UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
SHOPPING SHERLOCK, INC.
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(Exact name of registrant in its charter)
Florida 91-1962104
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(State or other jurisdiction or (I.R.S. Employer Identification No.)
of incorporation or organization)
11201 S.E. 8th Street, Suite 152
Bellevue, Washington 98004
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 372-3060
Securities to be registered under Section
12(b) of the Act:
None
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Title of each class to be so Name of each exchange on which each class
registered is to be registered
Securities to be registered under Section
12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Not Applicable
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(Title of Class)
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TABLE OF CONTENTS
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Page
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NOTE REGARDING FORWARD LOOKING STATEMENTS.........................................................................1
ITEM 1 BUSINESS............................................................................................1
ITEM 2 FINANCIAL INFORMATION..............................................................................24
ITEM 3 PROPERTIES.........................................................................................30
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................30
ITEM 5 DIRECTORS AND EXECUTIVE OFFICERS...................................................................31
ITEM 6 EXECUTIVE COMPENSATION.............................................................................32
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................33
ITEM 8 LEGAL PROCEEDINGS..................................................................................35
ITEM 9 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....35
ITEM 10 RECENT SALES OF UNREGISTERED SECURITIES............................................................35
ITEM 11 DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED............................................37
ITEM 12 INDEMNIFICATION OF OFFICERS AND DIRECTORS..........................................................37
ITEM 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................38
ITEM 14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............39
ITEM 15 FINANCIAL STATEMENTS AND EXHIBITS..................................................................39
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NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for statements of historical fact, certain information contained
herein constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results or achievements of the Company
to be materially different from any future results or achievements of the
Company expressed or implied by such forward-looking statements. Such factors
include, but are not limited to, the following: the Company's limited operating
history, competition, risks of technological change, the Company's dependence on
key personnel, marketing relationships and third party suppliers, the Company's
ability to protect its intellectual property rights and the other risks and
uncertainties described under "Business -- Risk Factors" in this Form 10.
Certain of the forward-looking statements contained in this registration
statement are identified with cross references to this section and/or to
specific risks identified under "Business -- Risk Factors."
ITEM 1 BUSINESS
Shopping Sherlock, Inc. (the "Company") is a development stage company that
currently provides Web site and e-business services. The Company is also
developing two Internet-based retail stores that will sell consumer goods and
intends to distribute and market rebate shopping memberships. The Company was
incorporated in Florida on August 17, 1984 under the name Aida Industries, Inc.
The Company began operations in January of 1999 and on March 24, 1999, changed
its name from Aida Industries, Inc. to Shopping Sherlock, Inc.
On May 26, 1999, the Company acquired all the issued and outstanding
capital stock of Shopping Sherlock, Inc., a Delaware corporation that was
unrelated to the Company ("SSI"). Pursuant to the terms of an Agreement and Plan
of Reorganization among the Company, SSI and Shopping Acquisition Corp.
("Acquisition Sub"), a wholly-owned subsidiary of the Company, Acquisition Sub
merged with and into SSI, and the stockholders of SSI, in exchange for all the
shares of SSI common stock held by them, received an aggregate of 2,000,000
shares of the Company's common stock. At the time of acquisition, the
controlling stockholder of SSI was Richard Stewart and, as a result of the
acquisition, Mr. Stewart became a director and 20.0% shareholder of the Company.
Mr. Stewart is also the President and Chief Executive Officer of Premier
Lifestyles International Corporation ("PLIC"). Unless otherwise noted herein,
references to "the Company" shall mean the Company and its wholly-owned
subsidiary SSI.
The Company has been in the development stage since inception. It has no
operating revenues to date, has accumulated losses of $458,980 and will require
additional working capital to complete its business development activities and
to generate revenues adequate to cover operating and further development
expenses. At June 30, 1999, the Company had working capital of $551,515. During
the year ended December 31, 1998 and the six-month period ended June 30, 1999,
the Company incurred expenses related to research and development of $0 and
$137,324, respectively. The Company incurred a net loss of $2,079 for the year
ended December 31, 1998 and of $455,901 for the six months ended June 30, 1999.
The Company's auditors have raised substantial doubt about the Company's ability
to continue as a going concern.
Industry Background
The Online Retail Industry. The Internet and commercial online services are
emerging as significant global communications media, enabling millions of people
to share information and conduct business electronically. A number of factors
have contributed to the growth in the use of the Internet and commercial online
services, including the large and growing installed base of advanced personal
computers in the home and workplace, improvements in network infrastructure,
easier, faster and cheaper access to the Internet and commercial online
services, the introduction of alternative Internet access devices, the increase
in consumer desire for more complete and up-to-date information, the increase in
available information and products and the increase in awareness of the Internet
and commercial online services among consumer and business users.
The functionality and accessibility of the Internet and commercial online
services have made them an increasingly attractive commercial medium by
providing features that historically have been unavailable through traditional
channels. For example, the Internet and commercial online services provide users
with convenient access
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to large volumes of dynamic data to support their investment, purchase and other
decisions. Online retailers are able to communicate effectively with customers
by providing frequent updates of featured selections, content, pricing and
visual presentations and to provide tailored products and services by capturing
valuable data on customer tastes, preferences, shopping and buying patterns.
Unlike most traditional distribution channels, online retailers do not have
the burden of building, managing and maintaining numerous local facilities to
provide their services or products on a global scale. In contrast, online
retailers benefit from the relatively low cost of reaching and electronically
serving customers worldwide from a central location. Because of these
advantages, an increasingly broad base of products and services are being sold
online, including books, brokerage services, computers and travel products and
services. As the number of online content, commerce and service providers has
expanded, strong brand recognition and strategic alliances have become critical
to the success of such companies. Brand development is especially important for
online retailers due to the need to establish trust and loyalty among consumers
in the absence of face-to-face interaction. Some online retailers have begun to
establish long-term strategic partnerships and alliances with content, commerce
and service providers to rapidly build brand recognition and trust, enhance
their service offerings, stimulate traffic, build repeat business, take
advantage of cross-marketing opportunities and create barriers to entry.
The Web Site Hosting and e-Business Services Industry. Business to business
electronic commerce is now becoming a common means of enabling business
transactions, replacing telephone, fax, mail and face to face contact. The past
two years have also seen the appearance of Web-based intranets and extranets as
a means of conducting business online. The Company believes this is a result of:
o groupware and email applications adopting Internet standards;
o a greater availability of bandwidth and a growing number of Internet
users;
o a movement towards knowledge management has put pressure on
organizations to provide more access to information through open
means; and
o an increasing number of applications being developed that extend the
reach of business processes to remote users, customers, partners and
suppliers.
The Company anticipates that intranet and extranet spending will grow over the
next few years because of these trends.
Trends In Online Retailing
The Company expects that a significant portion of its revenues in the
future will come from its planned online retail stores. The Company believes
that three key trends are currently shaping the online retailing industry:
o rapid growth of the Internet as an acceptable medium of effecting
retail transactions;
o increased self-regulation regarding privacy and security in the online
retail industry; and
o diminishing amounts of consumer free time.
Rapid Growth in Use of Internet for Retail Transactions. Aggregate online
retail sales are expected to grow from $2.7 billion in 1997 to $26.5 billion in
2000. A recent study by Jupiter Communications suggests that PC hardware and
software sales, the current leading online retail segment in terms of dollar
volume, is likely to fall from its number one position, being replaced by
household and other consumer items by 2002. The Company believes that this trend
signifies a broadening of the online retail market away from computer-related
purchases and toward general consumer-oriented items (i.e., plane tickets,
books, music, etc.). These projected high growth areas complement the Company's
marketing strategy that emphasizes selling "lower tech" goods and consumer items
instead of competing for computer hardware and software sales.
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Increased Self Regulation Regarding Privacy and Security. Over the past
year the online retail community has taken a number of steps toward increasing
security and privacy in retail transactions through self-regulation and the
implementation of secure transaction technologies. "Safe shopping policies,"
which include assurances of individual privacy and credit card security, are now
being adopted by online retailers who have become members of Web
"self-regulatory associations" like Trust-e and the Better Business Bureau
Online.
Diminishing Amounts of Consumer Free Time. The growing number of
professional, dual-income families require new means of completing common
shopping tasks in a more time-efficient manner. Online retailing can be used to
reduce transaction time by:
o recommending products and suppliers that provide the best price,
thereby reducing the need for the consumer to comparison shop;
o offering immediate access to unbiased and independent product reviews,
buying tips and advice to help shoppers narrow the choice of products;
o aggregating products in convenient categories for convenient
selection; and
o developing fulfillment processes that deliver orders quickly to buyers
and that maintain records of purchases.
Shopping Sherlock, Inc.
The Company developed and currently hosts an e-commerce-enabled Web site
for one client. From this Web site, the client's sales associates can
send/receive e-mail, place wholesale orders, receive retail orders, generate
genealogy and sales reports and sign-up new sales associates. The client is also
able to add and revise content on the site at any time.
The Company intends to operate in two additional business segments before
the end of 1999, namely, online retail sales and sales of rebate shopping
network memberships. On September 23, 1999, the Company launched its first
online retail site www.usrebatewarehouse.com, which has yet to generate revenues
for the Company. Usrebatewarehouse.com offers consumers the opportunity to join
its SCORE reciprocal rebate program, which enables consumers to receive rebates
on every product they purchase. To date, 100% of the Company's revenues have
been derived from its Web site hosting and e-business services.
Web Site and e-Business Services. The Company currently offers services to
network marketing businesses that need e-commerce sites and Web-based business
tools for their sales associates. This business segment has accounted for all of
the Company's revenues to date. The Company offers an e-business services
package to its clients, designing a custom solution based upon their individual
business requirements. These services include: o Needs Assessment: Decision
makers and system users are interviewed to identify and prioritize the business
processes that need to be improved or re-engineered in order to meet the goals
of the client.
o Process Analysis: Business processes are analyzed and documented from
three perspectives, (1) the flow of physical goods, (2) the flow of
financial transactions and (3) the flow of data. These processes are
then redesigned in collaboration with decision makers and system
users.
o e-business Strategies: An e-business model is developed that includes
an Internet marketing and customer service strategy, Web site content
and functionality goals and technical requirements (i.e., hardware,
software, networking, database and legacy system integration and
management).
o Information Architecture: A blueprint is developed for the Web site.
This includes a site map, content map, navigation system, labeling
systems and search functions.
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o Content production: Information is assembled and organized into text
and graphical images. Product descriptions are assembled or created.
The content map is further refined to the Web page level.
o Web site production: A site design and layout is created in
consultation with the client. Images and graphics are produced, Web
pages are coded and applications are developed. Maintenance and data
back-up systems are developed. Network address space, bandwidth and
domains are allocated.
o Systems Integration: Various hardware devices and software
packages/languages are integrated to build a custom solution for
electronic commerce. This includes:
o facilitating the interaction between the Web-based solution and
back-end order taking, transaction and administrative systems;
o streamlining credit card processing with third-party processors
and other intermediaries;
o providing tracking and monitoring reports of e-commerce
operations to clients; and
o providing the functionality and hardware for supporting Web site
hosting and Web-based e-mail services, both on an intranet and
extranet basis.
In addition, the Company's "Direct Marketing Organization (DMO) Platform"
enables each sales associate of a participating organization to:
o have a customized online storefront;
o display products;
o set up a merchant account;
o place and receive orders online;
o authorize transactions on credit cards;
o recruit and sign-up new associates online;
o track sales;
o download sales brochures; and
o communicate by e-mail.
In June 1999, the Company completed development and began operation of its
first e-commerce-enabled site, www.eyicom.com, which includes a corporate Web
site and Web-based business tools for the sales associates of Essentially Yours
Industries Corp., a network marketing company ("EYI"). To date, www.eyicom.com
is the only e-commerce-enabled site completed by the Company. The site was built
and is hosted by the Company with the product and content provided and owned by
EYI. As part of its agreement with EYI, the Company has the right to place its
rebate shopping link on every EYI sales associate's Web page.
In connection with the services provided to EYI, the Company currently
bills a monthly hosting fee of between $15.00 and $49.95 for each sales
associate with an online site, depending upon the level of service requested. As
of September 30, 1999, approximately 700 EYI sales associates have online sites
hosted by the Company. The Company also receives a fixed transaction fee of
$0.40 on every purchase made on an EYI sales associate's Web site. The fee
structure for future clients will likely vary, but will always include a
development fee, a hosting fee and a revenue-sharing component. In addition, the
Company intends to pursue the right to include its
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rebate shopping button on the Web pages of all its clients' sales associates.
See "Note Regarding Forward-Looking Statements."
Online Product Sales. As of September 23, 1999, the Company began selling
consumer products over the Internet through www.usrebatewarehouse.com, which is
linked to EYI's Web site and to a joint PLIC/Shopping Sherlock Web site. The
Company expects to generate revenues from US Rebate Warehouse immediately. US
Rebate Warehouse offers its customers access to a database of over 55,000
products. See "Note Regarding Forward-Looking Statements." Through its planned
Web site at www.shoppingsherlock.com, the Company intends to offer over 5,000
high-quality consumer and household products. The primary difference between the
www.shoppingsherlock.com Web site and the www.usrebatewarehouse.com Web site is
the number of products offered, the level of customer service provided and the
availability of product descriptions and pictures. www.usrebatewarehouse.com
features a broader range of products and more limited customer service features,
product descriptions and pictures. The Company believes each of these Web sites
will appeal to different segments of its intended customer base. See "Note
Regarding Forward-Looking Statements."
Because of its strategic marketing relationship with Premier Lifestyles
International Corporation ("PLIC"), under which the Company is allowed to
directly market its online stores to members of PLIC's rebate shopping network,
the Company believes that it will be able to offer products to a large,
established base of consumers in conjunction with rebates available through
PLIC's rebate shopping network. See "Note Regarding Forward-Looking Statements."
PLIC is a retail and marketing services company that offers a variety of
services to individuals and businesses including rebate shopping network
memberships, point of sale systems management, debit card processing, Web site
development and hosting, Internet access and product fulfillment. Richard
Stewart, a director and beneficial holder of 20.0% of the Company's outstanding
common stock, is the president and chief executive officer of PLIC. As part of
its operations, PLIC routinely contracts with companies and other organizations
to offer participation in its rebate shopping network. Members or employees of
these participating organizations are then eligible to receive rebates on
products purchased from participating merchants. On each purchase, a portion of
the price paid by the rebate network member is remitted to the member's
sponsoring organization and to the organization that recruited the participating
merchant. See "-- Sale of Rebate Shopping Network Memberships."
Currently, PLIC's rebate shopping network consists of the membership of 21
North American independent sales organizations. These organizations have signed
an agreement with PLIC to market PLIC's benefits and services to their
membership; PLIC's reciprocal rebate program being one of these benefits and
services. In 1998, members of these 21 organizations purchased over $100 million
worth of products from the organizations they belong to. The Company believes
that this is an indication of the buying power of its target market. However,
these purchases were not made using a rebate card and these purchases were not
made through the PLIC shopping network. PLIC is currently attempting to grow its
rebate shopping network customer base. All rebate-shopping members will be
directed by PLIC to a joint Web site, which features PLIC's rebate shopping
network and Shopping Sherlock's online stores. "Note Regarding Forward-Looking
Statements."
In February 1999, the Company entered into a Strategic Alliance Agreement
with PLIC. Under the terms of the agreement, PLIC granted the Company the right
to directly market the Company's online stores to members of PLIC's rebate
shopping network, to place links to the Company's Web sites on Web sites
sponsored by PLIC and to distribute memberships in PLIC's rebate shopping
network. In addition, PLIC agreed to provide transaction processing, product
fulfillment and helpdesk services to the Company. PLIC also agreed to give the
Company access to its list of participating merchants and product inventory on
an ongoing basis. In exchange, the Company agreed, on an exclusive basis, to
sell, market and honor PLIC product rebate network memberships and, subject to
certain exceptions, to use the transaction processing and product fulfillment
services recommended by PLIC. The parties also agreed to design jointly a Web
site which would feature links to both the Company's Web sites and other Web
sites operated by PLIC. The Strategic Alliance Agreement is for a perpetual
duration, but may be terminated by either party for cause, which is defined in
the agreement as any material breach of any obligation under the agreement that
is not remedied within 30 days of receiving written notice of such breach by the
other party. Additionally, either party may terminate the agreement if the other
party: (a) files or has filed against it a petition in bankruptcy; (b) has a
receiver appointed to handle its assets or affairs; (c) makes or attempts to
make an assignment for the benefit of creditors; or (d) violated the
confidentiality provisions of the agreement.
