UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________
Commission file number: 0-26975
PREFERENCE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Nevada 88-0417949
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
333 North Ranch Drive, Suite 810
Las Vegas, Nevada 89106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 648-6400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ..X.. No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the Registrant's $.001 Par Value Common Stock
(based on the price at which such equity was sold) held by non-affiliates of the
Registrant. -- $223,898,156.
At March 21, 2000, there were 28,650,964 shares of the Registrant's $.001
Par Value Common Stock outstanding.
Documents Incorporated By Reference
None.
Exhibit Index on page 55
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PART I
ITEM 1. BUSINESS
- -----------------
The following discussion contains trend information and other forward-looking
statements (including statements regarding future operating results, future
capital expenditures, new product introductions, technological developments and
industry trends) that involve a number of risks and uncertainties. The Company's
actual results could differ materially from the Company's historical results of
operations and those discussed in the forward-looking statements. Given these
uncertainties, investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained or incorporated by reference herein to
reflect any events or developments.
Introduction
Courtleigh Capital, Inc., a Kansas corporation, was incorporated under the laws
of the State of Colorado as ANCR, Inc. on July 30, 1985. On July 23, 1987, ANCR,
Inc. changed its name to CEA Lab, Inc. and reincorporated on October 16, 1995 in
the State of Kansas as CEA Lab, Inc. On September 12, 1997, it amended its
articles to change its name to Courtleigh Capital, Inc. Courtleigh Capital, Inc,
commenced trading during December, 1998 under the symbol CTLH on the Over-the-
Counter Bulletin Board. On February 2, 1999, Courtleigh Capital, Inc. changed
its name to StockUp.com, Inc. StockUp.com, Inc. a Kansas corporation formerly
Courtleigh Capital, Inc. reincorporated in the State of Nevada using the name
StockUp.com, Inc. StockUp.com, Inc. changed its trading symbol to SKUP effective
as of February 22, 1999. On February 23, 2000, StockUp.com, Inc. changed its
name to Preference Technology, Inc. (the "Company"). The Company changed its
trading symbol to PFER effective as of February 23, 2000.
The Company uses Microsoft's operating platform to develop second-generation
Internet technology, which is located on its servers and accessible from the
Internet. The Company owns, and is developing, a system of modular software
products (desktop applications) that may be deployed independently or in a
single, integrated system designed to increase traffic and user retention on
Internet websites deploying the technology.
The Company's goal is to offer users software products that provide a
customizable, interactive advertising technology, and dynamic Internet
experience compared to existing static portal models residing on the World Wide
Web. Although the Company is in the process of developing other
second-generation Internet technology products, including a financial website
and interactive agent technology, management has decided to incorporate various
aspects of the financial website into its desktop portal products and emphasize
the development for these technologies. The Company is a Microsoft Certified
Solutions Provider, and has based its technologies on Microsoft's operating
system. The Company employs more than forty programmers and animators.
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Streaming Products
The Global Information Gateway(TM)(GIG) is the Company's first product. It is a
desktop resident personal portal that uses proprietary second-generation
Internet technology (which pings or pulls content from the host website as
opposed to using push technology to forcibly drive content to the client) to
provide customizable news, business, sports, entertainment, and other
information. The GIG's power is its ability to aggregate and customize
information and news and deliver it to a desktop in real time. The GIG not only
collects and organizes content, it also updates automatically.
The Corporation Information Gateway (CIG) is a branded version of the The Global
Information Gateway. By deploying the CIG, companies create a two-way
communication link and establish a permanent presence on the user's desktop. The
CIG provides business to business (B2B) and
business to consumer (B2C) marketing solutions. The CIG can be used to
disseminate business-critical information to employees, or promote faster
interaction with partners and customers, or launched a targeted direct marketing
campaign at consumers. The CIG provides a seamless solution for companies
providing them the next generation of innovative Internet technology without
investing millions of dollars in technology development.
Both the GIG and CIG have multiple channels. QuoteStream is the first channel.
QuoteStream is used to deliver news stories and financial information from
various recognizable sources; the QuoteStream Network Internet search engines,
as well as, educational and research material. With a subscriber base of more
than 450,000 and a growing roster of media alliances (i.e. newspapers,
magazines, content web sites, and television) who are both content providers and
distributors of our product, currently numbering more than 275, QuoteStream
provides access to a continuous flow of news and business information tailored
to user preferences. The Company will soon deploy other channels for sports,
health, entertainment and travel. Although these products are branded separately
they are each available as channels on both the GIG and CIG (i.e. a QuoteStream
user desiring to use SportsStream need only select the appropriate channel from
the QuoteStream portal).
News
- ----
QuoteStream delivers stories from its two paid news vendors, Reuters and Comtex,
and more than 275 media partners. Reuters produces its own content, while Comtex
distributes stories from news services around the world. All stories are tagged
with descriptive identifiers. The media partners provide specialty content, such
as a local news source or information from a photography magazine. Based upon
customization preferences, the user will have access to more than 100,000
headlines per day. Additionally, news stories related to the users selected
topics is updated in the news scroller on a continual basis to ensure that the
viewer receives the most timely information.
Business/Financial
- ------------------
QuoteStream provides financial information gathered by S&P ComStock, Disclosure,
Market Guide, Zacks and others. The QuoteStream channel offers a high level of
customization and invites the user to tailor his view of historical statistics,
current market data, analysts' projections, and more. Examples of features
currently deployed and soon to be deployed include Real Time Quotes, Intraday
Best and Worst Performing Stocks, Short Interest, Up/Downgrades, Company
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Profiles, Charts, and Investment Newsletters. Other real time features are being
developed and will be offered in subsequent versions of the product.
Sports
- ------
Soon to be deployed, SportsStream will present information related to both
sporting events and sports betting. Real-time, play-by-play coverage of all
major professional sports will be available for
customization, in addition to college and amateur athletics, subsequently. The
betting lines from major Las Vegas casinos will be continually updated real
time, as well as breaking news influencing the odds, such as player trades,
injuries, weather, etc.
Health
- ------
HealthyStream will offer users a wide array of lifestyle information ranging
from basic medical to alternative medicine.
Entertainment
- -------------
Slated for development at a later time, EntertainmentStream will offer users the
ability to customize news stories and interviews with their favorite
celebrities; check schedules for movies, television, concerts, and exhibitions;
as well as consult their daily horoscope.
Travel
- ------
The Travel channel, slated for development at a later time, will offer users a
wide array of travel information such as real-time flight tracking information.
Industry Background
New Users
- ---------
The percentage of United States households with Internet access is expected to
greatly increase over the next three years. The Global Information Gateway is
targeting these new users as its client base. The Company recognizes that
software users experience considerable inertia with respect to branding and
accepting new products. Management's goal is to make QuoteStream a highly
functional, but user-friendly product that will appeal to the broad client base
destined to become Internet users over the next three years. Management believes
that company's which are able to brand these new users at a low acquisition cost
per user will realize higher market capitalization and be able to establish
stronger market position.
Advances in Technology
- ----------------------
Internet Service Providers ("ISPs") are connecting to the web faster than they
were 18 months ago. Speedier connections to ISPs can be expected to accompany
substantial increases in bandwidth and processing speed, particularly with the
market penetration of cable modems. Because QuoteStream is designed to operate
on the Windows 2000 platform, advances in technology will increase its utility
as the Internet becomes faster. As processing speed and bandwidth increases, the
popularity of Internet enabled desktop applications is increasing as well. Part
of what the streaming products do is simplify the Internet for the lay user.
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Distribution and Marketing
The Company expects to implement its distribution and marketing efforts over
four phases:
o Phase 1: Proof of Concept
o Phase 2: Brand Recognition
o Phase 3: Content Development
o Phase 4: Revenue Growth
Phase 1: Proof of Concept
- -------------------------
Although its technology is adaptable to different applications, the Company
chose financial information to showcase during the proof of concept stage. The
goals during the proof of concept phase are to introduce technology that defines
the product, lay the groundwork for branding the product, and rapidly build
content as a barrier to entry. Toward this end, the Company aggressively
purchases data; pursues strategic partnerships; and develops proprietary,
in-house content.
Phase 2: Brand Recognition
- --------------------------
The primary goal of the Company's marketing plan is to position the product and
Company as the leader in its market segment. This will be done through specific
marketing strategies:
o Establishing co-sponsoring with content and strategic partners
o Promoting co-sponsored partner marketing
o Building brand recognition: QuoteStream, other streaming products, and
Preference Technologies, Inc.
o Developing product functionality and awareness
Co-Sponsoring With Content and Strategic Partners
-----------------------------------------------
To further reduce the cost per subscriber, build brand recognition, and
establish a broad base of distribution channels, the Company has assembled
a marketing team that solicits and forms partnerships with traditional
media who have an Internet presence.
The strength of the partnership programs is that QuoteStream, and other
streaming products, serves as a hub that allows users to aggregate
information to a central source. Subsequently, partners with websites
generate traffic to their sites where they might be overlooked using
traditional Internet search methods due to the often times staggering
amount of information returned to the user.
Because QuoteStream and the other streaming products are technologies that
enhance other websites, the Company has acquired a substantial number of
subscribers at a low cost and built a network of strategic partners
without acquiring companies and diluting shareholders. This strategy has
enabled the Company to maintain a strong equity position, while building
strategic partners and adding users.
The initial targets for the partnership programs are local newspapers and
magazines. The company has more than 140 such partners as of March 21,
2000 and projects 300 partnering relationships (including radio and
television stations) by year end.
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Co-Sponsored Partner Marketing
----------------------------
The Company's co-sponsored partners are strategic marketing partners as
well. A large portion of our existing and future content providers are
affiliated with various news media. Each media partner is contracted to
market its co-sponsored version of the QuoteStream product through its
respective medium (newspaper, magazine, broadcast station, Internet). This
creates brand recognition and provides distribution for QuoteStream and
the other streaming products.
Partners are obligated to promote the co-sponsored product through their
specified media (i.e. print, broadcast, and web banner advertisements) and
websites. Partners also agree to display the QuoteStream download logo on
the homepage of their websites. These partnerships are currently providing
in excess of $2 million in advertising per year to promote QuoteStream and
management anticipates an increase in such advertising through next year.
Strategies To Engage Vendors
----------------------------
The Company employs the following strategies to motivate vendors to
participate in this program:
o Pay vendors for distributing QuoteStream via revenue sharing programs
o Aggressively implement programs to brand QuoteStream and the other
streaming products
o Provide a product that is highly customizable communication device
offering a wide array of functionality
o Motivate users to register and utilize the product through viewer
incentives, and award prizes to people who register for and deploy
QuoteStream
Product Functionality Awareness
-------------------------------
The Company will employ its technologies in a way that serves to promote
the products - with the primary goal of increasing customer usage rates.
Through well-placed banner advertisements within the product scroller and
various other areas, the Company intends to educate users about important
product features. This strategy is expected to boost usage time and drive
up subscription rates. In addition, e-mail campaigns will bolster product
promotion by focusing on average and below average usage time subscribers.
These e-mail messages will highlight new features, incentive programs, and
provide usability tips to encourage further product usage.
Phase 3: Content Development
- ----------------------------
The goals of Phase 3 are to build content and to increase distribution channels.
This will be accomplished by:
o Establishing more strategic partners and alliances
o Continuing to expand the subscriber base while reducing the cost per
subscriber by entering into hybrid exchange/cost per action agreements
with Internet advertisers
o Strengthening barriers to entry by expanding the content and functionality
of QuoteStream, and the other streaming products, with additional data
from vendors, a wider array of content from additional partners
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Increase Subscriber and Utilization
-----------------------------------
QuoteStream currently has approximately 450,000 registered subscribers,
and the number is growing daily. Of these 450,000 subscribers,
approximately 20 percent, or 90,000, are classified as regular
QuoteStream(TM) users.
Decrease Subscriber Acquisition Costs
-------------------------------------
The Company is implementing programs to reduce subscriber acquisition
costs. Additionally the Company anticipates that media alliances -- as
well as strategic placement on search engines and free software download
sites -- will substantially reduce the cost per subscriber.
Phase 4: Revenue Growth
- -----------------------
A successful implementation of Phases 1 through 3 of the Company's distribution
and marketing plan will develop the critical mass necessary for generating a
revenue stream. The Company will build off of this strategic platform to grow
its second generation Internet technology revenue.
Systems and Technology
The Company has invested over one million dollars in development of a state of
the art computer network that is scalable, secure, and fast. The Company
believes that the compatibility of the Company's computer network to its
business plan provides the Company with a competitive advantage in the following
ways:
Performance and Scalability
- ---------------------------
The Company's network is one of the most scalable networks available. Existing
technologies have been optimized for high speed performance and work load
balancing ensuring that potential data bottlenecks are non-existent within the
server and networking components.
Connectivity
- ------------
The Company is directly connected to the Internet through Sprint's Asynchronous
Transfer Mode (ATM) backbone, and separately at a Sprint DS3 connection at a
different point of presence (POP). The Company has signed an agreement with
Sprint for 90Mbps per second of burstable bandwidth from the Sprint backbone.
This is the equivalent of two T-3 connections or 56 T1 lines. Each T3 line is
delivered from a separate source providing redundancy in the event one source
fails. This is currently the largest burstable connection contract with Sprint
in the country, providing the Company with what it believes is the largest
bandwidth in the State of Nevada. The technology can handle a greater volume of
data as the business grows, is shielded from electromagnetic interference, is
resistant to eaves dropping, can travel long distances before the signal has to
be regenerated and retransmitted and supports LED and laser transmissions
thereby enabling the signal to travel at the speed of light.
Server Farm
- -----------
The Company has an array of high capacity Intel Pentium based systems that are
expandable to accommodate the business needs of the Company. The Company runs on
an NT based software platform and utilizes Microsoft's SQL servers. These
servers are configured with RAID 5 technology. RAID 5 copies all parts of all
data across five drives. If one drive goes down, the remaining four drives can
still access information from the fifth drive. Collectively, all servers provide
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the Company with approximately 700 GB of storage capacity, enabling the Company
to house large volumes of day-to-day data and archive data for quick retrieval.
Traffic Management. Server load balancing is handled in a back end TCP/IP
sub-net. The Company employs a load balance utility that evenly
distributes http responses across to incoming http requests.
Internet Service Provider. Because the Company has direct access to the
Internet, it serves as its own Internet Service Provider. As such, the
Company must allocate a server toward handling domain name service ("DNS")
requests and, in order to handle the projected heavy traffic, the Company
has allocated two servers as DNS servers.
Security
- --------
The Company employs the Microsoft Proxy Server as its firewall. A firewall
determines what types of traffic the Company will accept and which traffic will
be rejected. The Company will acknowledge http: traffic, IRC/MIC traffic and FTP
traffic coming from the Company website, but will not receive FTP of any kind.
