<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
JUMPMUSIC.COM, INC
------------------
(Name of Small Business Issuer in its charter)
Nevada 77-036-3000
- --------------------------------- ---------------------------------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
201 San Antonio Circle, Suite 105, Mountain View, California 94040
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(650) 917-7460
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
Securities to be registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001
-----------------------------
(Title of Class)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT
FORM AND YEAR OF ORGANIZATION
JumpMusic.com, Inc. (the "Company") was founded January 26, 1994 as
Jump! Software, Inc., a California corporation. On May 5, 1999, the Company
merged with America's Finest Waters, Inc., a Nevada corporation. America's
Finest Waters, Inc. had not had any significant operations in the two years
prior to the merger, and did not have any significant assets at the time of the
merger. As part of the merger, America's Finest Waters, Inc. changed its name to
JumpMusic.com, Inc. and Jump! Software, Inc., the California corporation, was
dissolved.
The principal offices of the company are located at 201 San Antonio
Circle, Suite 105 in Mountain View, California 94040. Whenever we refer to the
"Company" or use the terms "we," "us" or "our" in this report, we are referring
to JumpMusic.com, Inc. When we discuss the history of our company and give
financial information for the period prior to the merger on May 5, 1999, this
information pertains to Jump! Software, Inc. and not to America's Finest Waters,
Inc.
BRIEF HISTORY OF THE COMPANY.
We started operating in 1994 as a software development company named
"Jump! Software, Inc." specializing in music software. In 1995, we bought a
proprietary software product from Mindscape called Miracle Piano. We renamed
this product Piano Discovery and concentrated our efforts on further developing
and selling this product. Although we successfully released several versions of
the Piano Discovery software and sold tens of thousands of units, the
development process was capital intensive and we lacked the funds required for
advertising and for proceeding with further development.
In the first quarter of 1998, we refocussed our efforts from operating
as a software development company to selling third-party music products over the
Internet. Instead of developing the Piano Discovery software further, we
drastically downsized and worked on developing an e-commerce web site. In the
second quarter of 1998, we launched our e-commerce web site. Initially, we
specialized in selling sheet music. We have expanded our inventory to include
many other music products, although sheet music is still an important part of
our business.
As mentioned above, in May, 1999 we merged into a company called
America's Finest Waters, Inc. Concurrent with the merger, America's Finest
Waters, Inc. changed its name to "JumpMusic.com, Inc."
B. BUSINESS OF ISSUER
The Company is an on-line retailer who sells music products to amateur
musicians. The products sold include musical instruments, music accessories,
sound equipment, printed sheet music and music software. Our web site is
WWW.JUMPMUSIC.COM.
1. PRINCIPAL PRODUCTS AND SERVICES AND THEIR MARKET.
a. THE MARKET
The United States retail market for music products in 1998 was
estimated to be approximately $6.5 billion
1
<PAGE>
in net sales, representing a five-year compound annual growth rate of
approximately 7%.1 According to NAMM, the music products market includes retail
sales of string and fretted instruments, sound reinforcement and recording
equipment, drums, keyboards, print music (sheet music), pianos, organs, and
school band and orchestral instruments.
The music products industry is highly fragmented. Five music products
retailers (Guitar Center, Sam Ash Music Corp, Brook Mays/C&S/H&H, Schmitt Music
Company and Musician's Friend, Inc.) accounted for approximately 10.9% of the
industry's estimated $6.5 billion in net sales in 1998. Furthermore, 90% of the
industry's estimated 8,400 retailers operate only one or two stores. A typical
music products store averages approximately 3,200 square feet and generates an
average of approximately $0.7 million in annual net sales.
The introduction of affordable personal computers has dramatically
changed many market dynamics in the music products industry. New generations of
products have been developed to connect to computers. These include hardware and
software for sound recording, processing and reproduction. Products for
performance and enhancing performance have also been integrated with
microprocessors so that non-professional musicians can more easily afford
equipment which results in a more "professional sound."
Parents have also become more aware of the importance of music in the
education of their children. Research at the University of Wisconsin and
University of California, Irvine, reports that music training, specifically
piano instruction, enhances the development of brain functions required for
science, math and engineering. As this becomes common knowledge, we believe the
demand for musical instruction and therefore music products will
increase.
There is no e-commerce leader in the music products industry today.
While there are dozens of sites selling different classes of music products,
there is as yet no dominant e-commerce retailer offering an authoritative
selection of music products for amateur and professional musicians.
The e-commerce market is increasing at a dramatic rate. Over the past
few years, use of the Internet has grown dramatically, as has its infrastructure
for commercial transactions and building "affinity communities." Online
transactions continue to gain a high level of consumer acceptance. Further, a
recent report by International Data Corporation predicts that the consumer
Internet commerce market will reach $68 billion in 1999 and nearly $1 trillion
by 2002.
b. THE PRODUCTS AND SERVICES
- ----------------------------
1 "MUSIC USA, 1999 Statistical Review of the U.S. Music Products Industry"
published by the International Music Products Association ("NAMM") at 5790
Armada Drive, Carlsbad, California 92008. Telephone: (760) 438-8001.
2 "IDC Predictions for 1999" http://www.emarketer.com/estats/020199_idc.html
2
<PAGE>
There are hundreds of thousands of music products available for sale.
Our strategy is to offer an authoritative selection of both popular and
hard-to-find musical instruments (pianos, organs, guitars, percussion, wind and
string instruments), sound equipment (loudspeakers, amps, microphones),
accessories (cables, music stands, instrument cases), consumables (guitar
strings, picks, reeds, drumheads), printed music (sheet music, music books, song
collections), music software (recording, editing, performance), music
collectibles (rare and hard to find items) and novelty items (trophies/medals,
note cards, jewelry) on our web site. We currently have over 50,000 items
available for sale on our web site.
We have also developed two award winning piano education software
titles, Piano Discovery and Piano Discovery for Kids. We currently sell these
products on our web site and into retail distribution. Our long term strategy is
to offer these items for sale exclusively on our web site.
We offer secure on-line shopping and have a Verisign (TM) Digital ID.
Verisign(TM) Digital ID allows for encrypted communications and transactions
over the Internet. Our customers can check the status of their orders on-line
and we notify them by E-mail when their orders are shipped. While we verify
their credit card during the order process, we do not charge our customers until
we ship their order. All credit card transactions are processed by our
e-commerce server.
Customers can contact us by E-mail or phone with product or support
questions.
C. BUSINESS STRATEGY
Our goal is to become the leading music products on-line retailer. The
principal elements of our business strategy are as follows:
EXPANSION STRATEGY. Our expansion strategy is to continue to increase
our market share in the United States and to penetrate strategically selected
overseas markets by creating versions of our web site in multiple languages and
by locating distribution centers overseas.
We also believe there may be attractive opportunities to expand by
selectively acquiring existing music products on-line retailers in the U.S. and
overseas. We are presently investigating this avenue of growth.
AUTHORITATIVE SELECTION OF MERCHANDISE. We offer over 50,000 products
online and plan to extend our product offerings as quickly as possible. The
largest retail outlets carry only an estimated 7,000 products.
HIGHLY INTERACTIVE, MUSICIAN-FRIENDLY ON-LINE STORE. The purchase of
musical instruments is a highly personal decision. We plan to provide on-line
services to our customers that will help them in this decision making.
SUPERIOR CUSTOMER SERVICE. Our strategy is to provide 7 days a week, 24
hours per day on-line customer service worldwide through our web site.
INNOVATIVE ON-LINE MARKETING PROGRAMS AND LEGACY PRODUCT NAMES. We plan
to create on-line promotional programs such as forums, music events, auctions,
locator services, chat rooms, etc. to build a sense of community among our
customers. We believe these programs will help build a loyal customer base and
encourage repeat on-line business. There are over 300,000 Piano Discover/Miracle
Piano owners who can easily access us through key word searches on the Internet.
We plan to work closely with the Internet portals to establish and improve our
priority when potential customers perform key word searches.
PRICING. We plan to offer competitive pricing in our markets. We
generally mark our products down to partially cover the consumers'shipping
costs.
2. DISTRIBUTION
3
<PAGE>
Jump's products are primarily sold via the Internet. Our e-commerce
sever is hosted by Global Center, an ISP that provides redundant connections to
the Internet, backup power, and a secure building. We ship products to our
customers from our Mountain View, California facility or drop ship to them
directly from the manufacturer.
Our active URLs, JumpMusic.com and miraclepiano.com, are registered
with Yahoo, Infoseek, Alta Vista, and other popular search sites on the
Internet. A subset of our products is listed for sale by iMall.com.
3. STATUS OF ANY PUBLICLY ANNOUNCED NEW PRODUCT OR SERVICE.
None.
4. COMPETITION.
Potential competition for the Company falls into the following
categories:
TRADITIONAL INDEPENDENT MUSIC STORES. NAMM reports that there were
8,443 "brick & mortar" music stores in the U.S. in 1998, which each generated
average revenues of about $700,000 annually.
RETAIL MUSIC PRODUCT CHAINS. There are numerous small retail chains
selling music products. For perspective, the leading 91 chain merchants have a
total of 606 outlets, or an average of just over 6 stores each. Guitar Center,
Mars, and Sam Ash are the best-known, and combined, control a little over 10% of
the total market. Of these, Guitar Center is the largest and the only one which
is publicly held, with 1998 revenues of just under $391 million - a 6% market
share - via 48-some stores located in 24 major markets. These chains are
expanding their retail operations by adding new physical stores, and are slowly
replacing the smaller chains and single location stores.
MUSIC PRODUCTS CATALOGS. There are several music products catalogers,
including Musician's Friend, American Music Supply, Sweetwater Sound, and
Thoroughbred Music. We believe that the largest of these is Musician's Friend, a
privately-held company based in San Francisco with estimated retail sales of $80
million. Musician's Friend and Guitar Center announced they had merged on May
28, 1999. Sam Ash acquired Thoroughbred Music in the second quarter of 1999.
MUSIC PRODUCTS PUBLISHERS/MANUFACTURERS. These companies are suppliers
to the music products distribution channel and view this relationship as a
distribution partnership. Therefore, it is unlikely that most of them would
choose to compete directly with us, or the thousands of traditional music stores
through which they obtain the vast majority of their revenues. However, some
publishers and manufacturers may decide to offer their products for sale through
their web sites.
OTHER E-COMMERCE WEB SITES. There are dozens if not hundreds of web
sites selling some music products needed by some amateur musicians, with no site
yet having emerged as a market leader in music products. Below is a summary of
the most visible sites:
Amazon.com is a well-funded publicly-traded company that primarily
sells books via the internet although it has expanded its product line to
include auction merchandise, electronics, toys, and recorded music products such
as CD's. Amazon.com sells some printed music that it has acquired through its
book publishers. This printed music is primarily classical compositions in the
public domain. At the present time, however, Amazon.com remains
focused on book sales.
Sunhawk.com was founded by two former Microsoft engineers to publish
and distribute digital music scores. They have developed a proprietary music
publishing and notation engine called
4
<PAGE>
Solero. Their catalog of several thousand titles is available for downloading
and printing, including extensive classical listings in the public domain plus a
number of Warner properties. Sunhawk is focused on allowing its site visitors to
listen to the printed music available on its site and enabling purchasers to
download sheet music to their local computers for printing. We believe that most
amateur musicians prefer to order traditional paper-based printed music. The
vast majority of sales in the printed music category are books of songs, not
individual pieces of sheet music, reflecting a customer preference for
pre-selected collections of material. To further support our belief, Sunhawk has
recently started offering traditional paper-based printed music for sale on
their site.
Sheet-music.com is a California-based privately-held company
positioning itself as "The Marketplace for Musicians" offering printed music.
Musicianstore.com is based in San Francisco, CA and positions itself as
"Music and Supplies for the Music Maker." They are privately held and sell
printed music and a limited selection of other products.
According to NAMM, printed music sales in 1997 were $452.9 million or
just under 7% of the total music products market.
METHODS OF COMPETITION
Companies in the music products retail business compete by specializing
in product lines and attracting customers by advertising, and word of mouth.
Companies selling music products over the Internet, in addition to utilizing
these methods, offer services on their web sites in order to attract customers.
JumpMusic.com's APPROACH
We expect to successfully compete in the music products market by
offering a comprehensive selection of music products on our web site at
competitive prices and by also offering a large selection of community services
on our web site such as used musical gear auctions, music teacher finder
section, band member finder section, etc. In addition, because we plan to
completely focus on the Internet, we believe we can offer superior technology in
finding products for our customers than companies that have both a retail
presence and a web site. Finally, we believe that we have a seasoned team, board
of directors, and advisors that will prove to be an asset to the Company.
5. SOURCES AND AVAILABILITY OF INFORMATION AND PRINCIPAL SUPPLIERS.
We obtain internet services from several suppliers including Global
Center, Best Internet and Wolfe Internet. Products on our site are provided by a
variety of companies including Hal Leonard, Warner Brothers, Yamaha, and Music
Sales. Our e-commerce site has the capability to send new orders electronically
or by fax to our suppliers.
6. DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS. We sell primarily to
the end customer, and are not dependent on one or a few major customers.
7. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY
AGREEMENTS AND/OR LABOR CONTRACTS.
We have a patent, 5,183,398 "Apparatus and Method for Interactive
Instruction of a Student", on teaching music using a musical instrument
connected to a computer. This patent was issued on February 2, 1993.
We have registered the following web domain names: JumpMusic.com,
miraclepiano.com pianooffer.com, 800music.com, 800-music.com,
musicsuperstore.com, guitar-offer.com, guitardiscovery.com, musicsuperstore.com,
everything-music.com and topvalues.com.
5
<PAGE>
We own the Piano Discovery-Registered Trademark- and Miracle
Piano-Registered Trademark- trademarks.
8. GOVERNMENT APPROVAL.
No government approval is required for any of our current products or
services.
9. EFFECT OF ANY EXISTING OR PROPOSED GOVERNMENT REGULATIONS.
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet
and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services covering issues such as user privacy, pricing, content, copyrights,
distribution and characteristics and quality of products and services. The
adoption of any additional laws or regulations may decrease the growth of the
Internet or other online services, which could, in turn, decrease the demand
for our products and services and increase the our cost of doing business, or
otherwise have a material adverse effect on our business, prospects,
financial condition and results of operations. Moreover, the applicability to
the Internet and other online services of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Permits or licenses may be required from federal, state or local
government authorities to operate on the Internet. No assurances can be made
that such permits or licenses will be obtainable. We may be required to comply
with future national and/or international legislation and statutes regarding
conducting commerce on the Internet in all or specific countries throughout the
world.
