may send invoice, packing list, and shipping information
to retailers; all done in "real-time." All of the electronic documents may be
accompanied by digitized product photos to identify the order with the product.
This feature is designed to reduce confusion and mistakes in retailers'
accounting, receiving, and returns departments. Internet EDI may also provide a
retailer with quality assurance by matching the purchased item with the item
displayed on the ISN with that on the digitally generated purchase order and
invoice.
The Company's Internet EDI operates on Web-based software which may
integrate with any retailer's computer mainframe and database. Customized
integration of the Internet EDI into the retailer's computing environment takes
approximately 6 months to complete, and will be performed by the Company for a
fee should the retailer's MIS department need implementation assistance. The
Internet EDI will be offered at no cost to retailers and will be packaged and
implemented for retailers with the ISN. At this juncture, Management also
believes it is more effective to provide vendors with free Internet EDI access.
This strategy encourages retailers and vendors to adopt the Company's services.
A charge according to the amount of data transferred, or possibly based on the
value of the transaction supported by Internet EDI, may be levied on retailers
and vendors once the Internet EDI has gained a critical mass of users.
Supporting Technology
The Company has developed three proprietary technologies designed to
improve the efficiency and efficacy of the sourcing process:
Product Driven Search Engine - The Company believes the keyword search
functions employed by traditional search engines are impractical for merchandise
sourcing. Rather, the Company developed a product driven search engine which
simplifies the search process. The Company's search engine is linked to dynamic
Internet listings of the vendor's product catalog and line sheets, complete with
detailed product descriptions and digital photographs. These products are then
indexed and separated into easily recognizable categories which facilitates
quick product searches by retail buyers.
Focused Broadcasting ("FOCASTING") - The Company's FOCASTING software
enables retail buyers to create individual web pages filled with only those
products that fall within their buying responsibilities, thereby limiting
unnecessary "surfing." After the buyer creates his customized web page, the
FOCASTING software will "push" or broadcast directly to the buyer's desktop all
products contained within the Company's database that fall within the selected
product categories. For example, if a Men's jeans buyer created a customized web
page using FOCASTING and selected "Men's Jeans," the FOCASTING software will
transmit all the information and images relating to Men's Jeans within the
Company's database to the buyer each time he logs on.
Dynamic End-User Profile System ("DEPS") - The DEPS software provides
retail buyers and vendors with numerous interactive functions. Featured in the
Company's ISN, the DEPS software allows the user to maneuver and manipulate
(delete, restore, etc.) the product information contained within his own product
database. In addition, DEPS alerts the user whenever "new" or "close-out" items
are added to the user's database. This allows the user to efficiently search for
information regarding unique buying opportunities. The DEPS software also
enables interaction between the buyer and vendor. For the vendor, DEPS enables
them to remotely change, upload and delete their product information based on
user requests as well as receive business critical announcements from the
buyers. For example, after the FOCASTING software transmits all the information
within the selected categories, the DEPS software will allow the buyer to delete
items from the FOCASTed products without affecting what other buyers see. When
the product is deleted, the buyer will be prompted to a message screen whereby
the buyer can explain the reason for his deletion. This explanation will then be
transmitted to the vendor whose product was deleted. After receipt of this
message, the vendor can then remotely upload new products for the buyer to
consider. The DEPS software will then alert the buyer when these "new" items
have been uploaded. Additionally, the DEPS software promotes interactivity
between the retailer and vendor by allowing the buyer to send either bulk or
personal e-mails to all vendors on the ISN. These may be used to announce when
the buyer will purchase merchandise ("Open to Buy"), request special products,
to request more specific information on a product or announce business critical
information such as divisional or retailer-wide merchandise buying and planning
goals. These interactive features available through DEPS give vendors a
competitive edge in providing a means of rapid response to buyers' needs and
vendors' products.
Industry Background
As the worldwide retail industry faces competitive pressures and shifts
in consumer demand, traditional sourcing methods are coming under heightened
scrutiny, especially in light of proven emerging technologies which can now
offer dramatic improvements in efficiency, costs and business process
management. Most purchasing automation efforts address the post-order end of the
merchandise flow. The pre-order and order processes, the crucial "upstream"
lengths of the spectrum, may soon be automated. Retailers, in particular those
serving global or national markets, are increasingly exploring automated
purchasing solutions.
The Market Need In Focus
Retail supply-chain needs efficient electronic flow of goods/services,
enabling just-in-time receiving, lower overall costs, fewer data errors and
closer relationships between retailers and suppliers for better service and
planning.
Major retailers need buying efficiency and integration, supplier
partnering, lower costs, fewer data errors, and mapped input into existing
systems.
Qualified suppliers need customer partnering, closer relationships via
system tie-in to retailers, sales and bidding efficiency, Internet presence,
qualified presence in a network system with visibility and mapped output to an
array of customers and prospects.
Global Retail Market
The retail industry is characterized by intense competition,
consolidation and tightening profit margins. Consumers increasingly are more
discerning and consequently demand that retailers offer more value in return for
their purchasing dollar. Pressure on retailers affects all players in the
sourcing environment.
To attract and keep consumers, retailers must offer more desirable
products and prices, while optimizing factors such as product variety, inventory
carrying costs, retail prices and costs of goods. Successful buyers must now
sort, view, decipher and effectively act upon immense volumes of product and
purchasing data. The average large department store carries more than one
million stock keeping units ("SKUs") at any one time, each unique in terms of
product style, size, color, features, packaging, and so forth. Retailers need to
source these SKUs from hundreds, or in some cases thousands, of vendors
worldwide.
Sourcing related communications between retailers and their vendors are
a continuing dialogue about products, pricing, delivery, special promotions,
packaging and a host of other issues. To date, these communications have largely
been carried out through paper flow, phone calls, faxes, courier services, or
through travel and personal visits. It is time consuming, challenging and
expensive to maintain retail supply communications in this manner. Moreover, to
compare different merchandise buying programs on a consistent and meaningful
basis requires a major undertaking for which buyers often lack adequate
resources.
Current sourcing methods often result in less than optimal merchandise
buying, characterized by frequent misalignment between what the consumers want
and what is actually on the store shelf, not to mention lost sales, costly
retail price discounts, or even unsold merchandise returned to the supplier.
Business-To-Business Electronic Commerce In Retail
Retail buyers spend 60 to 80 percent of their time sourcing (searching
for and locating) merchandise and suppliers. The buying process is complex and
multi-faceted. A buyer's decision process involves selecting qualified suppliers
based on production volume, delivery, quality, and price. The buyer's objectives
include achieving pre-set goals for sales, turnover rate, expense levels,
margins and profitability; and updating product selection to meet fashion
trends. In order for retailers to remain competitive, buyers must be selective
and efficient in their purchasing decisions.
The expanding number and variety of products sold by each retailer,
together with pricing pressure and geographic diversity, drives the
globalization of retailer-supplier relationships. Growing volume and complexity
in merchandise sourcing relationships requires an information systems solution.
Long considered an art, merchandise buying must now be approached as a science,
with the help of technology.
To better manage their relationships and merchandise flow, both
retailers and suppliers are turning to information technology, and specifically
to electronic commerce solutions. C-ME believes that the electronic commerce
market is at the beginning of a long term expansion driven by adoption of the
Internet as a marketing venue and data highway.
However, despite the promises of E-commerce, the apparel wholesale
industry is characterized by low-level technology. Past Information Technology
(IT) investments spent by off-price retailers have been geared toward improving
back-end efficiencies, such as inventory control, distribution, and
point-of-sale ("POS") data.
One major area of investment by retailers is EDI, with nearly 100,000
companies which includes retailers and vendors around the world using EDI in one
form or another. EDI was developed over twenty years ago to facilitate back-end
efficiencies (i.e., purchase order fulfillment and processing) between retailers
and their vendors. Using EDI, purchase orders, shipping documents and
notifications were transformed into electronic format and transmitted over
Value-Added Networks (VANs) maintained by third-party providers. By means of
EDI, participating vendors are privy to an instant and continuous flow of
information concerning retail sales by styles, sizes and colors along with the
level of retail inventory. The ultimate goal of EDI is to help retailers and
their vendors realize significant cost savings versus non-automated means of
doing business. For example, the cost of a paper-based transaction in the
apparel industry is $26, versus $4 via electronic means.
Forward looking retailers are now allowing their vendors greater access
to formerly confidential sales and inventory data, in order to develop "quick
response" supply chain management efficiencies. Wal-Mart Stores' Retail Link
technology, for instance, gives 3,200 vendors access to its POS data to
replenish inventory at its 2,000 stores. For example, at each store, workwear
clothing inventory was customized by the vendor according to demographics,
regional tastes and weather patterns. With up to date information, via EDI,
apparel vendors may adjust cost sensitive production schedules and shipments in
accordance with instantly transmitted retailer supplied data, thereby increasing
turnover, avoiding costly mark-downs, and reducing inventory levels without
suffering loss of sales.
Proprietary EDI systems are expensive and exclusionary. Vendors pay
between $5,000 and $20,000 a year for access to standard EDI, depending on the
amount of data sent. Moreover, retailers pay monthly subscription fees for EDI
access and must buy and maintain third-party EDI software. The cost structure of
EDI inevitably favors large retailers, such as J.C. Penney, Wal-Mart and K-Mart,
and their larger vendors. This leaves many small to mid-sized vendors with no
effective path into large retailer's increasingly automated supply chain. This
leaves many small to mid-sized retailers without an electronic channel to link
up with their vendor base.
In order to successfully face these challenges, retailers and suppliers
are increasingly turning to information technology, and specifically electronic
commerce applications, as a means of managing their retailer-supplier
relationships. The Company believes that this trend towards electronic commerce
solutions represents an opportunity for application and service providers who
understand the unique requirements of the retail industry and can provide the
necessary reliability and security to consummate and manage sourcing
transactions. The challenge is coming up with an affordable E-commerce solution
that addresses both the front-end and back-end problems facing the retailer and
its supply chain vendors. The Company services are designed specifically to meet
these challenges.
Sales and Marketing
Direct Sales and Marketing Group
The Company plans to establish a direct sales and marketing force
divided into groups concentrating on three principal target markets: (i)
domestic retailers, (ii) domestic vendors, and (iii) foreign retailers and
vendors.