Redundancy
- ----------
The Company is designed to run 24 hours a day. Each server and network device
has redundancy built into the devices themselves. However, in servers with
single power supplies the Company will implement server mirroring, the process
of a second server with identical information automatically taking over should
one server go down. Networking devices will utilize resilient links, standby
alternate links in the event one should fail. Implementing additional OC-3
Modules to handle T-3 expansion and adding multiple fiber connections helps to
ensure the website will not go down in itself. The Company plans on purchasing a
new router in the third quarter of 2000 to alleviate the potential failure of
the Cisco dual ported router.
Disaster Recovery
- -----------------
The Company has three state of the art DLT taped backups. In the event of power
fluctuations the Company has a dozen American Power Conversion Uninterrupted
Power Sources that will protect all mission critical equipment from surges,
spikes, black outs and brown outs. In the event of a black-out all servers would
institute normal automatic shut down procedures before the power fails. Finally,
the Company employs dedicated isolated circuits on every server. This
substantially reduces the chance that a singe point of failure will impact the
entire network.
Distribution
The Company's information services are distributed via the Internet and CD
distribution.
Competition
The Company is a technology developer that has elected to initially showcase its
proprietary second-generation Internet applications on its desktop portal. The
Company's major competitors are in the areas of Internet portals and news
related websites. These include:
o Software development companies
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o Publishers and distributors of traditional media, including print, radio,
and television, such as The Wall Street Journal, Fortune, Bloomberg
Business Radio, and CNBC
o Providers of terminal-based financial news and data, such as Bloomberg
Business News, Reuters News Service, Dow Jones Markets, and Bridge News
Service
o Web "portal" companies, such as Yahoo! and America Online
The Company believes that the principal competitive factors in its market are
brand name recognition, wide selection, personalized service, ease of use,
24-hour accessibility, customer service, convenience, reliability, quality of
search engine tools, and quality of editorial and other site content. Many of
the Company's current and potential competitors have longer operating histories,
larger customer bases, greater brand name recognition and significantly greater
financial, marketing and other resources than the Company. In addition, other
websites may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. Certain of
the Company's competitors may be able to devote greater resources to marketing
and promotional campaigns, and devote substantially more resources to Web site
and systems development than the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished franchise
value. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and competitive pressures
faced by the Company may have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. Further as a
strategic response to changes in the competitive environment, the Company may,
from time to time, make certain service or marketing decisions or acquisitions
that could have a material adverse effect on its business, prospects, financial
condition and results of operations. New technologies and the expansion of
existing technologies may increase the competitive pressures on the Company. In
addition, companies that control access to transactions through network access
or Web browsers could promote the Company's competitors or charge the Company a
substantial fee for inclusion.
Sources and Availability of Raw Materials
The Company is not dependent on any raw materials. All software which comprises
a material component of its technology is developed at the Company's
headquarters. All other software which might be of potential use constitutes
readily available programs distributed at a number of locations.
Dependence on a Single or Few Customers
The Company currently does not have any customers. It has developed multiple
strategic alliances with newspapers located throughout the United States to
provide proprietary content to its website. The Company does not anticipate that
it will be dependent on a single or small group of customers.
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Importance Of Patents, Trademarks, Licenses, Franchises And Concessions Held
To protect its rights to its intellectual property, the Company relies on a
combination of trademark and copyright law, patent, trade secret protection,
confidentiality agreements, and other contractual arrangements with its
employees, affiliates, clients, strategic partners, and others. The protective
steps it has taken may be inadequate to deter misappropriation of the Company's
proprietary information. The Company may be unable to detect the Company's
proprietary information. The Company may be unable to detect the unauthorized
use of, or take appropriate steps to enforce its intellectual property rights.
The Company has registered certain of its trademarks in the United States and
has pending U.S. applications for other trademarks and patents. Effective
trademark, copyright, patent, and trade secret protection may not be available
in every country in which it offers or intends to offer its services. In
addition, although the Company believes that its proprietary rights do not
infringe on the intellectual property rights of others, other parties may assert
infringement claims against the Company or claims that it has violated a patent
or infringed a copyright, trademark, or other proprietary right belonging to
them. These claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources on its part, which could
materially adversely affect the Company's business, results of operations, and
financial condition. The Company incorporates certain licensed third-party
technology in some of its services. In these license agreements, the licensors
have generally agreed to defend, indemnify, and hold the Company harmless with
respect to any claim by a third party that the licensed software infringes any
patent or other proprietary right. The Company cannot assure that these
provisions will be adequate to protect from infringement claims. The loss or
inability to obtain or maintain any of these technology licenses could result in
delays in introduction of new services.
Research And Development Costs
Since the Company began operations in February 1999 it has spent in excess of
$1.4 million on the research and development of its proprietary technology. The
revenues the Company achieves will be primarily from strategic alliances and
subscriber fees. Revenues generated, while paying directly for research and
technology costs accrued to date, will fund the operations of the Company, which
includes funding on-going technological development.
Employees
As of the date hereof, the Company employs approximately 200 full-time
employees. The Company hires independent contractors on an "as needed" basis
only. The Company has no collective bargaining agreements with its employees.
The Company believes that its employee relationships are satisfactory. In the
long term, the Company will attempt to hire additional employees as needed based
on its growth rate.
ITEM 2. PROPERTIES
- -------------------
The main administrative offices of the Company are located at 333N. Rancho
Drive, Suite 600, Las Vegas, Nevada 89106. The Company leases approximately
14,100 square feet at this location, with an aggregate rental payment of $22,646
per month. The Company's leases expire for 13,000 square feet and 1,100 square
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feet on March 31, 2003 and July 31, 2000, respectively. The lease payments are
scheduled to increase by approximately $400 on March 31st of each year of the
lease term
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is a party to various actions and proceedings incident to its normal
business operations. The Company believes that the outcome of such litigation
and proceedings, individually and in the aggregate, will not have a material
adverse effect on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
- ------------------------------------------------------
There were no matters submitted to a vote of security holders through a
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ----------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
A. The Company's common stock began trading on the over-the-counter securities
market in February 19991. The over-the-counter market quotations reflect
interdealer bid prices, without retail markup, markdown or commission, and
may not necessarily represent actual transactions.
Common Stock
------------
For Fiscal Year Ended December 31, 1999 High Low
- --------------------------------------- ---- ---
2 Quarter $6.06 $2.00
3 Quarter 5.23 3.69
4 Quarter 7.81 4.50
Prior to February 1999(1), there was no active market for the Company's
securities.
- ------------
1. Courtleigh Capital, Inc., the Company's predecessor, began trading on the
over-the counter securities market in December 1998 under the symbol CTLH. On
February 2, 1999 the Company changed its name to StockUp.com, Inc. and commenced
trading under the symbol SKUP. On February 23, 2000 the Company changed its name
to Preference Technologies, Inc. and commenced trading under the symbol PFER.
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B. Holders
-------
As of March 21, 2000, there were 336 holders of record and the Company believes
that approximately 200 additional stockholders hold shares of the Company's
common stock in "street name."
C. Dividends
---------
The Company has never paid a cash dividend on its common stock. The Company does
not anticipate that it will pay any dividends for at least the next twelve
months.
D. Recent Sales of Unregistered Securities - Conversion of Warrants and
--------------------------------------------------------------------
Options
-------
The Company conducted a private offering of its securities from August 1, 1999
through December 1, 1999. The Company has issued 458,334 shares of common stock
for a total consideration of $1,201,247 net of offering costs.
In December 1999, the Company commenced two private offerings of its securities.
The Company raised $6,338,973 net of offering costs, of which $1,143,605 net of
offering costs was received before December 31, 1999, for the issuance of
500,002 shares.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATIONS DATA
- ------------------------------------------------------------
For the Period
from February 3, 1999 (Inception)
To December 31, 1999
--------------------
Selling, general, and administrative expenses $ 6,905,193
-----------
Loss from operations (6,905,193)
-----------
Other income (expense)
Interest income 19,303
Forgiveness of debt 81,822
Financing expense (1,557,335)
Miscellaneous income 660
-----------
Total other income (expense) (1,455,550)
-----------
Net loss $(8,360,743)
============
Basic loss per share $ (0.33)
==========
Diluted loss per share $ (0.33)
==========
Weighted-average shares outstanding 25,407,152
==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS AND
FUTURE PERFORMANCE OF THE COMPANY WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR SIMILAR LANGUAGE. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS DOCUMENT SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS DOCUMENT. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS. THE
COMPANY CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE
SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. IN EVALUATING THE COMPANY'S
BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
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FORTH BELOW UNDER THE CAPTION "RISK FACTORS" IN ADDITION TO THE OTHER
INFORMATION SET FORTH HEREIN.
Overview
The Company was incorporated in Nevada in February 1999 and is developing
second-generation Internet technology products. The Global Information Gateway
(GIG) is the Company's first product. The GIG aggregates news and other
information customized to the users preference and delivered to the desktop in
real time. The Corporation Information Gateway (CIG) is a branded version of the
Global Information Gateway. By deploying the CIG, companies create a two-way
communication link and establish a permanent presence on the user's desktop. The
CIG provides business to business (B2B) and business to consumer (B2C) marketing
solutions.
From its inception to date, the Company has incurred costs associated with the
development and launch of its products, probable markets, and business. The
Company has established relationships with information providers that increase
the quality and marketability of the Company's products. While there is no
assurance, management believes that the Company's products will commence
generating revenues during the second quarter of 2000.
The Company has historically financed its operations to date through the sale of
its common stock. Since inception through December 31, 1999, the company issued
26,413,052 shares of its common stock. The Company raised $2.9 million, net of
offering costs, from four accredited investors as follows: (i) February 1999
("the February Offering") - Issuance of 2,666,664 shares of common stock in
exchange for $900,000; and (ii) Issuance of options under Rule 506 of Regulation
D, promulgated under Section 4 (2) of the Securities Act of 1933, to acquire
units comprised of 2,400,000 shares of common stock, and 1,200,000 warrants
exercisable at $1.25 per share, and options to acquire 581,672 shares of common
stock at an aggregate exercise price of $31,250 in exchange for $2.3 million
cash. The February 1999 Offering was conducted under Rule 504. It provided the
necessary seed capital to commence implementation of the Company's business
plan. 2,400,000 of these shares are currently restricted and subject to a demand
registration rights as of January 1, 2000. The 2,400,000 shares and the shares
underlying the 1,200,000 warrants are subject to reasonable underwriter trading
restrictions in the event of a public offering. The investors holding these
securities are also entitled to anti-dilution rights in the event the Company
issues stock at less than $1.25 per share.
In June 1999, the Company entered into a private placement agreement to offer up
to $12,000,000 worth of shares of common stock for 4,000,000 shares. The Company
extended the minimum offering of $600,000 through October 31, 1999, for which
the minimum was timely met. The Company is also issuing two warrants for every
six shares of common stock to investors that provide a minimum of $18,000 at an
exercise price of $5 per share with a two-year term. The shares underlying these
warrants shall be subject to piggy-back registration rights. Institutional
investors shall receive the same type and number of warrants, except the
exercise price shall be $5 per share. The Company shall pay to each
broker-dealer warrants to purchase shares equal to 10% of the Company's common
stock sold by such broker-dealer with an exercise price of $7.50. The shares are
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not freely traded until the registration of the private placement agreement. The
warrants may be exercised, commencing upon the date the Company closes a public
offering of its stock pursuant to a Registration Statement registering the
shares underlying the warrants and terminating 180 days thereafter. The
investment period expired on December 1, 1999.
At December 31, 1999, a total offering of $1,201,247, net of offering costs, was
completed, and 458,334 shares of common stock were issued.
In connection with the offering, the Company granted 113,106 warrants to
investors at December 31, 1999 at an exercise price of $5 per share. The Company
further granted 45,832 warrants to broker-dealers at an exercise price of $7.50
per share.
On December 5, 1999, the Company entered into another private placement
agreement to offer up to $4,000,000 worth of units to accredited investors with
a minimum offering of $2,000,000. As of December 31, 1999, no common stock or
warrants have been issued in connection with this agreement. Subsequent to
December 31, 1999, the Company received $2,910,978, net of offering costs, and
issued 1,301,600 shares of common stock. Each unit was comprised of six shares
of the Company's common stock and two warrants at an exercise price of $5 per
share. The warrants may be exercised, commencing upon the date the Company
closes a public offering of its stock pursuant to a Registration Statement
registering the shares underlying the warrants and terminating three years
thereafter. Each warrant shall be callable upon providing the holder 20 days'
written notice in the event the shares have been registered and the closing bid
price of the shares is at a price of $10 per share during 10 consecutive trading
days. The securities comprising the units shall not be detachable unless and
until a Registration Statement is declared effective.
The offering also included distribution of warrants to broker-dealers in the
amount of 20% of the aggregate proceeds raised by a broker, divided by 3.75 at
an exercise price of $5 per share. In the event the Company registers its
securities, the Company shall register the shares and the shares underlying the
warrants, subject to a trading lock-up, (i) upon the effective date of the
Registration Statement ("the Effective Date"), 33.33% of such securities shall
be free trading; (ii) 45 days after the Effective Date, 33.33% of such
securities shall be free-trading, and (iii) 90 days after the Effective Date,
33.33% of such securities shall be free-trading. In the event the Company has
not filed a Registration Statement registering the shares and the shares
underlying the warrants prior to July 1, 2000, then a majority of the holders of
the units issued shall have the right to demand that the Company immediately
register all such securities. In the event of such a demand, then upon the first
of each month after such demand during which the Registration Statement is not
effective, commencing no earlier then October 1, 2000, the number of warrants
issued hereunder shall be increased, on a pro-rata basis, to the holders of the
units, by an amount equal to 2% of the warrants issued.
On December 3, 1999, the Company entered into a subscription agreement to offer
units at a price of $9 per unit. For Investors investing at least $1,000,000,
the price per unit will be decreased to $7.50 per unit. Each unit is comprised
of six shares of the Company's common stock and two warrants. There is no
minimum or maximum total investment related to this agreement. The Company shall
pay to each broker-dealer warrants to purchase shares equal to 10% of the
Company's total units issued. All warrants shall have an exercise price of $5
per share. In the event the Company has not filed a Registration Statement on or
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prior to September 1, 2000, the investor shall have the right to demand
registration of the shares and the warrant shares, and the number of warrants
issued shall be increased by 5% of the original number of warrants issued,
commencing September 1, 2000 and upon the first of each month thereafter, until
the shares and warrants are registered. In the even the Company, during the
six-month period of time following the date of the agreement, sells shares at
less than $3 per share (or $2.50 per share in the event an investor is providing
$1,000,000), then the Company shall be required to issue additional securities
to the investor in an amount such that the investor would receive, in the
aggregate, the same securities as if he had participated in the reduced price
offering.