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The Company and PLIC have agreed that PLIC will not provide transaction
processing or product fulfillment services to the Company, and the Company has
engaged third party service providers to provide these services. As a result,
PLIC has not and will not receive any fees for transaction processing or product
fulfillment services from the Company. Currently, the Company has engaged Harris
Bank Trust and Savings of Chicago, Illinois ("Harris Bank") to provide credit
card processing for all transactions on its Internet Web sites and Consumer
Benefits Services, Inc. ("CBS") to provide product fulfillment services. The
Company's relationship with CBS is on a purchase order basis and may be
terminated by either party without cause or notice. The Company has a three year
contract with Harris Bank expiring on June 1, 2002. If the Company's
relationship with Harris Bank or CBS were to terminate, it could delay the
opening of its online retail stores or, if it occurred after opening, it could
adversely affect the Company's ability to service its customers and could delay
or interrupt delivery of the products and services provided by the Company on
its Internet Web sites.
In addition to offering high-quality, brand-name products, the Company also
intends to link value-added services with the sale of products by offering the
following services to its online customers. See "Note Regarding Forward-Looking
Statements." These services include:
o Comparison Shopping: Online customers will be able to compare similar
products and prices through features built into the Company's Web
sites.
o Purchase Suggestions: Based on each customer's sponsoring
organization, general demographic characteristics and purchasing
profile, the Company will offer suggestions of products compatible
with the customer's lifestyle and anticipated buying interests.
o Free Consumer Intelligence Reports: The Company plans to offer access
to independent product reviews, buying tips and advice to help
shoppers make more informed purchases.
o Rebate Shopping Network Memberships: Through its relationship with
PLIC, the Company plans to offer inexpensive rebate shopping club
memberships and additional benefits to visitors to its Web sites.
o Product Rebates: Through its participation in the PLIC rebate shopping
network, the Company intends to offer rebates on selected items to
customers who are rebate shopping network members. These rebates will
accumulate for the customer and can be used on future purchases, or
will be remitted to the customer when they reach $25.00 or more.
o Help Desk: The Company intends to provide customer support to
individuals as well as product brokerage to help its organizations
receive the best products and prices for their members. See "Note
Regarding Forward-Looking Statements."
Sales of Rebate Shopping Network Memberships. As a participant in PLIC's
rebate shopping network, the Company currently has the right to sell rebate
shopping network memberships under its own brand names: Shopping Sherlock and
U.S. Rebate Warehouse. To date, the Company has not sold any such memberships
and has not derived any revenues from this activity. For example, if a visitor
to the Company's www.usrebatewarehouse.com Web site desires to take advantage of
the rebate offers posted on the site, he or she will be given an option to join
the rebate shopping network by purchasing a US Rebate Warehouse-branded rebate
card. After providing certain demographic information and paying an annual fee
of $29.95, the customer will be provided with a rebate shopping network member
number which he or she may use to begin purchasing products from the Web site or
from other participating merchants.
When the customer who is a rebate shopping network member purchases a
product from a participating merchant such as the Company, a portion of the
total rebate on the product is divided among the rebate shopping network
participants as follows:
o 25% of the rebate is credited to the customer;
o 30% of the rebate is remitted to PLIC;
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o 30% of the rebate is remitted to the organization that issued the
rebate shopping network membership to the customer (e.g., the Company,
PLIC or other organization to which the customer belongs);
o 10% is remitted to the organization that recruited the merchant
selling the product; and
o 5% is remitted to the Web site operator, (e.g., PLIC for
www.source4shopping.com or the Company for www.shoppingsherlock.com
and www.usrebatewarehouse.com).
When the customer is a non-rebate card holder and makes a purchase from a
participating merchant such as www.shoppingsherlock.com or
www.usrebatewarehouse.com, the total rebate on the product is divided among the
rebate shopping network participants as follows:
o 25% to the merchant; and
o 75% to PLIC.
The Company believes that its participation in PLIC's rebate shopping
network through selling, marketing and honoring PLIC's rebate shopping network
memberships will assist the Company in increasing its customer base while
generating additional revenues from the product sales made over its Web sites.
See "Note Regarding Forward-Looking Statements."
Advertising and Marketing
The Company's advertising and marketing strategy consists of several basic
components. First, through its participation in PLIC's rebate shopping network,
the Company has the right to use all of PLIC's customer profile information to
create a database to strategically segment customer groups and use them for
marketing purposes. The database will include profile information such as
addresses, age, income, occupation and other relevant characteristics. The
Company plans to use the database to custom design marketing and merchandising
strategies. This will enable the Company to target products to appropriate
consumer groups. In addition, the Company intends to continue to gather new data
to further refine its marketing strategies and product mix. See "Note Regarding
Forward-Looking Statements."
Second, special "first time" incentives to PLIC rebate shopping network
members, such as a gift with purchase, as well as the general population of
Internet users will be used to drive traffic to the Company's Web site. See
"Note Regarding Forward-Looking Statements.
Third, the Company intends to work closely with PLIC to market its products
and services to members of the rebate shopping network. This will be
accomplished primarily through communications with the member organizations that
are participating in PLIC's rebate shopping network. See "Note Regarding
Forward-Looking Statements."
Advertising. The Company intends to focus most of its advertising efforts
towards members of PLIC's rebate shopping network. For example, PLIC has agreed
to place links to the Company's Web sites on its various Web sites. In addition,
pursuant to the terms of the Company's Strategic Alliance Agreement with PLIC,
all PLIC-affiliated Web sites will link to a rebate shopping page, featuring two
logos: the Company's and PLIC's. No other logos will be added to these pages.
From this page potential customers will be able to link to either the Company's
Web sites or to PLIC's Web sites. PLIC will also continue to jointly market the
Company's site with any new partners it obtains. The Company and PLIC intend to
create joint promotion programs with network marketing clients, which may
include:
o e-mail announcements;
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o direct mail;
o catalog inserts;
o Internet workshops; and
o Participation in network marketing conventions and other similar
meetings.
In addition, the Company intends to place links and banner advertisements
on PLIC's retail site and other high profile traffic portals on the Internet.
Print advertising will be added to the program as profitability increases.
Currently, there are no plans for television or radio advertising, but those
media may be used as the business grows. See "Note Regarding Forward-Looking
Statements."
Branding. The Company believes that its bloodhound mascot will represent a
unique, value-added feature. The bloodhound mascot serves as a symbol for value
as it "sniffs" out the best prices for its owner. The Company intends to promote
this mascot as a tool to increase brand awareness and identity.
Other Marketing. PLIC has agreed to place the Company's URL in its
marketing materials and fax-based information/promotional service to selected
PLIC rebate customers. The Shopping Sherlock name and URL will be prominently
displayed on all faxes received by this customer group. PLIC has also agreed to
list the Company's name on all search engines and directories wherever PLIC
lists its own site.
Consumer Market Segments
The Company anticipates its primary target market will consist of the
membership of a group of 21 North American independent sales organizations. PLIC
has signed agreements with these 21 organizations to market PLIC's benefits and
services to their membership; the reciprocal rebate program being one component
of PLIC's benefits and services.
An informal survey conducted by PLIC with these organizations revealed that
in 1998, members from these 21 organizations purchased over $100 million worth
of products from the organizations to which they belong. Although the Company
believes that this is an indication of the buying power of this target market,
these purchases were not made using a rebate card and these purchases were not
made through the PLIC shopping network. All rebate shopping members will be
directed by PLIC to a joint Web site featuring PLIC's rebate shopping network
and the Company's online stores.
The secondary target market is expected to be the general population of
Internet users and on-line shoppers. This secondary target market now numbers
approximately 83 million in North America alone according to the Computer
Industry Almanac.
Web Sites
www.usrebatewarehouse.com, the Company's first online retail site, is a
"no-frills" online rebate shopping site carrying over 55,000 consumer products.
Through the site, the Company will be able to gather product sales and customer
profile information. The Company intends to use this information to enhance the
product and marketing mix for the www.shoppingsherlock.com site. See "Note
Regarding Forward-Looking Statements."
The www.shoppingsherlock.com and www.usrebatewarehouse.com Web sites are
being designed to ensure that they are enjoyable and easy to use for the
Company's customers, enhancing the Shopping Sherlock brand and encouraging
customers to purchase products. The Company anticipates incorporating the
following features into its Web sites:
o an easy-to-use shopping environment;
o minimal download times through efficient use of HTML and appropriate
graphics;
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o well-organized and logically-presented product information giving
customers the information necessary to make buying decisions;
o advanced search functionality enabling shoppers to quickly find a
desired product; and
o high-quality customer service features which allow users to quickly
find answers to questions and to track the status of orders.
Competition
Competitive Factors in the Online Product Sales Industry. The Company will
compete in its retail segment with a number of other retailers with similar
online sale concepts. The Company anticipates that the principal competitive
factors in the retail segment will include customer service support, price, and
product selection.
Customer Service Support: The Company believes customer service support is
an important competitive factor in the online product sales industry. The
Company provides customer service support through toll-free telephone lines and
through email during normal business hours. The Company plans to expand its
hours of telephone customer service support during the holiday buying season of
November and December. This support will require operators to be available after
business hours from 6 p.m. to 1 a.m., as well as on weekends. The Company's
customer service support line can handle only a limited number of calls
simultaneously, which may result in long waiting periods if call volume exceeds
capacity. Many of the Company's competitors provide telephone customer service
support 7 days a week, 24 hour a day.
Price: The Company believes a competitive pricing scheme is critical to
attracting online customers. Although the Company intends to establish a
competitive pricing scheme, the Company believes other online retailers with
greater purchasing power may sell the same or similar products at prices below
those offered by the Company. In addition, certain of the Company's competitors
possess greater financial resources than the Company, thus enabling such
retailers to offer products below-cost in order to attract online customers.
Product Selection: The Company believes that its success is dependent, in
part, on maintaining a broad, attractive selection of brand name products.
Currently, the Company offers tens of thousands of products made by over eighty
manufacturers, with many of these products manufactured by companies with
recognizable brand names. For example, men's running shoes sold by the Company
include those manufactured by the following brand names: Adidas, Converse, Fila,
New Balance, Nike, Puma, and Reebok. Certain of the Company's other competitors
may offer a more extensive selection of brand name products than the Company.
Competitive Factors in the Web Site Hosting and E-business Services
Industry. The Company will compete in its e-business services segment with other
web site hosting and e-business service providers. The Company anticipates that
the primary competitive factors in the e-business services segment will include
customer service support, price, and technological skill.
Customer Service Support: The Company believes customer service support is
an important competitive factor in Web site hosting and in the online business
service market. The Company provides customer service support through toll-free
telephone lines and through email during normal business hours. The Company's
customer service support telephone line can handle only a limited number of
calls simultaneously, which may result in long waiting periods if call volume
exceeds capacity. Competitors of the Company provide 7 day a week, 24 hour a
day, telephone customer service support.
Price: The Company believes a competitive pricing scheme is vital to
attracting online business customers. Although the Company intends to establish
a competitive pricing scheme, the Company believes other online business service
providers may offer the same or similar services at prices below those offered
by the Company.
Technological skill: The Company believes that it must provide technically
advanced e-commerce sites and services to effectively compete for the online
business service market. Currently, the Company uses a Linux platform, with
software developed module by module enabling the Company to use such modules in
multiple
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applications. The Company, however, has a small programming team and many of the
Company's competitors have greater financial and technical resources than those
of the Company.
Competitors
The Company's competitors can be broadly divided into four groups:
o traditional "brick and mortar" stores (e.g. Target, Wal-Mart, K-Mart,
Sam's, etc.);
o on-line megastores (e.g. Valueamerica.com and Worldspy.com);
o on-line specialty stores (e.g. Furniture.com, Jewelry.com,
Electronics.com, etc.); and
o network marketing e-business service providers (e.g. mis-software.com,
2021.com, etc.).
Traditional Stores: The Company will compete with other brick and mortar
megastores that offer the same types and a large selection of low-priced
products. Additionally, many of these stores not only operate "brick and mortar"
outlets but also have on-line shopping capabilities (e.g. Shop.target.com,
Wal-mart.com, etc.). These stores may have some distinct advantages in that they
are able to offer both types of shopping experiences, both on-line and off-line.
Furthermore, many customers have developed a loyalty to these stores based on
historical experience, available financing options and customer service. These
stores also have a significant reputation and presence in many communities with
access to substantial funds for additional marketing and advertising.
Online Megastores: Two key competitors in the on-line megastore/shopping
mall arena are ValueAmerica.com and Worldspy.com. These Web sites, and the
growing number of other Web sites like them, sell a large number of products
from many different categories such as home improvement, electronics, toys and
games, home furnishings, footwear, pharmacy, jewelry, general merchandise,
housewares, gifts, etc.
Many of these Web sites offer similar service offerings to the Company
including comparison-shopping and easily accessible product
information/research. Like the Company, these Web sites also have aesthetic
appeal, content that holds the consumer's attention and causes them to return to
the site and ease of use. They seek to attract consumers based on the appeal of
convenience, low prices, selection and additional services that may not be
available from a "brick and mortar" retailer, such as chat rooms to discuss
product purchasing experiences, free e-mail and electronic announcements
regarding sales or special deals.
While the Company anticipates that it will have a competitive advantage
over other sites in marketing to rebate shopping club members, it may face
competitors who offer coupons and special discounts, which may offset the
savings gained through rebates.
Specialty Stores: There are a number of other on-line retailers who will
compete with the Company in niche product categories. Retailers such as
Furniture.com who specialize in only one type of product will in many cases be
able to offer a greater selection and possibly better prices in a particular
category. Furthermore, many of these specialty retailers are well capitalized,
have significant budgets for marketing and have developed mindshare for their
niche markets.
Network Marketing e-Business Service Providers: The Company directly
competes with Multi-Level Information Systems, Inc. ("MIS"), and 2021
Interactive in the Web site hosting and e-business services segment. MIS offers
the MIS Internet Assistant, which enables companies to provide their sales
associates with the ability to access sales information, sign up new associates
and place orders via the Internet. MIS also offers business software
(distributor, receivables and inventory tracking) to network marketing
companies. 2021 Interactive's e-business service offering is Array, providing
custom e-commerce enabled Web sites for sales associates, online ordering and
access to product information. 2021 Interactive also offers a complete suite of
business software for network marketing companies, including interactive voice
response, forms processing, contact management, distribution and order tracking
software. These two companies, with their established customer base, represent
significant competition in the Web site hosting and e-business services segment.
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Companies such as amazon.com and Yahoo also offer e-commerce sites to small
business, which are less expensive than the Company's e-commerce sites. These
companies have a competitive advantage over the Company in that they have more
brand recognition and considerable capital to invest in marketing programs.
However, the Company has positioned itself for a specific market segment -
independent sales associates of network marketing organizations. This group is
precluded from building their own independent e-commerce sites because their Web
sites must be linked to the parent site in order to track sales and genealogy.
The Company believes it has a comparative advantage within this segment because
it offers a customized solution and intends to build on business relationships
that have already been established by PLIC.
Operations And Technical Development
The Company is currently located in two facilities: its headquarters in
Bellevue, Washington, and its software development office in Vancouver, British
Columbia. The Company has servers in multiple locations. Main servers are housed
at the Company's software development office and at Exodus Networks in Seattle,
Washington. Duplicate transaction logs are housed at the PLIC corporate offices
in Newhall, California. Complete system back-ups are held on tape offsite and on
servers at the development facility. As capacity increases, the Company plans to
add more servers. The primary focus of the Company's technical team is its Web
site user interface to ensure system software functions properly and offers a
reliable and appealing environment to search for and select merchandise. Servers
with restricted access databases are anticipated to be housed and protected by
the Company in the Exodus Networks Seattle facility. The Company will manage,
edit and update its own files.