Initially, the Company anticipates to focus a majority of its marketing
efforts on attracting domestic retailers to its services. The marketing team
will be headed by a Director of Marketing who will coordinate the team's efforts
towards achieving a critical mass of retailers. That is, the Company's marketing
efforts will be retailer-initiated with the Company's marketers following up and
bringing the vendors on to the Company's system. Depending upon the proceeds
raised in the Offering, the Company proposes to hire retailer and vendor-focused
marketers. The Company's marketing team will include salespeople whose primary
responsibility will be to attract additional retail customers to the Company and
salespeople whose primary responsibility will be to introduce the Company's
services to the retailers' vendors. The Company may deploy marketing
professionals in foreign countries to serve these important retailers and vendor
clients.
Target Markets
Retailers - In line with the Company's retailer-centric approach, the
Company plans to target all types of retailers, from conventional department
stores to national chains to mass merchandising stores to off-price stores, as
its potential partners. The Company's services offer this diverse group of
retailers the same benefits, which include an internal management tool to track
the performance of its buyers. Additionally, the Company's services provide
retailers with an automated sourcing vehicle which will centralize buying and
increase buyer productivity.
Through the use of the Company's services, retailers can scale back
trade show attendance and vendor showroom visits. Additionally, buyers can make
their trade show and showroom visits more productive by pre-selecting
merchandise they wish to see or vendors they wish to visit.
The Company's services offer retailers distinct advantages. For
example, department stores, national chains, and mass merchants buy 80 to 90
percent of their private label merchandise directly from manufacturers. And,
since most of these manufacturers, factories, and plants reside overseas, the
Company's services leverages the global reach of the Internet to give these
retailers direct access to foreign manufacturers. This type of ready access
alone has the potential to save retailers both time and money.
Retailers can now have greater access to a wider array of merchandise
to help diversify their merchandise sourcing base. The Company's services are
designed to assist retailers in their ability to quickly, inexpensively, and
easily access information on diverse product lines. Ultimately, the Company's
services benefit the consumer by giving them access to a broader array of goods
at low prices.
The Company also plans to pursue other retail market segments,
including national chain department stores such as J.C. Penney, sporting goods
stores, and mass merchandising department stores after it has gained a dominant
share of the off-price retailer market.
Vendors - The first group of vendors targeted are merchant wholesalers
which are primarily engaged in buying and selling merchandise on their own
account and include jobbers, distributors, importers, and exporters. The Company
also seeks subscribers in the manufacturers' sales and marketing branches.
Lastly, the Company has targeted agents, brokers, and commission merchants which
include establishments whose operators are in business for themselves and are
primarily engaged in selling or buying goods for others (i.e., auction
companies, import agents, export agents, selling agents, merchandise brokers,
and commission merchants).
Listed below are vendor market segments targeted by C-ME, their unique
attributes, and how each segment will benefit from participating in C-ME's
Internet-based sourcing solution.
Wholesalers and Jobbers - These vendors represent the largest
portion of the Company's targeted subscribers. According to Gale
Publishing, there are approximately 11,000 U.S.-based wholesalers in
the apparel industry alone. These vendors, who purchase merchandise
manufactured by others for resale purposes, benefit from the direct
access to retailers the Company's services provide. And, because the
merchandise sold by these vendors are sensitive to time and price
pressures, the Company's services expedite the presentation of time and
price sensitive products to retailers for quick consideration.
Manufacturers - Manufacturers make up a sizable portion of the
Company's targeted subscribers. For example, Gale Publishing has
determined that there are approximately 5,000 U.S.-based manufacturers
in the apparel industry alone. These vendors perform the entire range
of production, from designing to finishing. Manufacturers either sell
their goods directly to retailers through their own sales offices, or
more commonly, to wholesalers who in turn sell the manufacturers' goods
to retailers. Some manufacturers act as wholesalers for other
manufacturers' products.
In terms of IT, manufacturers concentrate on acquiring
relatively simple technologies to improve manufacturing efficiencies,
and have specifically geared computer applications toward improving the
coordination of inventory management practices with their retail
customers. Management believes that manufacturers will have to employ
as many quality Web-based marketing vehicles as possible in order to
maintain their competitiveness. The Company seeks to provide the
preeminent E-commerce solution used by vendors to market their products
and connect to their retail customers.
In addition, once Internet commerce becomes more common,
manufacturers may use the Internet to sell their goods directly to
consumers, just as a number of quality manufacturers have opened retail
outlet stores in an effort to sell directly to the public. Should this
come to pass, the Company may be well-positioned to develop and
facilitate its manufacturer members' E-commerce systems.
Brokers and Commission Merchants - These vendors include
auction companies, import and export agents, and selling agents, all of
whom act as intermediaries who buy and sell goods in the middle of the
supply chain - between wholesalers and manufacturers with retailers,
both domestic and overseas. There are over 8,000 of these entities
operating in the U.S. Management has targeted these vendors as they
sell products directly to retailers and, in most cases, need to enhance
their market presence via low-cost Web solutions such as those offered
by C-ME.
Overseas Vendors - Potential foreign vendor subscribers are
concentrated in the Pacific Rim and include all types of wholesalers,
manufacturers and brokers. In the Pacific Rim alone, Management
estimates that there are over 100,000 potential subscribers in the
apparel trade. C-ME has targeted foreign-owned manufacturers,
wholesalers and brokers that sell merchandise directly to U.S.
retailers.
Most foreign vendors are not connected to their U.S. retailers
by any electronic means and therefore must conduct business via fax,
phone, and courier service. This can prove expensive and
time-consuming. Different time zones also pose communication problems
during business hours. The Company's services will provide overseas
vendors with easy to use, up to date Web technology which is becoming
an essential tool for transacting business with U.S. retailers.
Management believes the lure of conducting business directly with major
U.S.-based retailers via the Company's services will be extremely
attractive and enable the Company to attract and gain a substantial
market share overseas.
The prospect of direct access to foreign vendors is equally
compelling to U.S.-based retailers because retailers can directly
source their products from manufacturers. This enables retailers to
circumvent wholesalers and other intermediaries and improve operating
margins and inventory management.
Business Development Strategy
Initially, the Company will focus its retailer-centric approach on
targeting off-price retailers. The Company has focused its entire range of
services towards automating the time-intensive and costly sourcing methods still
being used by off-price retailers and providing these retailers' vendors with an
effective Web-based tool to market their products. Moreover, if the Company's
system gains a dominant share of this market, Management plans to incorporate a
transaction function into its services, thereby making the system a complete
sourcing-to-purchasing solution. This first step of the Company's business
strategy is designed to accumulate a critical mass of vendor data and product
information.
The Company may also target foreign vendors. Management believes that
foreign vendors will be eager and immediately attracted to the prospects of
conducting business directly with U.S.-based retailers. The domestic and foreign
data accumulated by the Company provides a valuable source of information that
can be used by retailers for sourcing and production purposes for their
extensive "private label" or direct buying needs.
The Company's strategy is designed to enable it to provide a complete
front-end Web-based sourcing and production system for retailers and their
supply chain vendors. The Company plans to develop system enhancements that will
enable it to serve not only as a sourcing resource but also as a complete
closed-loop system that will integrate the entire supply chain architecture.
That is, the Company's services may be designed to help retailers with
distribution from planning, scheduling, delivery, freight management, trade
processing, cross-docking, receiving, processing, factoring, and warehouse
management. In addition, the Company's services may close the loop with a
complete back-end solution from order management and fulfillment to inventory
management (including administration and replenishment) to store operations to
Point-of-Sale ("POS"). Additionally, a transaction function may be built into
the system whereby a commission may be charged to retailers when they purchase
merchandise displayed by vendors on the Company's services.
Potential Revenue Streams
The Company's main source of revenue until the year 2001 will be
generated in the form of fees paid by subscribing vendors and for additional
services performed by the Company. The primary revenue stream for the Company
will be generated from vendors who join one of the Company's ISN through the
Company's retail customers. The Company charges the vendor a one-time setup fee
of $300 and $150 monthly hosting fee for a vendor to join the primary ISN. If
the same vendor joins a secondary ISN, it will only cost this vendor an
additional $20 monthly hosting fee. For example, Vendor A joins BCF's ISN as a
primary ISN and will pay a one time setup fee of $300 plus $150 monthly hosting
fee. If Vendor A is willing to join FBC's ISN as a secondary ISN, Vendor A only
pays an additional $20 for the monthly hosting fee for a total of $170 monthly
hosting. If the vendor only joins the VTS, it will only cost this vendor $300
one-time setup and $30 monthly hosting. If this vendor has already joined the
ISN, the Company waives the $30 monthly hosting fee for the VTS listing.
The Company expects to generate additional revenue from the following
sources:
o Premium marketing services in the form of mass e-mails sent to
retailers, and banner advertisements placed on the VTS.
Management believes vendors will be willing to pay for
prominent exposure in the apparel community.
o A 1.5 percent buying commission on transactions consummated
between vendors and retailers, paid by the retailer, when a
transaction function is incorporated into the Company's system
in the year 2000.
o Fees from enhancements to retailers' ISNs.
o Fees from each additional service integrating the supply chain
architecture.
Marketing and Sales Alliances
The Company believes it is in the interest of the retailers' buyers to
contact their vendors and encourage their vendors to subscribe to the Company's
services because of the potential buying efficiencies gained through the
Company's services. Interested vendors may either contact the Company to
subscribe or retailers may provide the Company with their vendor contacts. The
Company's sales and marketing professionals may then contact these vendors to
offer the Company's services. This retailer-initiated marketing approach is
incorporated in each agreement the Company enters into with its retail
customers. The marketing by the Company's retail customers may include, at the
discretion of the retail customers:
o A letter from the retailer's management sent to vendors
announcing the retailer's use of the ISN, and stating the
importance of joining the ISN.
o Production of glossy brochures describing the benefits of
joining the ISN, mailed to the retailers' vendors.
o Joint press conferences announcing the use of the ISN.
o Phone calls made by the retailers' buyers informing vendors of
the buyer's frequent use of the ISN and how the ISN will bring
the vendor more sales opportunities.
o Retailer-sponsored conferences attended by vendors.
In return for retailers' co-marketing efforts, the Company's retail
customers receive a portion of the monthly subscription fee charged to vendors
who join the retailer's ISN. For example, BCF's fee sharing rate stands at 50
percent, while FBAR's was contracted at 30 percent. Management does not intend
to extend such lucrative fee sharing arrangements with future retail customers.
Future fee sharing percentages will depend on the size of the retailer.
Management anticipates this percentage to be between 0 to 25 percent.