10. RESEARCH AND DEVELOPMENT COSTS
Research and development expenses consist primarily of personnel and
equipment costs required to conduct the development efforts on our web site. To
date, we have spent approximately $300,000 in developing our web site. We expect
to incur an additional $500,000 to $1,500,000 in additional development costs
over the next two years. Software development costs are expended as incurred.
11. COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND
REGULATIONS
We are not involved in a business which involves the use of materials
in a manufacturing stage where such materials are likely to result in the
violation of any existing environmental rules and/or regulations. Further, we do
not own any real property that would lead to liability as a land owner.
Therefore, we does not anticipate that there will be any costs associated with
the compliance of environmental laws and regulations.
12. EMPLOYEES
As of the date hereof, we employ 6 full-time employees and 7
part-time employees. We hire independent contractors on an "as needed" basis
only. We have no collective bargaining agreements with our employees. We
believe that our employee relationships are satisfactory. Long term, we will
attempt to hire additional employees as needed based on our growth rate.
13. KEY PERSONNEL
Our success depends to a significant extent on the services of Richard
Mathews, our President, and Jan
6
<PAGE>
Mathews, our Chief Operating Officer, as well as our ability to attract and
retain additional key personnel with the skills necessary to manage our existing
business and growth plans. The loss of one or more of these individuals or other
key personnel could have a material adverse effect on our business, results of
operations, liquidity and financial position. On May 5, 1999, we entered into
three-year employment contracts with both Mr. Mathews and Ms. Mathews.
Additionally, we carry "key-man" insurance on the lives of Mr. Mathews and Ms.
Mathews in the amount of $250,000 each. In order to achieve our growth plans, we
will depend upon our ability to find and recruit new personnel with the skills
and expertise to manage our business and to retain such employees. If we cannot
hire and retain qualified personnel, our business, results of operations,
financial condition and prospects could be adversely affected.
14. ECONOMIC CONDITIONS
Our business is sensitive to consumer spending patterns, which in turn,
can be affected by prevailing economic conditions. A downturn in economic
conditions in our market could have a material adverse effect on our results of
operations, financial condition, business and prospects. Although we attempt to
stay informed of consumer preferences for musical products and accessories
typically offered for sale on our site, any sustained failure on our part to
identify and respond to trends would have a material adverse effect on our
results of operations, financial condition, business and prospects.
7
<PAGE>
15. STOCK PRICE
We have a limited history of trading as a public company; our stock
price could be volatile. On May 5, 1999, our predecessor company, Jump!
Software, Inc. dba Jump! Music merged with America's Finest Waters, Inc. In the
merger, the shareholders of Jump! Software Inc. became the majority shareholders
in the Company, and the officers and directors of Jump! Software, Inc. took over
control of the Company. Since the merger, the trading volume in our stock has
been minimal with no shares trading on most trading days. The market price of
our shares of common stock may be subject to significant fluctuations in
response to our new business strategy, operating results and other factors,
including announcements by our competitors, and those fluctuations may continue
in the future. In addition, the stock market in recent years has experienced
significant price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of particular companies. These
fluctuations, as well as a shortfall in sales or earnings compared to public
market analysts' expectations, changes in analysts' recommendations or
projections, and general economic and market conditions, may adversely effect
the market price of our common stock.
16. RISKS RELATED TO THE BUSINESS
Described below are some of the risks and uncertainties facing our
company. There may be additional risks that we do not presently know of or that
we currently consider immaterial. All of these risks could adversely affect
our business, results of operations, liquidity and financial position.
WE MAY BE UNABLE TO MEET OUR GROWTH STRATEGY: Our growth strategy
requires that we raise additional capital: $3 million in 1999; $12 million in
2000; and $12 million in 2001. Our strategy requires that we use these funds to
capture new customers ($50.00 per customer and estimated to decrease to $20.00
over 5 years) and retain current customers ($12.50 and estimated to decrease to
$5.00 over 5 years). We may be unable to raise sufficient capital and our
estimates of the costs to acquire and retain customers may be low. Our growth
strategy also requires that we have a comprehensive offering of music products
on our site. We may not be able to negotiate deals with a sufficient number of
the music product vendors that we need to acquire these products.
WE MAY BE FACED WITH NEW AND WELL FUNDED ON-LINE COMPETITION: Currently
the larger retail chains are focused on growing their retail presence in the
music products market. It is possible that one of these chains will make a major
investment in the Internet. It is also possible that another Internet focused
retailer of music products will emerge and raise capital before us. To date, to
the best of our knowledge, neither of these events has happened.
17. FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Report, we
believe matters discussed herein, particularly those identified with the words
"expects," "believes," "anticipates," "strategy" and similar expressions, are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and with the
exception of any statements made in connection with any initial public offering,
such statements are subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to (a) the
acquisition of music products, (b) the expansion of on line domestic and
international sales (c) the continued protection of proprietary technologies and
(d) the ability to fund continued operations out of existing working capital,
additional capital infusion and cash flow from future operations. The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions that we will continue to acquire and
introduce new music products on it's web site in a timely basis, that rapid
changes in technology will not make our web site obsolete or otherwise reduce
our ability to compete in the marketplace, that competitive conditions within
the industry will not change materially or adversely, that the use of multimedia
PC's in homes and small offices will continue to grow, that management's
decision to focus our resources on the Internet will reduce certain expenses
from the levels which were experienced in 1997 and 1998, and that there will be
no material adverse change in our operations or business.
8
<PAGE>
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, there can be no assurance that the
forward-looking information will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a
representation by us or anyone else that our objectives or plans will be
achieved.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
OVERVIEW
Over the last two years, we have instituted far-reaching changes in our
plan of operation. We have transitioned from being a music software company to
becoming an Internet e-commerce retail business specializing in consumer music
products. For the most part, this transition occurred in 1998.
A. RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, selected
financial information for the Company. All financial information prior to Jump!
Software, Inc.'s merger with America's Finest Waters, Inc. on May 5, 1999 is for
Jump! Software, Inc.'s operations only. Prior to this merger, America's Finest
Waters, Inc. had no significant operations in 1998 and 1999 and therefore no
financial information is provided for America's Finest Waters, Inc.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDING JUNE 30 DECEMBER 31
------------------------------------------------------------------------------
1999 1998 1998 1997
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $527,192 $775,545 $1,738,367 $3,530,154
- ---------------------------------------------------------------------------------------------------------------------------
Cost of Sales 219,073 383,613 806,417 1,936,675
- ---------------------------------------------------------------------------------------------------------------------------
Gross Profit 308,119 391,931 931,950 1,593,477
- ---------------------------------------------------------------------------------------------------------------------------
General, Administrative, and 554,378 1,278,267 2,085,941 5,042,184
Selling Expenses
- ---------------------------------------------------------------------------------------------------------------------------
Other Income (Expenses) (198,508) (114,111) (276,200) (583,611)
- ---------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes (444,767) (1,000,447) (1,430,191) (4,032,316)
- ---------------------------------------------------------------------------------------------------------------------------
Provisions for Taxes 400 400 800 800
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (445,167) (1,000,847) (1,430,991) (4,033,116)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
B. SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998 (UNAUDITED)
We generated revenues of $527,192 for the six months ended June 30,
1999, as compared to revenues of $775,545 for the six months ended June 30,
1998. This decrease in revenues was a result of our transition from the software
business to the e-commerce retail business. The decrease in revenues is
partially offset by decreased general, administrative and selling expenses as a
result of company downsizing, which declined from $1,278,267 for June 30, 1998
to $554,378 for June 30, 1999. Likewise, the cost of sales declined from
$383,613 for June 30,
9
<PAGE>
1998 to $219,073 for June 30, 1999, due to the company downsizing. Other income
decreased from -$114,111 to - $198,508, as a result of increasing interest
expenses, off-set by debts forgiven by some of our creditors. Although our
interest expenses increased from $101,326 to $309,415, miscellaneous income
increased from $9,935 to $110,000 due the debt-forgiveness. The net loss of
$1,000,847 for June 30, 1998 was reduced to $445,167 for June 30, 1999.
C. FISCAL YEAR ENDED DECEMBER 31, 1998 (AUDITED) AS COMPARED TO
FISCAL YEAR ENDED DECEMBER 31, 1997 (AUDITED)
Between 1997 and 1998 we also restructured our company and reduced
costs by eliminating a product development group which we had been operating in
Seattle and reducing our marketing staff.
We generated revenues of $1,738,367 for the year ended December 31,
1998 as compared to revenues of $3,530,154 for the year ended December 31, 1997.
This decrease in revenue is due to our transition from a software company to a
e-commerce retail business, as discussed above. The decrease in revenue is
partially offset by a significant decrease in the general administrative and
selling expenses which were reduced from $5,042,184 to $2,085,941. This
reduction in the general, administrative and selling expenses was due primarily
to a reduction in overhead inherent in running a software business, as we
transitioned to becoming an e-commerce retail business. Additionally, the cost
of sales decreased from $1,936,675 in 1997 to $806,417 in 1998. By
reconcentrating our marketing efforts on the Internet, we were able to
drastically reduce the funds we spent on traditional retail marketing, such as
infomercial broadcasts. Other income (expenses) increased from -$583,6111 to
- -$276,200, largely due to a decrease in bad debts although this was offset by an
increase in interest expense. Expenses due to bad debts were reduced from
$456,193 in 1997 to $30,477 in 1998. The net loss of $4,033,116 for 1997 was
reduced to $1,430,991 for 1998.
D. LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, our principal sources of liquidity included cash
and net accounts receivable of $118,470. While we have generated revenues for
the last two years, expenses have exceeded revenues generated, resulting in
negative cash flow. As discussed in Results of Operations, our revenues are
down, but we are also spending less money and our net income is up to -$445,167
for the six months ending June 30, 1999 as opposed to - $1,000,847 for the six
months ending June 30, 1998.
Cash on hand, along with cash generated from the sale of products,
signing of a new distribution agreement and collections of accounts receivable,
is expected to be sufficient to meet our requirements through November 1, 1999.
Our ability to fund continued operations beyond November 1, 1999 depends on
raising additional capital and converting the majority of debt to equity. Our
officers are currently attempting to raise additional capital by offering
securities to accredited investors only. There is no guarantee that we will be
able to raise this additional capital. In addition, we have entered into a
verbal agreement with one of our creditors to convert an additional $700,000 of
debt to equity, although there is no guarantee that this conversion will take
place. Should we be unable to raise additional capital and convert most of our
debt to equity, we will be required to significantly reduce operations, and
reduce expenses. Such steps would likely have a material adverse effect on our
ability to establish profitable operations in the future. We will continue to
pursue other financing arrangements to increase its cash reserves. There can be
no assurance we will be capable of raising additional capital or converting debt
or that the terms upon which such capital or debt conversion will be available
to us will be acceptable.
10
<PAGE>
To date, we have financed operations principally through net proceeds
from private placements of debt and equity. Our initial financing was raised
from individual investors. We raised $4,724,562 in a Series A Preferred stock
offering and $574,654 in a Series B Preferred stock offering. $200,000 in Series
B Preferred was sold in 1998.
We do not believe that inflation has had a significant impact on our
operations since inception of the Company.
Current Assets decreased to $452,258 at June 30, 1999 from $491,577 at
the end of 1998. The decrease was due to in part to a reduction in inventory.
Total assets decreased to $520,446 at June 30, 1999 from $563,486 at December
31, 1999 due mainly to the reduction of current assets. There were no
significant additions to fixed assets in 1999. Current liabilities decreased
from $3,125,198 at December 31, 1998 to $1,910,786 at June 30, 1999. In recent
months, we have signed agreements to convert $4,700,000 of our debt to equity.
The creditors signing these agreements are receiving warrants for preferred
stock.
PLAN TO ADDRESS GOING CONCERN OPINION
Our independent certified public accountants' report on our financial
statements for the year ended December 31, 1998 contains an explanatory
paragraph regarding our ability to continue as a going concern. Among the
factors cited by the accountants as raising substantial doubt as to our ability
to continue as a going concern are our operating losses and our dependence on
financing to continue operations. We have developed a plan to achieve
profitability and allay doubts as to our ability to continue as a going concern.
LOWERING DEBT PAYMENTS.
We have converted almost all of our debt to equity and thus have
significantly lowered our debt payments. However, we need to reduce our interest
expenses by converting more of our debt to equity.
LIQUIDATING PIANO DISCOVERY INVENTORY.
Our inventory value of $359,129 as of December 31, 1998 consists almost
entirely of Piano Discovery inventory. Piano Discovery is a proprietary music
software product which we acquired before we refocused our efforts on selling
third-party over the Internet. We plan to sell the remainder of our inventory of
Piano Discovery for $1,500,000 over the next eighteen months. There is no
guarantee that we will be able to sell this inventory. If we do succeed in
selling the Piano Discovery inventory, this revenue would be in addition to
revenue we make from sales of third-party products on our e-commerce web site.
ADDITIONAL FUND-RAISING.
Our current total operating expense is $77,000 per month, so if we do
not receive significant additional funding in the next 12 months, we could
continue as a viable company although at a lower growth rate than we have
projected based on raising $25,000,000 in equity. But in order to continue as a
viable company at this lower growth rate for the next 18 months, we estimate
that we would still need to sell stock worth $400,000 in the next six months. We
will need to raise around $100,000 of this amount by November 1, 1999. These are
the minimal funds we would require to continue operations for the next year.
There is no guarantee that we will be able to raise this money.
If we only receive the minimum funds needed to maintain operations for
the next year, we believe that this would give us enough time for our web site
to become profitable through repeat business in addition to new customers
obtained through the referrals of existing customers. We also believe that
because of the high margins in the Music Products industry, typically 50%, we
could continue as a viable company indefinitely after raising a minimum of
$1,000,000 in the next 18 months for advertising and improving the web site.
However, there is no
11
<PAGE>
guarantee that we will be able to raise these funds. Even if we did raise this
money, there is no guarantee that these funds would ensure that more advertising
and an improved web site will ensure profitability.