Rebate Administration, Transaction Processing and Product Fulfillment. The
Company currently uses third-party service providers for its rebate
administration, product fulfillment and transaction processing functions. PLIC
will provide the Company with rebate cards and card administration services for
new members signing up for online rebate shopping privileges. Each rebate card
will have a separate number and all transactions associated with it will be
tracked through PLIC's database. PLIC is also responsible for all rebate
payments made to the Company's rebate card customers. The Company and PLIC plan
to maintain an electronic database on the Company's cardholders enabling the
Company to validate rebate cards and subsequent sales from them. Through this
database the Company anticipates it will be able to access all data related to
its rebate card customers for the purposes of marketing, auditing and
accounting.
The Company has a three-year agreement with Harris Bank to provide
transaction processing services for its online stores. Harris Bank processes all
online transactions through its agent Cybercash, an online processor who
verifies and authorizes the credit card transactions.
CBS has agreed to provide all product fulfillment operations for the
Company. Product fulfillment involves the ordering and shipping process that is
coordinated between CBS and jobbers/vendors. The Company anticipates that
product vendors will ship the products directly to the purchaser, typically
within two or three days after the customer places the order. However, it is
possible that shipments of some products may take longer. The product
fulfillment operation also includes general customer service support as well as
the following functions:
o customer support for a person's first Web search, product search and
purchase; and
o product fulfillment, including contacting jobbers, expediting orders,
changing orders and tracking orders.
Systems Infrastructure, Technology and Security. The Company's technology
platform consists of the deployment environment, Web servers, applications and
infrastructure for electronic data interchange, financial transactions and
security, as well as the Company's proprietary content management and authoring
system. All of the Company's computer equipment is powered by American Power
Corporation filtering, battery-backed, uninterrupted power supplies designed to
provide continuous power to the online store in the event of outages from the
local power utility. To ensure reliable 24 hours-a-day, 365-days-a-year
operation of its online stores, the Company has designed its system architecture
to be fault tolerant with redundant Web and database servers as well as
redundant paths into the Internet. If a failure should occur with either
Internet connection, traffic will be
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automatically routed through the alternate path. It is anticipated that the
online stores will incorporate database technology and dynamic HTML page
generation to offer maximum flexibility while minimizing maintenance overhead of
the site. The Company has developed a proprietary authoring tool to efficiently
create and manage content for publication in the online store. This tool
provides a database-centric approach to Web page creation that dramatically
speeds the development and maintenance of product listings, presentations and
pricing information. The Company utilizes secure credit card transaction
processing software from Cybercash. All transactions are audited from credit
authorization through receipt of funds. The Company addresses theft of
information during transmission over the Internet by utilizing standard secure
Web transfer technology ("SSL"), encryption technology available to customers
using browsers which are SSL encryption enabled, such as Netscape Navigator or
Microsoft Internet Explorer. The network that will support the online stores is
designed for scalability to accommodate peak transaction loads and to "scale up"
efficiently to handle increasing volumes over time. The Company uses virtual web
servers, which allow new servers to be configured and brought online
transparently as transaction loads dictate. Similarly, the database servers that
drive the store content are replicated to allow new servers to be added if
greater capacity is required. Access from external sites to the store is
restricted to the Web page transfer ("HTTP") protocol, and access from the
internal network is restricted to only essential maintenance services. The
Company performs self-diagnostic security checks, including measures for
password cracking, port scanning and operating system vulnerabilities.
Government Regulation
The Company is not currently subject to direct federal, state or local
regulation in the United States other than regulations applicable to businesses
generally or directly applicable to electronic commerce. However, because the
Internet is becoming increasingly popular, it is possible that a number of laws
and regulations may be adopted in the United States with respect to the
Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. Several states have proposed legislation to limit the use of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has indicated that it
may propose legislation on this issue to Congress in the near future and has
initiated action against at least one online service regarding the manner in
which personal information was collected from users and provided to third
parties. In that instance, the company involved entered to a consent decree
under which it agreed to establish programs to allow consumers to delete their
personal identifying information from the Company's database, provide access to
consumers to their personal information and allow them to rectify inaccurate
information, clearly identify any affiliations with third parties that may
collect information and obtain express parental consent before collecting and
using personal identifying information obtained from children under 13 years of
age. The adoption of additional consumer protection laws could create
uncertainty in Internet usage and reduce the demand for all products and
services.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local levels and by
foreign governments that could impose taxes on the online sale of goods and
services and other Internet activities. Recently, the Internet Tax Information
Act was signed into law, placing a three-year moratorium on new state and local
taxes on Internet commerce. This moratorium will end on October 21,2001. After
that date, it is possible that states will impose taxes on Internet commerce.
There can be no assurance that future laws imposing taxes or other regulations
on commerce over the Internet would not substantially impair the growth of
e-commerce and as a result could make it cost-prohibitive to operate the
Company's business.
The Company could also be affected by any change in the ability of users to
access the Internet through a dial-up telephone call without any additional
charges. The FCC has ruled that connections linking end users to their Internet
service providers are jurisdictionally interstate rather than local, but the FCC
did not subject such calling to the access charges that apply to traditional
telecommunications companies. Local telephone companies assess access charges to
long distance companies for the use of the local telephone network to originate
and terminate long distance calls, generally on a per-minute basis. The Company
could be adversely affected by any regulatory change that would result in the
application of access charges to Internet service providers because this would
substantially increase the cost of using the Internet. This could increase the
Company's operating costs and also reduce the amount of persons using the
Internet to purchase goods and services.
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The Company is not certain how its business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of those laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet marketplace. That uncertainty could reduce demand
for the Company's products or services or increase the cost of doing business as
a result of litigation costs or increased service delivery costs.
In addition, because the Company's products and services are available over
the Internet in multiple states and foreign countries, other jurisdictions may
claim that the Company is required to qualify to do business in each state or
foreign country. The Company is qualified to do business only in Florida and
Washington. The Company's failure to qualify in other jurisdictions when it is
required to do so could subject it to taxes and penalties. It could also hamper
the Company's ability to enforce contracts in those jurisdictions. The
application of laws or regulations from jurisdictions whose laws do not
currently apply to the Company's business could have a material adverse affect
on its business, results of operations and financial condition.
The European Union has adopted a policy directive which went into effect in
1998. Under this directive, business entities domiciled in member states of the
EU are limited in the transactions they may do with business entities domiciled
outside the EU unless they are domiciled in a jurisdiction with privacy laws
comparable to the EU privacy directive. The United States presently does not
have laws which satisfy the EU. Discussions between representatives of the EU
and the United States are ongoing and may lead to certain safe harbor provisions
which, if adhered to, would allow business entities in the EU and the United
States to continue to do business without limitation. If these negotiations are
not successful and the EU begins enforcement of the privacy directive, there
could be an adverse impact on international Internet business. If the Company
does business directly in the EU in the future the Company will be required to
comply with the privacy directive of the EU.
Intellectual Property Rights
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally on a combination of
copyright, trademark and trade secret laws, non-disclosure agreements and other
contractual provisions to establish and maintain its proprietary rights. The
Company's intellectual property primarily consists of registered trade names and
copyrighted material. The Company's trade names include Cyberbusiness Services,
Shoppingsherlock.com and US Rebate Warehouse. The Company has no patents or
proprietary technology.
As part of its confidentiality procedures, the Company generally enters
into nondisclosure and confidentiality agreements with each of its key
employees, consultants and business partners and limits access to and
distribution of its intellectual property, documentation and other proprietary
information. In particular, the Company has entered into non-disclosure
agreements with each of its employees and business partners. The terms of the
employee non-disclosure agreements include provisions requiring assignment to
the Company of employee inventions. Despite the Company's efforts to protect its
intellectual property rights, unauthorized third parties, including competitors,
may from time to time copy or use certain portions of the Company's intellectual
property and use such information in connection with competitive products.
Policing the unauthorized use of the Company's intellectual property is
difficult, and, while the Company is unable to determine the extent to which
piracy of the Company's intellectual property exists, such piracy can be
expected to be a persistent problem. In addition, the laws of certain countries
in which the Company's intellectual property is or may be used do not protect
its intellectual property rights to the same extent as do the laws of the United
States. As a result, use of the Company's intellectual property in such
countries may increase the likelihood that the Company's intellectual property
might be infringed upon by unauthorized third parties.
It is possible that the scope, validity and/or enforceability of the
Company's intellectual property rights could be challenged by competitors or
other parties. The results of such challenges before administrative bodies or
courts depend on many factors which cannot be accurately assessed at this time.
Unfavorable decisions by such
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administrative bodies or courts could have a negative impact on the Company's
intellectual property rights. Any such challenges, whether with or without
merit, could be time consuming, result in costly litigation and diversion of
resources, or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. In the event of a claim of infringement
against the Company and the Company's failure or inability to license the
infringed or similar technology, the Company's business, operating results and
financial condition could be materially adversely affected.
The Company has not registered any trademarks in Canada, the United States
or elsewhere.
Plan of Operation
Over the next 12 months, in addition to maintaining www.eyicom.com and
www.usrebatewarehouse.com, the Company intends to develop
www.shoppingsherlock.com. The Company anticipates www.shoppingsherlock.com will
be operational in the fourth quarter of 1999. The Company's Vancouver, Canada
software development office will develop and maintain Web sites and intends to
hire five additional programmers for this purpose. This office will also provide
technical support and help desk services and expects to hire an additional three
staff members for this purpose. In November 1999, the Company expects to hire up
to two additional employees for managing the product research and merchandising
function and to hire up to four additional employees for its sales and marketing
activities. See "Note Regarding Forward-looking Statements."
The Company intends to focus on continuing to grow its customer base for
www.eyicom.com and to acquire additional network marketing e-business service
clients by the end of 1999. In addition, the Company is currently planning to
implement an online check processing system in the fourth quarter of 1999.
Currently the Company has enough working capital to support the
www.eyicom.com site and www.usrebatewarehouse.com rebate shopping site. However,
to fully market and support these two sites, and to develop its
www.shoppingsherlock.com site, the Company anticipates it will engage in a
capital raising transaction prior to November 1999.
Employees
As of September 30, 1999, the Company had 14 employees, including six in
research and development, two in marketing and sales, one in customer support
and five in management, finance and administration. The Company's success will
depend in large part on its ability to attract and retain skilled and
experienced employees. None of the Company's employees are covered by a
collective bargaining agreement and the Company believes that its relations with
its employees is good. The Company does not currently have any key man life
insurance on any of its directors or executive officers.
Risk Factors
The Company's business is subject to the following risks. These risks also
could cause actual results to differ materially from results projected in any
forward-looking statement in this report.
The Company Has a Limited Operating History, Which Makes It Difficult to Predict
Its Future Performance.
The Company commenced operations in January 1999 and therefore has only a
limited operating history upon which an evaluation of its business and prospects
can be based. Prior to January 1999, the Company had no operations or revenues.
In addition, the Company expects significant changes in its business over the
next several months. As a result, in view of the rapidly evolving nature of the
Company's business and markets and limited operating history, the Company
believes that period-to-period comparisons of financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
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The Company Has a History of Losses, Expects Future Losses and May Never Achieve
Profitability.
The Company has not achieved profitability and expects to continue to incur
operating losses for the foreseeable future. The Company incurred a net loss of
$455,901 in the six months ended June 30, 1999 and of $2,079 for the year ended
December 31, 1998. The Company has not had any revenue in recent years, it has
never been profitable and there can be no assurance that, in the future, the
Company will be profitable on a quarterly or annual basis. In addition, over the
next twelve months, the Company plans to increase its operating expenses from
approximately $150,000 per month to $500,000 per month in order to expand its
sales and marketing operations, fund greater levels of research and development,
broaden its customer support capabilities and increase its administration
resources.
The Company May Need Additional Financing To Support Its Operations and May Be
Unable to Obtain It On Commercially Reasonable Terms, Or At All.
Revenue from the Company's operations is not sufficient to finance the
complete cost of development and marketing of its products and services.
Accordingly, the Company must raise substantial additional funding. The Company
expects to be able to meet its financial obligations for approximately the next
month. There is no assurance that, after such period, the Company will be able
to secure financing or that such financing will be obtained on terms favorable
to the Company. Failure to obtain adequate financing could result in significant
delays in development of new products and a substantial curtailment of
operations.
There Is Uncertainty Regarding The Company's Ability to Continue As A Going
Concern.
The Company has been in the development stage since its inception. It has
had no significant operating revenues to date, has accumulated losses of
$458,980 and will require additional working capital to complete its business
development activities and generate revenue adequate to cover operating and
further development expenses. This raises substantial doubt as to the Company's
ability to continue as a going concern.
The Company's Quarterly Operating Results Are Uncertain and May Fluctuate
Significantly.
As a result of the Company's limited operating history and the emerging
nature of the market in which it competes, the Company is unable to forecast its
revenue accurately. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenue and are to a
large extent fixed. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenue in relation to the Company's planned expenditures would
have an immediate adverse affect on the Company's business, financial condition
and results of operations. Further, in response to changes in the competitive
environment, the Company may from time to time make certain pricing, service or
marketing decisions that could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
The Company Depends on Its Relationship with PLIC.
The Company anticipates that its Internet Web sites and products will be
primarily marketed by PLIC. The Company's existing agreement with PLIC is
nonexclusive with respect to the obligations of PLIC and may be terminated with
cause. PLIC is not within the control of the Company, is not obligated to
actively market the Company's products and Web sites and may also represent and
sell competing products or perform marketing services for competing Internet Web
sites. The Company is contractually obligated to exclusively market PLIC's
rebate network memberships during the term of the agreement and to not market
any similar services for three years thereafter. There can be no assurance that
PLIC will provide the level of services and support necessary to effectively
market the Company's products, services or Web sites, or that it will not
emphasize its own or third-party products, services and Web sites to the
detriment of the Company's products, services and Web sites. The loss of these
services, the failure of PLIC, to perform under its agreement with the Company
or the inability of the Company to attract and retain new service providers with
the technical, industry and application experience required to market the
Company's products, services and Web sites successfully could have a material
adverse effect on the Company's business, financial condition, operating results
and cash flows.
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The Company Depends on Its Relationships with Third Parties.
The Company has contracted with CBS to provide merchandise for sale through
the Company's online stores. The Company also relies upon CBS to fulfill a
number of traditional retail functions, including maintaining inventory,
accepting product returns, and preparing merchandise for shipment to individual
customers. There can be no assurance that CBS will continue to perform these
tasks on behalf of the Company or will be willing or able to establish the
necessary communication protocols to support the Company's direct shipment
infrastructure. The failure of the Company or CBS to arrange for the delivery of
products in a timely manner, to accept product returns, to provide adequate
customer service or to prepare merchandise properly for shipment to customers
could cause customer dissatisfaction and result in the cancellation of orders,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. The failure of the Company to
maintain its relationships with CBS on acceptable commercial terms, to establish
similar relationships with vendors of products not currently offered by the
Company but demanded by its customers, or to obtain satisfactory performance
from such vendors could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows.
The Company has contracted with Harris Bank & Savings of Chicago, Illinois
("Harris Bank") to provide credit card processing services for the Company.
There can be no assurance that Harris Bank will continue to perform these tasks
on behalf of the Company or will be willing or able to perform such tasks. In
the event Harris Bank fails to do so, the Company may be unable to secure other
credit card processing services in a timely manner, which could result in losses
of sales on it Web sites and damage its reputation.
The Company's operations also depend to a significant degree on a number of
other third parties, including telecommunication service providers. The Company
has no effective control over these third parties and no long-term contractual
relationships with any of them. From time to time, the Company could experience
temporary interruptions in its Web site connection and its telecommunications
access. Continuous or prolonged interruptions in the Company's Web site
connection or in its telecommunications access would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's agreements with its Internet and transaction processing
service providers expressly limit the Company's ability to obtain damages from
the service providers to losses actually incurred. Such damages generally do not
include a right to any consequential damages such as lost profits or damages due
to loss of goodwill.