The Company will also employ more traditional marketing methods such as
using print advertising in trade publications, banner ads on and hyper-links to
industry related Web sites, and exhibitions at major trade shows.
Key Contracts and Collaborative Retail Parners
Management has established or is in the process of establishing
affiliations and contracts with several retailers. The most significant of these
are listed below:
Burlington Coat Factory Warehouse Corporation - The Company has
negotiated a contract with BCF. Under the terms of this contract, the
Company will build an exclusive ISN for BCF for free. In return, BCF
will provide the Company with a list of its existing vendors and assist
the Company in marketing the ISN to these vendors. Management
anticipates charging the vendors a $300 set-up fee and a $150 monthly
hosting fee. BCF will receive 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. BCF will also receive 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 fees
collected from foreign (non-US) vendors who join BCF's ISN. BCF will
also receive 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. Lastly, BCF received a
stock warrant whereby BCF has the option to purchase an equity interest
of up to 10 percent of the Company (See "Risk Factors--Reliance on
Retail Customers," "Principal Stockholders" and "Description of
Securities; Warrants").
Family Bargain Corporation - The Company has negotiated a contract with
FBAR, a San Diego-based retailer, to develop an exclusive ISN. FBAR,
through General Textiles and Factory 2-U, operates over 150 off-price
retail apparel and housewares stores located throughout California,
Arizona, Washington, New Mexico, Oregon, Nevada, and Texas. FBAR has
agreed to send letters to its vendors encouraging them to join the ISN.
In return for its efforts in marketing and promoting the ISN, FBAR will
receive 33 percent of the monthly hosting fees.
Competition
Defined broadly, the Company's competition includes each company
providing pre-order and order sourcing flow in the retail industry. Much of this
sourcing flow is currently conducted by the retailers or suppliers themselves
through (i) facsimile or telephonic communications or (ii) EDI-based computer
systems over private networks. These internal systems may involve extensive
hardware and software requirements that are prohibitively expensive for many
retailers and suppliers. The Company believes that most retailers and suppliers
will move to electronic-based sourcing flow as the costs of such systems
decrease over time. The Company's ISN is intended to provide retailers and
suppliers with the efficiencies offered by electronic-based sourcing without
incurring the costs of an EDI-based system.
Several competitors are pursuing the same general market as the
Company. They fall under five categories:
Web site showrooms for apparel vendors - These Web sites
display vendors' products on the Web, either at the Web site itself, or
via a link to the vendor's Web site. These sites do not integrate the
retail buyer into the viewing system, as does the Company's ISN.
Retailers may be "members" of these sites, but there is no assurance
that buyers visit with any regularity, much less buy products from the
site. Major sites include: AT-Net, which charges vendors $1,800 per
year to maintain a product showroom; Apparel.Net, which does not charge
a monthly subscription but rather generates fees from creating and
hosting Web sites for its prospective members; and The Virtual Garment
Center, which lists thousands of links to apparel companies' Web sites.
Web site marketplaces - These sites attempt to facilitate
business-to-business apparel commerce. Sites include: ICES, a web site
catering to upscale retail buyers and their vendors (retailers are able
to view and purchase merchandise via the system; annual membership fees
range from $2,000 to $5,500 per vendor); Global Textile Network lists
thousands of apparel vendor Web sites, and houses showrooms, and
attempts to facilitate an apparel trade marketplace via bid boards and
e-mail requests for products.
Automated supply chain solution companies - QCS, which is
developing an Internet-based subscription service which enables their
retailers to collaborate with their supply chain partners using
standard Web browsers.
Standard EDI suppliers - Major players in this area include
IBM Advantis, Sterling, Premenos, GE Information Services, and
Harbinger Corporation. Costs associated with using EDI through these
third-party providers range from $5,000 to $20,000 a year. Though these
companies are developing Internet-enhanced EDI systems, their
Internet-based products may cannibalize their widespread VANs which
provide an existing and recurring revenue stream.
On-line Catalog Aggregators - Competitors in the larger
general merchandise arena include Commerce One, which has developed
Buysite Electronic Procurement Application, giving purchasing
departments access to 5,000 suppliers' on-line catalogs. Participants
in Commerce One's Electronic Network include Office Depot, 3M, and
Black and Decker. Netscape and Ariba also compete in the intranet
procurement market. Another notable company in this class is
Industry.Net. Despite initial success, Industry.Net's $5,000 per month
fees proved too expensive to all but a few subscribers. Consequently,
Industry.Net is currently out of business.
Despite competition from this diverse group, Management believes that
it has several competitive advantages. First, the Company's pricing structure
and strategic retail alliances make it the most attractive among its
competitors. The Company believes solutions provided by the competition are
simply too expensive, complex, and time consuming to implement. Moreover, the
Company believes its retailer-centric approach of first offering a front-end
E-commerce sourcing solution to gain a critical mass of vendor subscribers is
more practical than those offered by the competition. Competitors offering
complete front-end and back-end solutions without first achieving a critical
mass of subscribers may find it difficult to attract both retailers and vendors.
Lastly, the Company's management lends a wealth of experience in industries
critical to the services being offered by the Company, including high
technology, retail buying, wholesaling, and importing. In total, Management does
not feel that these firms will encroach on its target market.
Intellectual Property Rights
The Company intends to seek U.S. patent and trademark protection on its
products and developments, where appropriate, and to protect its proprietary
technology under U.S. and foreign laws affording protection for trade secrets
and copyrights. Except for filing an application with the U.S. Copyright Office,
the Company, to date, has not filed for any such protection of either patent or
trademark or any other type of intellectual property rights in the U.S. or any
foreign country.
The Company relies primarily upon copyrights, trade secrets, technical
know-how and other unpatented proprietary information relating to its product
development. To protect its trade secrets, technical know-how and other
proprietary information, the Company's employees are required to enter into
agreements providing for maintenance of confidentiality. The Company also has
entered into non-disclosure agreements to protect its confidential information
delivered to third parties in conjunction with possible corporate collaborations
and for other purposes. However, there can be no assurance that these types of
agreements will effectively prevent unauthorized disclosure of the Company's
confidential information, that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the Company's trade
secrets and proprietary know-how will not otherwise become known or
independently discovered by others.
While the Company has not been involved in any patent or other
intellectual property rights litigation, there can be no assurance that third
parties will not assert claims against the Company with respect to existing and
future products. In the event of litigation to determine the validity of any
third party's claims, such litigation could result in significant expense to the
Company, and divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
The Internet industry is subject to frequent litigation regarding patent and
other intellectual property rights. Leading companies and organizations in the
Internet industry have numerous patents that protect their intellectual property
rights in these areas. In the event of an adverse result of any such litigation,
the Company could be required to expend significant resources to develop
non-infringing technology or to obtain licenses to the technology which is the
subject of the litigation. There can be no assurance that the Company would be
successful in such development or that any such license would be available on
commercially reasonable terms.
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Facilities
The Company leases its principal offices located at 320 South Garfield
Avenue, Suite 318, Alhambra, California 91801.
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.
Employees
The Company currently has 6 full-time employees, of which 1 is in sales
and marketing, 1 is in engineering and development, and 4 are in management and
administrative support services. The Company also has 6 outside Board Members.
All of the Company's employees are located within the United States. The
Company's employees are not represented by a labor union and Management believes
that its relations with its employees are satisfactory.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company and their
respective ages and positions with the Company are set forth in the following
table.
NAME AGE POSITION
---- --- --------
Howard W. Moore 68 Vice-Chairman
Frank S. Yuan 50 Chief Executive Officer, President, and
Chairman of the Board
Charles Rice 56 Director
Deborah Shamaley 39 Director
Robert Lee 41 Director
Robert Hsieh 50 Director
Peter Lin 28 Director
David Rau 43 Chief Financial Officer
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Board of Directors
Directors of the Company currently do not receive salaries or fees for
serving as directors of the Company. There are presently seven (7) directors on
the Board. All directors are reimbursed by the Company for any expense incurred
in attending Board meetings.
Howard W. Moore. Mr. Moore has served as Vice-Chairman of the Company since
December, 1998. Mr. Moore has extensive experience in the toy industry.
Beginning in 1948, Mr. Moore started a family toy business called Moore's Toy
Stores. In 1957, Mr. Moore founded Toy Barn Stores in Baltimore, Maryland. Then
in 1966, Mr. Moore founded and served as the President and Chief Executive
Officer of Toy Town, USA, Inc. In 1978, Toy Town, USA, Inc. was sold to Lionel
Corporation. From 1978 to 1979, Mr. Moore served as Executive Vice President for
Lionel Leisure. Mr. Moore joined Toys "R" Us in 1980 as its Vice President of
Purchasing. From there, Mr. Moore became the Toys "R" Us' Executive Vice
President and General Merchandising Manager. Moreover, in 1983, Mr. Moore was
appointed a member of Toys "R" Us' Executive Committee, where he served until
1990. In 1985, Mr. Moore was appointed to the Board of Directors for Toys "R"
Us, where he continues to serve to this day. In addition, Mr. Moore serves as a
member of Toys "R" Us' Governance Committee. In 1990, Mr. Moore retired from
Toys "R" Us and founded Howard Moore Associates, which provides consulting to
the toy industry in the areas of marketing, product licensing, and
merchandising/packaging. Currently, Mr. Moore acts as a consultant for Today's
Kids, Leapfrog, Wild Planet, Catylist, and Whamo as well as for start-up
companies, product developers, and toy inventors. Finally, Mr. Moore has
brokered the sale of four toy companies plus multiple product lines.
Frank S. Yuan. Founded the Company in 1996. Mr. Yuan has served as the Chief
Executive Officer, President and Chairman of the Board since the Company's
inception. Mr. Yuan has a well-diversified business background, which includes
more than 20 years experience in the apparel and computer wholesale industries.
In 1986, Mr. Yuan founded U.N. Imports, Inc. -- a men's apparel import/wholesale
company. Mr. Yuan has been working for UN Imports, Inc. since 1986. Prior to
that, Mr. Yuan founded Frenchy's Clothing Co., a 3 store men's clothing retail
chain, and Foria International, Inc., a men's clothing line that manufactured
apparel under the "Knights of Round Table" label. Mr. Yuan also co-founded
UNI-CGS, Inc. -- a computer hardware importer and wholesaler. Besides experience
in the apparel and computer industries, Mr. Yuan also has substantial experience
in real estate where he founded UNI-Fortune Company. UNI-Fortune was responsible
for developing and selling two retail shopping centers, three office buildings,
six condominium projects, and a 400+ unit apartment complex. Mr. Yuan was also
the co-founder of two community commercial banks -- United National Bank and
EverTrust Bank. Lastly, Mr. Yuan founded and served as the Chairman of the Board
for Western Cities Titles Insurance Company -- a title insurance company selling
title insurance in Los Angeles County, California. Mr. Yuan has a B.A. in
Economics from Fu-Jen Catholic University in Taiwan (1970) and a M.B.A. from
Utah State University (1973).