INCREASED SALES.
We believe we will have sales in 1999 of between $1,500,000 to
$2,000,000 even if we raise only $200,000 this year, although there is no
guarantee that we will be able to do this. We believe we can hold our total
operating expense to under $1,500,000 for the year, as it is only $554,378 for
the six months ending June 30, 1999. We had revenues of $527,192 for the same
period. With the reduction of interest expense made possible by the conversion
of debt to equity, we are close to breaking even and if we tightly control our
total operating expense, we could break even or become profitable in 2000.
As an electronic retail outlet, it is much easier for us to control our
operating expenses and even scale back our operating expenses in the event of
declining sales, compared to when we were a music software development
company and had to maintain high salaries for programmers.
However, in addition to the possibility that we might not continue as a
going concern, another risk is that if we grow slowly or not at all, we would be
more vulnerable to competition from a well-funded competitor. The primary use of
the money we wish to raise is to rapidly grow our customer base and prevent a
competitor from filling this niche in the market.
E. PLAN OF OPERATION
As we have already eliminated our product development group and cut the
administrative infrastructure required for a software development company, our
reorganization into an Internet retailer selling music products is substantially
complete. Our cost structure is substantially different from before our
reorganization. Prior to our reorganization we were burdened by high product
development and production costs. In addition, because we did not have an
e-commerce web site, and because traditional media advertising was the only way
for us to maintain contact with our customers, we had a higher advertising
budget.
As an Internet retailer selling products manufactured by third-parties,
we do not have any product development and production costs. However, we are
required to invest in web site maintenance and development. Additionally, we
must pay to maintain our inventory. If we are able to raise the necessary funds,
we hope to expand our marketing staff and to add some in-house developers to
further develop the web site. Also we hope to market the web site nationally via
the Internet as well as through printed, radio and possibly television ads.
Although advertising is not as critical as it was before the reorganization, we
will still need to advertise in order to increase the number of our customers.
Our financial forecast indicates that to grow according to plan, we
will need to raise $3,000,000 by the end of 1999, $12,000,000 in 2000, and
another $12,000,000 in 2001. Seventy-five percent of these funds will be used in
marketing to acquire new customers. The remaining funds will be used in product
development to expand and enhance our web site and in operations and customer
service. We plan to grow to 29 employees by the end of 1999
and 69 employees by the end of 2000.
F. YEAR 2000.
THE Y2K PROBLEM.
We have begun to address possible remedial efforts in connection with
computer software that could be affected by the Year 2000 "Y2K" problem. The Y2K
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
12
<PAGE>
The Y2K problem can affect any modern technology used by a business in
the course of its day. Any machine that uses embedded computer technology is
susceptible to this problem, including for example, telephone systems, postage
meters and scales, and of course, computers. The impact on a company is
determined to a large extent by the company's dependence on these technologies
to perform their day to day operations.
Y2K COMPLIANCE OF COMPANY EQUIPMENT.
Internally, we have begun reviewing all such equipment and have
determined that many of our systems are Y2K compliant. We anticipate that all
system and software will be fully reviewed and brought into compliance by
November 1999. If certain systems are not brought up to Y2K compliance by the
end of November 1999, then the non-compliant technology will be disabled so as
not to have an impact on the systems that are compliant. Any such events would
not have a serious impact on our day to day operations, nor would any valuable
information be lost. Our company backs up all computer systems daily to protect
us against data loss.
The costs of bringing our company technology up to Y2K compliance is
expected to be less than $5,000. This is because the majority of the "patches"
or programs designed to make software Y2K compliant can be obtained over the
Internet from manufacturers for little or no cost and we do not expect to rely
heavily on outside consultants to upgrade our systems as most of the work can be
performed in-house. We have already installed many of the latest Y2K software
patches to our system.
WORST CASE SCENARIO.
The worst case Y2K scenario for us would be the failure of the server
hosting our web site, the failure of our e-commerce and accounting software, the
failure of timely transmission of information on the Internet, and/or the
failure of basic utilities such as power and phone service. Any such failures
would negatively impact our sales, resulting in a suspension of our revenues. A
suspension of revenues could result in material losses from operations and a
reduction in our working capital. Management is unable at this time to quantify
the impact that the Y2K problem could have on our results of operations and
financial condition.
VENDORS & THIRD PARTIES.
We have recently contacted our suppliers and service providers
requesting their status on the Y2K problem. We have not yet received written
assurances that their systems will be Y2K compliant and must assume that they
will not be ready in time. The consequences of Y2K suppliers and service
providers could be severe. We depend on vendors for the products we sell on our
web site; we depend on utilities for phone service and power; we depend on our
Internet provider for access to the Internet; we depend on our bank for banking
services. The failure of the systems of any of these parties would negatively
impact the company by reducing or possibly shutting down our operations. Our web
server is located in a secure facility with redundant power and communications
lines, reducing the possibility our web site would be taken off-line.
Additionally, we rely on numerous vendors to supply the products which we sell,
and we consider it unlikely that all of them will experience Y2K problems.
However, in the absence of written assurances to the contrary, we cannot rule
this possibility out. Even the inability of a few of our vendors to supply us
with products could result in customer dissatisfaction and lost business.
Y2K CONTINGENCY PLANS.
We currently have no contingency plans in place for dealing with any
Y2K problems that may arise. We plan to more thoroughly review the Y2K risks to
the Company and create contingency plans by October 31, 1999. However, there is
no guarantee that the Company will be able to timely create such contingency
plans.
ITEM 3. DESCRIPTION OF PROPERTY
13
<PAGE>
Our offices are located at 201 San Antonio Circle, Suite 105, Mountain
View, California 94040. We pay $4,891.50 per month for 2,174 square feet of
office space. We are currently renting on a month-to-month basis while we look
for a larger facility.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock, as of the date hereof, by (i) each stockholder
known by the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) each director of the Company, (iii) each officer
of the Company, and (iv) all directors and officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NAME NUMBER OF SHARES (1) BENEFICIALLY OWNED
- ---- -------------------- ------------------
<S> <C> <C>
Lee J. Lorenzen and Julie
Lorenzen as a married couple(2) 1,063,634 14.03
Richard W. Mathews and Jan M.
Mathews as a married couple(2) 1,339,325 17.41
Dan Mirich(2) 59,324 *
Valorie Cook Carpenter(2) 61,998 *
Jerome W. Carlson(2) 61,956 *
Jack F. Kemp(2) 21,243 *
All officers and directors
as a group (6 persons) 1,543,846 20.11
</TABLE>
- ----------------------
(1) Except as otherwise indicated, we believe that the beneficial owners of
Common Stock listed above, based on information furnished by such
owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the percentage
of the person or group holding such options or warrants, but are not
deemed outstanding for purposes of computing the percentage of any
other person or group.
(2) c/o Company's address: 201 San Antonio Circle, Suite 105, Mountain
View, CA 94040.
* Less than one percent.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and officers are as follows:
NAME AGE OFFICE
- ---- --- ------
Richard W. Mathews 56 Chief Executive Officer, Chairman of
the Board of Directors
14
<PAGE>
Valorie Cook Carpenter 45 Acting Senior Vice President
Marketing, Director
Jerome W. Carlson 62 Acting Chief Financial Officer
Jan M. Mathews 50 Chief Operating Officer, Director,
Secretary
Jack F. Kemp 63 Director
Dan Mirich 65 Director
Richard W. Mathews, our Chief Executive Officer, and Jan M. Mathews,
our Chief Operating Officer, have been married for 13 years.
RICHARD W. MATHEWS, CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD OF
DIRECTORS. Richard W. Mathews, Chief Executive Officer, Chairman of the Board of
Directors. Mr. Mathews has worked full-time with the Company since its
inception. His current term as Chairman of the Board of Directors commenced on
May 5, 1999. Prior to founding the Company, Mr. Mathews held senior engineering
management positions with Claris, Aldus, Columbia Data Products and Nomadic
Systems. As Vice President of Product Development and Strategic Alliances for
Claris Corporation, Mr. Mathews was responsible for the strategic planning and
implementation of the migration of Claris s product line to the Windows
platform. While at Claris, Mr. Mathews managed the development of ClarisWorks,
FileMaker Pro, MacWrite Pro, Claris CAD, Mac Project, and other software
products. As Vice President of Product Development for Aldus, Mr. Mathews
managed the development of PageMaker 3.0 and 4.0 for the Mac and Windows
platforms and Persuasion for Windows. As Chief Engineer for Xerox Office
Products Division, Mr. Mathews led the team that produced the 860 word processor
and the 820 personal computer. While with Xerox, in 1981 Mr. Mathews sponsored
the skunkworks project that prototyped an Intel-based personal computer using
the Xerox Star interface. As Vice President of Product Development and Strategic
Planning at Columbia Data Products, Mr. Mathews was responsible for the
development of some of the first IBM-compatible computers, including desktops,
portables, and the first hard drive-based PC. Mr. Mathews managed teams that
developed ROM BIOS, modified GW Basic for IBM compatibility. Mr. Mathews served
as Vice President of Engineering at Nomadic Systems where he was responsible for
SmartSyncTM, a program that synchronized data between personal computers. He
also served as Manager of the Eastern Data Communications Center for Motorola
where he was responsible for the development, sales and installation of
computer-aided dispatching systems. Mr. Mathews has a BSE in Electrical
Engineering from the John Hopkins University night school and an MS in Computer
Science from John Hopkins University.
JEROME W. CARLSON, ACTING CHIEF FINANCIAL OFFICER. Mr. Carlson has been
President of Raljer, Inc., a management consulting firm, since January 1995,
specializing in assisting start-up companies and mid-size company re-
organizations. He is also our Chief Financial Officer on a part-time basis. We
expect to have a full-time CFO by the end of 1999. He has acted as an advisor to
several companies in the Software Business Cluster, a start-up incubator, in San
Jose, and is currently involved in the formation of a start-up incubator, in
Livermore, CA, along with representatives of Lawrence Livermore Labs, Sandia
Labs, Tri-Valley Business Council and other businesses. He recently was a
founder in aiding the start-up of the Valley Community Bank, in Pleasanton, CA,
and is now a director. The bank was formed to focus on serving the needs of
small businesses in an area where a number of new software, communications and
bio-tech companies are being formed.
Mr. Carlson also serves on the board of DBS Industries, in Mill Valley,
CA, a start-up company which will provide satellite communications for specific
industries using relatively low cost Leo satellite technology. From 1984 to
1990, Mr. Carlson served as the Chief Financial Officer for Triad Systems
Corporation , in Livermore, CA, responsible for all financial and legal
functions, and along with the leasing and business supplies operation which
served hundreds of the company's customers. From 1961 to 1984, Mr. Carlson
served in various positions with Hewlett Packard Company, in the Bay Area. where
he managed the service support operation for the Western United States, was
general manager of one of the company's first computer divisions and later
became the company's first corporate controller. As controller, he instituted a
unique world-wide reporting and control system that gave corporate management
visibility and control over nearly a hundred separate business operations that
spanned across divisional boundaries. Mr. Carlson holds an M.B.A. from the
Stanford Graduate School of Business
15
<PAGE>
and a B.S. degree in Economics from the University of California, at Davis.
VALORIE COOK CARPENTER, ACTING SENIOR VICE PRESIDENT MARKETING,
DIRECTOR. Ms. Carpenter first became a Director of the Company on May 1, 1995.
Her current term as a Director commenced on May 5, 1999. Ms. Carpenter currently
serves as a principal in the consulting practice she founded, Market Savvy
Consulting (founded in October 1994) which focuses on strategically driving the
creative process to deliver consistently outstanding marketing programs that
work and as Senior Vice President of Marketing for Caere Corporation (April 1999
to present).
Over the past ten years, she has also held Vice President of Marketing
positions with Claris Corporation / FileMaker, Inc. (June 1997 to July 1998) as
well as Broderbund Software (November 1992 to October 1994), and was Vice
President of Marketing and Manufacturing with Ashlar.
As Vice President of Marketing and Manufacturing with Ashlar, Ms.
Carpenter was responsible for product management/product marketing, marketing
communications, product support, end user documentation, manufacturing, and
customer service. In this role she established product line, distribution and
manufacturing strategies; created and staffed departments, including recruiting
the Vice President of Sales and setting up a telesales operation; managed
aggressive alpha and beta site seeding programs; developed marketing materials,
including the corporate identity, packaging, advertising, data sheet,
testimonial video, and trial version; launched the product; and obtained press
coverage, creating the image of a highly-successful, large company while closely
controlling expenses.
Ms. Carpenter has also held key positions at Software Publishing
Corporation. There she served as Director of Marketing Services, as well as
Product Marketing Manager and Group Product Manager for the PFS: series of
personal productivity applications. Ms. Carpenter began her career in brand
management with Procter & Gamble and is a classically-trained musician. She
holds an MBA from Stanford University and a BS in Business from Indiana
University.
JAN M. MATHEWS, CHIEF OPERATING OFFICER, CORPORATE SECRETARY AND
DIRECTOR. Ms. Mathews has been Director since the Commencement of the Company.
Her current term commenced on May 5, 1999. Ms. Mathews was Vice President of
Marketing for Catalog City, an internet startup focused on the catalog industry
from December 1997 through March 1998. From October 1993 through May 1999, Jan
served as Vice President of Marketing for Jump! Software Inc. where she directed
the repositioning of ConcertWare, a leading notation software program and
developed the Piano Discovery infomercial staring Herbie Hancock. In May 1999
she was promoted to Chief Operating Officer. Ms. Mathews has over eighteen years
experience in sales and marketing management for high technology and industrial
product companies. As President and founder of Bumblebee Software, Inc., Ms.
Mathews launched dBFast/Windows and dBFast/Mac, the first Windows and Macintosh
dBASE compatible database and compiler. At Bumblebee, Ms. Mathews negotiated
marketing partnerships with Microsoft to promote Windows and with Novell to
promote dBFast/Windows as an SQL front end to NetWare.
As Director of Marketing and Corporate Communications for Columbia Data
Products, Ms. Mathews
16
<PAGE>
managed Columbia's advertising and public relations. As Executive VP and
Director of Luhrs & Lange Advertising, Inc., Ms. Mathews marketed high tech
products for Fortune 500 businesses. She created a subsidiary company to develop
and market consumer products for PCs. She also worked with Nomadic Systems as
Director of Product Marketing for SmartSync-TM-, a Windows synchronization
utility.