The Company Depends on Key Personnel
The Company's performance and future operating results are substantially
dependent on the continued service and performance of its senior management and
key technical and sales personnel including Philip Garratt, the Company's
President and Chief Executive Officer; Mitchell Eggers, the Company's Chief
Operating Officer; Patrick McGrath, the Company's Chief Financial Officer; Jan
Walter, the Company's Chief Technical Officer and Raeanne Steele, the Company's
Executive Vice-President of Sales and Marketing. The Company intends to hire at
least eight additional software development and technical personnel and six
additional sales and marketing personnel in the next year. See "Note Regarding
Forward-Looking Statements." Competition for such personnel is intense, and
there can be no assurance that the Company can retain its key technical, sales
and managerial employees or that it will be able to attract or retain
highly-qualified technical and managerial personnel in the future. The loss of
the services of any of the Company's senior management or other key employees or
the inability to attract and retain the necessary technical, sales and
managerial personnel could have a material adverse effect upon the Company's
business, financial condition, operating results and cash flows. The Company
does not currently maintain "key man" insurance for any senior management or
other key employees.
The Company May Be Unable to Establish the Shopping Sherlock and
USRebateWarehouse Brands
The Company may not be successful in establishing its brands. As
competitive pressures in the online retail industry increase, the Company
expects that brand strength will become increasingly important. Over the next
twelve months, the Company intends to devote approximately $2.8 million to
establish the Shopping Sherlock and
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US Rebate Warehouse brands. The reputation of the Shopping Sherlock and US
Rebate Warehouse brands will depend on the Company's ability to provide a
high-quality online experience for consumers visiting its Web sites. If
consumers are not satisfied with the quality of their shopping experience with
the Company, they may stop visiting its Web sites. In addition, negative
experiences of consumers with the Company might result in publicity that could
damage the Company's reputation. The Company's expenditure of additional
resources to build its brands may not generate a corresponding increase in
revenue, and the Company may otherwise fail to promote its brands successfully.
See "Note Regarding Forward-Looking Statements."
Liability for Information Displayed on the Company's Web Site
The Company may be subjected to claims for defamation, negligence,
copyright or trademark infringement and various other claims relating to the
nature and content of materials it publishes on its Web site. These types of
claims have been brought, sometimes successfully, against online services in the
past. The Company could also face claims based on the content that is accessible
from its Web site through links to other Web sites.
Dependence on the Acceptance of Online Retailing
The demand for online retail products may not develop to a level sufficient
to support the Company's continued operations or may develop more slowly than
expected. The Company expects to derive almost all its revenue from sales to
consumers over its Web sites. The Internet has not existed long enough as a
retailing medium to demonstrate its effectiveness relative to traditional
retailing methods. Consumers that have historically purchased goods and services
through traditional retail channels may be reluctant or slow to adopt online
buying. Many consumers have limited or no experience using the Internet as a
purchasing medium. See "Note Regarding Forward-Looking Statements."
Inability to Adapt to Rapid Changes in the Online Retailing Industry
Online retailing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. The recent growth of the Internet and intense
competition in this industry exacerbate these market characteristics. The
Company could incur substantial costs to modify its services or infrastructure
to adapt to rapid technological change. The Company's future success will depend
on its ability to adapt to the online retailing industry by maintaining and
improving the performance, features and reliability of its products and
services. The Company may experience technical difficulties that could delay or
prevent the successful development, introduction or marketing of these products
and services.
Dependence on Continued Growth in Use of the Internet
The success of the Company's business depends on continued growth in the
use of the Internet, and the Company's business would suffer if Internet usage
does not continue to grow. Internet usage may be inhibited for a number of
reasons, such as:
o Inadequate network infrastructure;
o Security concerns;
o Inconsistent quality of service;
o Disruptions resulting from the inability of computer systems to
recognize the year 2000;
o Lack of available cost-effective, high-speed service;
o The adoption of new standards or protocols for the Internet; and
o Changes or increases in government regulation.
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Online companies have experienced interruptions in their services as a
result of outages and other delays occurring due to problems with the Internet
network infrastructure, disruptions in Internet access provided by third party
providers or failure of third party providers to handle higher volumes of user
traffic. If Internet usage grows, the Internet infrastructure or third party
service providers may be unable to support the increased demands which may
result in a decline of performance, reliability or ability to access the
Internet. If outages or delays frequently occur in the future, Internet usage,
as well as usage of the Company's planned Web sites, could grow more slowly or
decline.
Security and Privacy Issues
The Company could be subject to litigation and liability if third parties
were able to penetrate the Company's network security or otherwise
misappropriate its customers' personal information or credit card information.
This liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims. It could also include
claims for other misuses of personal information, such as for unauthorized
marketing purposes. In addition, the Federal Trade Commission and some states
have been investigating various Internet companies regarding their use of
personal information. The FTC has indicated that it may propose legislation on
this issue to Congress in the near future and has indicated action against at
least one online service regarding the manner in which personal information was
collected from users and provided to third parties. In that instance, the
company involved entered to a consent decree under which it agreed to establish
programs to allow consumers to delete their personal identifying information
from the Company's database, provide access to consumers to their personal
information and allow them to rectify inaccurate information, clearly identify
any affiliations with third parties that may collect information and obtain
express parental consent before collecting and using personal identifying
information obtained from children under 13 years of age. The Company does not
intend to sell or distribute personal user information to third parties. The
Company could incur additional expenses and be required to change its current
practices if new regulations regarding the use of personal information are
adopted or should government agencies choose to investigate its privacy
practices.
The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in
general, or, specifically, from using it to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
The Company's relationships with consumers may be adversely affected if the
security measures that it uses to protect their personal information, such as
credit card numbers, are ineffective. The Company cannot predict whether events
or developments will result in a compromise or breach of the technology it uses
to protect a customer's personal information.
Furthermore, the Company's computer servers may be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions. The Company
may need to expend significant additional capital and other resources to protect
against a security breach or to alleviate problems caused by any breaches. There
can be no assurance that the Company can prevent or remedy all security
breaches. If any of these breaches occur, the Company could lose customers and
visitors to its Web site.
Competition
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to increase in the future.
Barriers to entry are minimal, and current and new competitors can establish
Internet stores at relatively low cost. Moreover, all of the products sold by
the Company are widely available through established traditional retail
channels, and accordingly, the Company competes not only with other participants
in the electronic commerce market but also with traditional retailers and
resellers. The Company currently or potentially competes with a variety of other
companies depending on the type of merchandise and sales format offered to
customers. These competitors and potential competitors include: (i)
segment-specific online retailers such as Amazon.com, BuyComp, CDNow, Dell
Computer and Gateway International; (ii) online vendors of a broad selection of
consumer products such as Cendant, CyberShop, iMall, Internet Shopping Network,
iQVC, ONSALE, ValueAmerica, WorldSpy and Wal-Mart Online; (iii) a number of
indirect competitors that derive a substantial portion of their revenues from
electronic commerce, including America Online, Excite, Infoseek, Lycos,
Microsoft Network, Prodigy and Yahoo!; (iv) mail order catalog operators such as
Lands' End, Micro Warehouse,
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Sharper Image, Spiegel and Williams-Sonoma; (v) retail and warehouse/discount
store operators such as Circuit City, Home Depot, Office Depot, Price/Costco,
Staples and Target; and (vi) other national and international retail, catalog,
distribution and manufacturing companies.
The Company directly competes with Multi-Level Information Systems, Inc.
("MIS"), and 2021 Interactive in the Web site hosting and e-business services
segment. MIS offers the MIS Internet Assistant, which enables companies to
provide their sales associates with the ability to access sales information,
sign up new associates and place orders via the Internet. MIS also offers
business software (distributor, receivables and inventory tracking) to network
marketing companies. 2021 Interactive's e-business service offering is Array,
providing custom e-commerce enabled Web sites for sales associates, online
ordering and access to product information. 2021 Interactive also offers a
complete suite of business software for network marketing companies, including
interactive voice response, forms processing, contact management, distribution
and order tracking software.
Most of the Company's current and potential competitors have substantially
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, competing online retailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, well-established
and well-financed companies as the use of the Internet and other online services
increases. Many of the Company's competitors may be able to secure merchandise
from vendors on more favorable terms, respond more quickly to changes in
customer preferences, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to Internet site and systems development
than the Company.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is possible
that new competitors or alliances among competitors and vendors may emerge and
rapidly acquire market share. Increased competition may result in reduced
operating margins, loss of market share and a diminished brand franchise, any
one of which could materially adversely affect the Company's business, results
of operations and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not materially adversely affect its business.
The Company May Not Be Able to Expand Its Product Lines
The Company's business model also depends upon the Company's ability to
offer a complete selection of brand name products in a broad variety of product
categories. Many of the Company's planned product categories do not yet feature
a broad product selection, and there can be no assurance that the Company will
be able to establish vendor relationships that will enable it to achieve the
breadth of product offerings necessary for the Company to succeed. Moreover,
there can be no assurance that customers will be satisfied with the Company's
planned product offerings. The failure of the Company to offer a satisfactory
product selection could cause consumers to purchase products from the Company's
competitors and materially reduce the Company's revenues.
The Company Has Limited Customer Service Capabilities
There can be no assurance that the Company will be able to hire the
personnel necessary to build a customer service organization that is able to
respond satisfactorily to the needs of the Company's customers. Currently, the
Company provides all technical customer support services for its Web site
hosting and e-business service clients. Non-technical customer service is
provided by PLIC. Customer service for the Company's online retail stores is
anticipated to be provided by the Company. The failure of the Company to oversee
the customer service activities of PLIC or to provide adequate technical
customer support to its e-business clients could damage the Company's reputation
and could cause customers to transfer their business to other service providers,
Internet retailers or traditional retail stores. Accordingly, there can be no
assurance that the Company will not experience customer service capacity
constraints and the failure to remedy such constraints in a timely manner could
have a material adverse effect on the Company's business.
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Unproven Acceptance of the Internet as a Medium for Commerce
The Company's long-term viability is substantially dependent upon the
widespread acceptance and use of the Internet as a medium of commerce. The use
of the Internet as a means of effecting retail transactions is in a recent stage
of development, and there can be no assurance that a sufficiently large number
of customers will begin to use the Internet as a medium of commerce. Demand and
market acceptance for recently introduced products and services over the
Internet are subject to a high level of uncertainty and there exist few proven
electronic commerce business models. For the Company to be successful, consumers
and manufacturers that have historically relied upon traditional means of
commerce to purchase and sell merchandise must accept and utilize new ways of
conducting business and exchanging information. The Internet may not prove to be
a viable medium of commerce for certain purposes because of inadequate
development of the necessary infrastructure, such as a reliable network
backbone, or delayed development of enabling technologies, such as high-speed
modems and high-speed communication lines. There can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
on it by this continued growth. In addition, delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or increased governmental regulation could slow or stop the growth of
the Internet as a viable medium for commerce. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability,
accessibility and quality of service) remain unresolved and may adversely affect
the growth of Internet use or the attractiveness of conducting commerce online.
Because the exchange of information on the Internet is new and evolving, there
can be no assurance that the Internet will prove to be a viable medium of
commerce. The failure to resolve critical issues concerning the commercial use
of the Internet, the failure of the necessary infrastructure to develop in a
timely manner, or the failure of the Internet to continue to develop rapidly as
a viable medium of commerce would have a material adverse effect on the
Company's business, financial condition, operating results and cash flows.
The Company Is Vulnerable to System Malfunctions Resulting From Increased
Traffic on Its Web Sites.
A key element of the Company's strategy is to generate a high volume of
traffic through, and purchases from, its planned Internet-based retail stores.
Accordingly, the availability, reliability and satisfactory performance of the
Company's Internet sites, transaction processing systems and network
infrastructure are critical to the Company's reputation and its ability to
attract and retain customers and provide adequate customer service. The
Company's future revenues will depend on the number of visitors who shop at the
online stores and the volume of orders the Company fulfills. Any network
interruptions or system shortcomings that result in the unavailability of the
Company's Internet site or reduced order fulfillment would reduce the volume of
goods sold and the attractiveness of the Company's product and service
offerings. System delays or interruptions could negatively impact a customer's
shopping experience and reduce the likelihood that such customer would return to
the Company's online store in the future. Substantial increases in the volume of
traffic on the Company's Internet site or the number of orders placed by
customers through the Company's online store may require the Company to further
expand and upgrade its technology, transaction processing systems and network
infrastructure. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
Internet site, or to expand and upgrade its systems and infrastructure to
accommodate such increases in a timely manner.
Risks of Potential Government Regulation and Other Legal Uncertainties Relating
to the Internet
The Company is not currently subject to direct federal, state or local
regulation in the United States other than regulations applicable to businesses
generally or directly applicable to electronic commerce. However, because the
Internet is becoming increasingly popular, it is possible that a number of laws
and regulations may be adopted in the United States with respect to the
Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. The adoption of such consumer protection laws could create
uncertainty in Internet usage and reduce the demand for all products and
services.
In addition, the Company is not certain how its business may be affected by
the application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation,
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libel, obscenity and export or import matters. It is possible that future
applications of these laws to the Company's business could reduce demand for its
products and services or increase the cost of doing business as a result of
litigation costs or increased service delivery costs.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local levels and by
foreign governments that could impose taxes on the online sale of goods and
services and other Internet activities. Recently, the Internet Tax Information
Act was signed into law, placing a three-year moratorium on new state and local
taxes on Internet commerce. This moratorium will end on October 21,2001. After
that date it is possible that states will impose taxes on Internet commerce.
There can be no assurance that future laws imposing taxes or other regulations
on commerce over the Internet would not substantially impair the growth of
e-commerce and as a result could make it cost-prohibitive to operate the
Company's business.
The Company could also be affected by any change in the ability of users to
access the Internet through a dial-up telephone call without any additional
charges. The FCC has ruled that connections linking end users to their Internet
service providers are jurisdictionally interstate rather than local, but the FCC
did not subject such calling to the access charges that apply to traditional
telecommunications companies. Local telephone companies assess access charges to
long distance companies for the use of the local telephone network to originate
and terminate long distance calls, generally on a per-minute basis. The Company
could be adversely affected by any regulatory change that would result in the
application of access charges to Internet service providers because this would
substantially increase the cost of using the Internet. This could increase the
Company's operating costs and also reduce the amount of persons using the
Internet to purchase goods and services.
Because the Company's services are available over the Internet in multiple
states and foreign countries, other jurisdictions may claim that we are required
to qualify to do business in each state or foreign country. The Company is
qualified to do business only in Florida and Washington. The Company's failure
to qualify in other jurisdictions when it is required to do so could subject the
Company to taxes and penalties and could restrict the Company's ability to
enforce contracts in those jurisdictions. The application of laws or regulations
from jurisdictions whose laws do not currently apply to our business may have a
material adverse affect on its business, results of operations and financial
condition.
The European Union recently adopted a directive addressing data privacy
that may result in limits on the collection and use of consumer information. See
"Business -- Government Regulation."
The Company May Not Be Able to Adequately Protect Its Intellectual Property
Rights.
The Company's success is dependent on its ability to protect its
intellectual property rights. The Company relies principally on a combination of
copyright, trademark and trade secret laws, non-disclosure agreements and other
contractual provisions to establish and maintain its proprietary rights. The
Company's intellectual property primarily consists of registered trade names and
copyrighted material. The Company's trade names include Cyberbusiness Services,
Shoppingsherlock.com and US Rebate Warehouse. The Company has no patents or
proprietary technology.
As part of its confidentiality procedures, the Company generally enters
into nondisclosure and confidentiality agreements with each of its key
employees, consultants and business partners and limits access to and
distribution of its intellectual property, documentation and other proprietary
information. In particular, the Company has entered into non-disclosure
agreements with each of its employees and business partners. The terms of the
employee non-disclosure agreements include provisions requiring assignment to
the Company of employee inventions. Despite the Company's efforts to protect its
intellectual property rights, unauthorized third parties, including competitors,
may from time to time copy or use certain portions of the Company's intellectual
property and use such information in connection with competitive products.