Charles Rice. Mr. Rice has been a member of the Company's Board of Directors
since February 1, 1997. Mr. Rice has 30 years of experience in wholesale apparel
buying. He has extensive buying experience as a men's apparel buyer for Sears,
Roebuck and Company and Montgomery Ward. Mr. Rice is currently employed by Deer
Creek Enterprises, Ltd. where he serves as a manufacturer's representative for
Sunkyong America/Leader Apparel. Mr. Rice has a B.S. in Business and Economics
from the University of Delaware (1963).
Deborah Shamaley. Mrs. Shamaley has been a member of the Company's Board of
Directors since February 1, 1997. In March, 1985, Mrs. Shamaley co-founded the
Texas Apparel Group. The Texas Apparel Group was later renamed The Apparel Group
(TAG). TAG specialized in buying and selling wholesale/retail,
off-price/close-out women's apparel. TAG grew to 228 employees with 23 retail
outlets across Texas, New Mexico, Arkansas, Oklahoma, Missouri, and Mexico,
including 8 franchise outlets. TAG sold to 1,800 wholesale accounts; which
included BCF, Sears, J.C. Penney's, Nordstrom, Sam's, 50 Off, Factory 2-U, and
One Price Clothing Stores. Sales rose from $1.08 million in its first year of
business to $37.3 million at its peak. In 1996, Mrs. Shamaley sold her interest
in TAG and has since retired.
Robert H.J. Lee. Mr. Lee has been a member of the Company's Board of Directors
since February 1, 1997. Mr. Lee was the founder and President of PicoPower
Technology, Inc. which specialized in inventing low wattage chips for use in the
growing portable computer market. During the three years PicoPower was in
business, its sales rose to $40 million. In 1994, PicoPower was sold to Cirrus
Logic for approximately $60 million. From 1995 to 1996, Mr. Lee served as
Corporate Vice President for Cirrus Logic. In 1996, Mr. Lee became an
independent venture capitalist. In April, 1997, Mr. Lee joined 2M Invest Corp.
(a venture capital fund) and became its Managing Director. Mr. Lee also serves
as the Chairman for several companies including Link Max, Inc. (a company
specializing in Intranet services), Cycore A/S (a Swedish corporation
specializing in 3-D graphics rendering and special effects rendering software),
and Kaukas Systems, Inc. (a company specializing in providing a voice call back
response service for doctors). Mr. Lee has a degree from Chien-Hsien Institute
of Technology in Taiwan (1975) and a M.S. in Computer Science from Stevens
Institute of Technology (1982).
Robert Hsieh, Ph.D. Dr. Hsieh has been a member of the Company's Board of
Directors since February 1, 1997. Dr. Hsieh currently serves as the
Vice-Chairman of Microtek Lab, Inc. (USA) and Microtek International, Inc.
(Taiwan). Dr. Hsieh founded Microtek Lab, Inc. and was the guiding force behind
the development of its desktop scanner
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business. Under Dr. Hsieh's leadership, Microtek launched the industry's first
desktop scanner in 1984, which has grown progressively since then to include a
full array of color and grayscale models. Dr. Hsieh also co-founded, and is the
Co-Chairman of, Ulead Systems -- a Windows-based applications software company.
Dr. Hsieh has also served on numerous Boards of Directors for high-tech
companies, including C-Cube, Sierra Imaging Technology, and Hologram Imaging
Technology. Dr. Hsieh has a B.S. degree in Electrical Engineering from National
Cheng Kung University in Taiwan (1968) and a M.S. (1971) and Ph.D. (1978) in
Electrical Engineering from the University of Cincinnati.
Peter Lin. Mr. Lin has been a member of the Company's Board of Directors since
February 1, 1997. Mr. Lin is currently a Senior Financial Analyst specializing
in mergers and acquisitions for Watson Pharmaceuticals, Inc. Prior to that, Mr.
Lin was a Corporate Actions Analyst for Capital Research and Management Company
from September, 1993 to September, 1996 and for the Franklin Templeton Group
from October, 1992 to September, 1993. Mr. Lin was an Associate Portfolio
Manager in Global Investment Advisors, Inc., the General Partner of Global
Strategic Investment, and is the Investment/Portfolio Manager of the Lotus
Group. Mr. Lin has a B.S. in Business Administration from University of
California, Berkeley (1991) and a M.I.S. degree from Claremont Graduate
University in California (1998).
Officers
David Rau. Mr. Rau joined the Company in August, 1996 and serves as its
Controller and Chief Financial Officer. Mr. Rau also serves as the
Controller/CFO for U.N. Imports, Inc. and has served in that capacity since
1986. Mr. Rau has a B.A. in Economics from Fu-Jen Catholic University in Taiwan
(1977), a M.B.A. from Eastern New Mexico University (1983), and a M.S. in
Computer Science from North Texas State University (1986).
Other Key Advisors and Employees
James Zheng. Mr. Zheng serves as the Company's Chief Technology Officer and was
instrumental in designing, developing, and implementing the Company's
product-driven search engine, database structure, and on-line
purchasing/ordering systems. Mr. Zheng also designed and built the Company's
network, based on TCP/IP. Concurrent with his responsibilities at the Company,
Mr. Zheng owns a multimedia company HZ Multimedia, Inc. where he develops
interactive multimedia application in the areas of corporate presentation,
marketing, and computer-based training as well as provides consulting services
in cross-platform multimedia and Internet application development. Some of his
clients have included Fidelity National Title Insurance Company, Toshiba of
America, LPL Financial Services, Ross Roy Communications, Inc., Santa
Fe/Burlington Northern Railroad, JLG Technology, and Mazda Motor of America. Mr.
Zheng also worked at AIMS Multimedia from 1994 to 1996 where he functioned as a
software engineer, webmaster and UNIX systems engineer. Mr. Zheng has a B.S.
degree in Computer Science from Zhengzhou University, China (1989). Mr. Zheng
also has a M.S. degree in Computer Science from University of California,
Riverside (1992), where he is also a Ph.D. candidate.
James K. Ho, Ph.D. Dr. Ho serves as a consultant for the Company. Dr. Ho is a
professor of information and decision sciences at the University of Illinois at
Chicago, where he also serves as director of applied research and consulting
services for the College of Business Administration. He did his undergraduate
work at Columbia University and obtained his Ph.D. from Stanford University. Dr.
Ho has published widely in academic and professional journals and authored three
books and numerous research articles including "Evaluating the World Wide Web: A
Study of 1000 Commercial Sites," "A Comparative Study of Commercial Web Sites in
Australia, France, Hong Kong, and USA," and "Focasting: The future of Web
Advertising." He has extensive experience working with international
organizations, major corporations, as well as small businesses in the
application of information technology in the workplace. Based on his recent
book, "Prosperity in the Information Age", he conducts
26
<PAGE>
executive seminars on "Competing in the Information Age: Maximizing the Payoff
from Information Technology" and on "Internet Strategies: Beyond Web Sites and
Home Pages." Dr. Ho teaches courses in information and operations management for
MBA, MS, and Ph.D. students, making extensive use of Web resources. It was Dr.
Ho who suggested that the Company implement a FOCASTING (Focused Broadcasting)
function in the Company's web site to provide an added value for the Company's
subscribers.
Joseph Sloan. Mr. Sloan serves as a consultant to the Company. Mr. Sloan is
currently the senior UNIX administrator for Toyota in charge with implementing
its call center database, direct response marketing database, web site, external
UNIX mail gateway, and new UNIX system. Mr. Sloan has a background in system and
network administration of Solaris, SGI Irix, BSD, LINUX and other UNIX systems.
Moreover, Mr. Sloan has a background in UNI - PC integration, administration of
mail, DNS, web and security as well as utility programming in Perl, Shell, C/C++
and other languages. Mr. Sloan has worked at McDonnell Douglas Corporation where
he wrote ATE and Mil-1553 avionics test software and Hughes Aircraft Co. where
he was responsible for large-scale naval electronics warfare systems for the
Navy of the Republic of China. Mr. Sloan has an Associate Degree in Electronics
Technology from Fullerton College (1981). Mr. Sloan is currently completing his
B.S. Degree in Computer Engineering from California State Long Beach.
Executive Compensation
The following table sets forth, for the fiscal year ended June 30,
1998, annual compensation, including salary and bonuses paid by the Company to
each executive officer and all executive officers as a group.
Name and Principal Parties Annual Compensation
-------------------------- -------------------
Salary Bonus
------ -----
Frank S. Yuan $ 50,000 -0-
Chief Executive Officer and President
David Rau $ 33,600 -0-
Chief Financial Officer
All executive officers as a group (Frank S. Yuan $ 83,600 -0-
and David Rau)
27
<PAGE>
Employment Agreements
Mr. Rau entered into an employment agreement with the Company in
October 1996, pursuant to which Mr. Rau will serve as part-time treasurer. The
term of the agreement is "at will"; either party may terminate the agreement
upon ten (10) days written notice. Pursuant to the agreement with Mr. Rau, the
Company will pay Mr. Rau a base salary of $33,600 beginning October 1996.
Directors and Officers Insurance
The Company is exploring the possibility of obtaining Directors' and
Officers' liability insurance. The Company has obtained a premium quotation but
has not entered into any contracts with any insurance company to provide said
coverage as of the date of this Prospectus. There is no assurance that the
Company will be able to obtain such insurance.
Indemnification of Officers and Directors
At present, the Company has not entered into individual indemnity
agreements with its Officers or Directors. However, the Company's Articles of
Incorporation and By-Laws provide a blanket indemnification and state that the
Company shall indemnify, to the fullest extent under California law, its
Directors and Officers against certain liabilities incurred with respect to
their service in such capacities. In addition, the Articles of Incorporation
provide that the personal liability of Directors and Officers for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, Officers, and controlling persons of the
Company pursuant to the foregoing provision, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a Director, Officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such Director, Officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by the Company is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such case.