As of December 31, 1999, a total offering of $1,143,605, net of offering costs,
was completed, and 500,002 shares of common stock were issued. In connection
with the offering, a total of 16,667 and 166,670 warrants were issued to brokers
and investors, respectively, subsequent to December 31, 1999. Subsequent to
December 31, 1999, the Company received an additional $2,284,390, net of
offering costs.
We have incurred significant net losses and negative cash flows from operations
since our inception. At December 31, 1999, we had an accumulated deficit of
$8,360,743. These losses have been funded primarily through the issuance of our
equity securities. We intend to continue to invest heavily in marketing and
brand development, content enhancements, and technology and infrastructure
development. As a result, we believe that we will continue to incur net losses
and negative cash flows from operations for the foreseeable future. Moreover,
the rate at which these losses will be incurred may increase from current
levels.
From inception through December 1999, the Company's selling, general and
administrative expenses were $6,905,193. In addition, the Company incurred
financing expenses of $1,557,335. These financing expenses are partially offset
by income from investments in the amount of $19,303, miscellaneous income of
$660, and debt forgiveness in the amount of $81,822, resulting in a net loss of
$8,360,743.
We recorded cumulative deferred compensation of approximately $1,438,891 through
December 31, 1999, which represents the difference between the exercise price of
stock options granted in 1999, and the fair market value of the underlying
common stock at the date of grant. The difference is recorded as a reduction of
stockholders' equity and amortized over the vesting period of the applicable
options. Options granted through December 1999 typically vest over 15 months,
although a portion of those options vested immediately. Options granted after
December 1999 generally vest over 36 months. Of the total deferred compensation
amount, approximately $627,489 was amortized during the year ended December 31,
1999.
The amortization of deferred compensation is recorded as an operating expense.
As a result, we currently expect to amortize the following amounts of deferred
compensation annually:
- 2000--$811,297
- 2001--$ 105
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As of December 31, 1999, the Company had current assets of $47,491, and $705,032
in furniture, equipment, and other assets, resulting in total assets of
$752,523. The Company's current liabilities were $770,912.
Results of Operations
The Company is a development stage company and did not generate any operating
revenues from inception on February 3, 1999 to December 31, 1999. The Company is
currently focusing its efforts on developing quality products and establishing a
large consumer base for these products. While there is no assurance, the Company
anticipates that by developing quality products and establishing a consumer
base, it will be in a position to generate revenues in the future. The Company's
predecessor, Courtleigh Capital, had no operations accordingly there is no
meaningful comparative data available for the year ending December 1998.
Operating Expenses
- ------------------
Product and Technology
- ----------------------
Product and technology expenses were $1,416,908 from inception to December 31,
1999. Product and technology expenses consist primarily of employee compensation
relating to developing and enhancing the features and functionality of the
Company's online media products, hosting and telecommunication costs; and
content acquisition fees and revenue sharing arrangements related to agreements
with third-party content providers under which we pay guaranteed fees and/or a
portion of our revenues. We have, to date, expensed all product and technology
costs as incurred. We believe that increased investment in new and enhanced
features and technology is critical to attaining our strategic objectives and
remaining competitive. Accordingly, we intend to continue recruiting and hiring
experienced product and technology personnel and to make additional investments
in product development and technological infrastructure. We expect that product
expenditures will continue to increase in absolute dollars in future periods.
Marketing
- ---------
Marketing expenses were $1,840,260 from inception to December 31, 1999.
Marketing expenses consist primarily of advertising and other marketing related
expenses, compensation and employee related expenses, commissions, and travel
costs. The Company anticipates marketing expenses will continue to increase in
absolute dollars for the foreseeable future as we continue our branding
strategy; partnership content programs; deploy a direct sales force; hire
additional marketing personnel; and increase expenditures for marketing and
promotion.
General and Administrative
- --------------------------
General and administrative expenses were $2,783,480 from inception to December
31, 1999. General and administrative expenses consist primarily of compensation
and fees for professional services, costs for general corporate functions,
including finance, accounting and facilities.
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The Company anticipates that we will incur additional general and administrative
expenses as we hire additional personnel and incur additional costs related to
the growth of our business and our operation as a public company. Accordingly,
we anticipate that general and administrative expenses will continue to increase
in absolute dollars in future periods.
Financing Expense
- -----------------
Financing expense was $1,557,335 from inception to December 31, 1999. Financing
expense consists primarily of cost associated with the issuance of below market
options and warrants.
Forgiveness of Debt
- -------------------
Forgiveness of debt was $81,822 from inception to December 31, 1999.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expenses were $237,056 from inception to December
31, 1999. We expect that depreciation and amortization expenses will continue to
increase as we build the structure necessary to deploy and expand our products.
Stock-Based Compensation Expense
- --------------------------------
We recorded deferred compensation of $1,438,891 from inception to December 31,
1999. Of the cumulative deferred compensation amount, $627,489 was recorded as
an expense December 31, 1999. The unamortized balance is being amortized over
the vesting period for the individual options, which is typically 15 months for
options issued earlier than December 1999 and 36 months for options issued since
that date.
Investment Income, Net
- ----------------------
Investment income, net of expense, was $19,303 from inception to December 31,
1999. Investment income includes income from cash and investments. Investment
income in future periods may fluctuate as a result of fluctuations in average
cash balances maintained by the Company and changes in the market rates of its
investments.
Liquidity and Capital Resources
The Company has generated no revenues and does not anticipate generating revenue
until the second quarter of year 2000. The Company anticipates that it will
continue to incur net losses and negative cash flows from operations for the
foreseeable future. Moreover, the rate at which these losses will be incurred
may increase from current levels. As a result, the Company's sole source of
capital during 1999 has been investment capital provided by third parties.
Further, the Company anticipates it will require additional capital
contributions to fund its operations during the year 2000. In December 1999, the
Company commenced two private offerings of its securities. The Company raised
$6,338,973 net of offering costs, of which $1,143,605 net of offering costs were
received before December 31, 1999, for the issuance of 500,002 shares.
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From inception to December 31, 1999, cash used in operating activities was
$4,997,907. Cash used in investing activities was $506,154 from inception to
December 31, 1999. Capital expenditures have generally been comprised of
purchases of computer hardware and software as well as leasehold improvements
related to leased facilities and are expected to increase in future periods.
From inception to December 31, 1999, cash provided by financing activities of
$5,536,852 was due primarily to the issuance of common stock.
The Company currently has no material commitments other than those under
operating lease agreements. The Company has experienced a substantial increase
in its capital expenditures and operating lease arrangements since its
inception, which is consistent with increased staffing, and anticipates that
this will continue in the future. Additionally, the Company will continue to
evaluate possible acquisitions of or investments in businesses, products, and
technologies that are complementary to those of the Company, which may require
the use of cash. Management believes existing cash and investments will not be
sufficient to meet the Company's operating requirements for the next twelve
months; however, the Company may sell additional equity or debt securities or
obtain credit facilities to further enhance its liquidity position. The sale of
additional securities could result in additional dilution to the Company's
shareholders.
Year 2000 Implications
To date, the Company has not experienced any major systems failure or other
adverse consequences due to Year 2000 noncompliance. See "Risk Factors - Year
2000 Problems May Disrupt Our Internal Operations."
Risk Factors
- ------------
Risks Related To Our Financial Condition And Business Model
- -----------------------------------------------------------
Our Limited Operating History Makes Evaluating Our Business Difficult
The Company was incorporated in Nevada in February 1999. Accordingly, we have
only a limited operating history for you to evaluate our business. You must
consider the risks, expenses and uncertainties that a development stage company
like ours faces. These risks include our ability to:
- Increase awareness of the our Internet brands and continue to build
user loyalty;
- Expand the content and services on our network;
- Attract a larger audience to our network;
- Attract a large number of advertisers from a variety of industries;
- Maintain our current, and develop new, strategic relationships;
- Respond effectively to competitive pressures; and
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- Continue to develop and upgrade our technology.
If we are unsuccessful in addressing these risks, our business, financial
condition and results of operations will be materially and adversely affected.
We Have Never Made Money And Expect Our Losses To Continue
We have never been profitable. As of December 31, 1999, we had an accumulated
deficit of approximately $8,360,743. We expect to continue to incur significant
losses for the foreseeable future. Although the Company anticipates generating
revenues, we expect to increase our spending significantly. Accordingly, we will
need to generate significant revenues to achieve profitability. We may not be
able to do so.
We Have Entered Into Reciprocal Advertising Agreements, Which Do Not Generate
Cash Revenue
We have entered into reciprocal advertising arrangements under which we exchange
advertising space on our network predominantly for advertising space on
television and radio stations, rather than cash payments. We have not recognized
any revenue or expense associated with these reciprocal agreements.
Reciprocal advertising arrangements do not generate any cash revenues.
Our future revenues and results of operations may significantly fluctuate due to
a combination of factors, including:
- growth and acceptance of the Internet;
- our ability to attract and retain users;
- demand for advertising on the Internet in general and on our network
in particular;
- our ability to upgrade and develop our systems and infrastructure;
- technical difficulties that users may experience on our network;
- technical difficulties or system downtime;
- general economic conditions;
- acceptance and use of our products.
We May Not Be Able To Obtain Sufficient Funds To Grow Our Business
We intend to continue to grow our business. Because we expect to generate losses
for the foreseeable future, we do not expect that income from our operations
will be sufficient to meet these needs. Therefore, we will likely have
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substantial future capital requirements. Obtaining additional financing will be
subject to a number of factors, including: market conditions; our operating
performance; and investor sentiment. These factors may make the timing, amount,
terms and conditions of additional financing unattractive for us. If we are
unable to raise additional capital, our growth could be impeded.
Risks Related To Our Markets And Strategy
- -----------------------------------------
If The Internet Is Not Widely Accepted As A Medium For Advertising And Commerce,
Our Business Will Suffer
We expect to derive most of our revenue for the foreseeable future from Internet
advertising, and to a lesser extent, from electronic commerce. If the Internet
is not accepted as a medium for advertising and commerce, our business will
suffer. The Internet advertising market is new and rapidly evolving. As a
result, we cannot gauge its effectiveness or long-term market acceptance as
compared with traditional media.
Advertisers and advertising agencies must direct a portion of their budgets to
the Internet and, specifically, to our network. Many of our current or potential
advertising and electronic commerce partners have limited experience using the
Internet for advertising purposes and historically have not devoted a
significant portion of their advertising budgets to Internet-based advertising.
Advertisers that have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts. In addition, companies may choose not to
advertise on the GIG network if they do not perceive our audience demographic to
be desirable or advertising on our network to be effective.
The Acceptance Of The Internet As A Medium For Advertising Depends On The
Development Of A Measurement Standard
No standards have been widely accepted for the measurement of the effectiveness
of Internet advertising. Standards may not develop sufficiently to support the
Internet as an effective advertising medium. If these standards do not develop,
advertisers may choose not to advertise on the Internet in general or,
specifically, on our network. This would have a material adverse effect on our
business, financial condition and results of operations.
We May Not Be Able To Develop Our Brands And Attract Users To Our Network
Maintaining our brands is critical to our ability to expand our user base and
our revenues. We believe that the importance of brand recognition will increase
as the number of Internet sites in our target markets grows. In order to attract
and retain Internet users, advertisers and electronic commerce partners, we
intend to increase substantially our expenditures for creating and maintaining
brand loyalty.
Our success in promoting and enhancing our brands will also depend on our
success in providing high quality content, features and functionality. If we
fail to promote our brands successfully or if visitors to our network or
advertisers do not perceive our services to be of high quality, the value of our
brands could be diminished. This could have a material and adverse effect on our
business, financial condition and results of operations.
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We May Not Be Able To Successfully Adapt To New Internet Advertising Pricing
Models
It is difficult to predict which pricing model, if any, will emerge as the
industry standard. This makes it difficult to project our future advertising
rates and revenues. Our advertising revenues could be adversely affected if we
are unable to adapt to new forms of Internet advertising or we do not adopt the
most profitable form.
We May Not Be Able To Track The Delivery Of Advertisements On Our Network In A
Way That Meets The Needs Of Our Advertisers
It is important to our advertisers that we accurately measure the demographics
of our user base and the delivery of advertisements on our network. Companies
may choose to not advertise on our network or may pay less for advertising if
they do not perceive our ability to track and measure the delivery of
advertisements to be reliable. We depend on third parties to provide us with
some of these measurement services. If they are unable to provide these services
in the future, we would need to perform them ourselves or obtain them from
another provider. This could cause us to incur additional costs or cause
interruptions in our business during the time we are replacing these services.
We are currently implementing additional systems designed to record information
on our users. If we do not implement these systems successfully, we may not be
able to accurately evaluate the demographic characteristics of our users.
We Expect To Continue To Rely Heavily On Advertising Revenues And If We Do Not
Increase Our Advertising Sales, Our Business Will Not Grow As Expected
We depend on our advertising sales department to maintain and increase our
advertising sales. Our business, financial condition and results of operations
could be materially and adversely affected if our advertising sales department
is not effective. As of December 31, 1999, our advertising sales department
consisted of over 50 employees. Although we expect our advertising sales
department to grow, it can take a relatively long period of time before new
sales personnel become productive.
We May Not Be Able To Effectively Manage Our Expanding Operations
We have recently experienced a period of rapid growth. This has placed a
significant strain on our managerial, operational and financial resources. To
accommodate this growth, we must implement new or upgraded operating and
financial systems, procedures and controls throughout the Company. We may not
succeed with these efforts. Our failure to expand and integrate these areas in
an efficient manner could cause our expenses to grow, our revenues to grow more
slowly than expected and could otherwise have a material adverse effect on our
business, financial condition and results of operations.
Our Business And Growth Will Suffer If We Are Unable To Hire And Retain Key
Personnel That Are In High Demand
We depend on the services of our senior management and key technical personnel.
In particular, our success depends on the continued efforts of our Chairman and
Chief Executive Officer, Michael Calderone. The loss of the services of the
executive officer or any of our key management, sales or technical personnel
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could have a material adverse effect on our business, financial condition and
results of operations. In addition, our success is largely dependent on our
ability to hire highly qualified managerial, sales and technical personnel.
These individuals are in high demand and we may not be able to attract the staff
we need.
Financing For Future Joint Ventures, Acquisitions Or Alliances May Not Be
Available Or May Dilute Existing Stockholders
We do not know if we will be able to identify any future joint ventures,
acquisitions or alliances or that we will be able to successfully finance these
transactions. A failure to identify or finance future transactions may impair
our growth. In addition, to finance these transactions, it may be necessary for
us to raise additional funds through public or private financings. Any equity or
debt financings, if available at all, may impact our operations and, in the case
of equity financings, may result in dilution to existing stockholders.
We May Not Be Able To Compete Effectively Against Our Competitors
There are many companies that provide Web sites and online destinations.
Competition for visitors, advertisers and electronic commerce partners is
intense and is expected to increase significantly in the future. Increased
competition could result in: lower advertising rates; price reductions and lower
profit margins; loss of visitors; reduced page views; or loss of market share.