Policing the unauthorized use of the Company's intellectual property is
difficult, and, while the Company is unable to determine the extent to which
piracy of the Company's intellectual property exists, such piracy can be
expected to be a persistent problem. In addition, the laws of certain countries
in which the Company's intellectual property is or may be used do not protect
its intellectual property rights to the same extent as do the laws of the
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United States. As a result, use of the Company's intellectual property in such
countries may increase the likelihood that the Company's intellectual property
might be infringed upon by unauthorized third parties.
It is possible that the scope, validity and/or enforceability of the
Company's intellectual property rights could be challenged by competitors or
other parties. The results of such challenges before administrative bodies or
courts depend on many factors which cannot be accurately assessed at this time.
Unfavorable decisions by such administrative bodies or courts could have a
negative impact on the Company's intellectual property rights. Any such
challenges, whether with or without merit, could be time consuming, result in
costly litigation and diversion of resources, or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all. In
the event of a claim of infringement against the Company and the Company's
failure or inability to license the infringed or similar technology, the
Company's business, operating results and financial condition could be
materially adversely affected.
The Company has not registered any trademarks in Canada, the United States
or elsewhere.
The Company May Face System Failures Resulting From Year 2000 Risks.
The Company is aware that many software products assume a century number
(usually "19") when storing data and performing date calculations to save space,
and that this has the effect of making the year 2000 recognized as the year
1900, for instance. This can result in systems failures or other disruptions to
the operations of that computer system or program. As the Company is heavily
dependent on information technology, such a failure could result in material and
adverse effects on the Company.
The Company is continually monitoring the documentation of its software
vendors to ensure that it is aware of and able to compensate for any issues its
software vendors disclose. This is in addition to the Company's standard
verification tests, which it uses to verify its own software quality. The
Company expands the definition of the year 2000 compliance issues, as well, by
testing for proper leap year calculations in all its products, as it has been
noted that a number of software vendors' products have problems with detecting
the year 2000 as a leap year.
The Company's ongoing year 2000 compliance monitoring includes testing all
new software to be deployed on its systems with its procedures for data storage,
and confirming with the vendor that the product is Year 2000 compliant. The
Company is also communicating with its vendors, suppliers and service providers
to ensure that these third parties are at an appropriate state of year 2000
readiness and to determine the effect their state of readiness has on our
operations. To date, all of the Company's material vendors, suppliers and
service providers have been contacted. As of September 7, 1999, 80% of the
Company's vendors, suppliers and service providers have responded. All of the
respondents have indicated that they are year 2000 compliant, and 75% of those
who have responded have provided their response in writing to the Company. The
Company is also auditing its communications links with its vendors, suppliers
and service providers to ensure that the software, systems, and networks used
are year 2000 compliant.
CBS has advised the Company that they have tested their systems and believe
them to be Year 2000 compliant. CBS transfers an updated product data base via
EDI to the Company weekly. Purchase orders are batched daily to CBS via EDI. In
the event of a complete systems failure at CBS (Y2K related or otherwise), the
Company would be able to continue operation for the week, holding orders. This
would result in shipping delays and delays in rebate processing. If CBS were
unable to address their systems failure at the end of the week and the Company
continued to use the existing database to sell products, delays in shipping and
rebate processing could occur. In addition, the Company could experience an
increase in chargebacks associated with out-of-stock products.
To date, PLIC has been unable to provide us with their year 2000 compliance
status. Currently, PLIC provides non-technical support using e-mail for the
Company's sole e-business services client, EYI. In the event of a complete
systems failure at PLIC, the Company would have to take over the non-technical
support for PLIC. This would result in an increase in customer service operating
expenses, until PLIC addressed their systems failure.
The Company's Year 2000 Compliance Program is an integral and inseparable
part of information technology (IT) policy, and verifications are done as a part
of normal procedures. As such the costs for year 2000
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compliance testing is a part of the normal IT research, development and
implementation budget. The Company's internal software policies and test
procedures will be amended mid-year 2000 to include testing for unrelated date
issues. The Company believes that the total costs of the year 2000 compliance
program will be approximately $20,000.
Directors' and Officers' Involvement in Other Projects
Many of the officers and directors of the Company serve as directors,
officers and/or employees of companies other than the Company. For example,
Mitchell Eggers, the Company's Chief Operating Officer currently serves as a
director for two public corporations. Jan Walter, the Company's Chief Technical
Officer currently is a principal in his own systems consulting and development
company. Philip Garratt and Patrick McGrath, the Company's Chief Executive
Officer and Chief Financial Officer, respectively, currently act as independent
consultants to one other company. All of the Company's current officers devote,
on average, at least 40 hours per week to the Company. While the Company
believes that such officers and directors will be devoting adequate time to
effectively manage the Company, there can be no assurance that such other
positions will not negatively impact an officer's or director's duties for the
Company.
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ITEM 2 FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified in their entirety by reference to and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated Financial Statements and Notes thereto included
elsewhere in this Registration Statement. The consolidated statement of
operations data for the fiscal years ended December 31, 1996, 1997 and 1998 and
the six-month period ended June 30, 1999 and the consolidated balance sheets
dated at December 31, 1997 and 1998 and at June 30, 1999 are derived from, and
are qualified by reference to, the Company's consolidated financial statements,
which appear elsewhere in this Registration Statement.
<TABLE>
Six Months Ended June Years ended
30, December 31,
------------------------ -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating Expenses...... 455,901 -- 2,079 -- -- -- --
Net income (loss) for
the period.............. (455,901) -- (2,079) -- -- -- --
Earnings (loss) per
common share........... $ (0.115) $ (0.00) $ (0.005) $ (0.00) $ (0.00) $ (0.00) $ (0.00)
Weighted average shares
outstanding............ 3,976,516 100,000 445,833 100,000 100,000 100,000 100,000
</TABLE>
<TABLE>
As at June
31, As At December 31,
------------- ------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents. $ 593,773 $ -- $ -- $ -- $ -- $ --
Working capital
(deficiency)............ 551,515 -- -- -- -- --
Total assets.............. 706,705 -- -- -- -- --
Non-current liabilities... -- -- -- -- -- --
Stockholders' equity...... $ 644,099 $ -- $ -- $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed in these forward-looking statements as a result of various
factors, including those set forth in "risk factors" and elsewhere in this
Registration Statement. The following discussion should be read in conjunction
with the financial statements and notes thereto included elsewhere in this
Registration Statement.
The Company is a development stage company that is an e-commerce services
provider and plans to engage in retail sales of consumer products over the
Internet. The Company was inactive from its inception until the first quarter of
1999 when it initiated its software development program, developed and launched
its beta site and commenced its e-Commerce Direct Marketing Organization "DMO"
program. On May 26, 1999, the Company acquired SSI, a Delaware corporation,
whose sole asset is the Strategic Alliance Agreement with PLIC. SSI was
incorporated on January 20, 1999 and did not conduct any business from the date
of inception to May 31, 1999. During the first six months of 1999, the Company's
primary activities related to the:
o development of its primary and secondary server platforms;
o development of software for its online retail sites;
o design and construction of an electronic data interchange platform;
o development of the Company's Web site and e-business services Direct
Marketing Organization Platform ("DMO Platform") for one of its main
affinity groups;
o development of business processes;
o development of operating procedures and systems; and
o development of the Company's first online retail site,
www.usrebatewarehouse.com.
The Company has a limited operating history and is still in the early
stages of development. The Company has generated approximately $30,000 in Web
site hosting and e-business revenues through August 1999. Management anticipates
additional revenues by the end of the fourth quarter in 1999 from three primary
sources:
o Product sales from the Company's online store;
o Fees collected for Web site hosting and e-business services, including
Web design, preparation of digital images and monthly fees from DMO
Platform agreements; and
o Rebates from its Strategic Alliance Agreement with PLIC. See "Note
Regarding Forward-Looking Statements."
The Company recognizes Web site development costs as incurred and
recognizes the merchant Web site and systems development revenues when the work
has been completed. Amounts that are billed under the terms of these agreements,
but not yet earned, are reflected as deferred revenue. The Company recognizes
Web hosting revenue on a net basis after taking into account the fees paid to
the DMO and, if applicable, PLIC. This revenue is recognized in the month that
the majority of the services are provided.
Revenue from product sales and rebates will be recognized upon shipment
from the vendor. There will be an allowance for sales returns based on its
actual experience. The Company will be responsible for selling the merchandise,
collecting payment from the customer and ensuring that the product is shipped.
CBS and the Company are jointly responsible for processing returns. The Company
has direct communication with the
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customer and coordinates the process with CBS. The Company anticipates that its
product vendors will ship products directly to customers of its online stores,
typically within two to three days after a customer places an order. However, it
is possible that some product shipments may take longer. The Company plans to
inform its retail customers of the anticipated shipping time at the time of
order. The Company expects that payment for products sold through its Internet
Web sites will be made via credit card. "See "Note Regarding Forward-Looking
Statements."
The Company expects that its operating expenses will increase significantly
during the foreseeable future as the result of its plans to:
o increase expenditures on marketing, advertising and promotion from the
current level of approximately $20,000 per month to $230,000 per
month;
o enhance existing hardware and e-commerce capabilities by increasing
the levels of research and development expenditures and capital assets
from the current levels of $75,000 and $10,000 per month to $150,000
and $25,000 per month, respectively;
o increase expenditures on administration from the current levels of
$50,000 per month to $100,000 per month;
o increase monthly expenditures on customer service activities from
$2,000 per month to $15,000 per month; and
o establish strategic vendor relationships by hiring two merchandisers
and ensuring the Company has the capabilities to integrate its
software and hardware.
The Company must raise additional funds as a result of the planned
significant increase in its operating expenditures. The Company anticipates that
it will require an additional $4.0 million to $6.0 million in order to fund its
operations over the next twelve months. The Company currently has sufficient
working capital to support its operations through October 1999 and is in the
process of obtaining a short-term loan for approximately $400,000 in order to
support its operations until additional financing is available. The Company is
currently exploring additional financing alternatives, including the possibility
of a private equity offering. There can be no assurance, however, that such
financing will be available to the Company or, if it is, that it will be
available on terms acceptable to the Company. If the Company is unable to obtain
the financing necessary to support its operations, its may be unable to continue
as a going concern.
The Company has a limited operating history upon which to base an
evaluation of its business. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets such as electronic commerce. These
risks include, but are not limited to, rapid technological change, inability to
manage growth, competition from more established companies, dependence on
suppliers, internal system problems, risks relating to year 2000 issues,
inability to obtain sufficient financing and an unproven business record.
Results of Operations
The Company was formed on August 17, 1984, but did not commence operations
until January 1999. The Company incurred expenses of $1,000 during the initial
incorporation in 1984 and did not incur any further expenses until 1998 when the
Company incurred further expenses of $2,079 for professional fees in preparing
audited financial statements. Accordingly, discussions of periods prior to
January 1999 have not been included. No proforma statements of prior years are
presented because the subsidiary, SSI, was not incorporated until January 1999
and did not have any operations until June 1, 1999.
All operations of the Company were conducted through the Company from
January 1999 to May 31, 1999. In May 1999, the Company acquired SSI, which had
been inactive from inception to May 31, 1999. On June 1, 1999, the Company has
transferred all of its operations to SSI. The Company accounted for the
acquisition of SSI at
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nil value because of the common ownership between the Company, SSI and PLIC.
SSI's only asset at the time of acquisition was the Strategic Alliance Agreement
with PLIC signed on February 4, 1999. SSI's cost for the agreement was a
$150,000 cash payment to PLIC. Because of the common ownership between SSI and
PLIC, the $150,000 payment is treated as a preferential distribution to
shareholders and is recorded in the consolidated financial statements as a
reduction in equity.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue. The Company generated no revenue for the six-month period ended
June 30, 1999 and the six-month period ended June 30, 1998.
Cost of Revenue. The Company incurred no cost of revenue for the six-month
period ended June 30, 1999 and six-month period ended June 30, 1998.
Technical and System Development Expenses. Technical and system development
expenses were $137,324 for the six months ended June 30, 1999 compared with no
expenses for the six months ended June 30, 1998. Technical and system
development expenses consist primarily of expenses incurred for the development
and maintenance of the software required to support the Company's online stores,
including employee compensation and the cost of developing and improving store
content, Internet connectivity, operations and reporting. The significant costs
were payroll and consulting expenses of $87,664 for the six months ended June
30, 1999 relating to the design of its information and electronic data
interchange systems. The Company expects that technical and systems development
expenses will continue to increase for the foreseeable future.
Sales and Marketing Expenses. Sales and marketing expenses for the six
months ended June 30, 1999 were $54,185 compared with no expenses for the six
months ended June 30, 1998. Sales and marketing expenses consist of costs
associated with designing and marketing the Company's online stores. The
increase primarily reflected the commencement of the Company's e-commerce
activities in January 1999, an increase in the number of employees and
preliminary development of the Company's promotional materials. Payroll expenses
relating to merchandising, advertising and promotion department employees were
$27,343 for the six months ended June 30, 1999. The Company expects that sales,
advertising and marketing expenses will continue to increase significantly for
the foreseeable future as it continues to expand its operations.
General and Administrative Expenses. General and administrative expenses
consist of management compensation, rent, professional services, telephone
expense, travel and other general corporate expenses. General and administrative
expenses were $258,314 for the six months ended June 30, 1999 compared with no
expenses for the six months ended June 30, 1998. This increase reflected the
hiring of additional management, increased facilities charges and substantially
increased activity levels to support the expansion of the Company's operations,
all of which were undertaken in early 1999. Payroll expenses relating to general
and administrative personnel were $93,216 in the six months ended June 30, 1999.
Professional fees were $73,096 in the six months ended June 30, 1999 reflecting
the cost of raising funds and signing of agreements. Travel and accommodation
expenses were $36,971 in the six months ended June 30, 1999.
Income Taxes. Shopping Sherlock has not generated any taxable income to
date and therefore has not paid any federal income taxes since inception.
Deferred tax assets created primarily from net operating loss carryforwards have
been fully reserved as management is unable to conclude that future realization
is more likely than not.
Liquidity and Capital Resources
As at June 30, 1999, the Company consolidated cash position was $593,773
and the consolidated working capital was $551,515.
Since inception, the Company has financed its operations solely from
capital contributions from stockholders. During the six-month period ended June
30, 1999 the Company received proceeds of $1,250,000 from the sale of common
stock. The Company currently has sufficient working capital to support its
operations through
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<PAGE>
October 1999 and is in the process of obtaining a short-term loan for
approximately $400,000 in order to support its operations until additional
financing is available. The Company is also currently exploring additional
financing alternatives, including the possibility of a private equity offering
of between $4.0 million to $6.0 million before November 1999 to fund the
Company's working capital requirements for the next twelve months. There can be
no assurance, however, that such financing will be available to the Company or,
if it is, that it will be available on terms acceptable to the Company. If the
Company is unable to obtain the financing necessary to support its operations,
its may be unable to continue as a going concern.
Net cash used in operating activities was $425,753 for the six-month period
ended June 30, 1999, including a net loss of $455,901. The Company's current
operating expenditures are approximately $150,000 per month and the Company
plans to increase its operating expenditures to $500,000 a month in order to
expand its operations. The Company has recently begun generating revenues and
anticipates that cash flow from operations will be sufficient to fund its cash
requirements by September 2000.
The Company incurred capital expenditures of $99,784 in the six-month
period ended June 30, 1999. These expenditures are primarily for computer
equipment and furniture and fixtures associated with the Company's continued new
employee growth, new facilities and continued systems development.
The Company has entered into a lease for its office space located in
Bellevue, Washington. The Company's future minimum payments on the lease are
$10,338 for 1999, $41,352 for 2000 and $10,338 for 2001.
