<PAGE>
EX-20.1
AUDITED FINANCIAL STATEMENTS
Exhibit 20.1
ITARGET.COM
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1999 AND
FOR THE PERIOD FROM JUNE 3, 1998 (INCEPTION)
TO DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
itarget.com
We have audited the accompanying balance sheet of itarget.com as of December 31,
1999, and the related statements of operations, stockholders' deficit, and cash
flows for the year then ended and the period from June 3, 1998 (Inception) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of itarget.com as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended and the period from June 3, 1998 (Inception) to December 31, 1998 in
conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January 21, 2000 (except for the last paragraph of Note 10, as to which the date
is March 29, 2000)
<PAGE>
ITARGET.COM
BALANCE SHEET
December 31, 1999
================================================================================
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash $ 517,927
Accounts receivable, net of allowance for doubtful accounts
of $6,500 40,941
Prepaid expenses and other current assets 16,006
-----------
Total current assets 574,874
Property and equipment, net 315,317
Restricted deposit 71,795
-----------
Total assets $ 961,986
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C>
Current liabilities
Accounts payable $ 407,583
Payable to related party 254,856
Accrued issuance costs 178,500
Accrued consulting fees 125,000
Other accrued liabilities 124,282
-----------
Total current liabilities 1,090,221
-----------
Commitments and contingencies
Stockholders' deficit
Series A preferred stock, $0.01 par value
41,391 shares authorized, issued, and outstanding 414
Series B preferred stock, $0.01 par value
150,000 shares authorized
25,190 shares issued and outstanding 252
Common stock, $0.01 par value
1,000,000 shares authorized
238,375 shares issued and outstanding 2,384
Additional paid-in capital 1,990,664
Accumulated deficit (2,121,949)
-----------
Total stockholders' deficit (128,235)
-----------
Total liabilities and stockholders' deficit $ 961,986
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITARGET.COM
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1999 and
for the Period from June 3, 1998 (Inception) to December 31, 1998
================================================================================
<TABLE>
<CAPTION>
For the
Period from
June 3,
For the 1998
Year Ended (Inception) to
December 31, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
Revenues $ 179,878 $ -
Cost of revenues 56,018 -
----------- --------------
Gross profit 123,860 -
----------- --------------
Operating expenses
Sales and marketing 235,396 -
General and administrative 1,422,202 21,974
Research and development 516,896 25,288
Depreciation and amortization 24,053 -
----------- --------------
Total operating expenses 2,198,547 47,262
----------- --------------
Net loss $(2,074,687) $(47,262)
=========== ==============
Basic and diluted loss per share $(9.07) $ (0.23)
=========== ==============
Weighted-average shares outstanding 228,792 201,635
=========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITARGET.COM
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Year Ended December 31, 1999 and
for the Period from June 3, 1998 (Inception) to December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Additional
Series A Preferred Stock Series B Preferred Stock Common Stock Paid-In Accumulated
------------------------ ------------------------ ------------------
Shares Amount Shares Amount Shares Amount Capital Deficit Total
---------- ---------- ---------- ---------- ------ ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June
3, 1998
(Inception) - $ - - $ - 215,000 $ 2,150 $ 27,850 $ - $ 30,000
Net loss (47,262) (47,262)
---------- ---------- ---------- ---------- ---------- ------- ------------ ----------- ---------
Balance, December
31, 1998 - - - - 215,000 2,150 27,850 (47,262) (17,262)
Stock issued to
consultant 23,889 239 33,761 34,000
Options issued as
compensation 2,986 7,900 7,900
Options exercised 30 269 299
Cancellation
of shares of
common stock (3,500) (35) 35 -
Series A
preferred
stock issued
for cash 41,391 414 999,586 1,000,000
Series B
preferred
stock issued
for cash 25,190 252 1,099,763 1,100,015
Issuance costs (178,500) (178,500)
Net loss (2,074,687) (2,074,687)
---------- ---------- ---------- ---------- ---------- ------- ----------- ----------- ---------
Balance, December
31, 1999 41,391 $ 414 25,190 $ 252 238,375 $ 2,384 $ 1,990,664 $ (2,121,949) $ (128,235)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITARGET.COM
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1999 and
for the Period from June 3, 1998 (Inception) to December 31, 1998
================================================================================
<TABLE>
<CAPTION>
For the
Period from
For the June 3, 1998
Year Ended (Inception) to
December 31, December 31,
1999 1998
------------ --------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,074,687) $(47,262)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 24,053 -
Bad debt expense 6,500 -
Options issued as compensation 7,900 -
Stock issued to consultant 34,000 -
(Increase) decrease in