Stock Options
The Company has adopted a non-qualified Stock Option Plan covering
250,000 shares of the Company's Common Stock, pursuant to which directors,
officers, key employees, and consultants working for the Company are eligible to
receive stock options. The plan is administered by the Board of Directors and
the President of the Company (the "Administrator"). The selection of
participants, allotment of shares, determination of price and other conditions
of purchase of the stock options are determined by the Administrator in order to
attract and retain persons
28
<PAGE>
instrumental to the success of the Company. As determined by the Administrator,
payment upon exercise of options may be in cash or other payment method.
Generally, the vesting, exercise and termination schedules are determined by the
Administrator at the time of grant, as is the exercise price. The stock options,
in most cases, are terminated if the Grantee resigns, terminates, or no longer
holds his/her position with the Company prior to vesting. The table below
reflects stock options granted by the Company to executive officers and other
persons. The table covers all options granted by the Company through December
31, 1998. As of December 31, 1998, no options have been exercised.
Name of Date No. of Exercise
Holder Granted Shares Price
- -------------- ------- ------- --------------------
Alan Chang(1) 1996 50,000 $0.40/share
David Rau(2) 1996 25,000 $10.00
James Zheng(3) 1996 50,000 $10.00
Monica Cheang(4) 1997 10,000 $0.40/share
Luz Jimenez(5) 1997 5,000 $0.40/share
David Rau(5) 1998 5,000 $0.40/share
Laura Mercado(5) 1998 5,000 $0.40/share
Catherine Jampierre(5) 1998 5,000 $0.40/share
Howard W. Moore(6) 1998 15,000 $0.40/share
Total Granted 170,000 $0.40/share - $10.00
Total Ungranted 80,000(7)
(1) Alan Chang was granted a restricted stock option to purchase 50,000 shares
of Common Stock at $0.40 per share pursuant to an employment contract executed
on October 8, 1996. The option vested two years after the execution of the
employment contract. At the time of Mr. Chang's resignation from the Company
only 50 percent of the option (25,000 shares) had vested. Pursuant to the terms
of the Company's 1996 Stock Option Plan, Mr. Chang must exercise the option
within three months of his resignation from the Company.
(2) David Rau was granted a restricted stock option to purchase 25,000 shares of
Common Stock for a total cost of $10.00 pursuant to an employment contract
executed on October 28, 1996. The option vested two years after the execution of
the employment contract. However, Mr. Rau can only exercise 50 percent of the
option (12,500 shares) within 15 days after the end of his second year of
employment. The remaining 50 percent of the option (12,500 shares) is
exercisable within 15 days after the end of his third year of employment.
(3) James Zheng was granted a restricted stock option to purchase 50,000 shares
of Common Stock for a total cost of $10.00 pursuant to an employment contract
executed on November 1, 1996. The option vested two years after the execution of
the employment contract. However, Mr. Zheng can only exercise 50 percent of the
option (25,000 shares) within 15 days after the end of his second year of
employment. The remaining 50 percent of the option (25,000 shares) is
exercisable within 15 days after the end of his third year of employment.
(4) Monica Cheang, who serves as the Company's Office Administrator, was granted
a restricted stock option to purchase 10,000 shares of Common Stock at $0.40 per
share. Ms. Cheang can only exercise 50 percent of her option (5,000 shares)
within 15 days after the end of her second year of employment. The remaining 50
percent of the option (5,000 shares) is exercisable within 15 days after the end
of her third year of employment.
(5) Luz Jimenez, David Rau, Laura Mercado and Catherine Jampierre were each
granted restricted stock option to purchase 5,000 shares of Common Stock at
$0.40 per share. They can only exercise 50 percent of their option (2,500
shares) within 15 days after the end of their second year of employment. The
remaining 50 percent of the options (2,500 shares) are exercisable within 15
days after the end of their third year of employment.
(6) In consideration for serving as the Company's Vice-Chairman, Mr. Moore was
granted restricted stock options to purchase 15,000 shares of Common Stock at
$0.40 per share.
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<PAGE>
(7) The Board of Directors has empowered Management to grant the remaining
80,000 share of ungranted stock options to key employees.
The stock options described above are non-qualified stock options that
were issued by the Company to certain employees and executive officers. As of
September 30, 1998, no options have been exercised or canceled.
CERTAIN TRANSACTIONS
On September 17, 1996, the Company loaned Frank S. Yuan $922,020. The
loan was evidenced by a written promissory note that required Mr. Yuan to pay
monthly interest on the outstanding principal balance of the loan at a rate of 8
percent per annum. Furthermore, Mr. Yuan was required to make principal payments
on demand. To secure the promissory note, Mr. Yuan granted the Company a
security interest in two credit facilities offered by American International
Bank and United National Bank totaling $1,500,000. Mr. Yuan has since paid off
the loan in its entirety.
In July 1996, The Frank S. Yuan Family Trust purchased 2,250,000 shares
for $50,000, and on November 26, 1997, the Frank S. Yuan Family Trust purchased
450,000 shares for $225,000. Frank S. Yuan is the trustee of The Frank S. Yuan
Family Trust.
All future transactions, including loans, between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
30
<PAGE>
PRINCIPAL STOCKHOLDERS
<TABLE>
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of December
31, 1998, and as adjusted to reflect the sale of the Shares offered hereby, for
(i) each executive officer or director of the Company who beneficially owns
Shares; (ii) each stockholder known to the Company to beneficially own 5 percent
or more of the outstanding Shares of its Common Stock; and (iii) all executive
officers and directors as a group. The Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such Shares,
subject to community property laws where applicable.
<CAPTION>
Executive Officers, Shares Percentage of Common Shares Outstanding
Directors, and 5% Beneficially
Stockholders(1) Owned(2) After Offering
- ------------------- ------------ -----------------------------------------------------------------
Before Minimum Minimum Maximum Maximum
Offering w/o BCF w/BCF(3) w/o BCF w/BCF(4)
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Howard W. Moore(6) 15,000 0.3% 0.3% 0.2% 0.2% 0.2%
Frank S. Yuan Family Trust(7) 2,700,000 45% 44.1% 39.6% 31.8% 28.6%
Charles Rice 60,000 1% 1% 0.9% 0.7% 0.6%
Deborah Shamaley 300,000 5% 4.9% 4.4% 3.5% 3.2%
Robert H.J. Lee 250,000 4.2% 4.1% 3.7% 2.9% 2.6%
Robert Hsieh 62,500 1% 1% 0.9% 0.7% 0.7%
Peter Lin (8) 295,000 4.9% 4.8% 4.3% 3.5% 3.1%
David Rau (9) 30,000 0.5% 0.5% 0.4% 0.3% 0.3%
James Zheng (10) 50,000 0.8% 0.8% 0.8% 0.6% 0.5%
UNI, L.P.(11) 474,000 7.9% 7.7% 7.1% 5.6% 5.0%
All Officers, Directors,
and 5% Shareholders as Group 4,236,500 70.6% 69.2% 62.3% 49.8% 44.8%
All Other Stockholders(12) 1,763,500 29.4% 28.8% 25.9% 20.8% 18.7%
New Stockholders if Minimum Sold 125,000 2% 1.8%
New Stockholders if Maximum Sold 2,500,000 29.4% 26.5%
BCF if Minimum Sold 680,555(3) 10.0%
BCF if Maximum Sold 944,444(4) 10%
<FN>
(1) All officer, directors, and five-percent shareholders of the Company may be
reached at Cyber Merchants Exchange, Inc., 320 S. Garfield Ave., Ste. 318,
Alhambra, CA 91801.
(2) Based on 6,000,000 shares outstanding (5,750,000 shares outstanding plus
250,000 shares reserved for stock options of which stock options of 145,000
shares have been granted ). (After the 1-for-2 reverse stock split.)
(3) As part of the Company's contract with BCF, the Company granted BCF a stock
warrant to obtain a 10 percent equity interest in the Company. See, "Key
Contracts and Collaborative Retail customers - Burlington Coat Factory Warehouse
Corporation." Assumes the exercise by BCF of its stock warrant to obtain a 10
percent equity interest in the Company at $4.00 per share. If the minimum amount
of shares (125,000 shares) are subscribed to pursuant to this Offering, BCF's
stock warrant would entitle it to purchase up to 680,556 shares. This number of
shares is determined by taking the difference between that number of shares
6,810,556 (of which 6,125,000 shares represents 90 percent; 6,125,000 / .90 =
6,810,556) and 6,125,000 shares. Thus, if the minimum amount of shares are
subscribed to, BCF can purchase up to 680,556 shares for $4.00 per share.
(4) As part of the Company's contract with BCF, the Company granted BCF a stock
warrant to obtain a 10 percent equity interest in the Company. See, "Key
Contracts and Collaborative Retail customers - Burlington Coat Factory Warehouse
Corporation." Assumes the exercise by BCF of its stock warrant to obtain a 10
percent equity interest in the Company at $4.00 per share. If the maximum amount
of shares (2,500,000 shares) are subscribed to pursuant to this Offering, BCF's
stock warrant would entitle it to purchase up to 944,444 shares. This number of
shares is determined by taking the difference between that number of shares
9,444,444 (of which 8,250,000 shares represents 90 percent; 8,250,000 / .90 =
9,444,444) and 8,250,000 shares. Thus, if the maximum amount of shares are
subscribed to, BCF can purchase up to 944,444 shares for $4.00 per share.
(5) Assumes the exercise by Howard W. Moore of his stock options (15,000
shares).
(6) Frank Yuan and Vicky Yuan are the trustees of the Frank S. Yuan Family
Trust. Jerome Yuan is the beneficiary of the Frank S. Yuan Family Trust.
(7) Peter Lin was an Associate Portfolio Manager in Global Investment Advisors,
Inc., the General Partner of Global Strategic Investment, and is the
Investment/Portfolio Manager of the Lotus Group.
(8) Assumes the exercise by David Rau of his stock options (30,000 shares). Mr.
Rau is also the beneficial owner of 30,000 shares (after 1-for-2 reverse stock
split) that were purchased at $0.42 average cost per share.
See Footnote 11, below.
(9) Assumes the exercise by James Zheng of his stock options (50,000 shares).
Mr. Zheng is also the beneficial owner of 50,000 shares (after 1-for-2 reverse
stock split) that were purchased at $0.40 per share. See Footnote 11, below.