JACK F. KEMP, DIRECTOR. Mr. Kemp was appointed to the Board of
Directors to fill a vacancy on June 1 1999. Prior to founding Empower America in
1993, Mr. Kemp served for four years as Secretary of Housing and Urban
Development. Before his appointment to the Cabinet, Mr. Kemp represented the
Buffalo area and Western New York for 18 years in the United States House of
Representatives. Mr. Kemp also co-founded the AFL Players Association and was
elected president for five terms. He is on the Board of Habitat for Humanity and
Chairman of Habitat's National Campaign for Rebuilding our Communities. Mr. Kemp
has been self-employed for over five years.
Mr. Kemp is on the Boards of Oracle Corporation, Proxicom Inc.,
Speedway Motorsports, Inc., Everen Capital, Carson Inc., The Sports Authority,
Inc., and American Bankers Insurance Group, Inc.
DANIEL MIRICH, DIRECTOR. Mr. Mirich first became a Director of the
Company on February 1, 1999 and was reappointed on May 5, 1999. Mr. Mirich is
President of CJM Associates, Inc., a management consulting firm that serves
rapidly growing small to medium sized high-technology corporations. Mr. Mirich
has been with CJM for over ten years. Prior to CJM, Mr. Mirich held several
executive management positions at Altus Corporation including Vice President,
Senior Vice President and General Manager. He has been a partner with Thomas
Kelley & Associates as well as Korn-Ferry International, managing executive
searches exclusively for high-technology clients. Earlier in his career, Mr.
Mirich worked for Hewlett-Packard in Colorado and California. He received his
B.S. degree at Colorado State University and his M.A. degree at the University
of Northern Colorado. Mr. Mirich serves on the board of Business Backers
Management Corporation. Mr. Mirich is an active volunteer in the community. He
is a member of the Board of Directors for the Enterprise Network, a high
technology incubator cluster. In addition, he served the Santa Clara County
Chapter of Junior Achievement for years as Director and Chairman.
ITEM 6. EXECUTIVE COMPENSATION
The following table and attached notes sets forth the compensation of
our executive officers during each of the last three fiscal years. The
remuneration described in the table does not include the cost to the Company of
benefits furnished to the named executive officers, including premiums for
health insurance, reimbursement of expense, and other benefits provided to such
individual that are extended in connection with the ordinary conduct of our
business. The value of such benefits cannot be precisely determined, but the
executive officers named below did not receive other compensation in excess of
the lesser of $25,000 or 10% of such officer's cash compensation. We have no
annuity, pension or retirement benefits proposed to be paid to officers,
directors or employees in the event of retirement at normal retirement date
pursuant to any presently existing plan provided or contributed by us.
17
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------- ---------------------- ----------------------
Name and Principal Other Restricted All other
Position annual Stock Options LTIP Compen-
Year Salary Bonus Compen- Awards SARs Payouts sation
sation
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard W. Mathews 1999 $165,000(3) -0- -0- -0- 250,000 -0- -0-
Chief Executive 1998 $ 80,700 -0- -0- -0- -0- -0- -0-
Officer 1997 $170,000 -0- -0- -0- -0- -0- -0-
Jan M. Mathews 1999 $150,000 -0- -0- -0- 150,000 -0- -0-
Chief Operating 1998 $ 26,912 -0- -0- -0- -0- -0- -0-
Officer 1997 $145,800 $10,500 $14,190(4) -0- 4,560 -0- -0-
Valorie Cook 1999 -0- -0- -0- -0- 75,000 -0- -0-
Carpenter 1998 -0- -0- -0- -0- -0- -0- -0-
VP Marketing 1997 -0- -0- -0- -0- -0- -0- -0-
Jerome W. Carlson 1999 -0- -0- -0- -0- 6,000 -0- -0-
Chief Financial 1998 -0- -0- -0- -0- -0- -0- -0-
Officer 1997 -0- -0- -0- -0- 2,090 -0- -0-
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
---------------------------
3. Projected.
4. Accrued salary from 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
We did not grant any stock options during our 1998 fiscal year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NAME NUMBER OF PERCENT OF TOTAL EXERCISE OR EXPIRATION
SECURITIES OPTIONS/SARS BASE PRICE DATE
UNDERLYING GRANTED TO ($/SH)
OPTIONS/SARS EMPLOYEES IN
GRANTED (#) FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard W. Mathews -0- N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Jan M. Mathews -0- N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Valorie Cook Carpenter -0- N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
Jerome W. Carlson -0- N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
We have entered into employment contracts with Richard W. Mathews, our
Chief Executive Officer and
18
<PAGE>
Jan M. Mathews, our Chief Operating Officer and Secretary.
Our employment contract with Mr. Mathews provides that he shall be
employed for three years, commencing on May 5, 1999 and terminating on May 4,
2002. Mr. Mathews' salary is $13,750 per month. each January 1st, Mr. Mathews'
salary is increased by 6%. in addition, the contract provides that Mr. Mathews
shall get a bonus of 0.4% of gross sales over $2,000,000 per fiscal year, but
his maximum yearly bonus is limited to $200,000.
Our employment contract for Jan M. Mathews is for a term of three
years, commencing on May 5, 1999 and terminating on May 4, 2002. Ms. Mathews'
salary is $6,250 per month with an increase of 6% every January 1st. The
contract also provides that Ms. Mathews shall get a bonus of 0.2% of gross sales
over $2,000,000, but her maximum yearly bonus is limited to $150,000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998 and the first six months of 1999, the Company received
notes payable from shareholders in the amount of $284,833. These notes are
convertible to Preferred C stock pursuant to the conversion terms discussed
below. The interest rates on these notes payable range from zero to 12%.
Additional information on these notes payable is available in Note 4 of the
financial statements.
ITEM 8. DESCRIPTION OF SECURITIES
A. COMMON STOCK
Our Articles of Incorporation authorize the issuance of 200,000,000
shares of common stock, $.001 par value per share, of which 7,579,000 shares
were outstanding as of the date hereof.
Holders of shares of common stock are entitled to one vote for each
share on all matters to be voted on by the stockholders. Holders of common stock
have no cumulative voting rights. Accordingly, the holders of in excess of 50%
of the aggregate number of shares of Common Stock outstanding will be able to
elect all our directors and to approve or disapprove any other matter submitted
to a vote of all shareholders.
Holders of shares of common stock are entitled to share ratably in
dividends, if any, as may be declared, from time to time, by the Board of
Directors in its discretion, from funds legally available therefor. We do not
currently anticipate paying any dividends on our Common Stock. In the event of a
liquidation, dissolution or winding up of the Company, the holders of shares of
common stock are entitled to share pro rata all assets remaining after payment
in full of all liabilities. Holders of Common Stock have no preemptive rights to
purchase our Common Stock. There are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock.
Shares of Common Stock are registered at our office and are
transferable at such office by the registered holder (or duly authorized
attorney) upon surrender of the Common Stock certificate, properly endorsed. No
transfer shall be registered unless we are satisfied that such transfer will not
result in a violation of any applicable federal or state securities laws. Our
transfer agent is Interwest Stock Transfer, 1981 E. Murray Holiday Road, Salt
Lake City, UT 84117
B. PREFERRED STOCK
We are authorized to issue 50,000,000 shares of preferred stock, $.001
par value, of which 2,500,000 shares are designated as Series C Redeemable and
Convertible Preferred Stock ("Series C Preferred Stock"). 1,472,013 shares of
Series C Preferred Stock have been issued in connection with warrants. The
rights, privileges, and preferences of the Series C Preferred Stock are as
follows:
19
<PAGE>
a. DIVIDEND PROVISIONS. The holders of shares of Series C Preferred
Stock shall be entitled to receive dividends accruing at the rate of ten percent
(10.0%) per year of the face value (face value is $3.00 per share) from the date
of issuance through the date of conversion (the "Coupon Dividend"), as well as
dividends paid with respect to each share of common stock for each share of
Series C Preferred Stock at the same time and on a parity with dividends paid on
each share of common stock (the "Common Dividend") less any Coupon Dividend paid
for any such period. However, no dividends are payable, unless the Board of
Directors declare such dividends and we have funds legally available for such
dividends. Each share of Series C Preferred Stock shall rank on a parity with
each other share of Series C Preferred Stock with respect to dividends. Dividend
payments to the holders of shares of Series C Preferred Stock shall be payable
annually, in cash by delivery of a check to each entitled holder's address which
is registered with the Secretary of the Company. Any Coupon Dividend on the
Series C Preferred Stock which has accrued but which, for any reason whatsoever,
(a) has not been declared, or (b) has been declared but has not been timely
paid, shall be deemed in arrears and shall accumulate until paid.
b. CONVERSION PROVISIONS. Each share of Series C Preferred Stock is
convertible into shares of our Common Stock at any time after the date of
issuance based upon a conversion price of $3.00 per common share. Any holder of
the Series C Preferred Stock may elect conversion (the "Conversion Right") of
any number of the shares so held by remitting the Certificate evidencing
ownership of the shares together with a signed irrevocable stock transfer power,
with signature guaranteed, to the Company requesting and specifying the number
of shares that the Holder seeks to convert into our Common Stock (the
"Conversion Request").
c. REDEMPTION.
i. MANDATORY REDEMPTION. If the shares of Series C Preferred
Stock are not converted earlier by the holder(s), at two years following the
date of issuance, we are obligated to redeem for cash each and every
outstanding shares of Series C Preferred Stock at face value plus accrued and
unpaid dividends owed.
ii. VOLUNTARY REDEMPTION. Notwithstanding the Mandatory
Redemption provision, in the event that our Common Stock trades at $4.50 per
share or greater for ten (10) consecutive trading days, as measured by the
closing bid price, we shall have the right to convert into Common Stock such
shares of Series C Preferred Stock at the greater of $4.50 or the closing bid
price on the date that we provide written notice of our intention to convert.
d. LIQUIDATION PREFERENCES. In the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, the holders of
outstanding Series C Preferred Stock will be entitled to receive, before any
distribution is made with respect to the Corporation's common stock, a
preferential payment at a rate per each whole share of Series C Preferred Stock
equal to the face value of $3.00 per share plus accrued and unpaid dividends
thereon.
e. RECAPITALIZATION. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Amendment) provision shall be made so that the holders of the Series C
Preferred Stock shall thereafter be entitled to receive upon conversion of
the Series C Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this section with respect to the rights
of the holders of the Series C Preferred Stock after the recapitalization to
the end that the provisions of this section (including adjustment of the
applicable Conversion Prices then in effect and the number of shares
purchasable upon conversion of the Series C Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
f. NO VOTING RIGHTS AND NO SINKING FUND. The Series C Preferred
Shares have no voting
20
<PAGE>
rights and no sinking fund has or will be established to provide for dividends
or the redemption of the Series C Preferred Stock.
Prior to the merger, we had issued shares of Series A and Series B
preferred stock, but these were converted to common stock as part of our merger
on May 5, 1999.
C. OPTIONS AND WARRANTS
a. OPTIONS
In 1995 Jump! Software, Inc., prior to its merger with America's Finest
Waters, Inc., enacted the Jump! Software, Inc. 1995 Stock Option Plan ("1995
Plan"). Adjusted for the merger, 309,261 options are still outstanding under the
1995 Plan as of June 30, 1999, with an exercise price of $0.395 per share.
On May 5, 1999 the Company enacted the 1999 Incentive and Nonstatutory
Stock Option Plan (the "1999 Plan") which has reserved for issuance 2,00,000
options to purchase shares of Common Stock for board members, key employees and
consultants. The 1999 Plan is subject to, and must receive the approval of the
shareholders. As of June 30, 1999, 677,757 options have been issued under the
1999 Plan with an exercise price of $3.59 per share.
As of 1999, we have 987,018 options outstanding under both the 1995 and
199 Plan, of which 313,521 are currently exercisable.
b. WARRANTS
The following chart shows all of our current outstanding warrants:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
NUMBER OF WARRANTS PRICE CLASS OF SHARES
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
David Anderson 3,800 $0.03 Common
- -------------------------------------------------------------------------------------------
Silicon Valley Bank 6,196 $3.03 Common
- -------------------------------------------------------------------------------------------
Charles Corfield 41,801 $0.03 Common
- -------------------------------------------------------------------------------------------
L. George Klaus 9,500 $0.03 Common
- -------------------------------------------------------------------------------------------
John Kohler 9,500 $0.39 Common
- -------------------------------------------------------------------------------------------
J. Earl May 3,800 $0.03 Common
- -------------------------------------------------------------------------------------------
Mark Walsen 3,800 $0.03 Common
- -------------------------------------------------------------------------------------------
John Warnock 19,000 $0.39 Common
- -------------------------------------------------------------------------------------------
Jack Kemp 25,000 $1.00 Common
- -------------------------------------------------------------------------------------------
Dick Mathews 200,000 $5.125 Common
- -------------------------------------------------------------------------------------------
Jan Mathews 100,000 $5.125 Common
- -------------------------------------------------------------------------------------------
Houlihan, Smith & Co. 50,000 $1.00 Common
- -------------------------------------------------------------------------------------------
Dick Mathews 500,000 $3.00 Preferred C
- -------------------------------------------------------------------------------------------
Jan Mathews 100,000 $3.00 Preferred C
- -------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS' COMMON EQUITY AND
OTHER STOCKHOLDERS MATTERS
A. MARKET INFORMATION
Our Common Stock has been quoted on the over-the-counter bulletin board
system ("OTC Bulletin Board") since January 13, 1992, formerly under the symbol
AFWA, and since the Merger, under the symbol JMUS. In August, the OTC Bulletin
Board suspended quoting our stock pending effectiveness of this Form 10-SB.
Subsequently, we have been quoted on the pink sheets.
The following table sets forth the high ask, low bid and closing bid
prices for the Company's common stock as reported on the OTC Bulletin Board
and the pink sheets.