Any one of these could materially and adversely affect our business, financial
condition and results of operations.
In addition, our competitors may develop content that is better than ours or
that achieves greater market acceptance. It is also possible that new
competitors may emerge and acquire significant market share. A loss of users to
our competitors may have a material and adverse effect on our business,
financial condition and results of operations.
We Will Not Be Able To Attract Visitors Or Advertisers If We Do Not Continually
Enhance And Develop The Content And Features Of Our Network
To remain competitive, we must continue to enhance and improve our content. In
addition, we must: continually improve the responsiveness, functionality and
features of our network; and develop other products and services that are
attractive to users and advertisers.
We may not succeed in developing or introducing features, functions, products
and services that visitors and advertisers find attractive in a timely manner.
This would likely reduce our visitor traffic and materially and adversely affect
our business, financial condition and results of operations.
We Rely For Our Content On Third Parties Who May Make Their Content Available To
Our Competitors
We constantly attempt to determine what content, features and functionality our
target audience wants. We rely to a large extent on third parties for our
content, much of which is easily available from other sources. If other networks
present the same or similar content in a superior manner, it would adversely
affect our visitor traffic.
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If We Fail To Establish And Maintain Strategic Relationships With Content
Providers, Electronic Commerce Merchants And Technology Providers, We May Not Be
Able To Attract And Retain Users
We have focused on establishing relationships with leading content providers,
electronic commerce merchants, and technology and infrastructure providers. Our
business depends extensively on these relationships. Because most of our
agreements with these third parties are not exclusive, our competitors may seek
to use the same partners as we do and attempt to adversely impact our
relationships with our partners. We might not be able to maintain these
relationships or replace them on financially attractive terms.
If the parties with which we have these relationships do not adequately perform
their obligations, reduce their activities with us, choose to compete with us or
provide their services to a competitor, we may have more difficulty attracting
and maintaining visitors to our network and our business, financial condition
and results of operations could be materially and adversely affected. Also, we
intend to actively seek additional relationships in the future. Our efforts in
this regard may not be successful.
Risks Related To The Internet And Our Technology Infrastructure Unexpected
Network Interruptions Caused By System Failures May Result In Reduced Visitor
Traffic, Reduced Revenue And Harm To Our Reputation
The ability to provide timely information and continuous updates depends on the
efficient and uninterrupted operation of the Company's computer and
communications hardware and software systems. Similarly, the ability to track,
measure, and report the delivery of advertisements on the site depends on the
efficient and uninterrupted operation of its system. These systems and
operations are vulnerable to damage or interruption from human error, natural
disasters, telecommunication failures, break-ins, sabotage, and computer
viruses, intentional acts of vandalism and similar events.
The Company has a disaster recovery plan that generates a two-week tape rotation
and full backup for all tape devices. CD-Rom will back up historical data
requiring long-term storage. Two copies will be made for each archive created.
Data on the local are a network is backed up to a tape drive on a nightly basis.
Additionally, the Company has a state of the art network that is designed to run
24 hours a day, seven days a week. Drives in the servers can be switched without
shutting down the system. Backup generators are in place that will enable the
network to shut down properly in the event of total power loss. The network can
run independently for up to ten minutes of a brown out. Despite these
precautions, there is always the danger that human error or sabotage could
substantially disrupt the web site and the Global Information Gateway(TM)
technology.
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Concerns About Security Of Electronic Commerce Transactions And Confidentiality
Of Information On The Internet May Reduce The Use Of Our Network And Impede Our
Growth
A significant barrier to electronic commerce and confidential communications
over the Internet has been the need for security. Internet usage could decline
if any well-publicized compromise of security occurred. We may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by these breaches. Unauthorized persons could attempt to
penetrate our network security. If successful, they could misappropriate
proprietary information or cause interruptions in our services. As a result, we
may be required to expend capital and resources to protect against or to
alleviate these problems. Security breaches could have a material adverse effect
on our business, financial condition and results of operations.
Computer Viruses May Cause Our Systems To Incur Delays Or Interruptions And May
Adversely Affect Our Business
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses
could expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our visitor traffic may decrease.
Year 2000 Problems May Disrupt Out Internal Operations
Many currently installed computer systems and software products only accept two
digits to identify the year in any date. Therefore, the year 2000 will appear as
"00", which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations causing
disruptions to our operations. Our failure to correct a material Year 2000
problem could have a material adverse effect on our business, financial
condition and results of operations.
The Company has completed a comprehensive review of its computer systems to
identify the systems that could be affected by ongoing Year 2000 problems.
Upgrades to systems judged critical to business operations have been
successfully installed. To date, no significant costs have been incurred in the
Company's systems related to the Year 2000.
Based on the review of the computer systems, management believes all action
necessary to prevent significant additional problems has been taken. While the
Company has taken steps to communicate with outside suppliers, it cannot
guarantee that they have all taken the necessary steps to prevent any service
interruption that may affect the Company.
Risks Related To Legal Uncertainty We May Become Subject To Burdensome
Government Regulations And Legal Uncertainties Affecting The Internet Which
Could Adversely Affect Our Business
To date, governmental regulations have not materially restricted use of the
Internet in our markets. However, the legal and regulatory environment that
pertains to the Internet is uncertain and may change. Uncertainty and new
regulations could increase our costs of doing business and prevent us from
delivering our products and services over the Internet. In addition to new laws
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and regulations being adopted, existing laws may be applied to the Internet. New
and existing laws may cover issues that include: sales and other taxes; user
privacy; pricing controls; characteristics and quality of products and services;
consumer protection; cross-border commerce; libel and defamation; copyright,
trademark and patent infringement; pornography; and other claims based on the
nature and content of Internet materials.
Unauthorized Use Of Our Intellectual Property By Third Parties May Adversely
Affect Our Business
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may adversely affect our business and our
reputation. We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries are uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States.
26
Page 26 of 76
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Preference Technologies, Inc.
(formerly StockUp.com, Inc.)
We have audited the accompanying balance sheet of Preference Technologies, Inc.
(formerly StockUp.com, Inc.) (a development stage company) as of December 31,
1999, and the related statements of operations, stockholders' deficit and cash
flows for the period from February 3, 1999 (inception) to December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Preference Technologies, Inc.
(formerly StockUp.com, Inc.) as of December 31, 1999, and the results of its
operations and its cash flows for the period from February 3, 1999 (inception)
to December 31, 1999 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 2 to the
financial statements, the Company incurred a net loss of $8,360,743 during the
period from February 3, 1999 (inception) to December 31, 1999, and it had
negative cash flows from operations of $4,997,907. These factors, among others,
as discussed in Note 2 to the financial statements, 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 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Singer Lewak Greenbaum & Goldstein LLP
- ------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 4, 2000
27
Page 27 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 32,791
Notes receivable - employees 14,700
-----------
Total current assets 47,491
Furniture and equipment, net 637,276
Other assets 67,756
-----------
Total assets $ 752,523
===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 770,912
-----------
Total current liabilities 770,912
-----------
Commitments and contingencies
Stockholders' deficit
Common stock, $0.001 par value
50,000,000 shares authorized
26,413,052 shares issued and outstanding 26,413
Additional paid-in capital 8,315,941
Deficit accumulated during the development stage (8,360,743)
-----------
Total stockholders' deficit (18,389)
-----------
Total liabilities and stockholders' deficit $ 752,523
===========
The accompanying notes are an integral part of these financial statements.
28
Page 28 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Period from February 3, 1999 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
Selling, general, and administrative expenses $ 6,905,193
------------
Loss from operations (6,905,193)
------------
Other income (expense)
Interest income 19,303
Forgiveness of debt 81,822
Financing expense (1,557,335)
Miscellaneous income 660
------------
Total other income (expense) (1,455,550)
------------
Net loss $ (8,360,743)
============
Basic loss per share $ (0.33)
============
Diluted loss per share $ (0.33)
============
Weighted-average shares outstanding 25,407,152
============
The accompanying notes are an integral part of these financial statements.
29
Page 29 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
For the Period from February 3, 1999 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the
--------------------------------- Paid-In Development
Shares Amount Capital Stage Total
------ ------ ------- ----- -----
<S> <C> <C> <C> <C>
Balance, February 3,
1999 (inception) - $ - $ - $ - $ -
Initial capitalization 931,384 931 (931) -
Shares issued in
merger 18,000,000 18,000 350,178 368,178
Issuance of common
stock in private
placement in
February 1999 5,066,664 5,067 3,194,933 3,200,000
Offering costs in
February 1999 (300,000) (300,000)
Issuance of common
stock in private
placement in
June 1999 458,334 458 1,374,546 1,375,004
Offering costs in
June 1999 (173,757) (173,757)
Issuance of common
stock in private
placement in
December 1999 500,002 500 1,299,500 1,300,000
Offering costs in
December 1999 (156,395) (156,395)
Issuance of common
stock for legal
services 1,000,000 1,000 99,000 100,000
Issuance of stock
options for legal
services 35,000 35,000
Issuance of stock
options for
consulting services 30,000 30,000
Issuance of common
stock for employee
bonuses 38,000 38 37,962 38,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
Page 30 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
For the Period from February 3, 1999 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the
--------------------------- Paid-In Development
Shares Amount Capital Stage $ Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common
stock for employee
settlement 12,000 $ 12 $ 49,488 $ $ 49,500
Issuance of below-
market
stock options 864,335 864,335
warrants 693,000 693,000
Issuance of below-
market stock options
to employees 627,489 627,489
Issuance of common
stock for cash 406,668 407 291,593 292,000
Net loss (8,360,743) (8,360,743)
---------- ---------- ----------- ------------ -----------
Balance, December 31,
1999 26,413,052 $ 26,413 $ 8,315,941 $ (8,360,743) $ (18,389)
========== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
Page 31 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOW
For the Period from February 3, 1999 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(8,360,743)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 237,056
Common stock issued for services 165,000
Common stock issued for employee bonuses 38,000
Common stock issued for employee settlement 49,500
Financing expense recognized for issuing below-market warrants 693,000
Financing expense recognized for issuing below-market stock
options 864,335
Compensation expense recognized for issuing below-market
stock options 627,489
(Increase) decrease in
Notes receivable - employees (14,700)
Other assets (67,756)
Increase in
Accounts payable and accrued expenses 770,912
-----------
Net cash used in operating activities (4,997,907)
-----------
Cash flows from investing activities
Purchase of furniture and equipment (506,154)
-----------
Net cash used in investing activities (506,154)
-----------
Cash flows from financing activities
Proceeds from issuance of common stock 292,000
Proceeds from private placement of common stock 5,875,004
Offering costs (630,152)
-----------
Net cash provided by financing activities 5,536,852
-----------
Net increase in cash and cash equivalents 32,791
Cash and cash equivalents, beginning of period --
-----------
Cash and cash equivalents, end of period $ 32,791
===========
The accompanying notes are an integral part of these financial statements.
32
Page 32 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Period from February 3, 1999 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
Supplement disclosures of cash flow information
During the period from February 3, 1999 (inception) to December 31, 1999, the
Company paid no income taxes or interest.
Supplemental schedule of non-cash investing and financing activities
During the period from February 3, 1999 (inception) to December 31, 1999, the
Company acquired furniture and equipment valued at $368,178 in exchange for
18,000,000 shares of the Company's common stock. The equipment is recorded as
furniture and equipment on the accompanying balance sheet.
The accompanying notes are an integral part of these financial statements
33
Page 33 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
Preference Technologies, Inc. (the "Company") was incorporated in Nevada
in February 1999 under its former name StockUp.com, Inc. Effective
February 23, 2000, StockUp.com, Inc. officially changed its name to
Preference Technologies, Inc.
The Company is developing second-generation Internet technology(TM)
products that will be licensed to other websites and distributed to end
users. The Company's products offer the end user increased levels of
customization and interactivity. Websites deploying the technology will
benefit from increased traffic, enhanced user retention, and the ability
to build targeted aggregate marketing profiles of users.
Courtleigh Capital, Inc. ("Courtleigh"), a Kansas corporation and a
publicly traded corporation, was first incorporated under the name ANCR,
Inc. on July 30, 1985 under the laws of the State of Colorado. ANCR, Inc.
became an inactive shell corporation, and on July 23, 1997 changed its
name to CEA Lab, Inc. Furthermore, on October 16, 1995, CEA Lab, Inc.
reincorporated in the State of Kansas and subsequently changed its name to
Courtleigh Capital, Inc. In February 1999, Courtleigh subsequently changed
its name to StockUp.com, Inc. and reincorporated in the State of Nevada.
On December 30, 1998, Marketing Direct Concepts, Inc. ("MDC"), a Nevada
corporation, entered into an Asset Purchase and Escrow Agreement, whereby
it sold assets and liabilities, valued at $368,178, to the Company in
exchange for 18,000,000 shares of Courtleigh's common stock.
Courtleigh had minimal assets and liabilities at the date of the
acquisition and did not have operations prior to the acquisition.
Therefore, no pro forma information is presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, during the period
from February 3, 1999 (inception) to December 31, 1999, the Company
incurred a net loss of $8,360,743, and it had negative cash flows from
operations of $4,997,907. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
34
Page 34 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of Presentation (Continued)
---------------------
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the Company's
development program and its transition to the attainment of profitable
operations is dependent upon the Company achieving a level of sales
adequate to support the Company's cost structure. In addition, realization
of a major portion of the assets in the accompanying balance sheet is
dependent upon the Company's ability to meet its financing requirements
and the success of its plans to sell products. The financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to
continue in existence.
In addition to the capital raised as of December 31, 1999 through private
equity offerings, the Company is currently negotiating with certain
investors about raising additional capital through private placement
offerings. Unless the Company raises additional funds, either by debt or
equity issuances, management believes that its current cash on hand will
be insufficient to cover its working capital needs until the Company's
sales volume reaches a sufficient level to cover operating expenses.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents
-------------------------
For the purpose of the statement of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Development Stage Enterprise
----------------------------
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting
by Development Stage Enterprises." The Company is devoting substantially
35
Page 35 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Development Stage Enterprise (continued)
----------------------------------------
all of its present efforts to establish a new business, and its planned
principal operations have not yet commenced. All losses accumulated since
inception have been considered as part of the Company's development stage
activities.
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs for
the period from February 3, 1999 (inception) to December 31, 1999 were
$1,155,580.
Furniture and Equipment
-----------------------
Furniture and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method over estimated
useful lives as follows:
Furniture and equipment 7 years
Computer hardware and software 3 years
Leasehold Improvements 10 months (lease term)
Maintenance and minor replacements are charged to expense as incurred.