Accounts receivable (40,099) (7,342)
Prepaid expenses and other current assets (16,006) -
Restricted deposit (72,628) -
Increase (decrease) in
Accounts payable 363,447 43,993
Payable to related party 254,856 -
Accrued consulting fees 125,000 -
Other accrued liabilities 124,282 -
Deferred revenue (26,453) 26,453
------------ -----------
Net cash provided by (used in) operating activities (1,289,835) 15,842
------------ -----------
Cash flows from investing activities
Purchase of property and equipment (328,394) (10,000)
------------ -----------
Net cash used in investing activities (328,394) (10,000)
------------ -----------
Cash flows from financing activities
Proceeds from issuance of common stock 30,000 -
Proceeds from exercise of options 299 -
Proceeds from issuances of preferred stock 2,100,015 -
Advances under related party credit agreement 760,026 -
Payments on related party credit agreement (760,026) -
------------ -----------
Net cash provided by financing activities 2,130,314 -
------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITARGET.COM
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1999 and
for the Period from June 3, 1998 (Inception) to December 31, 1998
================================================================================
For the
Period from
For the June 3, 1998
Year Ended (Inception) to
December 31, December 31,
1999 1998
------------ --------------
Net increase in cash $ 512,085 $ 5,842
Cash, beginning of period 5,842 -
------------ --------------
Cash, end of period $ 517,927 $ 5,842
============ ==============
Supplemental disclosures of cash flow information
Interest paid $ - $ -
============ ==============
Income taxes paid $ - $ -
============ ==============
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 1999, the Company issued 23,889 shares of
common stock to a consultant for services valued at $34,000.
In connection with the initial capitalization, the Company issued 215,000 shares
of common stock and recorded subscriptions receivable of $30,000 from a related
party.
During the year ended December 31, 1999, the Company issued stock options to an
employee for compensation in the amount of $7,900.
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
itarget.com (the "Company") is a permission based, direct e-mail marketing
company based in San Diego, California. The Company was formed on June 3,
1998 as LJ Com, Inc. and had no significant operations prior to June 1999.
On December 23, 1999, LJ Com, Inc.'s name was changed to itarget.com. The
Company offers Internet users products and services delivered in real time
in exchange for the user's e-mail address and detailed demographic
information regarding the user. The Company currently has a database of
approximately 1,000,000 members that have granted the Company permission to
forward to them e-mails regarding products marketed by the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
----
Cash consists primarily of cash in banks. Deposits at the banks are
insured by the Federal Deposit Insurance Corporation up to $100,000. As of
December 31, 1999, uninsured portions of the balances totaled $436,709.
As of December 31, 1999, the Company had a restricted deposit of $52,628
related to a letter of credit agreement with a certain vendor. The
financial institution issuing the letter of credit restricts a certain
amount of cash to collateralize the letter.
Accounts Receivable
-------------------
Accounts receivable consist primarily of amounts due from customers. The
Company has provided for an allowance of $6,500 for accounts it considers
uncollectible and believes this amount to be sufficient.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization
are generally provided using the straight-line method over the estimated
useful lives of the related assets of three years.
Revenue Recognition
-------------------
The Company recognizes revenue as services are rendered.
Income Taxes
------------
The Company utilizes Statement of Financial Accounting Standards ("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.
Net Loss per Share
------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings per Share." SFAS No. 128 replaced the previously reported
primary and fully diluted loss per share with basic and diluted loss per
share. Unlike primary loss per share, basic loss per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
loss per share is very similar to the previously reported fully diluted
loss per share. Basic loss per share is computed using the weighted-
average number of common shares outstanding during the period. Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive. As such, basic and diluted loss per share are the same.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, accounts receivable, accounts
payable, and other accrued liabilities, the carrying amounts approximate
fair value due to their short maturities.
Estimates
---------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
from those estimates.
Risk Concentrations
-------------------
Substantially all of the Company's revenues as of December 31, 1999 were
generated from two sources. The loss of, or an economic event related to
these sources, most likely would have a substantial impact on the Company's
revenues.