The prices below also reflect inter-dealer quotations, without retail
mark-up, mark-down or commissions and may not represent actual transactions:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
QUARTER ENDED HIGH ASK LOW BID CLOSING BID
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
03/31/92(1) 1 1/4 0 3/8 1 1/8
- ---------------------------------------------------------------------------------------
06/30/92 1 1/4 0 1/4 0 9/16
- ---------------------------------------------------------------------------------------
09/30/92(2) 0 3/4 0 1/8 0 5/16
- ---------------------------------------------------------------------------------------
12/31/92 0 1/2 0 1/16 0 1/4
- ---------------------------------------------------------------------------------------
03/31/93 0 7/16 0 1/16 0 3/32
- ---------------------------------------------------------------------------------------
06/30/93 0 0 3/32 0 3/32
- ---------------------------------------------------------------------------------------
09/30/93 0 0 3/32 0 3/32
- ---------------------------------------------------------------------------------------
12/31/93 0 0 3/32 0 3/32
- ---------------------------------------------------------------------------------------
03/31/94 0 3/4 0 1/16 0 1/2
- ---------------------------------------------------------------------------------------
06/30/94 0 3/4 0 1/16 0 11/32
- ---------------------------------------------------------------------------------------
09/30/94 0 9/16 0 1/16 0 1/4
- ---------------------------------------------------------------------------------------
12/30/94 0 7/16 0 1/32 0 5/32
- ---------------------------------------------------------------------------------------
03/31/95 0 9/32 0 1/32 0 5/32
- ---------------------------------------------------------------------------------------
06/30/95 0 9/32 0 1/32 0 5/32
- ---------------------------------------------------------------------------------------
09/29/95 0 9/32 0 1/32 0 9/64
- ---------------------------------------------------------------------------------------
12/29/95 0 1/4 0 1/32 0 3/32
- ---------------------------------------------------------------------------------------
03/29/96 0 9/32 0 1/32 0 5/32
- ---------------------------------------------------------------------------------------
06/28/96 0 9/32 0 1/32 0 5/32
- ---------------------------------------------------------------------------------------
09/30/96 0 5/16 0 1/64 0 11/64
- ---------------------------------------------------------------------------------------
12/31/96 0 5/16 0 1/64 0 1/64
- ---------------------------------------------------------------------------------------
03/31/97 0 5/16 0 1/64 0 11/64
- ---------------------------------------------------------------------------------------
06/30/97 0 5/16 0 1/64 0 11/64
- ---------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
QUARTER ENDED HIGH ASK LOW BID CLOSING BID
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
09/30/97 0 5/16 0 1/64 0 11/64
- ---------------------------------------------------------------------------------------
12/31/97 0 5/16 0 1/64 0 11/64
- ---------------------------------------------------------------------------------------
03/31/98 0 5/16 0 1/64 0 1/32
- ---------------------------------------------------------------------------------------
06/30/98 0 3/64 0 1/64 0 1/32
- ---------------------------------------------------------------------------------------
09/30/98 0 3/64 0 1/64 0 1/32
- ---------------------------------------------------------------------------------------
12/31/98 3 1/8 0 1/64 1
- ---------------------------------------------------------------------------------------
03/31/99 1 1/4 0 1/4 0 3/4
- ---------------------------------------------------------------------------------------
06/30/99 4 1/2 4 1/2 4 1/2
- ---------------------------------------------------------------------------------------
07/30/99 2 1/2 1 1/2 2
- ---------------------------------------------------------------------------------------
08/30/99 4 1 1/2 2 3/4
- ---------------------------------------------------------------------------------------
</TABLE>
- -----------------------
1 Price and volume statistics are not available for the full period.
2 No pricing activity for the last day of the period.
As of September 3, 1999 the bid price of our Common Stock was $2 3/4
per share.
At the time we were last quoted on the OTC Bulletin Board, Management
understood that the following firms made a market for our securities:
Hill Thompson Magid & Company, Inc.
JP Trading, L.L.C.
Pennaluna & Company
Paragon Capital Corporation
Sharpe Capital, Inc.
B. HOLDERS
As of July 19, 1999 there were approximately 396 holders of Company
Common Stock, as reported by the our transfer agent.
C. DIVIDENDS
We have not paid any dividends on its Common Stock. We intend to retain
any earnings for use in its business, and therefore does not anticipate paying
cash dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
To the best knowledge of management, there are no legal proceedings
pending or threatened against the company.
23
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On March 7, 1999, we commenced an offering pursuant to Regulation D,
Rule 504, of the Securities Act of 1933, as amended (the "Act"). We sold a total
of 3,270,480 shares of its common stock ("Shares") at $0.04 per Share for which
we accepted subscriptions for a total of gross proceeds of $130,819.20 from 51
sophisticated or accredited investors. The Offering was terminated on April 2,
1999.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Revised Statutes and the Company's Articles of Incorporation
and Bylaws authorize indemnification of a director, officer, employee or agent
of the Company against expenses incurred by him or her in connection with any
action, suit, or proceeding to which such person is named a party by reason of
having acted or served in such capacity, except for liabilities arising from
such person's own misconduct or negligence in performance of duty. In addition,
even a director, officer, employee or agent of the Company who was found liable
for misconduct or negligence in the performance of duty may obtain such
indemnification if, in view of all the circumstances in the case, a court of
competent jurisdiction determines such person is fairly and reasonably entitled
to indemnification. Insofar as indemnification for liabilities arising under the
Act 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 Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
PART F/S
FINANCIAL STATEMENTS
The following financial statements are included herein:
Audited Financial Statements for the Fiscal Years Ended December 31, 1998 and
December 31, 1997 Unaudited Financial Statements for the Six Months Ended June
30, 1999 and June 30, 1998
PART III
ITEM 1 AND
ITEM 2. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS
Note: We are only including exhibits which have amended since the
original filing of this Form 10-SB.
Exhibit No. Document Description
- ----------- ---------------------
10.2 1999 Incentive and Non-statutory Stock Option Plan
24
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
as amended, the Registrant caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
JUMPMUSIC.COM, INC.
/s/ Richard W. Mathews
----------------------------------
By: Richard W. Mathews
Its: Chief Executive Officer and
Chairman
Signature Title Date
- ---------- ------ -----
/s/ Richard W. Mathews Chief Executive Officer September 2, 1999
- ----------------------------
Richard W. Mathews and Chairman
/s/ Jan M. Mathews Chief Operating Officer September 2, 1999
- ----------------------------
Jan M. Mathews and Director
/s/ Valorie Cook Carpenter Director and Acting Senior September 2, 1999
- ----------------------------
Valorie Cook Carpenter Vice President Marketing
/s/ Jerome W. Carlson Acting Chief Financial September 2, 1999
- ----------------------------
Jerome W. Carlson Officer
/s/ Jack F. Kemp Director September 2, 1999
- ----------------------------
Jack F. Kemp
25
<PAGE>
JUMPMUSIC.COM, INC.
Financial Statements
June 30, 1999 (unaudited)
and
December 31, 1998 and 1997
<PAGE>
C O N T E N T S
Accountants' Report ...................................................... 3
Balance Sheets............................................................ 4
Statements of Operations ................................................. 6
Statements of Stockholders' Equity........................................ 7
Statements of Cash Flows ................................................. 9
Notes to the Financial Statements ........................................ 10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of JumpMusic.Com, Inc.
We have audited the accompanying balance sheet of JumpMusic.Com, Inc. as of
December 31, 1998 and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JumpMusic.Com, Inc. as of
December 31, 1998 and the results of its operations and cash flows for the years
ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has had recurring operating losses for the
past several years. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in the Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
June 15, 1999
<PAGE>
JUMPMUSIC.COM, INC.
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------------------ ----------------
CURRENT ASSETS (unaudited)
<S> <C> <C>
Cash (Note 1) $ 13,653 $ 5,961
Accounts receivable (net of allowance for doubtful
accounts of $20,000 and $172,579, respectively) 118,470 126,487
Inventory 320,135 359,129
------------------ ----------------
Total Current Assets 452,258 491,577
------------------ ----------------
PROPERTY & EQUIPMENT (Note 1)
Computer and Music equipment 46,294 50,016
Trade show booth - 33,915
Furniture and equipment 36,902 36,902
Leasehold improvements 17,865 17,865
------------------ ----------------
101,061 138,698
Less:
Accumulated depreciation (36,869) (70,785)
------------------ ----------------
Total Property & Equipment 64,192 67,913
------------------ ----------------
OTHER ASSETS
Organization costs (Note 1) 522 522
Deposits 3,474 3,474
------------------ ----------------
Total Other Assets 3,996 3,996
------------------ ----------------
TOTAL ASSETS $ 520,446 $ 563,486
------------------ ----------------
------------------ ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements
-4-
<PAGE>
JUMPMUSIC.COM, INC.
Balance Sheets continued
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------------------ ----------------
<S> <C> <C>
CURRENT LIABILITIES (unaudited)
Accounts payable $ 593,412 $ 1,169,187
Accrued expenses 68,315 264,824
Deferred salaries 146,208 249,331
Deferred revenue - 70,000
Current portion of long-term liabilities (Note 4) 1,102,851 1,371,856
------------------ ----------------
Total Current Liabilities 1,910,786 3,125,198
------------------ ----------------
LONG TERM LIABILITIES (Note 4)
Notes payable 150,000 150,000
Notes payable-related party 947,833 4,381,000
Capital lease obligations 7,874 7,874
Less current portion (1,102,851) (1,371,856)
------------------ ----------------
Total long term Liabilities 2,856 3,167,018
------------------ ----------------
TOTAL LIABILITIES 1,913,642 6,292,216
------------------ ----------------
REDEEMABLE PREFERRED STOCK (Note 8)
Series C Redeemable convertible Preferred stock,
authorized 2,500,000 shares issued and outstanding
1,472,013 and 0 shares, respectively 4,416,039 -
------------------ ----------------
STOCKHOLDERS' EQUITY
Series A Convertible Preferred stock, authorized
14,000,000 shares issued and outstanding
0 and 4,151,793 shares, respectively
Liquidation value $4,774,562 - 4,152
Series B Convertible Preferred stock, authorized
287,327 shares issued and outstanding
0 and 287,327 shares, respectively
Liquidation value $330,426 - 287
Common stock, authorized 50,000,000 shares
issued and outstanding 7,579,005 and
5,843,858 shares, respectively 7,579 5,843
Additional paid in capital 6,750,574 6,383,208
Retained earnings (12,567,388) (12,122,220)
------------------ ----------------
Total Stockholders' Equity (5,809,235) (5,728,730)
------------------ ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 520,446 $ 563,486
------------------ ----------------
------------------ ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements
-5-
<PAGE>
JUMPMUSIC.COM, INC.
Statements of Operations
<TABLE>
<CAPTION>
June 30 December 31
1999 1998 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 527,192 $ 775,545 $ 1,738,367 $ 3,530,154
COST OF SALES 219,073 383,613 806,417 1,936,675
----------- ----------- ----------- -----------
GROSS PROFIT 308,119 391,931 931,950 1,593,479
----------- ----------- ----------- -----------
SELLING EXPENSES 10,448 162,837 272,551 1,510,231
GENERAL & ADMINISTRATIVE
EXPENSES 543,930 1,115,430 1,813,390 3,531,953
----------- ----------- ----------- -----------
TOTAL
OPERATING EXPENSES 554,378 1,278,267 2,085,941 5,042,184
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (246,259) (886,336) (1,153,991) (3,448,705)
----------- ----------- ----------- -----------
OTHER INCOME AND (EXPENSES)
Interest income -- -- -- 3,273
Miscellaneous income 110,907 9,935 32,419 --
Interest expense (309,415) (101,326) (278,142) (130,691)
Bad debts -- (22,720) (30,477) (456,193)
----------- ----------- ----------- -----------
Total Other Income
and (Expenses) (198,508) (114,111) (276,200) (583,611)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (444,767) (1,000,447) (1,430,191) (4,032,316)
PROVISION FOR INCOME
TAXES (Note 1) 400 400 800 800
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (445,167) $(1,000,847) $(1,430,991) $(4,033,116)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME (LOSS)
PER COMMON SHARE $ (.08) $ (.17) $ (.24) $ (.69)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE
OUTSTANDING SHARES 6,711,432 5,831,493 5,843,858 5,837,675
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
-6-
<PAGE>
JUMP! SOFTWARE, INC.
Statements of Stockholders' Equity
From December 31, 1996 through December 31, 1998
and June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Series A Series B Additional
Retained
Preferred Stock Preferred Stock Common Stock
-------------------- ------------------- ------------------------
Paid-in Earnings
Shares Amount Shares Amount Shares Amount Capital (Deficit)
--------- --------- --------- -------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance on
December 31, 1996 3,386,578 $ 3,387 - $ - 5,806,762 $ 5,806 $4,924,131 $(6,658,113)
Stock issued for cash - - - - 37,096 37 5,527 -
Stock issued for cash 721,737 722 - - - - 829,276 -
Stock issued for cash - - 137,327 137 - - 274,467 -
Stock issued for services - - 50,000 50 - - 99,950 -
Net income (loss) for the year
ended December 31, 1997 - - - - - - - (4,033,116)
--------- --------- --------- -------- --------- -------- ---------- ------------
Balance on
December 31, 1997 3,386,578 3,387 - - 5,843,858 5,806 4,924,131 (10,691,229)
Stock issued for services 43,478 43 - - - - 49,957 -
Stock issued for cash - - 100,000 100 - - 199,900 -
Net income (loss)
for the year ended
December 31, 1998 - - - - - - - (1,430,991)
--------- --------- --------- -------- --------- -------- ---------- ------------
Balance on
December 31, 1998 4,151,793 4,152 287,327 287 5,843,858 5,843 6,383,208 (12,122,220)
</TABLE>
The accompanying notes are an integral part of these financial statements
-7-
<PAGE>
JUMP! SOFTWARE, INC.