Leasehold improvements are amortized over the lease period or the useful
life of the asset, whichever is shorter.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
Net Loss per Share
------------------
For the period from February 3, 1999 (inception) to December 31, 1999, the
Company adopted SFAS No. 128, "Earnings per Share." Basic loss per share
is computed by dividing loss available to common stockholders by the
36
Page 36 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss per Share (continued)
------------------------------
weighted-average number of common shares outstanding. Diluted loss per
share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. For the period
from February 3, 1999 (inception) to December 31, 1999, the Company
incurred a net loss; therefore, basic and diluted loss per share are the
same.
Stock Split
-----------
On February 22, 1999, the Company effected a one-for-13 reverse stock
split of its common stock. All share and per share data have been
retroactively restated to reflect this stock split.
On September 14, 1999, the Company effected a two-for-one stock split of
its common stock. All share and per share data have been retroactively
restated to reflect this stock split.
On February 23, 2000, the Company effected a two-for-one stock split of
its common stock. All share and per share data have been retroactively
restated to reflect this stock split.
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
notes receivable - employees, and accounts payable and accrued expenses,
the carrying amounts approximate fair value due to their short maturities.
Concentrations of Credit Risk
-----------------------------
The financial instrument which potentially subjects the Company to
concentrations of credit risk is cash. The Company places its cash with
high quality financial institutions, and at times it may exceed the
Federal Deposit Insurance Corporation $100,000 insurance limit. As of
December 31, 1999, uninsured portions held at the financial institutions
aggregated to $192,729.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 136, "Transfer of Assets to a Not-for-Profit Organization or
Charitable Trust that Raises or Holds Contributions for Others." This
statement is not applicable to the Company.
37
Page 37 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Pronouncements (continued)
-----------------------------------------------------
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not expect adoption
of SFAS No. 137 to have a material impact, if any, on its financial
position or results of operations.
Comprehensive Income
--------------------
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which
are excluded from net income, include foreign currency translation
adjustments and unrealized gains and losses on available-for-sale
securities. Comprehensive income is not presented in the Company's
financials statements since the Company did not have any of the items of
comprehensive income in the period presented.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1999 consisted of the following:
Furniture and equipment $ 101,985
Computer hardware and software 750,840
Leasehold improvements 21,507
----------
874,332
Less accumulated depreciation and amortization 237,056
----------
Total $ 637,276
==========
Depreciation and amortization expense for the period from February 3, 1999
(inception) to December 31, 1999 was $237,056.
38
Page 38 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases certain facilities for its corporate and operations
offices under long-term, non-cancelable operating lease agreements that
expire through March 31, 2003. Future minimum aggregate lease payments
under non-cancelable operating leases with initial terms of one year or
more at December 31, 1999 were as follows:
Years Ending
December 31,
------------
2000 $ 358,000
2001 360,000
2002 370,000
2003 93,000
----------
Total $1,181,000
==========
Rent expense for the period from February 3, 1999 (inception) to December
31, 1999 was $226,891.
Litigation
----------
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe that
the outcome of these matters will have a material adverse effect on the
Company's financial position or results of operations.
Employment Agreement
--------------------
During the period from February 3, 1999 (inception) to December 31, 1999,
the Company entered into an employment agreement with a key officer of the
Company. This officer will receive an annual salary of $225,000, a monthly
personal allowance of $3,000, and all automobile expenses paid.
NOTE 5 - STOCKHOLDERS' DEFICIT
Common Stock
------------
In February 1999, the Company entered into an agreement with MDC to
acquire furniture and equipment valued at $368,178 in exchange for
18,000,000 shares of common stock.
39
Page 39 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' DEFICIT (continued)
Common Stock (continued)
------------------------
In February 1999, the Company entered into an agreement to issue an
aggregate of 1,000,000 shares of common stock for legal services rendered.
The shares were to be issued according to three stages of completion. In
connection with the issuance of the common stock, the Company recorded
$100,000 of legal expenses.
In March 1999, the Company entered into an agreement to issue 14,000 stock
options at an exercise price of $2.50 per share for legal services
rendered. In connection with this issuance, the Company recorded $35,000
of legal expenses.
In July 1999, the Company issued 38,000 shares of common stock in lieu of
bonuses to four employees. In connection with this issuance, the Company
recorded $38,000 in bonus expense.
In August 1999, the Company entered into an employee settlement agreement
to issue 12,000 shares of common stock at $4.13 per share. The Company
recorded $49,500 in settlement expense.
In September 1999, the Company entered into a consulting agreement to
issue a total of 30,000 stock options, vesting at a rate of 2,500 per
month at an exercise price of $16.50 per share and expiring three years
from each vesting period. As of December 31, 1999, 10,000 options have
been issued and are outstanding. In connection with this issuance, the
Company recorded $30,000 of consulting expense.
Private Placement - February 1999
---------------------------------
In February 1999, the Company entered into a subscription agreement to
offer up to $900,000 worth of shares of common stock for 2,666,664 shares
and $2,300,000 worth of units to accredited investors. Each unit was
comprised of two shares of the Company's common stock (or 2,400,000
shares) and one warrant at an exercise price of $1.25 per share. The
warrants are deemed granted below market value, for which an expense of
$693,000 has been recorded. The warrants may be exercised, commencing upon
the date the Company closes a public offering of its stock pursuant to a
Registration Statement registering the shares underlying the warrants and
terminating 30 days thereafter. The warrant holders have the right to
demand registration of the shares if such shares have not been registered
by January 1, 2000. In addition, the warrants are callable at the option
of the Company on and after the date that (i) the shares underlying the
warrants are registered and (ii) the Company's common stock is traded on
any exchange, at a Market Price, as defined below, equal to or exceeding
$5 per share for 10 consecutive trading days. The Market Price shall be
the closing bid price of the common stock.
A total offering of $2,900,000, net of offering costs, was completed and
collected at December 31, 1999.
40
Page 40 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' DEFICIT (continued)
Private Placement - February 1999 (continued)
---------------------------------------------
Stock options were granted in connection with the private placement,
granting an aggregate of 581,672 shares at an aggregate exercise price of
$31,250. The options were granted below market, for which an expense of
$864,335 has been recorded.
Private Placement - June 1999
-----------------------------
In June 1999, the Company entered into a private placement agreement to
offer up to $12,000,000 worth of shares of common stock for 4,000,000
shares. The Company extended the minimum offering of $600,000 through
October 31, 1999, for which the minimum was timely met. The Company is
also issuing two warrants for every six shares of common stock to
investors that provide a minimum of $18,000 at an exercise price of $5 per
share with a two-year term. The shares underlying these warrants shall be
subject to piggy-back registration rights. Institutional investors shall
receive the same type and number of warrants, except the exercise price
shall be $5 per share. The Company shall pay to each broker-dealer
warrants to purchase shares equal to 10% of the Company's common stock
sold by such broker-dealer with an exercise price of $7.50. The shares are
not freely traded until the registration of the private placement
agreement. The warrants may be exercised, commencing upon the date the
Company closes a public offering of its stock pursuant to a Registration
Statement registering the shares underlying the warrants and terminating
180 days thereafter. The investment period expired on December 1, 1999.
Due to the investment period expiring, additional investments totaling
$190,685 have been received, are held in escrow, and will be returned to
the investors. An additional $52,200 was received by the Company for
expired investments, which will be returned, and therefore is included in
accounts payable on the Company's balance sheet at December 31, 1999.
At December 31, 1999, a total offering of $1,201,247, net of offering
costs, was completed, and 458,334 shares of common stock were issued.
In connection with the offering, the Company granted 113,106 warrants to
investors at December 31, 1999 at an exercise price of $5 per share. The
Company further granted 45,832 warrants to broker-dealers at an exercise
price of $7.50 per share.
41
Page 41 of 76
<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' DEFICIT (continued)
Private Placement - December 1999
---------------------------------
On December 5, 1999, the Company entered into another private placement
agreement to offer up to $4,000,000 worth of units to accredited investors
with a minimum offering of $2,000,000. As of December 31, 1999, no common
stock or warrants have been issued in connection with this agreement.
Subsequent to December 31, 1999, the Company received $2,910,978, net of
offering costs, and issued 1,301,600 shares of common stock. Each unit was
comprised of six shares of the Company's common stock and two warrants at
an exercise price of $5 per share. The warrants may be exercised,
commencing upon the date the Company closes a public offering of its stock
pursuant to a Registration Statement registering the shares underlying the
warrants and terminating three years thereafter. Each warrant shall be
callable upon providing the holder 20 days' written notice in the event
the shares have been registered and the closing bid price of the shares is
at a price of $10 per share during 10 consecutive trading days. The
securities comprising the units shall not be detachable unless and until a
Registration Statement is declared effective.
The offering also included distribution of warrants to broker-dealers in
the amount of 20% of the aggregate proceeds raised by a broker, divided by
3.75 at an exercise price of $5 per share. In the event the Company
registers its securities, the Company shall register the shares and the
shares underlying the warrants, subject to a trading lock-up, (i) upon the
effective date of the Registration Statement ("the Effective Date"),
33.33% of such securities shall be free trading; (ii) 45 days after the
Effective Date, 33.33% of such securities shall be free-trading, and (iii)
90 days after the Effective Date, 33.33% of such securities shall be
free-trading. In the event the Company has not filed a Registration
Statement registering the shares and the shares underlying the warrants
prior to July 1, 2000, then a majority of the holders of the units issued
shall have the right to demand that the Company immediately register all
such securities. In the event of such a demand, then upon the first of
each month after such demand during which the Registration Statement is
not effective, commencing no earlier then October 1, 2000, the number of
warrants issued hereunder shall be increased, on a pro-rata basis, to the
holders of the units, by an amount equal to 2% of the warrants issued.
On December 3, 1999, the Company entered into a subscription agreement to
offer units at a price of $9 per unit. For Investors investing at least
$1,000,000, the price per unit will be decreased to $7.50 per unit. Each
unit is comprised of six shares of the Company's common stock and two
warrants. There is no minimum or maximum total investment related to this
agreement. The Company shall pay to each broker-dealer warrants to
purchase shares equal to 10% of the Company's total units issued. All
warrants shall have an exercise price of $5 per share.
42
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<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' DEFICIT (continued)
Private Placement - December 1999 (continued)
---------------------------------------------
In the event the Company has not filed a Registration Statement on or
prior to September 1, 2000, the investor shall have the right to demand
registration of the shares and the warrant shares, and the number of
warrants issued shall be increased by 5% of the original number of
warrants issued, commencing September 1, 2000 and upon the first of each
month thereafter, until the shares and warrants are registered. In the
event the Company, during the six-month period of time following the date
of the agreement, sells shares at less than $3 per share (or $2.50 per
share in the event an investor is providing $1,000,000), then the Company
shall be required to issue additional securities to the investor in an
amount such that the investor would receive, in the aggregate, the same
securities as if he had participated in the reduced price offering.
As of December 31, 1999, a total offering of $1,143,605, net of offering
costs, was completed, and 500,002 shares of common stock were issued. In
connection with the offering, a total of 16,667 and 166,670 warrants were
issued to brokers and investors, respectively, subsequent to December 31,
1999. Subsequent to December 31, 1999, the Company received an additional
$2,284,390, net of offering costs.
In connection with the offering, 88,548 shares were duplicated, of which
44,548 have been retrieved, and the remaining will be cancelled.
Stock Option Plan
-----------------
The Company's Board of Directors adopted the Option Agreement and
Certificate (the "Agreement") in order to issue options to purchase common
stock of the Company to certain employees, commencing on April 9, 1999.
These options took two forms: a Series A option and a Series B option.
The Series A options grant their holders the right to purchase common
stock of the Company at $2.13 per share. Each Series A option is
exercisable on the latter of the following: (i) the option holder has been
employed full-time by the Company for six months or (ii) April 2, 2000.
One-fifteenth of the shares granted by the option become exercisable each
month. The option terminates two years after it first becomes exercisable
or within three years from the date of issuance. However, if the option
holder is terminated for violating the Company's employee manual, the
option holder loses all rights in all vested and non-vested options. If
the option holder's employment with the Company is terminated for any
other reason, the holder retains all vested options, but all non-vested
options immediately terminate. In addition, the non-vested options
automatically terminate if there is a change in control of the Company. In
addition, the options are not assignable.
43
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<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 5 -STOCKHOLDERS' DEFICIT (continued)
Stock Option Plan (continued)
-----------------------------
The Series B options are substantially similar to the Series A options
with the following differences: (i) the option holder does not lose all
rights in vested and non-vested options if his or her employment is
terminated for violating the Company's employee manual; (ii) the option
holder agrees not to work for any company developing Internet technology
for six months following any termination of employment with the Company;
and (iii) the key officer's options are assignable for the express purpose
of attracting key management personnel to work for the Company. In
addition, the exercise prices range from $2.13 to $5.48.
Per SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
should incur additional compensation cost for the excess of the fair value
of the modified options issued over the value of the original options at
the date of the exchange. The Company thus added that incremental amount
to the remaining unrecognized compensation cost for the original options
at the December 31, 1999 pro forma disclosure and recognized the total
amount over the remaining years of the remaining life of the options. The
Company has adopted only the disclosure provisions of SFAS No. 123. It
applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock and
options/warrants issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at the
grant date for awards under its plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net loss and loss per share
would be reduced to the pro forma amounts indicated below for the period
from February 3, 1999 (inception) to December 31, 1999:
Net loss
As reported $ (8,360,743)
Pro forma $(15,545,081)
Basic loss per common share
As reported $ (0.33)
Pro forma $ (0.61)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1995. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the period from
February 3, 1999 (inception) to December 31, 1999: dividend yield of 0%;
44
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<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' DEFICIT (continued)
Stock Option Plan (continued)
-----------------------------
expected volatility of 100%; risk-free interest rate of 5.5%; and expected
life of one year. The weighted-average fair value of options granted
during the period from February 3, 1999 (inception) to December 31, 1999
for which the exercise price was less than the Market Price at the grant
date was $2.13. The exercise prices range from $2.13 to $5.48.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The following summarizes the stock option transactions under the stock
option plan:
Weighted-
Average
Stock Options Exercise
Outstanding Price
------------- ----------
Balance, February 3, 1999 (inception) - $ -
Granted 4,294,198 $ 2.16
-----------
Outstanding, December 31, 1999 4,294,198 $ 2.16
===========
Exercisable, December 31, 1999 - $ -
===========
The weighted-average remaining contractual life of the options outstanding
is 1.03 years at December 31, 1999.
During the period from February 3, 1999 (inception) to December 31, 1999,
the Company issued 4,227,198 stock options to employees when the exercise
price was less than the fair value of the Company's stock at the date of
the grant. The Company incurred compensation expense of $1,438,891, of
which $627,489 is recorded as of December 31, 1999, and the remainder will
be expensed according to the vesting period of the options.
45
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<PAGE>
PREFERENCE TECHNOLOGIES, INC.