The Company currently has no commitments for any credit facilities such as
revolving credit agreements or lines of credit that could provide additional
working capital. Based on its existing capital resources, the Company believes
that it will be able to fund operations through October 1999. The Company's
capital requirements depend on several factors, including the success and
progress of product development programs, the resources devoted to developing
products, the extent to which products achieve market acceptance, and other
factors. The Company anticipates that it will require substantial additional
financing to fund its working capital requirements. There can be no assurance,
however, that additional funding will be available or, if available, that it
will be available on terms acceptable to the Company. If adequate funds are not
available, it may not be able to continue servicing its existing e-business
services client, EYI, or to develop new clients in the e-business services
segment. In addition, the Company would likely be required to stop development
on its Internet Web sites and cease operations altogether. There can be no
assurance that the Company will be able to raise additional cash if its cash
resources are exhausted. The Company's ability to arrange such financing in the
future will depend in part upon the prevailing capital market conditions as well
as the Company's business performance.
The Company has been in the development stage since its inception. It has
had no significant operating revenue to date, has accumulated losses of
$458,980, and will require additional working capital to complete its business
development activities and generate revenue adequate to cover operating and
further development expenses. This raises substantial doubt as to the Company's
ability to continue as a going concern.
Market Risk
Market risk inherent in financial instruments outside the financial
statements is considered immaterial.
Year 2000 Issue
The year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (i.e. December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming will default to 01/01/1900 instead of 01/01/2000, and
calculations using or reporting the date will not be correct and errors will
arise. To prevent this from occurring, information systems need to be updated to
ensure they recognize the year 2000.
Since March 1999, the Company has been assessing its exposure to risks
relating to the year 2000 issue. These analysis and remediation issues are
addressed in a four-phase plan of action.
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<PAGE>
Phase I - Inventory and Risk Assessment. This Phase requires an inventory
and assessment of the business and information systems used by the Company,
including desktop hardware and software, network hardware and software, and
telephone systems. The Company uses Intel-based PC desktop products. In
connection with a review of this hardware the Company has determined that all
systems are year 2000 compliant and contain four digit date codes. In addition
the Company uses "off the shelf" software for desktop applications. The
Company's existing products are all year 2000 compliant and contain four digit
date codes. As a result, the Company believes it has completed this Phase. The
Company's Internet Web sites are year 2000 compliant. The Company utilizes
software produced by Red Hat, Inc., T.c.X. DataKonsult A.B., and the Apache
Group. Red Hat, Inc. has advised the Company that it has been certified as Year
2000 compliant by an independent third party. The other parties have advised the
Company that they are also Year 2000 compliant. The Company has made every
effort to use this software in a way that is Year 2000 compliant. The Company
does not have a formalized contingency plan in case the software provided by
these companies fails on January 1st, 2000, or February 29, 2000. However, the
Company has tested its software to be compatible with other systems and believes
that it can switch with minimal effort and disruption should it need to.
Phase II - Remediation Cost Estimation. This Phase involves the analysis of
each year 2000 compliance issue, determination of how such risks will be
remediated and the cost of such remediation. As indicated, the Company does not
anticipate needing to replace any additional hardware or software. Because of
the Company's limited operating history, it has not incurred significant time or
expense in connection with transferring data to any upgraded desktop software.
The Company believes it has completed this Phase.
Phase III - Remediation. This Phase includes the replacement or correction
of any necessary business or information systems. This Phase is complete for
both the information technology systems and the non-information technology
business systems of the Company.
Phase IV - Remediation Testing. This Phase includes the future date testing
of all remediation efforts made in Phase III to confirm that the changes made
bring the affected systems into compliance, no new problems have arisen as a
result of the remediation, and that all new systems which replaced non-compliant
systems are year 2000 compliant regardless of whether vendors represent that
such systems are year 2000 complaint. The Company believes it has completed this
Phase and is therefore year 2000 compliant.
Third Party Relationships. Even if the internal systems of the Company are
not materially affected by the year 2000 problem, the Company's business,
financial condition and results of operations could be materially adversely
affected by disruption in the operation of enterprises with which the Company
interacts. The Company currently relies or plans to rely on third-party
companies in connection with the distribution of products contemplated to be
sold over its Internet Web sites, credit card processing and other business
functions. In addition, the Company intends to rely upon PLIC to provide
additional marketing and support services for the Company. The Company has made
inquiries of all third parties with which it does business and, to date, has
received responses from approximately 80% of such parties that their systems are
year 2000 compliant. Of this percentage, approximately 75% have provided us
written confirmation of their compliance. The Company has not yet received
responses from PLIC.
The Company believes that the expected cost and availability of resources,
to recover information not properly processed after December 31, 1999, will not
exceed $20,000. However, there can be no assurance that the Company's year 2000
remediation efforts, or those of third parties will be properly and timely
completed, and the failure to do so could have a material adverse effect on the
Company, its business, results of operation, and its financial condition. In
particular, the Company has not yet completed its assessment of the year 2000
readiness of its significant third-party service providers. Completion of this
assessment may result in the identification of additional issues, which could
have a material adverse effect on the Company's results of operations. In
addition, important factors that could cause results to differ materially
include, but are not limited to, the ability of the Company to successfully
identify systems which have a year 2000 issue, the nature and amount of
remediation effort required to fix the affected system, and the costs and
availability of labor and resources to successfully address the year 2000
issues.
The worst-case scenario pertaining to the year 2000 issue would be an
overall failure of the Internet, electronic and telecommunications
infrastructure. In addition, the systems and services provided by the Company's
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<PAGE>
third-party vendors may fail to be year 2000 compliant despite their
representations to the contrary. The failure by these entities or systems to be
year 2000 compliant could result in a systemic failure beyond the Company's
control, which could also prevent users from accessing the Company's Internet
Web sites, which would have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company is continuing to formulate its year 2000 contingency plans. The
Company views its dependence on critical suppliers and the Internet as its
primary exposure to potential year 2000 concerns. The Company will continue to
evaluate potential alternatives to reduce its dependence on those suppliers, and
secure alternate supplies in the event that any supplier experiences significant
business interruption as a result of year 2000 or other concerns. Development of
the year 2000 contingency plans is expected to be substantially complete by the
end of November 1999.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including some types of
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133 is effective for fiscal years beginning
after June 15, 2000 and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997. The Company does not expect the
adoption of the accounting pronouncement to have a material effect on its
financial position or results of operations.
ITEM 3 PROPERTIES
The Company currently leases approximately 1,723 square feet of office
space located at Suite 152, 11201 S.E. 8th Street, Bellevue, Washington, 98004.
The lease is for a twenty-one and one-half month term commencing June 15, 1999
and is at a rate of $41,352 per year.
The Company leases approximately 2,400 square feet of office space in
Vancouver, Canada on a month-to-month basis. The rent payable under the lease is
$5,400 per month. See "Item 7 Certain Relationships and Related Transactions."
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the number of
shares of Common Stock owned beneficially as of September 30, 1999 by: (i) each
person known to the Company to own more than five percent (5%) of any class of
the Company's voting securities; (ii) each director of the Company; and (iii)
all directors and officers as a group. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the
shares shown.
<TABLE>
Amount and Nature of Percent
Title of Class Name and Address of Beneficial Owner Beneficial Owner of Class(1)
- -------------- ------------------------------------ ---------------- -----------
<S> <C> <C> <C>
Common Stock Richard Stewart (2) 1,800,000 20.0%
Common Stock All directors and officers as a group (1 person) 1,800,000 20.0%
</TABLE>
- --------------------
(1) Based on an aggregate 9,000,000 Shares outstanding as of September 7, 1999.
(2) Represents 600,000 shares held by the Stewart Family Trust of which Mr.
Stewart is a beneficiary and 1,200,000 shares held by PLIC, a corporation
controlled by Mr. Stewart. The address of Mr. Stewart is 24254 San Fernando
Road, Newhall, California, 91321.
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<PAGE>
The Company is not aware of any arrangement which might result in a change
in control in the future.
ITEM 5 DIRECTORS AND EXECUTIVE OFFICERS
Executive Officers and Directors
The following table sets forth certain information concerning the Company's
executive officers and directors as of September 30, 1999:
Name Age Position with the Company
- ---- --- -------------------------
Phillip Garratt* 48 President, Chief Executive Officer and
Director
Mitchell Eggers* 37 Chief Operating Officer and Director
Patrick McGrath 27 Chief Financial Officer
Jan Walter 27 Chief Technical Officer
Richard Stewart 53 Director
Jasbir Dhaliwal* 41 Director
Raeanne Steele 45 Executive Vice-President of Sales and
Marketing and Director
- ---------------------
* Audit Committee Member
Philip J. Garratt has served as the Company's President, Chief Executive
Officer and Director since June 1999. Mr. Garratt also currently works as an
independent consultant. From 1994-1998, Mr. Garratt served as president and
chief executive officer of CNH de Venezuela, a provider of high capacity
wireless telephony and data transmission services in Venezuela. In 1993, Mr.
Garratt founded Norcom Networks Corporation, a provider of value-added fixed and
mobile communication services within North America. Prior to starting Norcom,
Mr. Garratt was president and CEO of Cycomm International, Inc., a
telecommunications equipment company which provided secure wireless products for
voice and data transmission.
Mitchell Eggers has served as the Company's Chief Operating Officer and
Director since June 1999. From 1997 to 1999, Dr. Eggers was a researcher and
consultant for development stage technology companies. From 1991 to 1995 Dr.
Eggers was a research demographer for the Economic Commission of Europe, United
Nations, Geneva, Switzerland. Prior to that, he was a postdoctoral fellow at the
Population Research Center, University of Chicago. His Ph.D was granted in 1990
by the University of Pennsylvania. Currently Dr. Eggers serves on the Board of
Directors of Dejour Mines Ltd., a Vancouver-based mining company, and Intelispan
Inc., a public virtual private networking company.
Patrick McGrath has served as the Company's Chief Financial Officer since
April 1999. Mr. McGrath also currently works as an independent consultant. From
October 1996 to March 1999, Mr. McGrath worked as an accountant with
International Portfolio Management, a management consulting and accounting
services firm. Mr. McGrath received his Bachelor of Commerce degree from
Memorial University of Newfoundland in 1995 and is a Certified General
Accountant.
Jan Walter has served as the Company's Chief Technical Officer since June
1999. From 1994 to 1999, Mr. Walter has been a freelance computer systems and
software consultant and is also the owner of Centurion Services, a systems
consulting and development company. Mr. Walter has authored a book on the C++
programming language for Macmillan Computer Publishing, as well as having
contributed to a book on the Linux Operating System.
Richard Stewart has served as a director of the Company since April 1999.
In 1991, Mr. Stewart co-founded and is currently President and CEO of Premier
Lifestyles International Corporation, a marketing company.
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<PAGE>
Jasbir Dhaliwal has served on the Company's board of directors since April
1999. Mr. Dhaliwal has also served as an Associate Professor with the Technical
University of British Columbia since 1998 and also serves as Director of its
Centre for Electronic Commerce. Prior to that he was at the National University
of Singapore since 1993 where he served as the Deputy Director of its Centre for
Management of Technology. He obtained his MBA and Ph.D degrees from the
University of British Columbia in 1986 and 1993, respectively.
Raeanne Steele has served as the Executive Vice-President of Sales and
Marketing since January 1999 and as a director since June 1999. Prior to that
time, she served as a consultant providing contractual services to the private
and public sector in business development, market research, business planning,
and communications. Ms. Steele received a bachelor's degree in education and an
MBA in marketing from the University of Alberta. She also holds a Journalism
Certificate from Langara College, Vancouver. She is currently enrolled in the
E-Commerce Certificate program at the Technical University of British Columbia.
The Company's former President, John Jones, resigned on June 22, 1999. Mr.
Jones and the Company mutually agreed to terminate their relationship based on a
perceived conflict between Mr. Jones's background and experience and the
Company's proposed business plan.
Board of Directors
Each member of the Board of Directors is elected annually and holds office
until the next annual meeting of shareholders or until his successor has been
elected or appointed, unless his office is earlier vacated in accordance with
the Bylaws of the Company. Officers serve at the discretion of the Board and are
appointed annually. The Board currently has one committee, the Audit Committee.
None of the Company's directors or executive officers are parties to any
arrangement or understanding with any other person pursuant to which said
individual was elected as a director or officer of the Company. No director or
executive officer of the Company has any family relationship with any other
officer or director of the Company.
Audit Committee
The Audit Committee recommends independent accountants to the Company to
audit the Company's financial statements, discusses the scope and results of the
audit with the independent accountants, reviews the Company's interim and
year-end operating results with the Company's executive officers and the
Company's independent accountants, considers the adequacy of the internal
accounting controls, considers the audit procedures of the Company and reviews
the non-audit services to be performed by the independent accountants. The
members of the Audit Committee are Jasbir Dhaliwal, Philip Garratt and Mitchell
Eggers.
ITEM 6 EXECUTIVE COMPENSATION
Compensation of Executive Officers
The Company did not pay any compensation to its executive officers for the
fiscal year ended December 31, 1998. Development activity of the company
commenced in January 1999.
Employment and Consulting Agreements
Effective June 24, 1999, Phillip Garratt, Patrick McGrath, Mitchell Eggers,
Jan Walter and Raeanne Steele have entered into employment agreements with the
Company, providing for annual salaries of $120,000, $40,800, $120,000, $60,000
and Cdn.$120,000, respectively. The employment for each of the above officers is
"at will" and may be terminated without cause at any time, subject to one
month's notice. Employment may be terminated for cause without notice. In
addition to base salary, Mr. Garratt, Mr. McGrath, Mr. Eggers, Mr. Walter and
Ms. Steele have the right to receive stock option grants to purchase 150,000,
80,000, 165,000, 75,000 and 100,000 shares, respectively, of the Company's
common stock. On July 26, 1999, the options were granted at an exercise price of
$5-$6 depending on the year the options vest. The stock closed at $5.94 on the
date of grant. The employment agreements are governed by the laws of the state
of Washington.
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<PAGE>
In April 1, 1999, the Company entered into a Consulting Agreement (the
"TUBC Agreement") with Technical University of British Columbia ("TUBC"). Dr.
Jasbir Dhaliwal, a director of the Company, is an Associate Professor at TUBC
and is providing services to the Company under the TUBC Agreement. Pursuant to
the Terms of the TUBC Agreement, TUBC will provide consulting services to the
Company in exchange for a consulting fee of Cdn.$5,113 per month for a period of
12 months. The initial term of the TUBC Agreement is 12 months and may be
terminated by either party on sixty (60) days' notice.
Compensation of Directors
During the most recently completed fiscal year ended December 31, 1998,
there was no compensation paid by the Company to the directors for their
services as directors except as otherwise disclosed herein. There are no
standard arrangements for any such compensation to be paid other than
reimbursement for expenses incurred in connection with their services as
directors.
1999 Stock Option Plan
In June 1999, the Company's board of directors adopted the 1999 Stock
Option Plan. The Stock Option Plan will terminate on May 10, 2004. The Stock
Option Plan is administered by the board of directors (or a committee thereof)
and provides that options may be granted to officers, directors, employees and
other persons, including consultants, as determined by the Plan Administrator in
its sole discretion.
The options issued under the Stock Option Plan are exercisable at a price
fixed by the Plan Administrator, in its sole discretion; provided that options
granted in substitution for outstanding options of another corporation in
connection with a merger, consolidation, acquisition of property or stock or
other reorganization involving such corporation and the Company or any of the
Company's subsidiaries may be granted with an exercise price equal to the
exercise price for the substituted option of the other corporation, subject to
adjustment. Subject to exceptions in the Stock Option Plan relating to death,
divorce and estate planning techniques, options granted under the Stock Option
Plan are non-assignable and non-transferable.
The maximum number of the shares reserved for issuance under the Stock
Option Plan including options currently outstanding is 1,000,000 shares. As of
September 7, 1999, 794,000 stock options have been granted under the plan. The
options vest over a period of three years with approximately a third of the
options becoming eligible at the end of each respective year. The options
vesting in the first year have an exercise price of $5 a share and the options
vesting in the second and third years have an exercise price of $6 a share. The
market value of the stock at the time of grant was $5.94. The Company will
record a compensation expense of $260,000 because the options granted at $5 were
below market value at the time of grant. The expense will be amortized over the
next year to coincide with the shares vesting in year one.