(10) The following table sets forth the beneficial owners of UNI, L.P. after
giving effect to the 1-for-2 reverse stock split:
1st Round 1st Round 2nd Round 2nd Round
Name of Partner Residence Shares Investment Shares Investment
- --------------- --------- ------ ---------- ------ ----------
Alan Chang CA USA 1,250 $ 500 250 $ 125
Edward Chang CA USA 1,250 $ 500 250 $ 125
Helen Chang NY USA 5,000 $ 2,000 1,000 $ 500
Monica Cheang CA USA 5,000 $ 2,000 1,000 $ 500
Gary & Grace Chou CA USA 5,000 $ 2,000 1,000 $ 500
Martin Chow CA USA 12,500 $ 5,000 2,500 $ 1,250
Peter & Jenny Chow CA USA 5,000 $ 2,000 1,000 $ 500
Mei-Jui Hsu CA USA 0 $ 0 5,000 $ 2,500
Nina Hsu CA USA 25,000 $ 10,000 0 $ 0
Inky Hwang CA USA 12,500 $ 5,000 0 $ 0
Wei H. Kao CA USA 12,500 $ 5,000 2,500 $ 1,250
Judson Lee CA USA 37,500 $ 15,000 0 $ 0
Ming- Feng Lee NV USA 0 $ 0 5,000 $ 2,500
Ingrio Liao CA USA 0 $ 0 5,000 $ 2,500
Jacqueline Michaela Liao CA USA 25,000 $ 10,000 0 $ 0
Willy Ma CA USA 12,500 $ 5,000 2,500 $ 1,250
David Rau CA USA 25,000 $ 10,000 5,000 $ 2,500
Fredrik Ross Runnerstrum CA USA 5,000 $ 2,000 1,000 $ 500
Martha Shih CA USA 2,500 $ 1,000 500 $ 250
Andy & Maureen Storch IL USA 2,500 $ 1,000 500 $ 250
Helen T. Wang CA USA 0 $ 0 5,000 $ 2,500
Albert S. Yuan CA USA 2,500 $ 1,000 500 $ 250
Lili C. & Kenneth Yuan CA USA 12,500 $ 5,000 0 $ 0
Norbert Yuan CA USA 12,500 $ 5,000 2,500 $ 1,250
Ya-Yuan C. & Harry Yuan CA USA 12,500 $ 5,000 2,500 $ 1,250
James Zheng CA USA 50,000 $ 20,000 0 $ 0
Shi-Pin Yuan Taiwan 30,000 $ 12,000 6,000 $ 3,000
Yi-Kung Hwang Taiwan 37,500 $ 15,000 0 $ 0
Shih-Li Yuan Taiwan 42,500 $ 17,000 6,000 $ 3,000
Hwa-Hung Tseng Taiwan 22,500 $ 9,000 0 $ 0
======== ======== ======== ========
Total: 417,500 $167,000 56,500 $ 28,250
(11) Assumes the exercise by Monica Cheang (10,000), Laura Mercado (5,000),
Catherine Jampierre (5,000), David Rau (5,000) and Luz Jimenez (5,000) of their
stock options. Also assumes the grant and exercise of the remaining 80,000
shares held in reserve for stock options.
</FN>
</TABLE>
DESCRIPTION OF SECURITIES
Common Stock
On June 30, 1997, the authorized capital stock of the Company consisted
of 50,000,000 Shares of Common Stock. On March 24, 1998, the Company's Articles
of Incorporation were amended so that the Company's authorized capital stock
consisted of 40,000,000 Shares of Common Stock and 10,000,000 Shares of
Preferred Stock, without par value. As of December 31, 1998, there were
5,750,000 Shares of Common Stock outstanding and held of record by 36
stockholders. There are no outstanding shares of Preferred Stock. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, except that upon giving the
legally required notice, stockholders may cumulate their Shares in the election
of directors. The Company may pay dividends at the time and to the extent
declared by the Board of Directors and in accordance with California corporate
law. The Common Stock has no preemptive or other subscription rights, and there
are no conversion rights or redemption or sinking fund provisions with respect
to such Shares. All outstanding Shares of Common Stock are, and the Shares
offered hereby will be, upon the completion of this Offering, fully paid and not
assessable.
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<PAGE>
Warrants
BCF owns a warrant (the "Warrant") to purchase the Company's Common
Stock, on a fully diluted basis, equal to ten percent (10%) of the Company
pursuant to the Warrant Agreement dated October 15, 1997. See "Key Contracts and
Collaborative Retail customers - Burlington Coat Factory Warehouse Corporation."
The Warrant is currently exercisable at $4.00 per share. The Warrant expires
upon the earlier of the following dates: (i) October 15, 2002 or (ii) 30 days
after the closing of a firm underwritten public offering of the Company's
securities with which the aggregate gross proceeds to the Company are at least
$5,000,000 and the offering price is at least $4.00 per share. The Common Stock
issued upon the exercise of this Warrant has certain registration rights. In the
event the Company sells only the Minimum, BCF shall have a warrant to purchase
680,556 shares of the Company's Common Stock. In the event the Company sells the
Maximum, BCF shall have a warrant to purchase 944,444 shares of the Company's
Common Stock.
PLAN OF DISTRIBUTION
General
The Company proposes to offer and sell the Shares of Common Stock
directly to members of the public residing in the following states: California,
Illinois, New Jersey and New York. Announcements of this Offering, in the form
prescribed by Rule 134 of the Securities Act, will be communicated to selected
persons. A copy of this Prospectus will be delivered to those who request it,
together with the Subscription Agreement. All shares will be sold at the public
offering price of $8.00 per share. The Company reserves the right to reject any
subscription or share purchase agreement in full or in part.
The Company will effect offers and sales of shares through printed
copies of this Prospectus delivered by mail and electronically by the Company
and through broker-dealers. Any voice or other communications will be conducted
in certain states through its executive officers, and in other states through a
designated sales agent, licensed in those states. Under Rule 3a4-1 of the
Exchange Act, none of these employees of the Company will be deemed a "broker,"
as defined in the Exchange Act, solely by reason of participation in this
Offering, because (1) none is subject to any of the statutory disqualifications
in Section 3(a)(39) of the Exchange Act, (2) in connection with the sale of the
shares hereby offered, none will receive, directly or indirectly, any
commissions or other remuneration based either directly or indirectly on
transactions in securities, (3) none is an associated person (partner, officer,
director or employee) of a broker or dealer and (4) each meets all of the
following conditions: (A) primarily performs substantial duties for the issuer
otherwise than in connection with transactions in securities; (B) was not a
broker or dealer, or an associated person of a broker or dealer, within the
preceding 12 months; and (C) will not participate in selling an offering of
securities for any issuer more than once every 12 months.
The Company has also engaged certain broker-dealers to act as best
efforts underwriters for this Offering (collectively the "Selling Group"). The
Selling Group is comprised on Ace Diversified Capital, Inc., Drake & Co., U.S.
Pacific Financial Services, Travis Morgan Securities, Corporate Investment
Group, AM Razo and Company Securities Inc., Tradeway Securities Group, Inc., The
Malachi Group, Inc., and First Montauk Securities Corp. The Company has executed
and entered into Best Efforts Compensation Agreements with each member of the
Selling Group, whereby the Company has granted each broker/dealer a different
allotment of the 2,500,000 shares to sell. The following table sets forth the
Maximum number of shares that each broker-dealer has been allotted of the total
2,500,000 shares being offered herein.
Name of Broker-dealer Number of Shares Allotted to Sell
- --------------------- ---------------------------------
Ace Diversified Capital, Inc. 400,000
Drake & Co. 100,000
U.S. Pacific Financial Services 300,000
Travis Morgan Securities 100,000
Corporate Investment Group 50,000
AM Razo and Company Securities 50,000
Tradeway Securities Group, Inc. 50,000
The Malachi Group, Inc. 50,000
First Montauk Securities Corp. 100,000
TOTAL 1,200,000
It is important to note that since the Company has allotted only
1,200,000 of the 2,500,000 shares offered herein, the Company, through its
officers, will have to sell the remaining 1,300,000 shares (and any of the
1,200,000 shares allotted to, but not sold, by the Broker-dealers) directly to
the public. The Company, however, reserves the right in its sole and absolute
discretion to increase said allotments to an amount not to exceed the 2,500,000
shares offered herein.
The National Association of Securities Dealers has approved the terms
and conditions for the Best Efforts Compensation Agreements for the members of
the Selling Group. Accordingly, the Company is now permitted to sell the Shares
offered herein directly to the public through its executive officers, as well as
through the members of the Selling Group. See "Plan of Distribution."
The maximum placement agent commission is seven percent (7%). The
Company is not responsible for any due diligence fees. The Company is not
responsible and will not pay for the reimbursement of any expenses incurred by
the members of the Selling Group. The Company will pay and bear all costs
incident to the performance of its obligations under the Best Efforts
Compensation Agreements, but not including the fees and expenses incurred by
legal counsel for any of the members of the Selling Group.
Each member of the Selling Group shall receive warrants to purchase up
to five percent (5%) of the number of shares of Common Stock allotted by the
Company to each broker/dealer (pursuant to the terms of each respective Best
Efforts Compensation Agreement) at a price equal to one hundred and sixty-five
percent (165%) of the final offering price (165% of $8.00 or an exercise price
for the warrants of $13.20 per day). The number of warrants granted to each
broker/dealer will be based on a pro rata amount of allotted shares of Common
Stock that are sold by each broker/dealer. For example, if a broker/dealer sells
all of its allotted shares, the broker/dealer will receive warrants for the full
five percent; in the alternative, if the broker/dealer sells none of its
allotted shares, the broker/dealer will not receive any warrants.
Each warrant shall be assignable, shall contain net exercise
provisions, and shall expire four (4) years after the effective date of this
registration statement.
The warrants and the underlying securities are "restricted securities"
and may not be sold, transferred, assigned, pledged or hypothecated, except by
operation of law or in conjunction with a reorganization, for a period of one
year following the effective date of this registration statement. The warrants
and the underlying securities (in the event the warrants are exercised) will
contain a restrictive legend describing the restriction and the time period.
In the event that any officers, directors or beneficial stockholders of
the Company decide to purchase any of the Shares offered herein in order to
reach the Minimum, such purchases will be made for investment purposes only and
not with a view towards redistribution.
Determination of Offering Price
Prior to this Offering there has been no market for the common stock of
the Company, and there can be no assurances that a market will develop or be
sustained. Accordingly, the public offering price has been determined by the
Company's Board of Directors. Among factors considered in determining the public
offering price were the Company's results of operations, the Company's current
financial condition, its future prospects, the state of the markets for its
products, the experience of management and the economics of the industry segment
in general.