(formerly STOCKUP.COM, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES
As of December 31, 1999, the Company had $8,360,743 in net operating loss
carryforwards that may be offset against future taxable income. No
provision for income taxes for the period from February 3, 1999
(inception) to December 31, 1999 has been made, except for minimum state
taxes, since the Company incurred a loss during the period. The deferred
income tax benefit of the loss carryforward is the only significant
deferred income tax asset or liability of the Company. It has been offset
by a valuation allowance of the same amount since management does not
believe the recoverability of this deferred tax asset is more likely than
not. Accordingly, no deferred income tax benefit has been recognized in
these financial statements.
NOTE 7 - YEAR 2000 ISSUE
The Company has completed a comprehensive review of its computer systems
to identify the systems that could be affected by ongoing Year 2000
problems. Upgrades to systems judged critical to business operations have
been successfully installed. To date, no significant costs have been
incurred in the Company's systems related to the Year 2000.
Based on the review of the computer systems, management believes all
action necessary to prevent significant additional problems has been
taken. While the Company has taken steps to communicate with outside
suppliers, it cannot guarantee that they have all taken the necessary
steps to prevent any service interruption that may affect the Company.
46
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON
- ------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
The names and ages of the directors and executive officers of the Company as of
December 31, 1999, are as follows:
Name Age Position Since
---- --- -------- -----
Michael Calderone 40 Chief Executive Officer, Chairman of 1999
the Board, and President, Director
Kerry Nicponski 38 Chief Operating Officer, Director 1999
Leo Verheul 54 Chief Information Officer, Director 1999
Paul Yeager 61 Chief Financial Officer 1999
Michael Calderone. Michael Calderone has 17 years of business experience. Mr.
Calderone has served as Chief Executive Officer and President of the Company
since February 3, 1999. From 1988 through 1991 Mr. Calderone was the President
of two companies, Express Tel 900, which was a long distance service for 800 and
900 lines, and Access Media Network, a direct response advertising agency. From
1995 to 1998 Mr. Calderone was President of Marketing Direct Concepts Inc., a
financial public relations firm.
Kerry Nicponski. Mr. Nicponski resigned as an officer, director and employee of
the Company effective March 9, 2000. Kerry Nicponski possesses 14 years
experience in business and high technology, as well as computer programming. Mr.
Nicponski served as Chief Operating Officer of the Company from February 3, 1999
to March 9, 2000. During his tenure in Utah and Nevada from 1996 through 1999,
Mr. Nicponski worked with a number of businesses, including Household Credit
Services and NOS Communications. Mr. Nicponski holds credentials as both a
Microsoft Certified Professional and a Microsoft Solution Provider. In 1989 Mr.
Nicponski received his Bachelors of Science in Business Administration and
Computer Sciences at Southern University Utah. In 1996 Mr. Nicponski filed and
obtained a discharge from bankruptcy.
Leo Verheul. Leo Verheul has served as Chief Information Officer of the Company
since May 17, 1999. From April 1997 to April 1999 he was appointed by Governor
Pete Wilson to the position of Chief Information Officer and deputy director of
the IS Division for the State of California, Department of Motor Vehicles. From
April 1995 to April 1999 he was Chief Information Officer of Kaiser - Hill, LLC,
one of the largest engineering, construction and consulting services companies
in the United States, where he assumed the leadership role of all statewide IT
47
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<PAGE>
functions. On September 22, 1995, Mr. Verheul filed for bankruptcy in the
Sacramento Division of the U.S Bankruptcy court. On January 11, 1996, the U.S.
Bankruptcy Court - Easter District of California (Case No. 95-29029-C-7) entered
an order for Discharge of Debtor.
Paul Yeager. Paul Yeager has served as Chief Financial Officer of the Company
since August 23, 1999. Mr. Yeager comes to the Company from the privately held
Color Spot Nurseries, the largest wholesale nursery in the United States, where
he worked as Chief Financial Officer for from January 1997 to August 1998.
During his tenure at Color Spot, sales rose from $50 million to more than $200
million annually. Prior to Color Spot, Mr. Yeager spent 20 years as Chief
Financial Officer for The Scotts Company -- the billion-dollar world leader in
lawn and garden chemical technologies and consumer products - guiding the
company through its Initial Public Offering and secondary offerings.
Section 16(a) Beneficial Ownership Reporting Compliance
Each of the Company's Section 16(a) reporting persons are currently late in
filing Section 16(a) reports. The Company anticipates that such reports will be
filed by such persons at or about the same time as this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
Summary Compensation Table
- --------------------------
The following table sets forth the annual compensation paid and accrued by
the Company since inception to the executive officers to whom the Company paid
in excess of $100,000, including cash and issuance of securities.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Annual Compensation Long Term All Other
------------------- --------- ---------
Compensation Compensation
------------ ------------
- ------------------------------------------------------------------------------------------------
Restricted Securities
---------- ----------
Name and Principal Year Salary Bonus Other Stock Underlying
- ------------------ ---- ------ ----- ----- ----- ----------
Position ($) ($) ($) Awards Options
-------- --- --- --- ------ -------
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Calderone 1999 $225,000 $0 $36,000(1) 0 2,400,000(2) $0
Chief Executive
Officer, President
- ------------------------------------------------------------------------------------------------
Paul Yeager 1999 $100,000 $0 $0 0 400,000(3) $0
Chief Financial Officer
- ------------------------------------------------------------------------------------------------
- --------------------
<FN>
1. Consists of a $3,000 monthly personal allowance and automobile expense.
2. Granted April 9, 1999 at an exercise price of $2.13 and vesting over 15
months. Such options expire April 2, 2002.
3. Granted August 23, 1999 at an exercise price of $2.13 and vesting over 15
months. Such options expire April 2, 2002.
</FN>
</TABLE>
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<PAGE>
Options/SAR Grants In Last Fiscal Year
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
-----------------------------
Individual Growth Assumed Annual Rates of Stock
----------------- -----------------------------
Price Appreciation for Option
-----------------------------
Term
----
% of Total
----------
Options/SARs Options/SARs Exercise or Expiration
------------ ------------ ----------- ----------
Name Granted (#) Granted to Base Price Date
---- ----------- ---------- ---------- ----
Employees in ($) 5% ($) 10% ($)
------------- --- ------ -------
Fiscal Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Calderone
Chief Financial 2,400,000 56% 2.13 4-2-02 854,400 1,435,200
Officer and President
- ----------------------------------------------------------------------------------------------------------------------
Kerry Nicponski 280,000
Chief Operating Officer 7% 2.13 4-2-02 99,680 167,440
- ----------------------------------------------------------------------------------------------------------------------
Leo Verheul
Chief Information 100,000 2% 2.13 4-2-02 35,600 59,800
Officer
- ----------------------------------------------------------------------------------------------------------------------
Paul Yeager
Chief Financial Officer 400,000 9% 2.13 4-2-02 142,400 289,200
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Aggregated Option and SAR Exercises in Fiscal Year-End Option/SAR Values
- ------------------------------------------------------------------------
No officers or directors exercised options in Fiscal 1999.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
-------------------- --------------------
Shares Value Underlying Unexercised In-The-Money Options/SARs at
------ ----- ---------------------- ----------------------------
Acquired on Realized ($) Options/SARs at Fiscal Year Fiscal Year End ($)
----------- ------------ --------------------------- -------------------
Name Exercise (#) End (#)
---- ------------ -------
Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael Calderone N/A N/A 0/2,400,000 0/13,650,000
- ----------------------------------------------------------------------------------------------------------------------
Kerry Nicponski N/A N/A 0/ 280,000 0/ 1,597,500
- ----------------------------------------------------------------------------------------------------------------------
Leo Verheul N/A N/A 0/ 100,000 0/ 568,750
- ----------------------------------------------------------------------------------------------------------------------
Paul Yeager N/A N/A 0/ 400,000 0/ 2,275,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
49
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<PAGE>
Compensation of Directors
- -------------------------
The Company's Bylaws permit the Directors of the Company to receive compensation
for their services. However, to date, the Company has not fixed or awarded such
compensation to the Board of Directors.
Employment Contracts, Termination of Employment and Change-In-Control
- --------------------------------------------------------------------------------
Arrangements
- ------------
On June 1, 1999 the Company entered into an Employment Memorandum with Michael
Calderone, the Company's Chief Executive Officer and President. Pursuant to such
memorandum Mr. Calerdone will receive $225,000 annually and a monthly personal
allowance of $3,000, including all automobile expenses.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Executive officer compensation decisions are made by the Company's entire board
of directors. The compensation of the Company's Chief Executive Officer, Michael
Calderone, was decided by the board of directors pursuant to the terms of the
Employment Memorandum dated June 1, 1999 discussed above.
50
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT
----------
The following table sets forth information regarding beneficial ownership as of
March 21, 2000, of the Company's outstanding common stock by any person who is
known to the Company to be a beneficial owner of more than 5% of the Company's
voting securities and the Company's equity securities held by each director and
officer and by directors and officers of the Company as a group.
Name and Address of Class of Amount and Nature Percent of
------------------- -------- ----------------- ----------
Beneficial Owner Stock of Beneficial Class
---------------- ----- ------------- -----
Ownership
---------
- --------------------------------------------------------------------------------
Michael Calderone Common 18,201,200(1) 58.6%
Preference Technologies, Inc.
333 N. Ranch Drive, Suite 900
Las Vegas, NV 89106
- --------------------------------------------------------------------------------
Kerry Nicponski Common 420,000(2) 1.5%
Preference Technologies, Inc.
333 N. Ranch Drive, Suite 900
Las Vegas, NV 89106
- --------------------------------------------------------------------------------
Leo Verheul Common 100,000(3) *
Preference Technologies, Inc.
333 N. Ranch Drive, Suite 900
Las Vegas, NV 89106
- --------------------------------------------------------------------------------
Paul Yeager Common 400,000(4) 1.4%
Preference Technologies, Inc.
333 N. Ranch Drive, Suite 900
Las Vegas, NV 89106
- --------------------------------------------------------------------------------
Executive Officers and Directors As a Common 19,121,200 60.1%
Group Consisting of 4 Persons
- --------------------------------------------------------------------------------
* indicates less than 1%
1 Total includes 15,761,200 Common Shares solely owned by Mr. Calderone;
2,400,000 Common Shares that can be purchased upon exercise of stock options;
and 40,000 Common Shares owned by Mr. Calderone's minor child.
2 Total includes 140,000 Common Shares solely owned by Mr. Nicponski and
280,000 Common Shares that can be purchased upon exercise of stock options.
3 Total includes 100,000 Common Shares that can be purchased upon exercise of
stock options, solely owned by Mr. Verheul.
4. Total includes 400,000 Common Shares that can be purchased upon exercise of
stock options, solely owned by Mr. Yeager.
51
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
- -------------------------------------------------------
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- -----------------------------------------------------------------
FORM 8-K
--------
(a) Financial Statements
Balance Sheet
Statement of Operations
Statement of Stockholder Deficit
Statement of Cash Flows
Notes to Financial Statements
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 7, 1999.
(c) Exhibits
2.1 Plan and Agreement of Merger dated February 25, 1999 - Incorporated
by reference to Form 10-SB of Registrant filed August 8, 1999.
3.1 Amended and Restated Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant - incorporated by reference to Form 10-5B
of the Registrant filed August 8, 1999
4.1 Form of Common Stock Certificate - Incorporated by reference to Form
10-SB of the Registrant filed August 8, 1999
4.2 Form of Series A Option Agreement
4.3 Form of Series B Option Agreement
4.4 Form of Series A 2000 Option Agreement
4.5 Form of Vesting Agreement - incorporated by reference to Form 10-SB
of the Registrant filed August 8, 1999
10.1 Atrium Office Lease dated February 5, 1999 - incorporated by
reference to Form 10-SB of Registrant filed August 8, 1999
10.2 Sublease Agreement dated May 15, 1999- incorporated by reference to
Form 10-SB of the Registrant filed August 8, 1999
10.3 Agreement with Travis Morgan Securities, Inc. dated June 15, 1999 -
incorporated by reference to Form 10-SB of Registrant filed August
8, 1999
52
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<PAGE>
10.4 Asset Purchase and Escrow Agreement dated December 30, 1998 -
incorporated by reference to Form 10-SB of Registrant filed August
8, 1999
12.1 Employment Memorandum with Michael Calderone date June 1, 1999 -
incorporated by reference to Form 10-SB of Registrant filed August
8, 1999
27.1 Financial Data Schedule
53
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PREFERENCE TECHNOLOGIES, INC.
Date: March 30, 2000 /s/ Michael Calderone
_____________________________
Michael Calderone
Chief Executive Officer/President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael Calderone
________________________ Director March 28, 2000
Michael Calderone Chief Executive Officer
(Principal Executive Officer)
/s/ Paul Yeager
________________________ Chief Financial Officer March 28, 2000
Paul Yeager (Principal Accounting Officer)
/s/ Leo Verheul
________________________ Director March 28, 2000
Leo Verheul Chief Information Officer
54
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<PAGE>
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
Exhibit
No. Description Page
--- ----------- ----
3.1 Amended and Restated Articles of Incorporation of 56
the Registrant
4.2 Form of Series A Option Agreement 57
4.3 Form of Series B Option Agreement 64
4.4 Form of Series A 2000 Option Agreement 70
27.1 Financial Data Schedule 76
55
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<PAGE>
Exhibit 3.1
-----------
THIRD AMENDMENT TO ARTICLES OF INCORPORATION
OF
PREFERENCE TECHNOLOGIES, INC.
The Articles of Incorporation of Preference Technologies, Inc., formerly
known as Stockup.com, Inc., originally filed with the Secretary of the State of
Nevada on or about February 5, 1999, as amended, are hereby amended by way of
resolution of the board of directors and by way of vote of the shareholders of
the Corporation pursuant to the bylaws of the corporation as follows:
Article Third is Amended as Follows:
The Total number of shares which the corporation is authorized to issue is
Two Hundred Million (200,000,000) shares of common stock with a par value of
$.001. Upon amendment of this Article to read as herein set forth, each
outstanding share is split up and converted into two (2) shares.
Certification and Acknowledgment
I, Michael Calderone, the secretary of the corporation, do hereby verify
by the attached resolution and certificate of vote of the Secretary of the
corporation, that the amendment set forth above has been made pursuant to the
articles and bylaws of the corporation by appropriate action and measures of the
board of directors and shareholders of the corporation.
- ------------------------------
MICHAEL CALDERONE, Secretary
State of Nevada )
) ss:
County of Clark )
On this ___ day of March 2000, personally appeared before me Michael
Calderone, personally known to me, a Notary Public, and proven to me that on the
basis of satisfactory evidence to be the person whose name is subscribed to the
within instrument. He acknowledged to me that he executed the same in his
authorized capacity, and that this is his signature on the instrument, and that
he is the person, and has signed for the entity and has acted to execute the
instrument in that capacity.