Statements of Stockholders' Equity
From December 31, 1996 through December 31, 1998
and June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Additional
Series A Series B Retained
Common Stock
Preferred Stock Preferred Stock ------------------------
------------------- ------------------- Paid-in Earnings
Shares Amount Shares Amount Shares Amount Capital (Deficit)
---------- -------- --------- ------ ---------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance on
December 31, 1998 4,151,793 $ 4,152 287,327 $ 287 5,843,858 $ 5,843 $6,383,208 $12,122,220)
Reverse acquisition
and reorganization
adjustment (Note 13) (4,151,793) (4,152) (287,327) (287) 1,735,147 1,736 367,366 -
Net income (loss) for the
period ended June 30,1999 - - - - - - - (445,168)
---------- -------- --------- ------ ---------- ------- ---------- ------------
Balance on June 30,1999 - $ - - $ - $7,579,005 $ 7,579 $6,750,574 $(12,567,388)
========== ======== ========= ====== ========== ======= ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
-8-
<PAGE>
JUMPMUSIC.COM, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
June 30 December 31
1999 1998 1998 1997
----------------- ------------ -------------- --------------
Cash Flows From Operating Activities (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ (445,167) $ (1,000,847) $ (1,430,991) $ (4,033,116)
Non-cash items:
Depreciation & amortization 20,615 61,642 131,814
Bad debt - 22,720 16,977 456,193
Stock issued for services - - 35,854 100,000
Conversion of payables, accruals and
deferred expense to Preferred Stock 1,026,411 - - -
(Increase)/decrease in current assets:
Accounts receivable 8,033 600,552 362,075 526,276
Prepaid Expenses - (5,748) 25,500 (15,616)
Inventory 38,669 125,609 238,187 (127,228)
Increase/(decrease) in current liabilities:
Accounts payable (575,777) 47,896 231,987 (873,010)
Deferred salaries (103,124) 27,158 249,332 (46,000)
Accrued expenses (196,517) (67,953) (51,690) 132,617
Deferred revenue (70,000) - (80,000) 150,000
----------------- ------------ -------------- -------------
Net Cash Provided (Used) by
Operating Activities (317,472) (229,998) (341,127) (3,598,070)
----------------- ------------ -------------- -------------
Cash Flows from Investing Activities
Purchase of property and equipment - (7,315) (12,594) (27,556)
Cash paid for deposits - - (306) -
----------------- ------------ -------------- -------------
Net Cash Provided (Used)
by Investing Activities - (7,315) (12,900) (27,556)
----------------- ------------ -------------- -------------
Cash Flows from Financing Activities
Cash received from acquisition 115,164 - - -
Cash from line of credit - - - 1,000,000
Cash from sale of stock - 200,000 200,000 1,123,739
Cash received from debt financing 210,000 - 75,000 1,305,000
Principal payments on long-term debt - - (3,674) -
----------------- ------------ -------------- -------------
Net Cash Provided (Used) by
Financing Activities 325,164 200,000 271,326 3,428,739
----------------- ------------ -------------- -------------
Increase/(decrease) in Cash 7,692 (37,313) (82,701) (196,887)
Cash and Cash Equivalents at
Beginning of Period 5,961 88,662 88,662 285,549
----------------- ------------ -------------- --------------
Cash and Cash Equivalents at
End of Period $ 13,653 51,349 $ 5,961 $ 88,662
================= ============ ============== ==============
Supplemental Cash Flow Information:
Cash paid for interest $ - $ 131,804 $ 25,667 $ -
Cash paid for income taxes $ - $ - $ - $ -
Non-cash financing transaction:
Purchase of equipment with
lease obligations $ - $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements
-9-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and
December 31, 1998
NOTE 1 - Summary of Significant Accounting Policies
a. Organization
The financial statements presented are those of JumpMusic.Com,
Inc. (The Company). The Company was incorporated under the laws of the
State of California on January 26, 1994 as Jump! Software, Inc. On
April 26, 199 the Company changed the name to JumpMusic.Com, Inc.
pursuant to a merger agreement, (See Note 13). The Company develops,
publishes and markets interactive music software and hardware products
for the consumer market.
b. Recognition of Revenue
The Company recognizes income and expense on the accrual basis
of accounting. Revenue from sales of software and hardware products is
recorded on the date of shipment.
c. Earnings (Loss) Per Share
The computation of earnings per share of common stock is based
on the weighted average number of shares outstanding at the date of the
financial statements.
d. Provision for Income Taxes
No provision for income taxes have been recorded due to net
operating loss carryforwards totaling approximately $12,567,388 that
will be offset against future taxable income. These NOL carryforwards
will begin to expire in the year 2012. No tax benefit has been reported
in the financial statements because the Company believes there is a 50%
or greater chance the carryforward will expire unused.
Deferred tax asset and the valuation account is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
Deferred tax asset:
NOL carryforward $ 4,300,000 $ 4,100,000
Valuation allowance (4,300,000) (4,100,000)
--------------- --------------
$ - $ -
=============== ===============
</TABLE>
e. Cash and Cash Equivalents
The company considers all highly liquid investments with
maturities of three months or less to be cash equivalents.
The accompanying notes are an integral part of these financial statements
-10-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 1 - Summary of Significant Accounting Policies (Continued)
f. Property and Equipment
Expenditures for property and equipment and for renewals and
betterments, which extend the originally estimated economic life of
assets or convert the assets to a new use, are capitalized at cost.
Expenditures for maintenance, repairs and other renewals of items are
charged to expense. When items are disposed of, the cost and
accumulated depreciation are eliminated from the accounts, and any gain
or loss is included in the results of operations.
The provision for depreciation is calculated using the
straight-line method over the estimated useful lives of the assets.
Depreciation expense for the period ended June 30, 1999 and December
31,1998 is $0 and $29,443, respectively.
g. Inventory
Inventory is recorded at the lower of cost or market.
h. Concentrations
At December 31, 1998, three customers accounted for 27%, 17%
and 10% of accounts receivable.
i. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company
for loans with similar terms, the carrying value of notes payable
approximate fair value.
j. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation", which is effective for
the Company's financial statements for fiscal years beginning after
December 15, 1995. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or
under the provisions of Accounting Principles Board Opinion No. 25 (APB
No. 25), "Accounting for Stock Issued to Employees", but requires pro
forma disclosure in the footnotes to the financial statements as if the
measurement provisions of SFAS No. 123 had been adopted. The Company
accounts for its stock based compensation in accordance with the
provisions of APB No. 25 and presents disclosures required by SFAS No.
123.
-11-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 2 - Going Concern
The accompanying financial statements have been prepared
assuming that the company will continue as a going concern. The company
has had recurring operating losses for the past several years and is
dependent upon financing to continue operations. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty. Management plans to raise additional funds
through a public offering of its stock and expand its internet business
to generate necessary revenues.
NOTE 3 - Related Party Transactions
During the six months ended June 30, 1999 and the year ended
December 31, 1998, the Company received $209,833 and $75,000 in notes
payable from shareholders of the Company (See Note 4).
The President loaned the Company $5,500 during 1998. It was
converted to capital in anticipation of the merger.
NOTE 4 - Long-Term Liabilities
Long Term Liabilities are detailed in the following schedules
as of June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, December 31,
Notes payable is detailed as follows: 1999 1998
------------------ ----------------
<S> <C> <C>
Note payable to a corporation, due
May 5, 1998, bears interest at 10%,
convertible to preferred stock 150,000 150,000
------------------ ----------------
Total Notes Payable 150,000 150,000
------------------ ----------------
Notes payable related party is detailed as follows:
Note payable to a shareholder, due
December 31, 1999, bears interest at 8%,
convertible to preferred stock - 25,000
Note payable to a shareholder, due
June 30, 1998, bears interest at 12%,
convertible to preferred stock - 358,000
Note payable to a shareholder, due
October 29, 1997, non-interest bearing
convertible to preferred stock - 135,000
Note payable to a shareholder, due
March 31, 1998, non-interest bearing
convertible to preferred stock 700,000 700,000
</TABLE>
-12-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 4 - Long-Term Liabilities (continued)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ----------------
<S> <C> <C>
Note payable to a shareholder, due
March 31, 1998, bears interest at 8%,
convertible to preferred stock - 150,000
Note payable to a shareholder, due
December 1, 1998, bears interest at 8%,
convertible to preferred stock 38,000 38,000
Note payable to a corporation, due
within one year, bears interest at 8%,
convertible to preferred stock 9,833 -
Note payable to a shareholder, due
December 31, 1998, bears interest at 8%,
convertible to preferred stock - 50,000
Note payable to shareholder of the Company,
bears interest of 8%, unsecured note 200,000 -
Note payable to founders of the Company,
bear interest of 8%, unsecured note - 2,925,000
------------------ ----------------
Total notes payable - related party 947,833 4,381,000
------------------ ----------------
Capital lease obligations are detailed in the following schedule as
of June 30, 1999 and December 31, 1998:
Capital lease obligation to a corporation for computer equipment,
lease payments due monthly of $306 through June 2002, bears
interest at 12%, secured by computer
equipment. $ 7,874 $ 7,874
------------------ ----------------
Total Lease Obligations 7,874 7,874
------------------ ----------------
Total long term liabilities 1,105,707 4,538,874
</TABLE>
-13-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 4 - Long-Term Liabilities (continued)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ----------------
<S> <C> <C>
Less current portion of:
Notes payable 150,000 150,000
Notes payable - related party 947,833 1,218,000
Capital lease obligations 5,018 3,856
------------------ ----------------
Total current portion 1,102,851 1,371,856
------------------ ----------------
Net Long Term Liabilities $ 2,856 $ 3,167,018
------------------ ----------------
------------------ ----------------
</TABLE>
Future minimum principal payments on notes payable are as follows
at June 30, 1999:
<TABLE>
<S> <C>
1999 1,097,833
2000 -
2001 -
2002 -
2003 -
----------------
Total notes payable $ 1,097,833
----------------
----------------
</TABLE>
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1999 3,670
2000 3,670
2001 3,670
2002 1,830
----------------
12,840
Less portion representing interest (4,966)
---------------
Total $ 7,874
---------------
---------------
</TABLE>
NOTE 5 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1998
---------------
<S> <C> <C>
Electrical Parts $ 357,609
Finished Goods 1,520 359,129
--------------- ---------------
---------------
</TABLE>
NOTE 6 - Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted
-14-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period.
NOTE 7 - Stockholders' Equity
CONVERTIBLE PREFERRED STOCK
The rights, preferences and privileges of the preferred
shareholders are as follows:
DIVIDENDS
Holders of Series A Preferred Stock (the Preferred Stock) are entitled
to receive dividends of $0.09 per share per annum, in preference to any
payment of cash dividends declared or paid on shares of common stock.
Dividends on Preferred Stock are noncumulative and are payable as
determined by the Board of Directors. As of December 31, 1998, no
dividends have been declared.
LIQUIDATION
Holders of Preferred Stock are entitled to liquidation preferences over
common shareholders to the extent of $0.09 per share of Preferred
Stock, plus all declared but unpaid dividends. If funds are
insufficient to make a complete distribution to the preferred
shareholders, such shareholders will share in the distribution of the
Company assets on a pro rata basis in proportion to the aggregate
preferential amounts owed each shareholder. After payment has been made
to the preferred shareholders, any remaining assets and funds are to be
distributed equally among the holders of the Common Stock based upon
the number shares of the Common Stock held by each.
CONVERSION
At the option of the holder, Preferred Stock is convertible into such
number of fully paid shares of common stock as is determined by
dividing the Preferred Stock issue price by the conversion price in
effect at the time. The initial conversion price of the Preferred Stock
is $1.15 per share, and is subject to adjustment in accordance with the
antidilution provisions contained in the Company's Articles of
Incorporation. Conversion is automatic (i) upon the closing of a firm
commitment underwritten public offering under the Securities Act of
1933 or (ii) the approval by the holders of a majority of the then
outstanding shares of the Preferred Stock. The Company has reserved
3,386,578 shares of common stock in the event of conversion.
-15-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 7 - Stockholders' Equity (continued)
REDEMPTION
At the election of the Board of Directors, the Company may redeem all
or part of the shares of the Preferred Stock (pro rata based upon the
total number of shares of the Preferred Stock held by each holder) by
paying in cash a sum per share equal to $1.15 plus $0.09 per annum from
the date of issuance (as adjusted for any stock dividends,
combinations, splits or similar transactions).
VOTING RIGHTS
The holder of each share of Preferred Stock is entitled to one vote for
each share of common stock into which such share of the Preferred Stock
is convertible.
CONVERTIBLE PREFERRED STOCK (SERIES B)
The rights, preferences and privileges of the preferred
shareholders are as follows:
DIVIDENDS
Holders of Series B Preferred Stock (the Preferred Stock) are entitled
to receive dividends of $0.16 per share per annum. In preference to any
payment of cash dividends declared or paid on shares of common stock.
Dividends on Preferred Stock are noncumulative and are payable as
determined by the Board of Directors. As of December 31, 1998, no
dividends have been declared.
LIQUIDATION
Holders of Preferred Stock are entitled to liquidation preferences over
common shareholders to the extent of $0.16 per share of Preferred Stock
plus all declared but unpaid dividends. If funds are insufficient to
make a complete distribution to the preferred shareholders, such
shareholders will share in the distribution of the Company assets on a
pro rata basis in proportion to the aggregate preferential amounts owed
each shareholder. After payment has been made to the preferred
shareholders, any remaining assets and funds are to be distributed
equally among the holders of the Common Stock based upon the number
shares of the Common Stock held by each.
CONVERSION
At the option of the holder, Preferred Stock is convertible into such
number of fully paid shares of common stock as is determined by
dividing the Preferred Stock issue price by the conversion price in
effect at the time. The initial conversion price of the Preferred
Stock is $2.00 per share, and is subject to adjustment in accordance
with the antidilution provisions contained in the Company's Articles of
Incorporation. Conversion is automatic (I) upon the closing of a firm
commitment underwritten public offering under the Securities Act of
1933 or (ii) the approval by the holders of a majority of the then
outstanding shares of the Preferred Stock. The Company has reserved
287,327 shares of common stock in the event of conversion.
REDEMPTION
At the election of the Board of Directors, the Company may redeem all
or part of the shares of the Preferred Stock (pro rata based upon the
total number of shares of the Preferred Stock held by each holder) by
paying in cash a sum per share equal to $2.00 plus $0.16 per annum from
the date of issuance (as adjusted for any stock dividends,
combinations, splits or similar transactions).
VOTING RIGHTS
The holder of each share of Preferred Stock is entitled to one bote for
each share of common stock into which such share of the Preferred Stock
is convertible.
REDEEMABLE PREFERRED STOCK
The rights, preferences and privileges of the preferred
shareholders are as follows:
DIVIDENDS
Holders of Series C Preferred Stock (the Preferred Stock) are entitled
to receive dividends of $0.30 per share per annum, in preference to any
payment of cash dividends declared or paid on shares of common stock.