The Shares are offered on a "Minimum-Maximum" basis: 125,000 Shares
(the "Minimum"), and 2,500,000 Shares (the "Maximum"). The Shares are offered
directly by the Company subject to the subscription and payment for not less
than the Minimum, offered by the Company during the "Holding Period," which
shall begin with the commencement of the Offering and terminate upon the earlier
of (i) the date upon which the escrow agent, Union Bank of California, confirms
that it has received the Minimum in deposited funds is a specified escrow
account, (ii) within 180 days of the date of the commencement of this Offering,
(iii) the date upon which the Company terminates the Offering prior to the sale
of the Minimum, or (iv) the date upon which the Company terminates the Offering
after the sale of the Minimum. All subscription payments received during the
Impound Period will be deposited into an interest bearing escrow account
entitled: "Imperial Trust Company Escrow Account for Cyber Merchants Exchange,
Inc." at Imperial Trust Company, 201 N. Figueroa, Suite 610, Los Angeles,
California 90012.
All payments for Shares must be made payable to the order of "Union
Bank of California Escrow Account for Cyber Merchants Exchange, Inc." and
delivered with a completed subscription agreement to the Company directly or via
a member of the Selling Group. If the Shares are purchased through a member of
the Selling Group, that member will forward the payment for the Shares directly
to the Escrow Agent by noon of the next business day after receipt of such
payment. If the Shares are purchased directly from the C-ME, the Company will
transmit for deposit into the escrow account, within three business days of
receipt, all payments and corresponding copies of subscription agreements.
During the Impound Period, subscribers will not have the right to any return of
subscriptions.
In the event less than $1,000,000 in subscriptions are received within
180 days of the date of the commencement of this Offering, then 100% of the
proceeds shall be promptly returned to the prospective investors by the Escrow
Agent, pursuant to the terms of an Escrow Agreement the Company has filed with
the Securities and Exchange Commission. When the balance of the bank account
reaches $1,000,000, the Escrow Agent shall then release such funds to the
Company and they will be used in the manner described under "Use of Proceeds."
Unless the Minimum number of Shares offered hereby are sold by the end
of the Offering period (i.e., within 180 days of the date of the commencement of
this Offering), all proceeds will be promptly returned to subscribers without
deduction for commissions or expenses. If the Minimum amount is raised, the
remaining 2,375,000 shares will continue to be offered until the earlier of the
sale of all of the Shares being offered, termination of the Offering or until
expiration of the offering period.
The Shares are offered subject to prior sale and the Company reserves
the right to reject any offer in whole or in part. The Company will send written
confirmation by U.S. mail to notify subscribers of the acceptance of their
subscriptions within ten days of their acceptance (i.e., signed copies of the
Subscription Agreement). Common Stock certificates will be delivered to
investors by means of Federal Express or other delivery service within two weeks
after the Minimum has been sold, and thereafter within 30 days of acceptance of
the subscription by the Company.
Registration Rights
The Company has issued a stock warrant to BCF pursuant to which BCF was
granted certain registration rights.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by its counsel, Evers & Hendrickson, LLP, San
Francisco, California.
34
<PAGE>
EXPERTS
The financial statements of the Company as of June 30, 1998 and 1997
and for the years then ended, included herein and in the Registration Statement
in reliance upon the report of KPMG, LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
The report of KPMG, LLP covering the June 30, 1998 and 1997 financial
statements contains an explanatory paragraph that states that the Company's
recurring losses from operations raise substantial doubt about the entity's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of that uncertainty.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto,
relating to the shares offered hereby has been filed with the Securities and
Exchange Commission, Office of Small Business Policy, Washington, D.C. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the shares
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, the Northeast Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York, 10048 and copies of all or any
part thereof may be obtained from the Public Reference Branch of the Commission
upon the payment of certain fees prescribed by the Commission. In addition the
Commission maintains a World Wide Web site on the Internet at http://www.sec.org
that contains reports, proxy and information statements and other documents
filed electronically with the Commission, including the Registration Statement.
The Company intends to furnish its shareholders with annual reports containing
financial statements audited by its independent public accountants and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year.
35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article IV of the Registrant's Articles of Incorporation provides that the
liability of the directors of this corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law and that the
corporation is authorized to indemnify the directors and officers of the
corporation to the fullest extent permissible under California law.
Section 2.15 of Article II of the Registrant's By-laws provides that it may
indemnify any director, officer, agent or employee as to those liabilities and
on those terms and conditions as are specified in Section 317 of the California
Corporations Code. In any event, the Registrant shall have the right to purchase
and maintain insurance on behalf of any such persons whether or not the
Registrant would have the power to indemnify such person against the liability
insured against.
Insofar as indemnification for liabilities arising under the Securities Act,
indemnification may be permitted to directors, officers or persons controlling
the Registrant pursuant to the foregoing section. The Registrant has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution of
the securities being registered are estimated as follows, assuming the Maximum
offering amount is sold:
SEC filing fees 5,900
Blue Sky filing fees 10,500
Accountant's fees and expenses 25,000
Legal fees and expenses 40,000
Printing 20,000
Marketing expenses 20,000
Postage 5,000
Transfer Agent's fees 5,000
Miscellaneous 18,600
Total $150,000
The Registrant will bear all expenses shown above.
36
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
a) The following information is given for all securities that Cyber Merchants
Exchange, Inc. (the "Company") sold within the past three years without
registering the securities under the Securities Act. It is important to
note that the sales of securities listed below occurred before the Company
effected a 1-for-2 reverse stock split in March of 1998.
Date Title Amount
---- ----- ------
1. 7/16/96 to 12/31/96 Common Stock $ 1,050,000
2. 10/1/97 to 12/31/97 Common Stock $ 500,000
<TABLE>
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
<CAPTION>
1st Round 1st Round 2nd Round 2nd Round
Name of Shareholder Shares Investment Shares Investment Residence
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
DJR Telecom, Inc. 50,000 $10,000 10,000 $2,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Jeannie Chen 100,000 $20,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Amy Me-Ling Young 100,000 $20,000 20,000 $5,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
R. Douglas Smith 25,000 $5,000 5,000 $1,250 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Finefeld Group, Inc. 250,000 $50,000 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Calsafe Capital Corporation 250,000 $50,000 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Chang-Huan & Haily Chen Hsueh 250,000 $50,000 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Robert H.J. Lee 500,000 $100,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
T.K. Lin Investment Co. 250,000 $50,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Su, Peng Chang-Ching 50,000 $10,000 10,000 $2,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Robert & Ning-Ning Hsieh(1) 250,000 $50,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
UNI L.P. 835,000 $167,000 113,000 $28,250 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Yuan Family Trust 4,500,000 $50,000 900,000 $225,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Guo Li Gang 350,000 $70,000 70,000 $17,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Song-Nien Yeh 150,000 $30,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Global Strategic Investment, L.P.(2) 470,000 $94,000 120,000 $30,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Charles Hung, Jr. 30,000 $6,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Chang Pension Trust 0 0 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Shen, Xu 0 0 40,000 $10,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Yao, Jie 0 0 16,000 $4,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Lin, Po wen 0 0 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Baumin Lee & Jung Chang 0 0 60,000 $15,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Aretha Lee 0 0 40,000 $10,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
John J. Shay 0 0 100,000 $25,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Tsay, Yuh Tsuen 0 0 34,000 $8,500 Taiwan
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
C. Stewart & Ying-Foon Chow 0 0 30,000 $7,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Jerry Yeh 0 0 30,000 $7,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Charles & Margaret Rice 100,000 $20,000 20,000 $5,000 IL
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Lonnie B. Martin 10,000 $2,000 2,000 $500 TX
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Deborah Shamaley 500,000 $100,000 100,000 $25,000 TX
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Loyis & Barbara Vargochik 50,000 $10,000 0 $0 NC
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Lux Corporation(3) 125,000 $25,000 0 $0 WA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Avram Jay & Eleanor Kaiser 25,000 $5,000 5,000 $1,250 FL
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Arlene & Peter Langone 5,000 $1,000 0 $0 CT
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Wen-Tsung Chen 250,000 $50,000 0 $0 Taiwan
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
William & Dee Mowbray 25,000 $5,000 5,000 $1,250 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Total 9,500,000 $1,050,000 2,000,000 $500,000
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
<FN>
(1) As part of a divorce settlement, Robert Hsieh and Ning-Ning Hsieh each
currently owns 125,000 shares of the Company's Common Stock.
(2) Lotus Group succeeded Global Strategic Investment's interest in the
Company. Peter Lin was an Associate Portfolio Manager in Global Investment
Advisors, Inc., the General Partner of Global Strategic Investment, and is
the Investment/Portfolio Manager of the Lotus Group.
(3) Claire's Stores, Inc. acquired all of the assets of Lux Corporation.
</FN>
</TABLE>
State Exemptions Relied Upon
California: Cal. Corp. Code Section 25102(f)
Illinois: 815 ILCS 5/4 Sections 4(B), (G), and (S)
Florida: Fla. Stat. Section 517.061(11)
Texas: Texas Securities Act Sections 5(E) and (I)
Connecticut: Uniform Securities Act Ch. 672a Section 36b-21(b)(9)(A)
Washington: RCW 21.20.320(1)
North Carolina: Securities Act Section 78A-17(9)
b) No underwriters were used in connection with any of the issuances of
shares. The class of persons to whom the Company issued shares was those
persons known to the
1. Founders, Employees, Directors, consultants, business associates,
private investors
2. Employees, Directors, consultants, business associates, private
investors
c) No underwriters were used in connection with any of the issuances of shares
or options so there were no underwriting discounts or commissions. The
transactions and the types and amounts of consideration received by the
Company were:
1. Cash
2. Cash
d) The sales were made pursuant Section 4(2) of the Securities Act. Each
investor was provided with a Private Placement Memorandum which described
the information needed so that prospective investors could make an informed
investment decision.
Item 27. EXHIBITS
ITEM (601) DOCUMENT PAGE
- ---------- -------- ----
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 Malachi Group, Inc.