NOTARY PUBLIC
- -------------------------
Page 56 of 76
<PAGE>
Exhibit 4.2
-----------
Option Series A No. __________
OPTION AGREEMENT AND CERTIFICATE
This OPTION AGREEMENT AND CERTIFICATE (the "Agreement") is issued as of
this date, April 9, 1999 by and between STOCKUP.COM, INC. (the "Company"), and
the individual set forth in Exhibit A hereto ("Option Holder").
WHEREAS, the Company proposes to issue to Option Holder the number of
Options set forth in Exhibit A hereto (the "Options"), each such Option
entitling the holder thereof to purchase one share of Common Stock, $.001 par
value, of the Company (the "Shares") at the price of $8.50 per share (the
"Exercise Price").
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. Option Certificates. This Agreement shall also constitute an
Option Certificate evidencing the Options issuable hereunder. This Agreement
shall be executed on behalf of the Company by its Chief Executive Officer or
President.
SECTION 2. Right to Exercise Options. Each Option which is vested may be
exercisable upon the later to occur of the following two conditions: (i) the
Option Holder has been employed full-time by the Company for six months and (ii)
April 1, 2000 (the "Exercise Commencement Date"). This Option shall be effective
during the two year period of time following the Exercise Commencement Date (the
"Expiration Date"). Each Option not exercised on or before the Expiration Date
shall expire. Subject to the provisions of this Option Agreement, the holder of
each Option shall have the right to purchase from the Company, and the Company
shall issue and sell to each such Option Holder, at an initial exercise price
equal to the Exercise Price, one fully paid and nonassessable Share upon
surrender to the Company of this Agreement evidencing such Option, with the form
of election to purchase set forth as Exhibit B hereto duly completed and signed
and evidence of payment of the Exercise Price. Payment of the Exercise Price
shall be by wire transfer or certified check to the Company.
Upon surrender of this Agreement and payment of the Exercise Price, the
Company shall cause to be issued and delivered promptly to Option Holder a
certificate for the Shares issuable upon the exercise of the Option or Options.
The Options evidenced by this Agreement shall be exercisable at the election of
the Option holder thereof, either as an entirety or from time to time for less
than all of the number of Options specified in this Agreement. In the event the
Options are only exercised in part, then the Option Holder shall receive another
Agreement in substantially the form of this Agreement evidencing the Options
which have not yet been vested.
1
Page 57 of 76
<PAGE>
SECTION 3. Reservation of Shares. The Company will at all times reserve
and keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Shares or its authorized and issued Shares held in its
treasury for the purpose of enabling it to satisfy any obligation to issue
Shares upon exercise of Options, the full number of Shares deliverable upon
exercise of Options will be validly issued, fully paid and nonassessable
outstanding Shares of the Company.
SECTION 4. Registration under the Securities Act of 1933. Option Holder
represents and warrants to the Company that Option Holder is acquiring the
Options for investment and with no present intention of distributing or
reselling any of the Options. The Shares and the certificate or certificates
evidencing any such Shares shall bear the following legend:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT
IS AVAILABLE."
Certificates for Shares without such legend shall be issued if such shares are
sold pursuant to an effective registration statement under the Act or if the
company has receiver an opinion from counsel reasonably satisfactory to counsel
for the Company, that such legend is no longer required under the Act.
Certificates for Options or Shares shall also bear such legends as may be
required from time to time by law. The Shares shall be registerable under Form
S-8 when and if: (i) the option is exercised and (ii) the Company is a Reporting
Company within the meaning of the Securities Exchange Act of 1934.
SECTION 5. Vesting and Termination of Option. The Options granted
hereunder shall vest in the amount of one-fifteenth of the number of Options
granted hereunder each month during the 15 month period commencing upon the
Commencement Date (i.e., all Options granted hereunder shall fully vested 16
months from the Commencement Date). In the event the Option Holder's employment
with the Company is terminated by reason of violation of the company's Employee
Manual in effect at the time of the termination ("Manual Violation"), then the
Option Holder shall lose all rights in all vested and non-vested Options. In the
event the Option Holder's employment with the Company is voluntarily or
involuntarily terminated hereunder for any other reason than a Manual Violation,
then the Option Holder shall be null and void as of the date of such
termination. All non-vested Options shall automatically terminate, at any time
after the Commencement Date in the event there is a Change in Control of the
Company (as hereinafter defined). Change in Control shall be the acquisition by
a single third party of at least 50.1% of the issued and outstanding shares of
the common stock of the Company or securities convertible or exercisable into
such amount which provide the acquirer with at least 50.1% of the voting control
of the Company.
SECTION 6. Adjustment of Number of Shares and Class of Capital Stock
Purchasable. The Number of Shares and Class of Capital Stock purchasable under
this Agreement are subject to adjustment from time to time as set form in this
section.
2
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<PAGE>
Adjustment for Change in Capital Stock. If the Company:
(i) pays a dividend or makes a
distribution on its Common Stock,
in each case, in shares of its
Common Stock;
(ii) subdivides its outstanding Shares
of Common Stock into a greater
number of shares;
(iii) combines its outstanding shares
of Common Stock into a smaller
number of shares;
(iv) makes a distribution on its
Common Stock in shares of its
capital stock other than Common
Stock; or
(v) issues by reclassification of its
shares of Common Stock any
shares of its capital stock.
then the number and classes of shares purchasable upon exercise of this
Agreement in effect immediately prior to such action shall be adjusted so that
the holder of this Agreement thereafter exercised may receive the number and
classes of shares of capital stock of the Company which such holder would have
owned immediately following such action if such holder had exercised the Option
immediately prior to such action.
For a dividend or distribution the adjustment shall become effective
immediately after the record date for the dividend or distribution. For a
subdivision, combination or reclassification ("Capital Restructure"), the
adjustment shall become effective immediately after the effective date of the
subdivision, combination or reclassification. In the event of a Capital
Restructure, the Exercise Price shall be adjusted to be the "Weighted Average
Trading Price" (as hereinafter defined) during the five trading day period,
whichever is less. "Weighted Average Trading Price" shall be calculated as the
number of shares traded during each of the designated five days multiplied by
the closing price of that day and then this product would be divided by the
number of shares, in the aggregate, which traded during this five day period of
time.
If after an adjustment the holder of an Option upon exercise of it
may receive shares of two or more classes of capital stock of the Company, the
Board of Directors of the Company shall in good faith determine the allocation
of the adjusted Exercise Price between or among the classes of capital stock.
After such allocation, that portion of the Exercise Price applicable to each
share of each such class of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Stock in this
Agreement. Notwithstanding the allocation of the Exercise Price between or among
shares of capital stock as provided herein. An Option issued under this
Agreement may only be exercised in full by payment of the entire Exercise Price
currently in effect.
3
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<PAGE>
SECTION 6. Notices to Company and Option Holder. Any notice or demand
authorized by this Agreement to be given or made by any party to this Agreement
shall be:
If to the Company:
StockUp.com, Inc.
333 north Rancho Drive, Suite 900
Las Vegas, Nevada 89106
Attn: Michael Calderone
If to the Option Holder:
At the address set forth adjacent to his/her name set forth in Exhibit A
hereto. Three attempted but unsuccessful deliveries shall constitute notice for
purposes of this Agreement. All such notices shall be sent registered mail,
postage prepaid, addressed as set forth above (until another address is filed in
writing by either the Company or the Option Holder) to the Company and Option
Holder.
SECTION 7. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of and Option Holder in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company may deem necessary or desirable which shall not affect the
interests of the Option Holder.
SECTION 8. Assignment. This Option shall not be assigned by either the
Company or the Option Holder, it being expressly understood that this Option is
provided in exchange for personal services provided by the Option Holder to the
Company.
SECTION 9. Governing Law. This Agreement shall be deemed to be a contract
made under the laws of the State of Nevada and for all proposes shall be
governed by and construed in accordance with the laws of said state. The parties
submit to the jurisdiction of the Courts of the State of Nevada or a Federal
Court empaneled in the State of Nevada for the resolution of all legal disputes
arising under the terms of this Agreement.
SECTION 10. Execution of this Agreement. This Agreement shall be executed
simultaneously by the Company and the Option Holder. The Option Holder shall be
provided with the original copy of the Option and the Company shall retain a
copy of the Option for its records.
4
Page 60 of 76
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, effective as of the Commencement Date, as set forth in Exhibit A
hereto.
STOCKUP.COM, INC.,
A Nevada corporation
By:_______________________________
Michael Calderone
Title: President
5
Page 61 of 76
<PAGE>
EXHIBIT A
Option Holder:
Signature:__________________________________
Name:_______________________________________
Address:____________________________________
____________________________________
Issuance Date:______________________________
Commencement Date:__________________________
Number of Options:__________________________
6
Page 62 of 76
<PAGE>
EXHIBIT B
FORM OF
ELECTION TO PURCHASE
(To be executed upon exercise of Option)
The undersigned hereby irrevocably elects to exercise the right,
represented by the Option Agreement and Certificate to which this Form is an
Exhibit, to purchase ________ Shares and herewith authorizes payment for such
Shares in the amount of $_______ all in accordance with the terms thereof. The
undersigned requests that certificates for such Shares be registered as follows:
Name Number of Shares
----------------------------- ---------------
All of whose addresses are _________________________________________________,
and that such certificates be delivered to Option Holder whose address
is______________________________________________.If said number of Shares is
less than all of the Shares purchasable hereunder, the undersigned requests
that a new Option Agreement and Certificate representing the remaining balance
of the Options be registered in the Option Agreement and Certificate be
delivered to the attention of ___________________ at the above address.
Dated:_______________________ OPTION HOLDER
By:_____________________________
(signature)
________________________________
(print name)
7
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<PAGE>
Exhibit 4.3
-----------
Option Series B No. _____________
OPTION AGREEMENT AND CERTIFICATE
This OPTION AGREEMENT AND CERTIFICATE (the "Agreement") is issued as of
__________________________ and is by and between StockUp.com, Inc. (the
"Company"), and the individual set forth in Exhibit A hereto ("Option Holder").
WHEREAS, the Company proposes to issue to Option Holder the number of
Options set forth in Exhibit A hereto (the "Options"), each such Option
entitling the holder thereof to purchase one share of Common Stock, $.001 par
value, of the Company (the "Shares") at the price of $____________ per share
(the "Exercise Price").
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. Option Certificates. This Agreement shall also constitute an
Option Certificate evidencing the Options issuable hereunder. This Agreement
shall be executed on behalf of the Company by its Chief Executive Officer or
President.
SECTION 2. Right to Exercise Options. Each Option which is vested may be
exercisable upon the later to occur of the following two conditions: (i) the
Option Holder has been employed full-time by the Company for six months and (ii)
April 1, 2000 (the "Exercise Commencement Date"). This Option shall be effective
during the two-year period of time following the Exercise Commencement Date (the
"Expiration Date"). Each Option not exercised on or before the Expiration Date
shall expire. Subject to the provisions of this Agreement, the holder of each
Option shall have the right to purchase from the Company, and the Company shall
issue and sell to each such Option Holder, at an initial exercise price equal to
the Exercise Price, one fully paid and nonassessable Share upon surrender to the
Company of this Agreement evidencing such Option, with the form of election to
purchase set forth as Exhibit B hereto duly completed and signed and evidence of
payment of the Exercise Price. Payment of the Exercise Price shall be made by
wire transfer or certified check to the Company.
Upon surrender of this Agreement and payment of the Exercise Price, the
Company shall cause to be issued and delivered promptly to Option Holder a
certificate for the Shares issuable upon the exercise of the Option or Options.
The Options evidenced by this Agreement shall be exercisable at the election of
the Option Holder thereof, either as an entirety or from time to time for less
than all of the number of Options specified in this Agreement. In the event the
Options are only exercised in part, then the Option Holder shall receive another
Agreement in substantially the form of this Agreement evidencing the Options
which have not yet been vested.
SECTION 3. Reservation of Shares. The Company will at all times reserve
and keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Shares or its authorized and issued shares held in its
1
Page 64 of 76
<PAGE>
treasury for the purpose of enabling it to satisfy any obligation to issue
Shares upon exercise of Options, the full number of Shares deliverable upon the
exercise of all outstanding Options. The Company covenants that all Shares which
may be issued upon exercise of Options will be validly issued, fully paid and
nonassessable outstanding Shares of the Company.
SECTION 4. Registration under the Securities Act of 1933. Option Holder
represents and warrants to the Company that Option Holder is acquiring the
Options for investment and with no present intention of distributing or
reselling any of the Options. The Shares and the certificate or certificates
evidencing any such Shares shall bear the following legend:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER
SUCH ACT IS AVAILABLE."
Certificates for Shares without such legend shall be issued if such shares are
sold pursuant to an effective registration statement under the Act or if the
Company has received an opinion from counsel reasonably satisfactory to counsel
for the Company, that such legend is no longer required under the Act.
Certificates for Options or Shares shall also bear such legends as may be
required from time to time by law. The Shares shall be registerable under Form
S-8 when and if: (i) the Option is exercised and (ii) the Company is a Reporting
Company within the meaning of the Securities Exchange Act of 1934.
SECTION 5. Vesting and Termination of Option. The Options granted
hereunder shall vest in the amount of one-fifteenth of the number of Options
granted hereunder each month during the 15-month period commencing upon the
Commencement Date (i.e., all Options granted hereunder shall be fully vested 16
months from the Commencement Date). In the event the Option Holder's employment
with the Company is voluntarily or involuntarily terminated hereunder for any
reason then the Option Holder shall be entitled to retain all vested Options,
but all non-vested Options granted to such Option Holder shall be null and void
as of the date of such termination. Upon the occurrence of the Option Holder no
longer being employed by the Company, the Option Holder agrees that such Option
Holder shall not be employed by or otherwise assist, directly or indirectly, any
company involved in the business of developing technology to be utilized in the
Internet industry during the six-month period of time following the date of such
termination. All non-vested Options shall automatically be deemed exercised (net
of the applicable Exercise Price), at any time after the Commencement Date in
the event there is a Change in Control of the Company (as hereinafter defined).
Change in Control shall be the acquisition by a single third party of at least
50.1% of the issued and outstanding shares of the common stock of the Company or
securities convertible or exercisable into such amount which provide the
acquiror with at least 50.1% of the voting control of the Company.
SECTION 6. Adjustment of Number of Shares and Class of Capital Stock
Purchasable. The Number of Shares of Class of Capital Stock purchasable under
this Agreement are subject to adjustment from time to time as set forth in this
Section.
Adjustment for Change in Capital Stock. If the Company:
(i) pays a dividend or makes a distribution on its Common Stock,
in each case, in shares of its Common Stock;
2
Page 65 of 76
<PAGE>
(ii) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(iii) combines its outstanding shares of common Stock into a
smaller number of shares;
(iv) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(v) issues by reclassification of its shares of Common Stock
any shares of its capital stock;
then the number and classes of shares purchasable upon exercise of this
Agreement in effect immediately prior to such action shall be adjusted so that
the holder of this Agreement thereafter exercised may receive the number and
classes of shares of capital stock of the Company which such holder would have
owned immediately following such action if such holder had exercised the Option
immediately prior to such action.