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise disclosed herein, no director, senior officer,
principal shareholder, or any associate or affiliate thereof, had any material
interest, direct or indirect, in any transaction since the beginning of the last
financial year of the Company that has materially affected the Company, or any
proposed transaction that would materially affect the Company, except for an
interest arising from the ownership of shares of the Company where the member
will receive no extra or special benefit or advantage not shared on a pro rata
basis by all holders of shares in the capital of the Company.
On May 26, 1999, the Company acquired SSI, an entity controlled by Richard
Stewart, a director of the Company. The sole asset of SSI was a strategic
alliance agreement it had with PLIC, an entity also controlled by Mr. Stewart.
Under the terms of the acquisition, entities controlled by Mr. Stewart received
an aggregate of 1,800,000 shares of the Company's common stock.
From January 1999 to June 30, 1999, the Company reimbursed 5215 Holdings
Inc. ("5215"), a company for which Phillip Garratt is the sole shareholder and
serves as a director, $214,750 for costs associated with the start-up of the
Company's product development office in Vancouver for the period January 1999 to
June 30, 1999. The Company pays 5215 rent of $5,400 a month for the premises in
Vancouver and has a damage deposit on account of $11,500 for the premises. This
is an informal agreement and may be cancelled at any time. The Company continues
to reimburse 5215, at cost, for general and administrative expenses incurred by
5215 on the Company's behalf.
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<PAGE>
On February 4, 1999, the Company, through its wholly-owned subsidiary,
entered into a Strategic Alliance Agreement with PLIC, a company controlled by
Mr. Stewart. Under the terms of the agreement, PLIC granted the Company the
right to directly market the Company's online stores to members of PLIC's rebate
shopping network, to place links to its Web sites on Web sites sponsored by PLIC
and to distribute memberships in PLIC's rebate shopping network. In addition,
PLIC agreed to provide or to introduce the Company to transaction processing,
product fulfillment and helpdesk services providers and to give the Company
access to its list of participating merchants and product inventory on an
ongoing basis. In exchange, the Company agreed, on an exclusive basis, to sell,
market and honor PLIC product rebate network memberships and, subject to certain
exceptions, to use PLIC's transaction processing and product fulfillment
services. The Strategic Alliance Agreement is for a perpetual duration, but may
be terminated by either party for cause. The Company paid to PLIC a one-time
payment of $150,000 on the signing of the Strategic Alliance Agreement.
PLIC has introduced the Company to third-party service providers who have
agreed to provide transaction processing and product fulfillment services to the
Company. Specifically, the Company has engaged Harris Bank Trust and Savings of
Chicago, Illinois to provide credit card processing for all transactions on its
Internet Web sites and CBS to provide product fulfillment services. The
Company's relationship with CBS is on a purchase order basis and may be
terminated by either party without cause. The Company also has a three year
contract with Harris Bank. If the Company's relationship with Harris Bank or CBS
were to terminate, it could delay the opening of its online retail stores or, if
it occurred after opening, it could adversely affect the Company's ability to
service its retail customers and could delay or interrupt the products and
services provided by the Company on its Internet Web sites.
Under the terms of the Strategic Alliance Agreement with PLIC, the Company
has agreed to share revenues with PLIC and other third parties that are
generated from rebates on product sales by participating merchants. The Company
is obligated to pay PLIC a flat fee for every new member of the rebate network
that is recruited by the Company. The allocation of the rebate amount varies
depending upon whether the ultimate customer is a participant in the rebate
network. For example, assuming the ultimate customer is a member of the rebate
network, the rebate would be allocated as follows:
o 25% of the rebate is credited to the customer;
o 30% of the rebate is remitted to PLIC;
o 30% of the rebate is remitted to the organization which issued the
membership in the rebate network to the customer (e.g., the Company,
PLIC or other organization to which the customer belongs);
o 10% is remitted to the organization that recruited the merchant
selling the product; and
o 5% is remitted to the operator of the Web site (e.g., PLIC for
www.source4shopping.com or the Company for www.shoppingsherlock.com
and www.usrebatewarehouse.com)
When the ultimate customer is not a member of the rebate network, the total
rebate is allocated as follows:
o 25% to the merchant that sold the product; and
o 75% to PLIC.
The Company and PLIC have further agreed that PLIC will provide
non-technical customer support for EYI and any other e-business services clients
introduced to the Company by PLIC. The Company made a one-time payment to PLIC
of $10,000 in connection with establishing the customer support services for
EYI. PLIC is solely responsible for all costs associated with the provision of
non-technical customer support for EYI and any other e-business services clients
introduced to the Company by PLIC. The Company is responsible for all costs
associated with the provision of technical customer support for EYI and any
other e-business services clients introduced to the Company by PLIC.
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<PAGE>
On February 15, 1999, the Company entered into a Consulting Agreement for
Non-Technical Services (the "Consulting Agreement") with John C. Jones, the
former President and a former director of the Company. Pursuant to the terms of
the Consulting Agreement, Mr. Jones provided consulting services to the Company
in exchange for a $5,000 per month fee and reimbursement of expenses previously
approved by the Company that relate to outside services retained by Mr. Jones,
any other direct costs incurred, and travel expenses. The term of the agreement
was six (6) months and ended on August 15, 1999.
In June 1999, the Company entered into employment agreements with Philip
Garratt, Mitchell Eggers, Raeanne Steele, Patrick McGrath and Jan Walter. The
Company has also entered into Consulting Agreements with John C. Jones, a former
director, which terminates on August 15, 1999, and also with Dr. Jasbir
Dhaliwal, a current director of the Company. See "Management -- Employment and
Consulting Agreements."
ITEM 8 LEGAL PROCEEDINGS
The Company is not a party to, and none of the Company's property is
subject to, any pending or threatened legal proceeding.
ITEM 9 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's shares have traded on the NASD Over-The-Counter Bulletin
Board Market (the "OTCBB") since March 31, 1999 under the symbol SSLK. On July
2, 1999, the Company ceased trading on the OTCBB and began trading on the
Over-The-Counter "Pink Sheets". The following is a summary of trading, on a
calendar quarter basis, in the shares on the OTCBB and the "Pink Sheets" during
1999:
The NASD OTC Bulletin Board
<TABLE>
---------------------------- -------------------------- ------------------------- --------------------------
Quarter Presented High Low Volume
---------------------------- -------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
1st Quarter --1999 $6.25 $5.00 190,000
(on March 31, 1999)
---------------------------- -------------------------- ------------------------- --------------------------
2nd Quarter -- 1999 $9.75 $5.62 727,100
---------------------------- -------------------------- ------------------------- --------------------------
3rd Quarter -- 1999 $8.00 $2.25 167,150
---------------------------- -------------------------- ------------------------- --------------------------
</TABLE>
The price for the Company's shares on the "Pink Sheets" on September 27,
1999, was $8.00 (High) and $8.00 (Low), and the close price was $8.00. The
prices reflected represent interdealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
Other than described above, the Company's shares are not and have not been
listed or quoted on any other exchange or quotation system.
As of September 30, 1999, the Company had approximately 38 shareholders of
record (including nominees and brokers holding street accounts) of the Company's
shares.
As of September 30, 1999, 794,000 shares of the Company's common stock are
subject to outstanding options.
The Company has never paid dividends on its shares. The Company currently
intends to retain earnings for use in its business and does not anticipate
paying any dividends in the foreseeable future.
ITEM 10 RECENT SALES OF UNREGISTERED SECURITIES
On February 17, 1999, the Company issued 5,000,000 shares of common stock
at a price of $0.05 per share for an aggregate purchase price of $250,000. The
shares were issued to the following persons: Brian James, Prostar Ltd., Eric
Silinger, Peter Garratt, Gary James, Robert Parker, David Flower, Kole
Jovanovski, Zorica Kostovska,
-35-
<PAGE>
Kiril Pancevski, Pero Jovanov, Filip Petrovski, Slavko Trifunovski, Epicenter
Venture Finance Ltd., Peter Snape, Savannah Foundation Ltd., Keith Moriarty,
Marjorie Surbey, Jacques Conforti and Christopher Brown. The shares were issued
to holders outside the United States pursuant to an exemption from registration
under Rule 504 of Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"). The shares were issued to the above persons in the following
amounts:
Brian James 250,000
Prostar Ltd. 250,000
Eric James Silinger 250,000
Peter Garratt 250,000
Gary Phillip James 250,000
Robert Allan Parker 250,000
David Stapleton Flower 250,000
Kole Jovanovski 250,000
Zorica Kostovska 250,000
Kiril Pancevski 250,000
Pero Jovanov 250,000
Filip Petrovski 250,000
Slavko Trifunovski 250,000
Epicenter Venture Finance Ltd. 250,000
Peter Snape 250,000
Savannah Foundation Ltd. 250,000
Keith Moriarty 250,000
Marjorie Surbey 250,000
Jacques Conforti 250,000
Christopher Brown 250,000
Total 5,000,000
On April 16, 1999, the Company issued 1,000,000 shares of common stock at a
price of $1.00 per share for an aggregate purchase price of $1,000,000, pursuant
to agreements dated March 25, 1999. The shares were issued to the following
persons: Jim Fitzgerald, Jer O'Callaghan, Jim O'Callaghan, Brian Weldon, Anthony
Forde, Tony Duddy, Thomas O'Gorman, Greenland Investments Inc., Hugh Farrington,
David O'Brien, Gerard Murray, Gerard Walsh, Brian Gillespie, Noel Dineen,
Richard O'Shea, Ernest Holloway and Guernroy Ltd. The shares were issued to
holders outside the United States pursuant to an exemption from registration
under Rule 506 of Regulation D under the Securities Act. The shares were issued
to the above persons in the following amounts:
Jim Fitzgerald 482,000
Jer O'Callaghan 10,000
Jim O'Callaghan 100,500
Brian Weldon 7,000
Anthony Forde 7,500
Tony Duddy 42,000
Thomas O'Gorman 10,000
Greenland Investments 100,000
Hugh Farrington 35,000
David O'Brien 10,000
Gerard Murray 15,000
Gerard Walsh 10,000
Brian Gillespie 13,500
Noel Dineen 7,500
Richard O'Shea 50,000
Ernest Holloway 50,000
Guernroy Ltd. 50,000
Total 1,000,000
-36-
<PAGE>
On May 26, 1999, the Company issued 2,000,000 shares of common stock at a
deemed value of $2,000,000 or $1.00 a share in connection with the Company's
acquisition of SSI. The acquisition agreement embodied terms and conditions as
set forth under a previous agreement dated February 17, 1999 at which time the
Company was negotiating a private placement for $1 a share. The shares were
issued to the following shareholders of SSI, The Becker Family Trust, Stewart
Family Partners and PLIC. The shares were issued pursuant to an exemption from
registration under Rule 506 of Regulation D under the Securities Act. The shares
were issued to the above persons in the following amounts:
Becker Family Trust 200,000
Stewart Family Partners 600,000
PLIC 1,200,000
Total 2,000,000
ITEM 11 DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company's authorized capital consists of 50,000,000 shares of common
stock, $.001 par value. At September 7, 1999, there were 9,000,000 shares issued
and outstanding and an additional 1,000,000 shares have been reserved for
issuance under the Company's 1999 Stock Option Plan.
All shares are of the same class and have the same rights, preferences and
limitations. The holders of the shares are entitled to dividends in cash,
property or shares as and when declared by the Board of Directors out of funds
legally available therefor, to one vote per share at meetings of security
holders of the Company and, upon liquidation, to receive such assets of the
Company as are distributable to the holders of the shares. Upon any liquidation,
dissolution or winding up of the business of the Company, if any, after payment
or provision for payment of all debts, obligations or liabilities of the Company
shall be distributed to the holders of shares. There are no pre-emptive rights
or conversion rights attached to the shares. There are also no redemption or
purchase for cancellation or surrender provisions, sinking or purchase fund
provisions, or any provisions as to modification, amendment or variation of any
such rights or provisions attached to the shares of the Company.
ITEM 12 INDEMNIFICATION OF OFFICERS AND DIRECTORS
Florida law permits the Company indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
proceeding by reason of the fact that he is or was a director or officer of the
Company or any other person designated by the board of directors which may
include any person serving at the request of the Company as a director, officer,
employee, agent, fiduciary or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other entity or enterprise, in each
case, against certain liabilities including damages, judgments, amounts paid in
settlement, fines, penalties and expenses including attorneys' fees and
disbursements, except where such indemnification is expressly prohibited by
applicable law, where such person has engaged in willful misconduct or
recklessness or where such indemnification has been determined to be unlawful.
Such indemnification as to expenses is mandatory to the extent the individual is
successful on the merits of the matter. Florida law also permits the Company to
provide similar indemnification to employees and agents who are not directors or
officers. The determination of whether an individual meets the applicable
standard of conduct may be made by the disinterested directors, independent
legal counsel or the shareholders. Florida law also permits indemnification in
connection with a proceeding brought by or in the right of the Company to
procure a judgment in its favor. Insofar as indemnification for liabilities
arising under the SEC may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is therefore
unenforceable.
-37-
<PAGE>
ITEM 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants
Financial Statements
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statement of Changes in Stockholders Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statement
-38-
<PAGE>
ITEM 14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Barry L. Friedman, P.C., Certified Public Accountant previously served as
the auditor for the Company. Barry L. Friedman, P.C., Certified Public
Accountant resigned as the auditor for the Company due to the Company's listing
on the OTCBB during 1999 and BDO Seidman, LLP was appointed as auditor for the
Company and its subsidiaries. The decision to change auditors was approved by
the Company's board of directors. There have not been disagreements with the
previous auditor on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures. Within the past two
fiscal years, the Company's previous auditor has not issued a report containing
a disclaimer adverse or qualified opinion.
ITEM 15 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements and related schedules are included in
this Item:
Report of Independent Certified Public Accountants:
Consolidated Balance Sheets as of June 30, 1999, December 31, 1998 and
December 31, 1997;
Consolidated Statements of Operation, Stockholder's Equity and Cash
Flows for the six months ended June 30, 1999 and each of the years in
the three-year period ended December 31, 1998 and for the period from
the date of inception (August 17, 1984) through June 30, 1999; and
Notes to Consolidated Financial Statement.
(b) Exhibits
Exhibit Number Description
- -------------- -----------
2.1* Agreement and Plan of Reorganization dated as of May 17,
1999 by and among the Registrant, Shopping Sherlock, Inc.
(Delaware) ("SSI") and Shopping Acquisition Corp.
3.1* Articles of Incorporation, as amended, of the Registrant
3.2* Bylaws of the Registrant
4.1* Form of Common Stock Share Certificate
10.1* 1999 Stock Option Plan
10.2* Form of Stock Option Agreement
10.3* Strategic Alliance Agreement: E-commerce, Marketing and
Operations dated February 4, 1999 by and between SSI and
Premier Lifestyles International Corp.
10.4* Form of Independent Contractor Services Agreement
10.5* Consulting Agreement for Non-Technical Services dated
February 15, 1999 by and between the Registrant and John C.
Jones
-39-
<PAGE>
Exhibit Number Description
- -------------- -----------
10.6* Consultant Agreement effective as of April 1, 1999 by and
between the Registrant and Technical University of British
Columbia
10.7* Employment Agreement dated June 24, 1999 by and between the
Registrant and Philip Garratt.
10.8* Employment Agreement dated June 24, 1999 by and between the
Registrant and Mitchell Eggers.
10.9* Employment Agreement dated June 24, 1999 by and between the
Registrant and Raeanne Steele.
10.10*
Employment Agreement dated June 24, 1999 by and between the
Registrant and Jan Walter.
10.11* Employment Agreement dated June 24, 1999 by and between the
Registrant and Patrick McGrath.
10.12* Lease Agreement dated May 21, 1999 by and between the
Registrant and Spieker Properties, L.P.