Dividends on Preferred Stock are noncumulative and are payable as
determined by the Board of Directors. As of December 31, 1998, no
dividends have been declared.
LIQUIDATION
Holders of Preferred Stock are entitled to liquidation preferences over
common shareholders to the extent of $3.00 per share of Preferred
Stock, plus all declared but unpaid dividends. If funds are
insufficient to make a complete distribution to the preferred
shareholders, such shareholders will share in the distribution of the
Company assets on a pro rata basis in proportion to the aggregate
preferential amounts owed each shareholder. After payment has been made
to the preferred shareholders, any remaining assets and funds are to be
distributed equally among the holders of the Common Stock based upon
the number shares of the Common Stock held by each.
CONVERSION
At the option of the holder, Preferred Stock is convertible into such
number of fully paid shares of common stock as is determined by
dividing the Preferred Stock issue price by the conversion price in
effect at the time. The initial conversion price of the Preferred Stock
is $3.00 per share, and is subject to adjustment in accordance with the
antidilution provisions contained in the Company's Articles of
Incorporation.
-16-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 7 - Stockholders' Equity (continued)
REDEMPTION
(a) MANDATORY REDEMPTION. If the Series C Redeemable and
Convertible Preferred Shares are not converted earlier by the
holder(s), at two years following the date of issuance, the Company is
obligated to redeem for cash each and every outstanding shares of
Series C Redeemable and Convertible Preferred Stock at face value plus
accrued and unpaid dividends owed.
(b) VOLUNTARY REDEMPTION. Notwithstanding the Mandatory
Redemption provision stated above, in the event that the Company's
common stock trades at $4.50 per share or greater for ten (10)
consecutive days, as measured by the closing bid price, the Company
shall have the right to convert into its common shares such Class C
shares at the greater of $4.50 or the closing bid price on the date
that the Company provides written notice of its intention to convert.
The Company's stock has traded for more than $4.50 for 10 consecutive
days as of June 30, 1999, and the Company intends to voluntarily redeem
the Preferred C Stock for common in the near future.
VOTING RIGHTS
The holder of each share of Preferred Stock has no voting rights.
The Company converted notes payable, accounts payable,
deferred salaries and accrued interest into redeemable Series C
Preferred Stock in the amount of $4,416,039 during the six months ended
June 30, 1999.
NOTE 8 - Stock Option Plan
In 1995, the Company adopted the 1995 Stock Option Plan (the
Plan) under which 2,078,000 shares of the Company's common stock have
been reserved for issuance to employees, directors, or consultants
under terms and provisions established by the Board of Directors. Under
the terms of the Plan, incentive options may be granted to employees,
an nonstatutory options may be granted to employees, directors and
consultants, at prices no less than 100% and 85%, respectively, of the
fair market value of the Company's common stock at the date of grant,
as determined by the Board of Directors. The options generally vest at
a rate of at least 25% per year and expire ten years from the date of
grant.
-17-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 8 - Stock Option Plan (continued)
The Company has also issued various options for services
performed. Following is a summary of the options issued at June 30,
1999:
<TABLE>
<CAPTION>
Weighted
Number Average
Of Exercise
Shares Price
-------------- -----------
<S> <C> <C>
Outstanding at December 31, 1996 $ 593,764 $ .395
Granted 46,507 -
Exercised 475 .395
Forfeited - -
-------------- -----------
Outstanding at December 31, 1997 639,796 .395
Granted - -
Exercised - -
Forfeited 330,535 -
-------------- -----------
Outstanding at December 31, 1998 309,261 .395
Granted 677,757 -
Exercised - -
Forfeited - -
-------------- -----------
Outstanding at June 30, 1999 987,018 .395
-------------- -----------
-------------- -----------
Options exercisable at June 30, 1999 313,521 .395
-------------- -----------
-------------- -----------
Weighted Average Fair Value of Options granted during the year ended:
December 31, 1996 $ .395
--------------
--------------
December 31, 1997 $ .395
--------------
--------------
December 31, 1998 $ .395
--------------
--------------
June 30, 1999 $ .395
--------------
--------------
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
(SFAS No. 123)." The Company, however, continues to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for the Plan. Had compensation cost for the Plan been determined based on the
fair value at the grant date for awards in 1998 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net loss for the year ended December
31, 1998 would not have been materially different from the reported net loss.
-18-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 8 - Stock Option Plan (continued)
As the provisions of SFAS No. 123 are only applied to stock
options granted after January 1, 1995, pro forma stock compensation
cast may be material in future years, as the Company may grant
additional options and as the vesting period for the Company's options
and the period over which stock compensation is charged to expense is
generally four years.
The fair value of each option grant is estimated on the date
of grant using the minimum value method with the following weighted
average assumptions used for grants in 1998 and 1997:
Risk-free interest rate 6.42%
Expected life 4 years
The weighted average expected life was calculated based on
the vesting period and the exercise behavior. The risk-free interest
rate was calculated in accordance with the grant date and expected
life.
The options outstanding and currently exercisable price at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
--------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercisable Number Contractual Exercise Options Exercisable
Prices Outstanding Life (years) Price Exercisable Price
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.395 309,261 8.93 $ 0.395 274,928 $ 0.395
</TABLE>
NOTE 9 - Warrants
The Company issued fully exercisable warrants to purchase
16,304 shares of Preferred Stock at a price of $1.15 per share. The
Company also issued fully exercisable warrants to purchase 75,000 and
165,000 shares of Common Stock at a price of $.15 and $.01,
respectively.
NOTE 10 - Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan which
covers substantially all employees. Under the Plan, employees are
permitted to defer up to 15% of their earnings, not to exceed the
statutory amount per year on a pretax basis through contributions to
the Plan. The Plan provides for employer contributions at the
discretion of the Board of Directors; however, no such contributions
were made in 1998 and 1997.
-19-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 11 - Commitments and Contingencies
The Company is committed to an operating lease for office space.
The lease requires the Company to pay monthly rent of $1,659. The lease
expires January 31, 1999 after which the lessor has agreed to lease the
space to the Company on a month to month basis.
NOTE 12 - Unaudited Information
The information furnished herein was taken from the books and
records of the Company without audit. However, such information reflects
all adjustments which are, in the opinion of management, necessary to
properly reflect the results of the six months ended June 30, 1999. The
information presented is not necessarily indicative of the results from
operations expected for the full fiscal year.
NOTE 13 - Subsequent Events/Reverse Merger
On April 26, 1999, the Company entered an agreement to merge with
America's Finest Waters, Inc. (AFWI) a Nevada Corporation. Pursuant to
the agreement, AFWA issued 4,400,000 shares of common stock to the
shareholders of the Company for all issued and outstanding stock of the
Company. The merger has been treated as a reverse merger, therefore
JumpMusic.Com, Inc. becomes the accounting acquirer and all historical
information in these financial statements are those of JumpMusic.Com,
Inc. At the time of the merger, all Preferred Series A and B were
converted to common stock. An adjustment was made on the books to reflect
the legal entities (AFWA) equity and Series C Redeemable Preferred Stock
was organized. The June 30, 1999 financial statements are consolidated
unaudited financial statements including the books of JumpMusic.Com, Inc.
and America's Finest Waters, Inc. At the time of the merger the Company
changed its name to JumpMusic.Com, Inc.
NOTE 14 - New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier period provided for comparative purposes
is required. The adoption of SFAS No. 130 is not expected to have a
significant impact on the Company's results of operations, financial
position or cash flows.
-20-
<PAGE>
JUMPMUSIC.COM, INC.
Notes to the Financial Statements
June 30, 1999 (unaudited) and December 31, 1998
NOTE 14 - New Authoritative Accounting Pronouncements (continued)
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interrim financial
reprots issued to shareholders. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Financial statement disclosures
for prior periods are required to be restated. The adoption of SFAS No.
131 is not expected to have a significant impact on the Company's results
of operations, financial position or cash flows.
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it is designated,
for example, gain or losses related to changes in the fair value of a
derivative not designated as a hedging instrument is recognized in
earnings in the period of the change, while certain types of hedges may
be initially reported as a component of other comprehensive income
(outside earnings) until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of SFAS No. 133 should
be as of the beginning of a fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the
provisions of SFAS No. 133. Earlier application of all of the provisions
of SFAS No. 133 is encouraged, but it is permitted only as of the
beginning of any fiscal quarter. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods.
The Company does not currently have any derivative instruments and
is not currently engaged in any hedging activities.
-21-
<PAGE>
EXHIBIT 10.2
1999 INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
<PAGE>
JUMPMUSIC.COM, INC.
1999 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
1. PURPOSE
This Incentive and Nonstatutory Stock Option Plan (the "Plan") is
intended to further the growth and financial success of JUMPMUSIC.COM, INC., a
Nevada corporation (the "Corporation") by providing additional incentives to
selected employees, directors, and consultants of the Corporation or parent
corporation or subsidiary corporation of the Corporation as those terms are
defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code") (such parent corporations and subsidiary corporations
hereinafter collectively referred to as "Affiliates") so that such employees,
directors, and consultants may acquire or increase their proprietary interest in
the Corporation. Stock options granted under the Plan (hereinafter "Options")
may be either "Incentive Stock Options," as defined in Section 422A of the Code
and any regulations promulgated under said Section, or "Nonstatutory Options" at
the discretion of the Board of Directors of the Corporation (the "Board") and as
reflected in the respective written stock option agreements granted pursuant
hereto.
2. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the
Corporation; provided however, that the Board may delegate such administration
to a committee of not fewer than three (3) members (the "Committee"), at least
two (2) of whom are members of the Board and all of whom are disinterested
administrators, as contemplated by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended ("Rule 16b-3"); and provided further, that the
foregoing requirement for disinterested administrators shall not apply prior to
the date of the first registration of any of the securities of the Corporation
under the Securities Act of 1933, as amended (the "Act").
Subject to the provisions of the Plan, the Board and/or the Committee
shall have authority to (a) grant, in its discretion, Incentive Stock Options in
accordance with Section 422A of the Code or Nonstatutory Options; (b) determine
in good faith the fair market value of the stock covered by an Option; (c)
determine which eligible persons shall be granted Options and the number of
shares to be covered thereby and the term thereof; (d) construe and interpret
the Plan; (e) promulgate, amend and rescind rules and regulations relating to
its administration, and correct defects, omissions, and inconsistencies in the
Plan or any Option; (f) consistent with the Plan and with the consent of the
optionee, as appropriate, amend any outstanding Option or amend the exercise
date or dates thereof; (g) determine the duration and purpose of leaves of
absence which may be granted to optionholders without constituting termination
of their employment for the purpose of the Plan; and (h) make all other
determinations necessary or advisable for the Plan's administration. The
interpretation and construction by the Board of any provisions of the Plan or of
any Option shall be conclusive and final. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option.
3. ELIGIBILITY
The persons who shall be eligible to receive Options shall be key
employees, directors, and consultants of the Corporation or any of its
Affiliates ("Optionees"). The term consultant shall mean any person who is
engaged by the Corporation to render services and is compensated for such
services, and any director of the Corporation whether or not compensated for
such services; provided that, if the Corporation registers any of its securities
pursuant to the Act, the term consultant shall thereafter not include directors
who are not compensated for their services or are paid only a director fee by
the Corporation.
(a) INCENTIVE STOCK OPTIONS. Incentive Stock Options may
only be issued to employees of the Corporation or its Affiliates. Incentive
Stock Options may be granted to officers, whether or not they are
1
<PAGE>
directors, but a director shall not be granted an Incentive Stock Option
unless such director is also an employee of the Corporation. Payment of a
director fee shall not be sufficient to constitute employment by the
Corporation. Any grant of option to an officer or director of the Corporation
subsequent to the first registration of any of the securities of the
Corporation under the Act shall comply with the requirements of Rule 16b-3.
An optionee may hold more than one Option.
The Corporation shall not grant an Incentive Stock Option
under the Plan to any employee if such grant would result in such employee
holding the right to exercise for the first time in any one calendar year, under
all options granted to such employee under the Plan or any other stock option
plan maintained by the Corporation or any Affiliate, with respect to shares of
stock having an aggregate fair market value, determined as of the date of the
Option is granted, in excess of $100,000. Should it be determined that an
Incentive Stock Option granted under the Plan exceeds such maximum for any
reason other than a failure in good faith to value the stock subject to such
option, the excess portion of such option shall be considered a Nonstatutory
Option. If, for any reason, an entire option does not qualify as an Incentive
Stock Option by reason of exceeding such maximum, such option shall be
considered a Nonstatutory Option.
(b) NONSTATUTORY OPTION. The provisions of the foregoing
Section 3(a) shall not apply to any option designated as a "Nonstatutory
Stock Option Agreement" or which sets forth the intention of the Parties that
the option be a Nonstatutory Option.
4. STOCK
The stock subject to Options shall be the shares of the Corporation's
authorized but unissued or reacquired Common Stock (the "Stock").
(a) NUMBER OF SHARES. Subject to adjustment as provided
in Paragraph 5(i) of this Plan, the total number of shares of Stock which may
be purchased through exercise of Options granted under this Plan shall not
exceed two million (2,000,000) shares. If any Option shall for any reason
terminate or expire, any shares allocated thereto but remaining unpurchased
upon such expiration or termination shall again be available for the grant of
Options with respect thereto under this Plan as though no Option had been
granted with respect to such shares.
(b) RESERVATION OF SHARES. The Corporation shall reserve
and keep available at all times during the term of the Plan such number of
shares as shall be sufficient to satisfy the requirements of the Plan. If,
after reasonable efforts, which efforts shall not include the registration of
the Plan or Options under the Act, the Corporation is unable to obtain
authority from any applicable regulatory body, which authorization is deemed
necessary by legal counsel for the Corporation for the lawful issuance of
shares hereunder, the Corporation shall be relieved of any liability with
respect to its failure to issue and sell the shares for which such requisite
authority was so deemed necessary unless and until such authority is obtained.
5. TERMS AND CONDITIONS OF OPTIONS
Options granted hereunder shall be evidenced by agreements between the
Corporation and the respective Optionees, in such form and substance as the
Board or Committee shall from time to time approve. Such agreements need not be
identical, and in each case may include such provisions as the Board or
Committee may determine, but all such agreements shall be subject to and limited
by the following terms and conditions:
(a) NUMBER OF SHARES: Each Option shall state the number
of shares to which it pertains.