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 any period presented.
Recently Issued Accounting Pronouncements
-----------------------------------------
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-Retirement Benefits." The Company does not
expect adoption of SFAS No. 132 to have a material impact, if any, on its
financial position or results of operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. This statement is not applicable to the Company.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," is effective for financial statements with the first fiscal
quarter beginning after December 15, 1998. This statement is not
applicable to the Company.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the Company.
In June 1999, the 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.
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.
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consisted of the following:
Machinery and equipment $ 71,041
Computers and software 184,742
Furniture and fixtures 61,451
Website development 17,856
Leasehold improvements 16,638
---------
351,728
Less accumulated depreciation and amortization 50,411
---------
Total $ 301,317
=========
NOTE 4 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1999 and the period from June 3, 1998
(inception) to December 31, 1998, the Company entered into agreements and
incurred transactions with a related party in which certain stockholders of
the related party are stockholders of the Company.
On June 15, 1998, the Company entered into a revolving credit agreement
with the above related party. The agreement bears interest at 8% per annum
and has no stated due date. The party advanced certain funds to and paid
for certain of the Company's obligations through the use of the credit
arrangement. In connection with this agreement, the related party agreed
to advance $30,000 as a capital contribution on behalf of its stockholders.
In addition, during the period from June 3, 1998 (inception) to December
31, 1998, the Company issued common stock to the stockholders of the
related party in the same proportional interest as they owned in shares of
the related party and recorded subscriptions receivable of $30,000. Total
advances to the Company and payment of expenses for the Company by the
related party under the agreement aggregated to $760,026 as of December 31,
1999. As of December 31, 1999, the Company had satisfied all outstanding
balances on this debt instrument.
On January 1, 1999, the Company entered into an agreement with the above
related party, whereby the related party provided certain services,
including consulting services, office space, website hosting services, and
providing personal identification numbers relating to prepaid calling
cards. As of December 31, 1999, total consulting fees provided by the
related party were $94,242, rent expense was $50,960, website hosting
service costs were $14,280, and personal identification number costs were
$113,065. As of December 31, 1999, the Company maintained amounts payable
to the related party totaling $254,856.
During the year ended December 31, 1999, the Company purchased property and
equipment totaling $15,706 from the related party in addition to recording
a transfer of certain fully depreciated property and equipment to the
Company from a related party for no consideration.
On December 1, 1999, the Company entered into a consulting agreement with a
stockholder of the Company. Pursuant to the agreement, the Company paid
the stockholder fees in the amount of $133,000 for financial-related
services.
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
---------------------
On June 14, 1999, the Company entered into an employment agreement with the
Chief Executive Officer of the Company, whereby the Company pays a base
salary of $295,000 per year. The agreement terminates on January 1, 2003
and will be automatically extended by one year on each subsequent
anniversary date unless written notice is provided. The agreement provides
for a lump sum payment equal to three times the base salary upon the
closing of a change of control of the Company, plus certain other
compensation.
On August 2, 1999, the Company entered into an employment agreement with
the President of the Company, whereby the Company will pay a base salary of
$100,000 per year in addition to a signing bonus of $100,000. The
agreement terminates on January 1, 2003 and will be automatically extended
by one year on each subsequent anniversary date unless written notice is
provided. The agreement provides for a lump sum payment equal to three
times the base salary upon the closing of a change of control of the
Company, plus certain other compensation.
Operating Leases
----------------
The Company subleases its facility under a lease, which commenced in
October 1999 and expires in November 2000. The lease requires monthly
payments of $11,976. As of December 31, 1999, the payments remaining under
this lease totaled $171,733.
The Company also uses certain equipment under a lease that commenced in
November 1999 and expires in November 2002. The lease requires monthly
payments of $573. As of December 31, 1999, the minimum annual payments
required under this lease totaled $20,064.
Rent expense was $62,631 and $0 for the year ended December 31, 1999 and
for the period from June 3, 1998 (inception) to December 31, 1998,
respectively.
NOTE 6 - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes for the year ended December 31, 1999
consisted of the following:
Deferred tax assets
Net operating loss carryforwards $ 828,202
Valuation allowance 828,202
---------
Net deferred tax asset $ -
=========
Deferred tax assets consisted of net operating loss carryforwards and
temporary differences arising from the issuance of stock options. The
federal and state net operating loss carryforwards at December 31, 1999
were approximately $2,062,000 and $2,062,000, respectively, which expire
through 2019.