27.1 Financial Data Schedule.
- ------------------
*previously filed
-40-
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Consolidated Financial Statements
Six months ended June 30, 1999 (unaudited) and
Three years ended December 31, 1998
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Contents
================================================================================
Report of Independent Certified Public Accountants........................ 1
Financial Statements
Consolidated Balance Sheets............................................ 2
Consolidated Statement of Operations................................... 3
Consolidated Statement of Changes in Stockholders' Equity.............. 4
Consolidated Statement of Cash Flows................................... 5
Notes to Consolidated Financial Statements.............................6 - 10
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of
Shopping Sherlock, Inc.
We have audited the accompanying consolidated balance sheets of Shopping
Sherlock, Inc. (a development stage company) and its subsidiary ("the Company")
as of December 31, 1998 and December 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998 and for the period from
the date of inception (August 17, 1984) through December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Shopping Sherlock,
Inc. (a development stage company) and its subsidiary at December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 1998, and the period from the date
of inception (August 17, 1984) through December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company is in the development stage and
has generated no operating revenue to date and will need to raise additional
working capital for future development costs. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
Seattle, Washington
June 30, 1999
1
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
================================================================================
<TABLE>
(Unaudited) December 31, December 31,
June 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 593,773 $ - $ -
Prepaid expenses and deposits 20,348 - -
- -----------------------------------------------------------------------------------------------------------------------
Total Current Assets 614,121 - -
Furniture and Equipment, net 92,584 - -
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $ 706,705 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 43,296 $ - $ -
Due to related party 19,310 - -
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities 62,606 - -
- -----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders Equity
Common stock, $.001 par value; 50,000,000 shares authorized,
9,000,000, 1,000,000 and 100,000 issued and outstanding 9,000 1,000 100
Additional paid in capital 1,094,079 2,079 900
Deficit accumulated during the development stage (458,980) (3,079) (1,000)
- -----------------------------------------------------------------------------------------------------------------------
Total Stockholders Equity 644,099 - -
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders Equity $ 706,705 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Consolidated Statement of Operations
================================================================================
<TABLE>
Cumulative Amounts (unaudited)
from Six Months Ended Twelve Months Ended
Date of Inception June 30, December 31,
to ------------------------------- ----------------------------------
June 30, 1999 1999 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Sales and marketing $ 54,185 $ 54,185 $ - $ - $ - $ -
General and administrative 261,393 258,314 - 2,079 - -
Systems and business development 137,324 137,324 - - - -
Depreciation and amortization 7,200 7,200 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 460,102 457,023 - 2,079 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 1,122 1,122 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ 458,980 $ 455,901 $ - $ 2,079 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted $ 0.115 $ 0.115 $ - $ 0.005 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares of common
stock outstanding 3,976,516 3,976,516 100,000 445,833 100,000 100,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders Equity
================================================================================
<TABLE>
Deficit
Common Stock Accumulated
----------------------- during
Additional Development
Shares Amount Paid-in Capital Stage Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shopping Sherlock, Inc. Activities
(Formerly known as AIDA
Industries):
Issuance of common stock
for cash 100,000 $ 100 $ 900 $ - $ 1,000
Net Loss - - - (1,000) (1,000)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1985 100,000 100 900 (1,000) -
Activity January 1986 through
December 31, 1997 - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 100,000 100 900 (1,000) -
Issuance of Common stock for
reinstatement fees - July 20,
1998 900,000 900 1,179 - 2,079
Net Loss - - - (2,079) (2,079)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,000,000 1,000 2,079 (3,079) -
Sale of Common Stock for Cash
($.05/Share) 5,000,000 5,000 245,000 - 250,000
Sale of Common Stock for Cash
($1.00/Share) 1,000,000 1,000 999,000 - 1,000,000
Issuance of Common Stock for
Acquisition of Shopping Sherlock
- Delaware 2,000,000 2,000 (2,000) - -
Cash distributed to significant
shareholder - - (150,000) - (150,000)
Net Loss - - - (455,901) (455,901)
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (unaudited) 9,000,000 $ 9,000 $1,094,079 $(458,980) $ 644,099
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Consolidated Statement of Cash Flows
================================================================================
<TABLE>
INCREASE (DECREASE) IN CASH
Cumulative (unaudited) Twelve Months Ended
Amounts from Date Six Months December 31,
of Inception to Ended ------------------------------------
June 30, 1999 June 30, 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (458,980) $ (455,901) $ (2,079) $ - $ -
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 7,200 7,200 -
Change in assets and liabilities:
Prepaid expenses and deposits (20,348) (20,348)
Accounts payable 43,296 43,296 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (428,832) (425,753) (2,079)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Acquisition of subsidiary (150,000) (150,000)
Purchase of furniture and equipment (99,784) (99,784) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (249,784) (249,784) -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuing common stock for cash 1,253,079 1,250,000 2,079
Increase in due to related party 19,310 19,310 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,272,389 1,269,310 2,079 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 593,773 593,773 -
Cash, beginning of period - - -
Cash, end of period $ 593,773 $ 593,773 $ - - -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statement
================================================================================
NOTE 1:
Description of Business and
Summary of Significant
Accounting Policies
Operations - Shopping Sherlock, Inc. ("the Company") was incorporated
in the State of Florida on August 17, 1984, under the name of AIDA
Industries, Inc. ("AIDA"). From inception until July 20, 1998 there
was no activity within AIDA. On July 20, 1998, AIDA amended its
articles of incorporation to provide for a 1000:1 stock split, and to
apply for listing on the OTC Bulletin Board. On March 24, 1999 AIDA
changed its name to Shopping Sherlock, Inc.
Shopping Sherlock, Inc. ("SSI"), was organized and incorporated in the
State of Delaware on January 20, 1999, for the purpose of developing
and implementing an Internet based retail business providing discounts
and purchase rebates to its customers. On February 4, 1999, SSI
entered into a strategic marketing and operations agreement with
Premier Lifestyles International Corporation ("PLIC"), a direct
marketing and sales company, to provide certain Internet based
services to PLIC's existing customers. SSI paid PLIC a one-time fee of
$150,000 upon signing of the agreement for access to its customer
base. SSI received an advance of $150,000 from the Company to pay the
licensing fee to PLIC. SSI began operations June 1, 1999. SSI had no
operating activity in the five-month period ended May 31, 1999.
On May 26, 1999 the Company entered into an acquisition agreement with
SSI obtaining all rights and obligations under the agreement between
SSI and PLIC, whereby 2,000,000 shares of the Company's common stock
were issued to the shareholders of SSI for 100% of its common stock.
Because of the common ownership between SSI and PLIC, and the fact
that the majority shareholder of SSI and PLIC will hold a continuing
equity position in the Company in excess of 10%, the marketing
agreement acquired has been assigned no value in the Company's
financial statements. The $150,000 paid to SSI has been recorded as a
capital distribution to shareholders in the financial statements of
the Company.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and SSI. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Accounting Estimates - The Company's financial statements are prepared
in conformity with generally accepted accounting principles which
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from the estimates.
6
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statement
================================================================================
NOTE 1:
Description of Business and
Summary of Significant
Accounting Policies (continued)
Furniture and Equipment - Furniture and equipment are stated at cost.
Depreciation and amortization are computed utilizing straight-line and
accelerated methods over estimated useful lives ranging from 3 to 5
years.
Revenue Recognition - The Company anticipates there will be at least
two separate revenue producing activities: web site development and
e-business services for network marketing organizations, and on-line
sales of merchandise coupled with a rebate program for consumers.
Web site development is billed at the initial stages of development
but is recognized as revenue when the work has been completed. The
Company charges e-business customers monthly service fees and a
non-refundable one time setup fee. The Company shares both the monthly
service revenue and setup fees with PLIC. The Company recognizes the
net proceeds as revenue when the service is provided. The Company also
charges a fee for each transaction processed through its hosted Web
sites.
The Company plans to sell merchandise to consumers over the Internet.
It is anticipated that these transactions will be paid by credit card
and the Company will be the credit card merchant of record. These
transactions will be recorded at the aggregate retail value at the
time of shipment. The Company will provide an allowance for sales
returns based on its actual experience.
For consumers who wish to enroll in the Company's rebate shopping
program, the Company will charge a non-refundable annual account fee
that will be recognized as revenue over the subsequent 12 month
period. Additionally, the Company will receive a transaction fee for
each purchase made by the consumer from participating vendors. The
Company will recognize these fees as revenue when the sale is
recognized by the selling company.
Income Taxes - The Company accounts for income taxes in accordance
with the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," ("SFAS 109"). SFAS 109 requires
the recognition of deferred tax assets and liabilities for the
expected future income tax consequences of events that have been
recognized in a company's financial statements or tax return. Under
this method, deferred tax assets and liabilities are determined based
on the temporary differences between the financial statement carrying
amounts and their tax basis using enacted tax rates in effect in the
years in which the temporary differences are expected to reverse.
Valuation allowances are provided when management determines that the
realization of deferred tax assets fails to meet the more likely than
not standard imposed by SFAS 109.
7
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statement
================================================================================
NOTE 1:
Description of Business and
Summary of Significant
Accounting Policies (continued)
Net Loss Per Share - Basic loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding. Per
share information for all prior periods have been adjusted to reflect
the 1,000:1 stock split declared on July 20, 1998. As of June 30,
1999, the Company had no outstanding options or common stock
equivalents.
NOTE 2:
Development
Operations
The Company has been in the development stage since its inception. It
has had no operating revenues to date, has accumulated losses of
$458,980, and will require additional working capital to complete its
business development activities and generate revenues adequate to
cover operating and further development expenses. This raises
substantial doubt as to the Company's ability to continue as a going
concern.
The Company believes it can raise adequate working capital through
subsequent sales of its common stock in private placement
transactions. To date, the Company has raised $1.25 million in private
placements, and is attempting to raise an additional $4-$6 million
through another private placement. The Company is expected to enter
into a temporary loan of $400,000 to sustain itself until the private
placement is complete, which is expected by the end of November 1999.
The financial statements do not contain any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE 3:
Furniture and
Equipment
Furniture and equipment consists of the following:
<TABLE>
(unaudited) December 31,
June 30 --------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture $ 48,237 $ - $ -
Computer hardware 46,958 - -
Computer software 4,589 - -
---------------------------------------------------------------------------------------
99,784 - -
Less accumulated depreciation 7,200 - -
---------------------------------------------------------------------------------------
Furniture and equipment, net $ 92,584 $ - $ -
---------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statement
================================================================================
NOTE 4:
Income Taxes
At June 30, 1999 the Company has net deferred tax assets of $156,000
primarily due to net operating loss carry forwards, which begin to
expire in 2018. A 100% valuation allowance has been recorded against
the deferred tax asset as management has yet to establish that
recovery of this asset is more likely than not.
NOTE 5:
Operating Leases
In addition to the informal rent agreement discussed in Note 6, the
Company leases office space under a twenty-one and one half-month
operating lease commencing June 15, 1999. Future minimum lease
payments approximate $20,000 in 1999, $41,400 in 2000, and $10,400 in
2001.
NOTE 6:
Related Party Transactions
SSI has entered into a strategic marketing agreement with PLIC, and
has paid $150,000 as a one-time signing fee. The principals of PLIC
were the sole shareholders of SSI, and were issued 2,000,000 shares of
common stock in conjunction with the acquisition of SSI. Additionally,
one of the principals of PLIC will serve as a director of the Company.
The company obtained all the rights and obligations under the
agreement when it acquired SSI on May 26, 1999.
The marketing agreement grants to the Company a non-exclusive right to
utilize PLIC's existing customer and vendor databases in establishing
its own Internet based commerce site. Sales from the Company's site
may be to PLIC customers or other third parties. The Company and PLIC
will split a portion of the net proceeds of the transaction (sales
less cost of goods sold and credit card processing fees) as specified
in the agreement.
The agreement will be perpetual, however it may be terminated for
cause with 30 days notice, or immediately in the event of bankruptcy,
appointment of a receiver, assignment for the benefit of creditors, or
violation of the confidentiality provisions of the agreement.
Certain operating expenses are paid by a related company, which in
turn is reimbursed by the Company. For the six months ended June 30,
1999, the Company reimbursed the related company $214,750. In
addition, the Company paid the related company $27,000 under an
informal rental agreement, which includes $11,500 of prepaid expenses
and deposits. The agreement may be cancelled at any time.
9
<PAGE>
Shopping Sherlock, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statement
================================================================================
NOTE 6:
Related Party
Transactions
(continued)
The Company retained all key employees under consulting agreements
during the six-month period ended June 30, 1999. These agreements may
be cancelled at any time. The expense of these agreements totaled
$141,300, which includes $10,000 in related party payables.
The Company has entered into a one year consulting contract beginning
April 1, 1999, with a university in British Columbia where one of the
Company's directors is an instructor. The Company will pay $3,500 per
month, of which $10,500 is included in expenses for the six months
ended June 30, 1999.
The Company purchased $57,000 in fixed assets from a company owned by
one of its key employees in 1999.
On June 22, 1999, the Company's President resigned. The residual
amount due under his consulting contract is $12,500, and will be paid
over the term of the contract.
On June 24, 1999, the Company has entered into employment contracts
with its officers. The contracts run from month to month and may be
terminated upon 30 days notice. The aggregate obligation under these
agreements is $35,200 per month, the same amounts that were paid under
the previous consulting agreements. If these contracts had been in
place for the six-month period ended June 30, 1999, the Company would
have recognized additional operating expenses of approximately
$17,000, primarily from increased payroll taxes.
NOTE 7:
Subsequent Events
The Company has implemented a stock option plan as of July 1, 1999.
1,000,000 shares have been granted to officers and key employees and
other third parties. Total expense to be recognized under plan will be
$260,000 for the first year..
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Company has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHOPPING SHERLOCK, INC.
Date: October 13, 1999 By /s/ Phillip J. Garratt
------------------------------------------
Phillip J. Garratt
Chief Executive Officer
<PAGE>
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
2.1* Agreement and Plan of Reorganization dated as
of May 17, 1999 by and among the Registrant,
Shopping Sherlock, Inc. (Delaware) ("SSI")
and Shopping Acquisition Corp.
3.1* Articles of Incorporation, as amended, of the
Registrant
3.2* Bylaws of the Registrant
4.1* Form of Common Stock Share Certificate
10.1* 1999 Stock Option Plan
10.2* Form of Stock Option Agreement
10.3* Strategic Alliance Agreement: E-commerce,
Marketing and Operations dated February 4,
1999 by and between SSI and Premier
Lifestyles International Corp. ("PLIC")
10.4* Form of Independent Contractor Services
Agreement
10.5* Consulting Agreement for Non-Technical Services
dated February 15, 1999 by and between the
Registrant and John C. Jones
10.6* Consultant Agreement effective as of April 1,
1999 by and between the Registrant and Technical
University of British Columbia
10.7* Employment Agreement between dated June 24, 1999
by and between the Registrant and Philip Garratt.
10.8* Employment Agreement between dated June 24, 1999
by and between the Registrant and Mitchell Eggers.
10.9* Employment Agreement between dated June 24, 1999
by and between the Registrant and Raeanne Steele.
10.10* Employment Agreement between dated June 24, 1999
by and between the Registrant and Jane Walter.
10.11* Employment Agreement between dated June 24, 1999
by and between the Registrant and Patrick McGrath.
10.12* Lease Agreement dated May 21, 1999 by and between
the Registrant and Spieker Properties, L.P.
27.1 Financial Data Schedule
- ------------------
*previously filed
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 593,773 0
<SECURITIES> 0 0
<RECEIVABLES> 20,348 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 614,121 0
<PP&E> 92,584 0
<DEPRECIATION> 7,200 0
<TOTAL-ASSETS> 706,705 0
<CURRENT-LIABILITIES> 62,606 0
<BONDS> 0 0
0 0
0 0
<COMMON> 9,000 1,000
<OTHER-SE> 635,099 0
<TOTAL-LIABILITY-AND-EQUITY> 706,705 0
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 455,901 2,079
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (455,901) (2,079)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (455,901) (2,079)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (455,901) (2,079)
<EPS-BASIC> (.115) (0.005)
<EPS-DILUTED> (.115) (0.005)
</TABLE>