(b) OPTION PRICE: Each Option shall state the Option
Price, which shall be determined as follows:
2
<PAGE>
(i) Any Option granted to a person who at the time
the Option is granted owns (or is deemed to own pursuant to Section 424(d) of
the Code) stock possessing more than ten percent (10%) of the total combined
voting power of value of all classes of stock of the Corporation, or of any
Affiliate, ("Ten Percent Holder") shall have an Option Price of no less than
one hundred ten percent (110%) of the fair market value of the common stock
as of the date of grant; and
(ii) Incentive Stock Options granted to a person
who at the time the Option is granted is not a Ten Percent Holder shall have
an Option price of no less than one hundred percent (100%) of the fair market
value of the common stock as of the date of grant.
(iii) Nonstatutory Options granted to a person who at
the time the Option is granted is not a Ten Percent Holder shall have an
Option Price determined by the Board as of the date of grant.
For the purposes of this paragraph 5(b), the fair market value
shall be as determined by the Board, in good faith, which determination shall be
conclusive and binding; provided however, that if there is a public market for
such stock, the fair market value per share shall be the average of the bid and
asked prices (or the closing price if such stock is listed on the NASDAQ
National Market System) on the date of grant of the Option, or if listed on a
stock exchange, the closing price on such exchange on such date of grant.
(c) MEDIUM AND TIME OF PAYMENT: To the extent permissible
by applicable law, the Option price shall be paid, at the discretion of the
Board, at either the time of grant or the time of exercise of the Option (i)
in cash or by check, (ii) by delivery of other common stock of the
Corporation, provided such tendered stock was not acquired directly or
indirectly from the Corporation, or, if acquired from the Corporation, has
been held by the Optionee for more than six (6) months, (iii) by the
Optionee's promissory note in a form satisfactory to the Corporation and
bearing interest at a rate determined by the Board, in its sole discretion,
but in no event less than 6% per annum, or (iv) such other form of legal
consideration permitted by the Nevada Revised Statutes and case law related
thereto as may be acceptable to the Board.
(d) TERM AND EXERCISE OF OPTIONS: Any Option granted to
an Employee of the Corporation shall become exercisable over a period of no
longer than ten (10) years and no less than twenty percent (20%) of the
shares covered thereby shall become exercisable annually. No Incentive Stock
Option shall be exercisable, in whole or in part, prior to one (1) year from
the date it is granted unless the Board shall specifically determine
otherwise, as provided herein. In no event shall any Option be exercisable
after the expiration of ten (10) years from the date it is granted, and no
Incentive Stock Option granted to a Ten Percent Holder shall, by its terms,
be exercisable after the expiration of ten (10) years from the date of the
Option. Unless otherwise specified by the Board or the Committee in the
resolution authorizing such option, the date of grant of an Option shall be
deemed to be the date upon which the Board or the Committee authorizes the
granting of such Option.
Each Option shall be exercisable to the nearest whole share,
in installments or otherwise, as the respective option agreements may provide.
During the lifetime of an Optionee, the Option shall be exercisable only by the
Optionee and shall not be assignable or transferable by the Optionee, and no
other person shall acquire any rights therein. To the extent not exercised,
installments (if more than one) shall accumulate, but shall be exercisable, in
whole or in part, only during the period for exercise as stated in the option
agreement, whether or not other installments are then exercisable.
(e) TERMINATION OF STATUS AS EMPLOYEE, DIRECTOR, OR
CONSULTANT: If Optionee's status as an employee, director, or consultant shall
terminate for any reason other than Optionee's death, then the Optionee (or if
the Optionee shall die after such termination, but prior to exercise, Optionee's
personal representative or the person entitled to succeed to the Option) shall
have the right to exercise the portions of any such termination, in whole or in
part, at any time within thirty (30) days after such termination (or in the
event Optionee's termination was caused permanent disability [within the meaning
of Section 22(e)(3) of the Code) this 30 day period shall be extended to six (6)
months] of "termination for good cause" as that term is defined under the Nevada
Revised Statutes and case
3
<PAGE>
law related thereto, such shorter period as the option agreement may specify,
but not less than three (3) days) or the remaining term of the Option,
whichever is the lesser; provided, however, that with respect to Nonstatutory
Options, the Board may specify such longer period, not to exceed one hundred
eighty (180) days, for exercise following termination as the Board deems
reasonable and appropriate. The Option may be exercised only with respect to
installments that the Optionee could have exercised at the date of
termination of employment. Nothing contained herein or in any Option granted
pursuant hereto shall be construed to affect or restrict in any way the right
of the Corporation to terminate the Optionee with or without cause.
(f) DEATH OF OPTIONEE: If an Optionee dies while employed
or engaged as a director or consultant by the Corporation or an Affiliate,
the portion of such Optionee's Option or Options which were exercisable at
the date of death may be exercised, in whole or in part, by the estate of the
decedent or by a person succeeding to the right to exercise such Option or
Options, at any time within the remaining term of this Option, but only to
the extent, that Optionee could have exercised this Option as of the date of
Optionee's death; provided, in any case, that this Option may be so exercised
only to the extent that this Option has not previously been exercised by
Optionee.
(g) NONTRANSFERABILITY OF OPTION: No Option shall be
transferable by the Optionee, except by will or by the laws of descent and
distribution.
(h) RECAPITALIZATION: Subject to any required action by
the stockholders, the number of shares of common stock covered by each
outstanding Option, and the price per share thereof set forth in each such
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of common stock of the Corporation resulting from a
subdivision or consolidation of shares or the payment of a stock dividend, or
any other increase or decrease in the number of such shares affected without
receipt of consideration by the Corporation.
Subject to any required action by the stockholders, if the
Corporation shall be the surviving entity in any merger or consolidation, each
outstanding Option thereafter shall pertain to and apply to the securities to
which a holder of shares of common stock equal to the shares subject to the
Option would have been entitled by reason of such merger or consolidation. A
dissolution or liquidation of the Corporation or a merger or consolidation in
which the Corporation is not the surviving entity shall cause each outstanding
Option to terminate on the effective date of such dissolution, liquidation,
merger or consolidation. In such event, if the entity which shall be the
surviving entity does not tender to Optionee an offer, for which it has no
obligation to do so, to substitute for any unexercised Option a stock option or
capital stock of such surviving entity, as applicable, which on an equitable
basis shall provide the Optionee with substantially the same economic benefit as
such unexercised Option, then the Board may grant to such Optionee, but shall
not be obligated to do so, the right for a period commencing thirty (30) days
prior to and ending immediately prior to such dissolution, liquidation, merger
or consolidation or during the remaining term of the Option, whichever is the
lesser, to exercise any unexpired Option or Options, without regard to the
installment provisions of Paragraph 5(d) of this Plan; provided, that any such
right granted shall be granted to all Optionees not receiving an offer to
substitute on a consistent basis, and provided further, that any such exercise
shall be subject to the consummation of such dissolution, liquidation, merger or
consolidation.
In the event of a change in the common stock of the
Corporation as presently constituted, which is limited to a change of all of its
authorized shares without par value into the same number of shares with a par
value, the shares resulting from any such change shall be deemed to be the
common stock within the meaning of this Plan.
4
<PAGE>
To the extent that the foregoing adjustments relate to stock
or securities of the Corporation, such adjustments shall be made by the
Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided in this Paragraph 5(h), the Optionee
shall have no rights by reason of any subdivision or consolidation of shares
of stock or any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class, and the
number or price of shares of common stock subject to any Option shall not be
affected by, and no adjustment shall be made by reason of, any dissolution,
liquidation, merger or consolidation, or any issue by the Corporation of
shares of stock of any class or securities convertible into shares of stock
of any class.
The grant of an Option pursuant to the Plan shall not affect
in any way the right or power of the Corporation to make any adjustments,
reclassifications, reorganizations or changes in its capital or business
structure or to merge, consolidate, dissolve, or liquidate or to sell or
transfer all or any part of its business or assets.
(i) RIGHTS AS A STOCKHOLDER: An Optionee shall have no
rights as a stockholder with respect to any shares covered by an Option until
the date of the issuance of a stock certificate to Optionee for such shares.
No adjustment shall be made for dividends (ordinary or extraordinary, whether
in cash, securities or other property) or distributions or other rights for
which the record date is prior to the date such stock certificate is issued,
except as expressly provided in Paragraph 5(h) hereof.
(j) MODIFICATION, ACCELERATION, EXTENSION, AND RENEWAL OF
OPTIONS: Subject to the terms and conditions and within the limitations of the
Plan, the Board may modify an Option, or once an Option is exercisable,
accelerate the rate at which it may be exercised, and may extend or renew
outstanding Options granted under the Plan or accept the surrender of
outstanding Options (to the extent not theretofore exercised) and authorize the
granting of new Options in substitution for such Options, provided such action
is permissible under Section 422A of the Code and the Nevada Revised Statutes
and case law related thereto.
Notwithstanding the foregoing provisions of this Paragraph
5(j), however, no modification of an Option shall, without the consent of the
Optionee, alter to the Optionee's detriment or impair any rights or obligations
under any Option theretofore granted under the Plan.
(k) INVESTMENT INTENT: Unless and until the issuance and
sale of the shares subject to the Plan are registered under the Act, each
Option under the Plan shall provide that the purchases of stock thereunder
shall be for investment purposes and not with a view to, or for resale in
connection with, any distribution thereof. Further, unless the issuance and
sale of the stock have been registered under the Act, each Option shall
provide that no shares shall be purchased upon the exercise of such Option
unless and until (i) any then applicable requirements of state and federal
laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Corporation and its counsel, and (ii) if requested to do
so by the Corporation, the person exercising the Option shall (i) give
written assurances as to knowledge and experience of such person (or a
representative employed by such person) in financial and business matters and
the ability of such person (or representative) to evaluate the merits and
risks of exercising the Option, and (ii) execute and deliver to the
Corporation a letter of investment intent, all in such form and substance as
the Corporation may require. If shares are issued upon exercise of an Option
without registration under the Act, subsequent registration of such shares
shall relieve the purchaser thereof of any investment restrictions or
representations made upon the exercise of such Options.
(l) EXERCISE BEFORE EXERCISE DATE: At the discretion of
the Board, the Option may, but need not, include a provision whereby the
Optionee may elect to exercise all or any portion of the Option prior to the
stated exercise date of the Option or any installment thereof. Any shares so
purchased prior to the stated exercise date shall be subject to repurchase by
the Corporation upon termination of Optionee's employment as contemplated by
Paragraphs 5(e) and 5(f) hereof prior to the exercise date stated in the
Option and such other restrictions and conditions as the Board or Committee
may deem advisable.
(m) OTHER PROVISIONS: The Option agreements authorized
under this Plan shall contain such other provisions, including, without
limitation, restrictions upon the exercise of the Options, as the Board or
the
5
<PAGE>
Committee shall deem advisable. Shares shall not be issued pursuant to
the exercise of an Option, if the exercise of such Option or the issuance of
shares thereunder would violate, in the opinion of legal counsel for the
Corporation, the provisions of any applicable law or the rules or regulations
of any applicable governmental or administrative agency or body, such as the
Act, the Securities Exchange Act of 1934, as amended, the rules promulgated
under the foregoing or the rules and regulations of any exchange upon which
the shares of the Corporation are listed.
6. AVAILABILITY OF INFORMATION
During the term of the Plan and any additional period during which an
Option granted pursuant to the Plan shall be exercisable, the Corporation
shall make available, not later than one hundred and twenty (120) days
following the close of each of its fiscal years, such financial and other
information regarding the Corporation as is required by the bylaws of the
Corporation and applicable law to be furnished in an annual report to the
stockholders of the Corporation.
7. EFFECTIVENESS OF PLAN; EXPIRATION
Subject to approval by the stockholders of the Corporation, this Plan
shall be deemed effective as of the date it is adopted by the Board. The Plan
shall expire on May 5, 2009, but such expiration shall not affect the validity
of outstanding Options.
8. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, insofar as permitted by law, from time to time, with
respect to any shares at the time not subject to Options, suspend or terminate
the Plan or revise or amend it in any respect whatsoever, except that without
the approval of the stockholders of the Corporation, no such revision or
amendment shall (i) increase the number of shares subject to the Plan, (ii)
decrease the price at which Options may be granted, (iii) materially increase
the benefits to Optionees, or (iv) change the class of persons eligible to
receive Options under this Plan; provided, however, no such action shall alter
or impair the rights and obligations under any Option outstanding as of the date
thereof without the written consent of the Optionee thereunder. No Option may be
granted while the Plan is suspended or after it is terminated, but the rights
and obligations under any Option granted while the Plan is in effect shall not
be impaired by suspension or termination of the Plan.
9. INDEMNIFICATION OF BOARD
In addition to such other rights or indemnifications as they may have
as directors or otherwise, and to the extent allowed by applicable law, the
members of the Board and the Committee shall be indemnified by the Corporation
against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any claim, action, suit
or proceeding, or in connection with any appeal thereof, to which they or any of
them may be a party by reason of any action taken, or failure to act, under or
in connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such claim, action, suit or proceeding, except
in any case in relation to matters as to which it shall be adjudged in such
claim, action, suit or proceeding that such Board member is liable for
negligence or misconduct in the performance of his or her duties; provided that
within sixty (60) days after institution of any such action, suit or Board
proceeding the member involved shall offer the Corporation, in writing, the
opportunity, at its own expense, to handle and defend the same.
10. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of common stock
pursuant to the exercise of Options will be used for general corporate purposes.
6
<PAGE>
11. NO OBLIGATION TO EXERCISE OPTION
The granting of an Option shall impose no obligation upon the Optionee
to exercise such Option.
12. NOTICES
All notice, requests, demand, and other communications pursuant this
Plan shall be in writing and shall be deemed to have been duly given on the date
of service if served personally on the party to whom notice is to be given, or
on the third day following the mailing thereof to the party to whom notice is to
be given, by first class mail, registered or certified, postage prepaid.
13. FINANCIAL STATEMENTS
Optionees under this Plan shall receive financial statements annually
regarding the Corporation during the period the options are outstanding. The
financial statements provided need not comply with Title 10, Section 260.613 of
the California Code of Regulations.
*****