NOTE 7 - STOCKHOLDERS' DEFICIT
Series A and Series B Preferred Stock
-------------------------------------
Series A Preferred Stock ("Series A") and Series B Preferred Stock ("Series
B") have par values of $0.01 per share, and each carries the right to one
vote for each share of common stock into which the Series A or Series B can
be converted. Each share of Series A or Series B can be converted, at the
option of the holder, at any time after the date of issuance of the share,
into the number of fully paid and non-assessable shares of common stock as
determined by dividing the original Series A issue price or the original
Series B issue price by the conversion price applicable to the share in
<PAGE>
NOTE 7 - STOCKHOLDERS' DEFICIT (continued)
effect on the date the certificate is surrendered for conversion. Each
share of Series A or Series B is automatically converted into shares of
common stock at the conversion price in effect at the time, upon the
earlier of (i) a majority vote of the holders of Series A or Series B, as
applicable, voting as a separate series, or (ii) the Company's sale of its
common stock in a firm commitment underwritten public offering, with the
public offering price of not less than $72.48 per share, subject to
adjustments, and $10,000,000 in the aggregate.
Series A and Series B Preferred Stock (Continued)
-------------------------------------
The conversion price of Series A and Series B is subject to certain
adjustments. If the Company issues, after the date upon which any shares
of Series A or Series B were first issued, any additional stock without
consideration or for a consideration per share less than the conversion
price for such series in effect immediately prior to the issuance of the
additional stock, the conversion price for such series in effect
immediately prior to each issuance will (i) be adjusted to a price
determined by multiplying the conversion price by a fraction, the numerator
which is the number of shares of common stock outstanding immediately prior
to such issuance (including the number of shares of common stock issuable
upon the conversion of all of the outstanding shares of preferred stock and
other convertible securities and assuming the exercise of all outstanding
options, warrants, or other rights to purchase common stock or other
securities convertible to common stock), plus the number of shares of
common stock that the aggregate consideration received by the Company for
such issuance would purchase at the conversion price, and the denominator,
which is the number of shares of common stock outstanding immediately prior
to such issuance (including the number of shares of common stock issuable
upon the conversion of all of the outstanding shares of preferred stock and
other convertible securities and assuming the exercise of all outstanding
options, warrants, or other rights to purchase common stock or other
securities convertible into common stock), plus the number of shares of
additional stock.
Holders of shares of Series A or Series B are entitled to receive dividends
out of any assets legally available, prior and in preference to, any
declaration or payment of any dividend on common stock at the rate of $1.69
per share of Series A and $3.06 per share of Series B, subject to certain
adjustments, per annum. Dividends are payable only when declared by the
Company's Board of Directors and are not cumulative. To date, the
Company's Board of Directors has not declared any cash dividends. In the
event of any liquidation, dissolution, or winding up of the Company, either
voluntary or involuntary, holders of Series A or Series B are entitled to
receive, prior and in preference to, any distribution of any of the assets
of the Company to holders of common stock, an amount per share equal to the
sum of (i) $24.16 for each outstanding share of Series A, (ii) $43.67 for
each outstanding share of Series B, and (iii) an amount equal to declared
but unpaid dividends on each such share.
During the year ended December 31, 1999, the Company issued 41,391 shares
of Series A for cash of $1,000,000 from an investor. Related to the
issuance of the preferred stock, the Company issued 4,139 warrants as fees
to the placement agents (see Note 8).
Series A and Series B Preferred Stock (Continued)
-------------------------------------
During the year ended December 31, 1999, the Company issued 25,190 shares
of Series B for cash totaling $1,100,015. Related to the issuance of the
preferred stock, the Company issued 2,519 warrants as fees to the placement
agents (see Note 8).
Common Stock
------------
In connection with the initial capitalization, the Company issued 215,000
shares of its $0.01 par value common stock at approximately $0.14 per share
and recorded subscriptions receivable of $30,000.
<PAGE>
NOTE 7 - STOCKHOLDERS' DEFICIT (Continued)
During the year ended December 31, 1999, the Company cancelled 3,500 shares
of common stock issued to an employee as founders stock at the Company's
inception. The shares were returned to the Company for no consideration
upon the employee's termination of employment.