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, July 16, 1996
3.2* Amendment to Articles of Incorporation filed
March 30, 1998
3.3* By-laws
4.1* Article II of By-laws (Reference is made to
Exhibit 3.3)
4.2* Share Specimen
4.3* Warrant held by Burlington Coat Factory
Warehouse Corporation
5* Opinion of Evers & Hendrickson, LLP with
respect to the legality of the shares being
registered
10.1* Lease of registrant's facilities
37
<PAGE>
10.2* Participation Agreement with Burlington Coat
Factory Warehouse Corporation
10.3* Contract with Family Bargin Corporation
10.4* Employment contract with David Rau
10.5* Escrow Agreement with Imperial Trust Company
10.6* 1996 World Wide Magic Net, Inc. Stock Option Plan
23.1* Consent of KPMG, LLP
23.2* Consent of Evers & Hendrickson, LLP
99.1* Share Purchase Agreement
- --------------------
* Previously Filed.
Item 28. UNDERTAKINGS
a) The Registrant hereby undertakes that is will:
1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the bona fide
offering.
3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
e) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion or the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
38
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe the registrant
meets all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned in the City
of Alhambra, on __________________.
Cyber Merchants Exchange, Inc.
By:________________________ By:_________________________________
Frank S. Yuan David Rau
Chief Executive Officer, Chief Financial Officer
President, and Chairman of the Board
<TABLE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<CAPTION>
Signature Title Date
<S> <C> <C>
________________________ Vice-Chairman ____________________
Howard W. Moore
________________________ Chief Executive Officer ____________________
Frank S. Yuan President, Chairman of the Board
________________________ Chief Financial Officer ____________________
David Rau
________________________ Director ____________________
Deborah Shamaley
________________________ Director ____________________
Charles Rice
________________________ Director ____________________
Robert Hsieh
________________________ Director ____________________
Robert Lee
________________________ Director ____________________
Peter Lin
</TABLE>
39
<PAGE>
No person is authorized in connection with any offering made hereby to give any
information or to make any representation not contained herein and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any security other than the Securities
offered hereby to any person in any jurisdiction in which it is unlawful to make
such an offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Company since the date of this
Prospectus or that the information contained herein is correct as of any date
subsequent to the date of this Prospectus.
TABLE OF CONTENTS Page
----
Summary......................................................................___
Risk Factors.................................................................___
Use of Proceeds..............................................................___
Dividend Policy..............................................................___
Capitalization...............................................................___
Dilution.....................................................................___
Selected Financial Data......................................................___
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................___
Business.....................................................................___
Management...................................................................___
Certain Transactions.........................................................___
Principal Stockholders.......................................................___
Description of Securities....................................................___
Plan of Distribution.........................................................___
Legal Matters................................................................___
Experts......................................................................___
Additional Information.......................................................___
Financial Statements.........................................................F-1
Until ____________, 1999 (90 days after the effective date of this Prospectus),
all dealers effecting transactions in the Securities, whether or not
participating in this Offering, may be required to deliver a Prospectus. This in
addition to the obligation of dealers to deliver a Prospectus when acting as
Selling Group members and with respect to their unsold allotments or
subscriptions.
---------------
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
---------------
2,500,000 Shares of
Common Stock
PROSPECTUS
____________________
40
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
<S> <C>
Report of KPMG LLP, Independent Auditors............................................... F-2
Balance Sheets as of June 30, 1997 and 1998 and December 31, 1998 (unaudited).......... F-3
Statements of Operations for the years ended June 30, 1997 and 1998 and for the six
months ended December 31, 1997 and 1998 (unaudited).................................... F-4
Statements of Stockholders' Equity for the years ended June 30, 1997 and 1998 and for
the six months ended December 31, 1997 and 1998 (unaudited)............................ F-5
Statements of Cash Flows for the years ended June 30, 1997 and 1998 and for the
six months ended December 31, 1997 and 1998 (unaudited)................................ F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
<PAGE>
KMPG
725 South Figueroa Street
Los Angeles, CA 90017
The Board of Directors
Cyber Merchants Exchange, Inc.:
We have audited the accompanying balance sheets of Cyber Merchants Exchange,
Inc. (the "Company") as of June 30, 1998 and 1997 and the related statements of
operations, stockholders' equity and cash flows for the years 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 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 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 account principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30, 1998
and 1997 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has experienced operating losses and negative
cash flows from operating activities since inception. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KMPG LLP
Los Angeles, California
October 16, 1998
F-2
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
Balance Sheets
<CAPTION>
June 30
--------------------------
Assets 1997 1998 December 31, 1998
----------- ----------- ------------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,078 81,636 133,227
Certificates of deposit -- 300,000 --
Accounts receivable 9,560 7,477 7,515
Notes receivable 419,570 -- --
Other current assets 5,901 -- --
----------- ----------- -----------
Total current assets 439,109 389,113 140,742
Property and equipment, net 97,524 78,821 62,940
Other assets 4,583 4,562 4,562
----------- ----------- -----------
$ 541,216 472,496 208,244
=========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 44,552 47,502 26,822
Deferred revenue 4,275 3,965 6,260
----------- ----------- -----------
Total current liabilities 48,827 51,467 33,082
----------- ----------- -----------
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 December 31, 1998, 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) (1,404,838)
----------- ----------- -----------
Net stockholders' equity 492,389 421,029 175,162
Commitments and contingency (note 6)
----------- ----------- -----------
$ 541,216 472,496 208,244
=========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
Statements of Operations
<CAPTION>
Year ended June 30 Six months ended December 31
1997 1998 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues - subscriber's fees $ 35,900 65,722 38,640 29,380
Operating costs and expenses:
Cost of revenues 123,104 139,680 69,133 60,361
General and
administrative expenses 550,004 512,849 231,165 231,952
----------- ----------- ----------- -----------
Operating loss (637,208) (586,807) (261,658) (262,933)
----------- ----------- ----------- -----------
Other income (expenses):
Loss on sale of fixed assets -- (91) -- --
Interest income 50,397 16,338 9,963 17,066
----------- ----------- ----------- -----------
Loss before
income taxes (586,811) (570,560) (251,695) (245,867)
----------- ----------- ----------- -----------
Income taxes 800 800 -- --
----------- ----------- ----------- -----------
Net loss $ (587,611) (571,360) (251,695) (245,867)
----------- ----------- ----------- -----------
Basic and diluted net loss per share $ (0.14) (0.11) (0.05) (0.04)
=========== =========== =========== ===========
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>
F-4
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
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) -- -- -- (245,867) (245,867)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998
(unaudited) 5,750,000 $1,550,000 30,000 (1,404,838) 175,162
========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
Statements of Cash Flows
<CAPTION>
Year ended June 30 Six months ended December 31
1997 1998 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (587,611) (571,360) (251,695) (245,867)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 24,632 38,623 16,777 15,881
Compensation expense related
to stock options 30,000 -- -- --
Loss on sale of fixed assets -- 91 -- --
Provision for doubtful accounts -- 3,600 1,700 --
Changes in assets and liabilities:
Accounts receivable (9,560) (1,517) (4,472) (38)
Other current assets (5,901) 5,901 2,854 --
Other assets (4,583) 21 21 --
Accounts payable and
accrued expenses 44,552 2,950 (22,326) (20,680)
Deferred revenue 4,275 (310) 945 2,295
----------- ----------- ----------- -----------
Net cash used in operating activities (504,196) (522,001) (256,196) (248,409)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of (payment to)
certificates of deposit -- (300,000) (500,000) 300,000
Purchase of property and equipment (122,156) (23,421) (12,779) --
Proceeds from sale of property and equipment -- 3,410 -- --
Net proceeds received from (paid to) note receivable (419,570) 419,570 418,970 --
----------- ----------- ----------- -----------
Net cash provided by
(used in) investing activities (541,726) 99,559 (93,809) 300,000
----------- ----------- ----------- -----------
Cash flows provided by financing activities
- proceeds from issuance of common stock 1,050,000 500,000 485,250 --
----------- ----------- ----------- -----------
Net increase in cash and cash
equivalents 4,078 77,558 135,245 51,591
Cash and cash equivalents at beginning of period -- 4,078 4,078 81,636
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,078 81,636 139,323 133,227
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- -- -- --
Income taxes 800 1,600 -- --
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-6
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
(1) Summary of Significant Accounting Policies
Cyber Merchants Exchange, Inc. (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 operations in November 1996.
(a) Unaudited Interim Financial Information
The interim financial statements of the Company for the six months
ended December 31, 1997 and 1998, 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 December 31, 1998, and the
results of its operations and its cash flows for the six months
ended December 31, 1997 and 1998.
(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
F-7
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
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.
(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 Pronouncements
In June 1997, the 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 Financial Accounting Standards Board 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,
F-8
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
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 six months ended December 31, 1998 and
the year ended June 30, 1998, respectively does not include the
effect of 170,000 stock options and 160,000 stock options,
respectively, and 944,444 common stock warrants because their
effects are anti-dilutive.
Net loss per share for the six months ended December 31, 1997 does
not include the effect of 155,000 stock options and 944,444 Common
Stock warrants because their effect are anti-dilutive.
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 December 31, 1998
--------- --------- -----------------
(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) (77,104)
--------- --------- ---------
$ 97,524 78,821 62,940
========= ========= =========
F-9
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
(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
December 31, 1998, June 30, 1998 and 1997. As such, management has
recorded a valuation allowance for the full amount of deferred tax assets
at December 31, 1998, June 30, 1998 and 1997.
At December 31, 1998, the Company has available net operating losses of
approximately $1,300,000 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's 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 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.
F-10
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
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.
<TABLE>
A summary of stock option activity is as follows:
<CAPTION>
Weighted average
Number of shares exercise price
----------------- ------------------
<S> <C> <C>
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) (5,000) .40
Options exercised (unaudited) -- --
----------------- ------------------
Balance at December 31, 1998 (unaudited) 170,000 .22
================= ==================
</TABLE>
At December 31, 1998, there were 62,500 shares of options exercisable.
For the year ended June 30, 1997, 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 amount indicated below:
June 30
1998 1997
---- ----
As reported $(571,360) $(587,611)
Pro forma (577,000) (593,000)
The compensation cost was calculated under the minimum-value method using the
assumptions of the three-year weighted average expected life of the options and
a 6% risk-free interest rate.
(6) Commitments and Contingency
F-11
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
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
June 30, 1998 are as follows:
Year ending June 30:
1999 $ 37,968
2000 12,248
--------------------
Total minimum lease payments $ 50,216
====================
Rent expense for the years ended June 30, 1998 and 1997 was approximately
$38,000 and $26,000, respectively.
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 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.
F-12