For a dividend or distribution the adjustment shall become effective
immediately after the record date for the dividend or distribution. For a
subdivision, combination or reclassification ("Corporate Recapitalization"), the
adjustment shall become effective immediately after the effective date of the
subdivision, combination or reclassification. In the event of a Corporate
Recapitalization, the Exercise Price shall be adjusted to be the "Weighted
Average Trading Price" (as hereinafter defined) during the five trading day
period following the adjustment or the actual average trading price during such
period, whichever is less. "Weighted Average Trading Price" shall be calculated
as the number of shares traded during each of the designated five days
multiplied by the closing price of that day and then this product would be
divided by the number of shares, in the aggregate, which traded during this five
day period of time.
If after an adjustment the holder of an Option upon exercise of it may
receive shares of two or more classes of capital stock of the Company, the Board
of Directors of the Company shall in good faith determine the allocation of the
adjusted Exercise Price between or among the classes of capital stock. After
such allocation, that portion of the Exercise Price applicable to each share of
each such class of capital stock shall thereafter be subject to adjustment on
terms comparable to those applicable to Common Stock in the Agreement.
Notwithstanding the allocation of the Exercise Price between or among shares of
capital stock as provided herein, an Option issued under this Agreement may only
be exercised in full by payment of the entire Exercise Price currently in
effect.
SECTION 7. Notices to Company and Option Holder. Any notice or demand
authorized by the Agreement to be given or made by any party to this Agreement
shall be:
If to the Company:
StockUp.com, Inc.
333 North Rancho Drive, Suite 650
Las Vegas, Nevada 89106
Attn: Michael Calderone
3
Page 66 of 76
<PAGE>
If to the Option Holder:
At the address set forth adjacent to his/her name set forth in Exhibit A
hereto. Three attempted but unsuccessful deliveries shall constitute notice for
purposes of this Agreement. All such notices shall be sent registered mail,
postage prepaid, addressed as set forth above (until another address is filed in
writing by either the Company or the Option Holder) to the Company and the
Option Holder.
SECTION 8. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any Option Holder in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company may deem necessary or desirable which shall not affect the
interests of the Option Holder.
SECTION 9. Assignment. This Options shall not be assignable by either the
Company or the Option Holder, it being expressly understood that this Option is
provided in exchange for personal services provided by the Option Holder to the
Company; provided, however it is understood that Options issuable to Michael
Calderone under this Series B shall be assignable for the express purpose of
attracting key management personnel.
SECTION 10. Governing Law. This Agreement shall be deemed to be a contract
made under the laws of the State of Nevada and for all purposes shall be
governed by and construed in accordance wit the laws of said State. The parties
submit to the jurisdiction of the Courts of the State of Nevada or a Federal
Court empaneled in the State of Nevada for the resolution of all legal disputes
arising under the terms of this Agreement.
SECTION 11. Execution of this Agreement. This Agreement shall be executed
simultaneously by the Company and the Option Holder. The Option Holder shall be
provided with the original of the Option and the Company shall retain a copy of
the Option for its records.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, effective as of the Commencement Date, as set forth in Exhibit A
hereto.
StockUp.com, Inc.,
A Nevada corporation
By: ________________________________
Michael Calderone
Title: President & C.E.O.
4
Page 67 of 76
<PAGE>
EXHIBIT A
Option Holder:
Signature: _______________________________________
Name: _______________________________________
Address: _______________________________________
_______________________________________
Commencement Date: ____________________________
Number of Options: ____________________________
Grant Date: ____________________________
Signed on: ____________________________
Today's Date
5
Page 68 of 76
<PAGE>
EXHIBIT B
FORM OF
ELECTION TO PURCHASE
(To be executed upon exercise of Option)
The undersigned hereby irrevocably elects to exercise the right,
represented by the Option Agreement and Certificate to which this Form is an
Exhibit, to purchase ____________ Shares and herewith authorizes payment for
such Shares in the amount of $_______________ all in accordance with the terms
thereof. The undersigned requests that certificates for such Shares be
registered as follows:
Name Number of Shares
----------------------------- ---------------
all of whose addresses are ____________________________________, and that such
certificates be delivered to Option Holder whose address is ___________________
_____________________________. If said number of Shares is less than all of the
Shares purchasable hereunder, the undersigned requests that a new Option
Agreement and Certificate representing the remaining balance of the Options be
registered in the name of Option Holder whose address is
__________________________________________ and that such Option Agreement and
Certificate be delivered to the attention of __________________________ at the
above address.
6
Page 69 of 76
<PAGE>
Exhibit 4.4
-----------
Option Series A 2000 No.________________
OPTION AGREEMENT AND CERTIFICATE
This OPTION AGREEMENT AND CERTIFICATE (the "Agreement") is issued as of
this date _________________________________ by and between Preference
Technologies, Inc. (the "Company"), and the individual set forth in Exhibit A
hereto ("Option Holder").
WHEREAS, the Company proposes to issue to Option Holder the number of
Options set forth in Exhibit A hereto (the "Options"), each such Option
entitling the holder thereof to purchase one share of Common Stock, $.001 par
value, of the Company (the "Shares") at the price of $_________________ per
share (the "Exercise Price").
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. Option Certificates. This Agreement shall also constitute an
Option Certificate evidencing the Options issuable hereunder. This Agreement
shall be executed on behalf of the Company by any Corporate Officer.
SECTION 2. Right to Exercise Options. Each Option which is vested may be
exercisable upon the later to occur of the following two conditions: (i) the
Option Holder has been employed full-time by the Company for six months and (ii)
April 1, 2000 (the "Exercise Commencement Date"). This Option shall be effective
during the two-year period of time following the Exercise Commencement Date (the
"Expiration Date"). Each Option not exercised on or before the Expiration Date
shall expire. Subject to the provisions of this Agreement, the holder of each
Option shall have the right to purchase from the Company, and the Company shall
issue and sell to each such Option Holder, at an initial exercise price equal to
the Exercise Price, one fully paid and nonassessable Share upon surrender to the
Company of this Agreement evidencing such Option, with the form of election to
purchase set forth as Exhibit B hereto duly completed and signed and evidence of
payment of the Exercise Price. Payment of the Exercise Price shall be made by
wire transfer or certified check to the Company.
Upon surrender of this Agreement and payment of the Exercise Price, the
Company shall cause to be issued and delivered promptly to Option Holder a
certificate for the Shares issuable upon the exercise of the Option or Options.
The Options evidenced by this Agreement shall be exercisable at the election of
the Option holder thereof, either as an entirety or from time to time for less
than all of the number of Options specified in this Agreement. In the event the
Options are only exercised in part, then the Option Holder shall receive another
Agreement in substantially the form of this Agreement evidencing the Options,
which have not yet been vested.
SECTION 3. Reservation of Shares. The Company will at all times reserve
and keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Shares or its authorized and issued shares held in its
treasury for the purpose of enabling it to satisfy any obligation to issue
Shares upon exercise of Options, the full number of Shares deliverable upon
exercise of all outstanding Options. The Company covenants that all Shares,
which may be issued upon exercise of Options, will be validly issued, fully paid
and nonassessable outstanding Shares of the Company.
1
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<PAGE>
SECTION 4. Registration under the Securities Act of 1933. Option Holder
represents and warrants to the Company that Option Holder is acquiring the
Options for investment and with no present intention of distributing or
reselling any of the Options. The Shares and the certificate or certificates
evidencing any such Shares shall bear the following legend:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT IS AVAILABLE."
Certificates for Shares without such legend shall be issued if such shares are
sold pursuant to an effective registration statement under the Act or if the
Company has received an opinion from counsel reasonably satisfactory to counsel
for the Company, that such legend is no longer required under the Act.
Certificates for Options or Shares shall also bear such legends as may be
required from time to time by law. The Shares shall be registerable under Form
S-8 when and if: (i) the Option is exercised and (ii) the Company is a Reporting
Company within the meaning of the Securities Exchange Act of 1934.
SECTION 5. Vesting and Termination of Option. The Options granted
hereunder shall vest in the amount of one-thirty sixth of the number of Options
granted hereunder each month during the 36-month period commencing upon the
Commencement Date (i.e., all Options granted hereunder shall be fully vested 36
months from the Commencement Date). In the event the Option Holder's employment
with the Company is voluntarily or involuntarily terminated hereunder for any
reason then the Option Holder shall be entitled to retain all vested Options,
but all non-vested Options granted to such Option Holder shall be null and void
as of the date of such termination. Upon the occurrence of the Option Holder no
longer being employed by the Company, the Option Holder agrees that such Option
Holder shall not be employed by or otherwise assist, directly or indirectly, any
company involved in the business of developing technology to be utilized in the
Internet industry during the six-month period of time following the date of such
termination. All non-vested Options shall automatically terminate, at any time
after the Commencement Date in the event there is a Change in Control of the
Company.
SECTION 6. Adjustment of Number of Shares and Class of Capital Stock
Purchasable. The Number of Shares of Class of Capital Stock purchasable under
this Agreement are subject to adjustment from time to time as set form in this
Section.
Adjustment for Change in Capital Stock. If the Company:
(i) pays a dividend or makes a distribution on its
Common Stock, in each case, in shares of its
Common Stock;
(ii) subdivides its outstanding shares of Common Stock into
a greater number of shares;
(iii) combines its outstanding shares of common Stock
into a smaller number of shares;
(iv) makes a distribution on its Common Stock in shares of
its capital stock other than Common Stock; or
2
Page 71 of 76
<PAGE>
(v) issues by reclassification of its shares of Common
Stock any shares of its capital stock;
then the number and classes of shares purchasable upon exercise of this
Agreement in effect immediately prior to such action shall be adjusted so that
the holder of this Agreement thereafter exercised may receive the number and
classes of shares of capital stock of the Company which such holder would have
owned immediately following such action if such holder had exercised the Option
immediately prior to such action.
For a dividend or distribution the adjustment shall become effective
immediately after the record date for the dividend or distribution. For a
subdivision, combination or reclassification ("Corporate Recapture"), the
adjustment shall become effective immediately after the effective date of the
subdivision, combination or reclassification. In the event of a Capital
Restructure, the Exercise Price shall be adjusted to be the "Weighted Average
Trading Price" (as hereinafter defined) during the five trading day period,
whichever is less. "Weighted Average Trading Price" shall be calculated as the
number of shares traded during each of the designated five days multiplied by
the closing price of that day and then this product would be divided by the
number of shares, in the aggregate, which traded during this five day period of
time.
If after an adjustment the holder of an Option upon exercise of it may
receive shares of two or more classes of capital stock of the Company, the Board
of Directors of the Company shall in good faith determine the allocation of the
adjusted Exercise Price between or among the classes of capital stock. After
such allocation, that portion of the Exercise Price applicable to each share of
each such class of capital stock shall thereafter be subject to adjustment on
terms comparable to those applicable to Common Stock in this Agreement.
Notwithstanding the allocation of the Exercise Price between or among shares of
capital stock as provided herein. An Option issued under this Agreement may only
be exercised in full by payment of the entire Exercise Price currently in
effect.
SECTION 7. Notices to Company and Option Holder. Any notice or demand
authorized by this Agreement to be given or made by any party to this Agreement
shall be:
If to the Company:
Preference Technologies, Inc.
333 North Rancho Drive, Suite 810
Las Vegas, Nevada 89106
Attn: Michael Calderone
If to the Option Holder:
At the address set forth adjacent to his/her name set forth in Exhibit A
hereto. Three attempted but unsuccessful deliveries shall constitute notice for
purposes of this Agreement. All such notices shall be sent registered mail,
postage prepaid, addressed as set forth above (until another address is filed in
writing by either the Company or the Option Holder) to the Company and Option
Holder.
SECTION 8. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of and Option Holder in
3
Page 72 of 76
<PAGE>
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company may deem necessary or desirable which shall not affect the
interests of the Option Holder.
SECTION 9. Assignment. This Option shall not be assigned by either the
Company or the Option Holder, it being expressly understood that this Option is
provided in exchange for personal services provided by the Option Holder to the
Company.
SECTION 10. Governing Law. This Agreement shall be deemed to be a contract
made under the laws of the State of Nevada and for all proposes shall be
governed by and construed in accordance with the laws of said state. The parties
submit to the jurisdiction of the Courts of the State of Nevada or a Federal
Court empaneled in the State of Nevada for the resolution of all legal disputes
arising under the terms of this Agreement.
SECTION 11. Execution of this Agreement. This Agreement shall be executed
simultaneously by the Company and the Option Holder. The Option Holder shall be
provided with the original copy of the Option and the Company shall retain a
copy of the Option for its records.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, effective as of the Commencement Date, as set forth in Exhibit A
hereto.
Preference Technologies
A Nevada corporation
By:_______________________________
Michael Calderone
Title: President
4
Page 73 of 76
<PAGE>
EXHIBIT A
Option Holder:
Signature:__________________________________
Name:_______________________________________
Address:____________________________________
____________________________________
Issuance Date:______________________________
Commencement Date:__________________________
Number of Options:__________________________
5
Page 74 of 76
<PAGE>
EXHIBIT B
FORM OF
ELECTION TO PURCHASE
(To be executed upon exercise of Option)
The undersigned hereby irrevocably elects to exercise the
right, represented by the Option Agreement and Certificate to which this Form is
an Exhibit, to purchase ________ Shares and herewith authorizes payment for such
Shares in the amount of $_______ all in accordance with the terms thereof. The
undersigned requests that certificates for such Shares be registered as follows:
Name Number of Shares
_____________________ _______________
All of whose addresses are _________________________________________________,
and that such certificates be delivered to Option Holder whose address
is______________________________________________.If said number of Shares is
less than all of the Shares purchasable hereunder, the undersigned requests
that a new Option Agreement and Certificate representing the remaining balance
of the Options be registered in the Option Agreement and Certificate be
delivered to the attention of ___________________ at the above address.
Dated:_______________________ OPTION HOLDER
By:_____________________________
(signature)
________________________________
(print name)
6
Page 75 of 76
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> FEB-03-1999
<PERIOD-END> DEC-31-1999
<CASH> 32,797
<SECURITIES> 0
<RECEIVABLES> 14,700
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,491
<PP&E> 874,332
<DEPRECIATION> 237,056
<TOTAL-ASSETS> 752,523
<CURRENT-LIABILITIES> 770,912
<BONDS> 0
0
0
<COMMON> 26,413
<OTHER-SE> 44,802
<TOTAL-LIABILITY-AND-EQUITY> 752,523
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,905,193
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
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<NET-INCOME> (8,360,743)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