During the year ended December 31, 1999, the Company recorded expense of
$34,000 related to the issuance of 23,889 shares of common stock to a
consultant for services.
NOTE 8 - STOCK OPTIONS AND WARRANTS
Stock Purchase Warrants
-----------------------
In August 1999, the Company entered into an agreement with a vendor,
whereby the Company granted warrants with a term of five years to the
vendor as payment for finding investors to purchase securities. The
securities have an exercise price equal to 120% of the price paid by the
investor. The number of warrants granted will be equal to 10% of the
number of securities sold. As of December 31, 1999, the Company granted
4,139 warrants to purchase common stock related to the issuance of Series A
and 2,519 warrants to purchase common stock related to the issuance of
Series B at exercise prices of $28.99 and $52.40, respectively.
Stock Options
-------------
In connection with an employment agreement with the President of the
Company, the Company granted 5,972 options to purchase common stock. The
options have an exercise price of $0.10 and expire on December 31, 2002.
Related to these options, the Company recognized $7,900 in compensation
expense. During December 1999, 2,986 of these options were exercised.
Stock Options (Continued)
-------------
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its non-
compensating options and does not recognize compensation expense for its
stock-based compensation 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 consistent with the methodology prescribed by SFAS
No. 123, the Company's net loss and loss per share would be increased to
the pro forma amounts indicated below for the year ended December 31, 1999
and the period from June 3, 1998 (inception) to December 31, 1998:
1999 1998
------------ ---------
Net loss
As reported $ (2,074,687) $ (47,262)
Pro forma $ (2,074,687) $ (47,262)
Basic loss per common share
As reported $ (9.03) $ (0.23)
Pro forma $ (9.03) $ (0.23)
The fair value of these options was estimated at the date of grant using
the minimum value method with the following weighted-average assumptions
for the year ended December 31, 1999. (There were no options granted
during the period from June 3, 1998 (inception) to December 31, 1998):
dividend yield of 0%, exercise price of $0.10, risk-free interest rate of
5.87%, and expected life of one year. The weighted-average fair value of
options granted during for the year ended December 31, 1999 was $0.10.
<PAGE>
NOTE 8 - STOCK OPTIONS AND WARRANTS (Continued)
The following summarizes the stock option transactions under the stock
option plan:
Weighted-
Average
Stock Options Exercise
Outstanding Price
-------------- --------
Balance, June 3, 1998 (inception) and December
31, 1998 - $ -
Granted 5,972 $ 0.10
Exercised (2,986) $ 0.10
------
Balance, December 31, 1999 2,986 $ 010
====== ======
Exercisable, December 31, 1999 - $ -
====== ======
Stock Options (Continued)
-------------
The weighted-average remaining contractual life of the options outstanding
is three years at December 31, 1999.
NOTE 9 - 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.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to December 31, 1999, all outstanding employee options of the
Company were exercised for 2,986 shares of the Company's common stock.
On January 20, 2000, the Company entered into a stock swap agreement with
Quintel Communications, Inc. ("Quintel"), whereby the Company issued 42,372
shares of its Series B and placed in escrow 10,593 shares of its Series B
in exchange for 229,862 shares of common stock of Quintel. In addition,
the Company entered into a strategic marketing agreement with Quintel for
the development of a proposed website. The agreement allows for any
surviving party in a subsequent change of control of the Company to
terminate the agreement for $150,000, subject to certain provisions.
On February 7, 2000, the Company executed a lending agreement for $200,000
with a related party. The agreement bears interest at 8% and is due on
April 7, 2000. The Company has borrowed $150,000 under this agreement. If
the loan is not repaid in full on the maturity date, the lenders may
convert outstanding amounts to common stock of the Company at $20 per share
or into Quintel common stock at $4 per share.
<PAGE>
NOTE 10 - SUBSEQUENT EVENTS (Continued)
On February 14, 2000, the Company borrowed $300,000 under a secured
promissory note and pledge agreement. The promissory note bears interest
at 12% per annum and matures on April 14, 2000. The loan is secured by
certain securities received by the Company pursuant to the Quintel stock
swap agreement.
Effective March 29, 2000, the Company completed its merger with Cybergold,
Inc.
