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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT 2
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
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(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
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(Address of principal executive offices) (Zip Code)
(650) 917-7460
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(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
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None None
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Securities to be registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001
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(Title of Class)
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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
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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,
and organs.
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."
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.(2)
b. THE PRODUCTS AND SERVICES
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
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(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
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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
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.
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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. Three of the largest are Guitar Center, Sam Ash
Music and MARS. Other chains include Musician's Friend, Thoroughbred Music,
and Music Go Round. The 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.
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 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.
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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 1998 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.
Based on our experience in the music products retail business, we believe
that companies in this industry compete primarily on providing superior
customer service and product selection although offering competitive prices
is also important.
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 piano-offer.com, 800music.com, 800-music.com,
musicsuperstore.com, guitar-offer.com, guitardiscovery.com,
music-superstore.com, everything-music.com and topvalues.com.
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
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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 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
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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.
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. 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
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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.
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.
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SIX MONTHS YEAR ENDED
ENDING JUNE 30 DECEMBER 31
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1999 1998 1998 1997
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
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<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)
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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, 1998 to $219,073 for June 30, 1999, due
to the company downsizing. Other income (expenses) 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.
To date, we have financed operations principally through net proceeds from
private placements of debt and
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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 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.
10
<PAGE>
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.
The Y2K problem can affect any modern technology used by a business in the
course of its day. Any
11
<PAGE>
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
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
12
<PAGE>
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
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 (5 persons) 1,484,522 19.33
</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:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
Richard W. Mathews 56 Chief Executive Officer, Chairman of the Board
of Directors
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
</TABLE>
13
<PAGE>
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. He became its Chief Executive Officer and Chairman of the
Board on January 26, 1994 when he founded the Company and has continued to
serve the Company in these roles up to the present date. 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
became our acting Chief Financial Officer on May 5, 1999. 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 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. On May 5, 1999
she also became our acting Senior Vice President of Marketing. 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
14
<PAGE>
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 served the Company as Chief Operating Officer,
Corporate Secretary, and Director continually since the commencement of the
Company on January 26, 1994. Her current term commenced on May 5, 1999. In
addition, 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 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.
15
<PAGE>
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.
16
<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
17
<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 the last two years, we have borrowed money from
shareholders. A list of all such transactions in the last two years for
amounts exceeding $60,000 follows.
On September 23, 1997, we borrowed $700,000 from Charles Corfield,
who is one of our shareholders. This note is convertible to Series C
Preferred stock and has an interest rate of 10% a year, compounded annually.
The note is secured by our company assets and matured on March 31, 1998. We
have reached a verbal agreement with Mr. Corfield to convert this note to
Series C Preferred stock. A copy of this note is included as an exhibit to
this Form 10-SB.
On September 25, 1997, we borrowed $150,000 from J. Earle May, who
is one of our shareholders. This note was convertible to our preferred stock
and has already been converted to Series C Preferred stock. The interest rate
on this note was 8% a year, compounded annually. This note was unsecured. The
note matured on March 31, 1998 but has been extended by oral agreement. We
anticipate reaching an agreement with Mr. May to convert this note to Series
C Preferred stock in the near future. A copy of this note is included as an
exhibit to this Form 10-SB.
On March 31, 1999 we borrowed $200,000 from Lee Lorenzen, who along
with his wife, Julie Lorenzen, is one of our largest shareholders. This loan
is pursuant to a verbal agreement. The loan is unsecured and has an interest
rate of 8%. Pursuant to our agreement with Mr. Lorenzen, we are not required
to repay this loan until we have adequate funds to repay it.
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:
18
<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 rights and no sinking fund has or will be
established to provide for dividends or the redemption of the Series C
19
<PAGE>
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>
20
<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
- -------------------------------------------------------------------------------
21
<PAGE>
<CAPTION>
- -------------------------------------------------------------------------------
QUARTER ENDED HIGH ASK LOW BID CLOSING BID
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
03/31/97 0 5/16 0 1/64 0 11/64
- -------------------------------------------------------------------------------
06/30/97 0 5/16 0 1/64 0 11/64
- -------------------------------------------------------------------------------
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
22
<PAGE>
company.
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 been added since the
filing of the last Amendment of this Form 10-SB.
<TABLE>
<CAPTION>
Exhibit No. Document Description
- ----------- --------------------
<S> <C>
10.8 Promissory Note Executed September 23, 1997
10.9 Promissory Note Executed September 25, 1997
27.1 Financial Data Schedule
</TABLE>
23
<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
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard W. Mathews Chief Executive Officer September 17, 1999
- -------------------------- and Chairman
Richard W. Mathews
/s/ Jan M. Mathews Chief Operating Officer and September 17, 1999
- -------------------------- Director
Jan M. Mathews
/s/ Valorie Cook Carpenter Director and Acting Senior September 17, 1999
- -------------------------- Vice President Marketing
Valorie Cook Carpenter
/s/ Jerome W. Carlson Acting Chief Financial Officer September 17, 1999
- --------------------------
Jerome W. Carlson
/s/ Jack F. Kemp Director September 17, 1999
- --------------------------
Jack F. Kemp
</TABLE>
24
<PAGE>
EXHIBIT 10.8
PROMISSORY NOTE
EXECUTED SEPTEMBER 23, 1997
<PAGE>
THIS INSTRUMENT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS AND HAVE BEEN TAKEN FOR
INVESTMENT ONLY AND NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF. IT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION AND QUALIFICATION UNLESS AN EXEMPTION FROM SUCH
REGISTRATION AND QUALIFICATION REQUIREMENTS IS AVAILABLE.
THIS INSTRUMENT IS SUBJECT TO A PLEDGE AND SUBORDINATION AGREEMENT DATED AS
OF SEPTEMBER 23, 1997 BETWEEN JUMP! SOFTWARE, INC. AND CHARLES CORFIELD, OF
WHICH AGREEMENT CERTAIN PERSONS DESCRIBED AS HOLDERS OF "SENIOR INDEBTEDNESS"
ARE THIRD PARTY BENEFICIARIES.
CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTE
$700,000 Mountain View, California
September 23, 1997
JUMP! SOFTWARE, INC., a California corporation (the "COMPANY"), for
value received, hereby promises to pay to the order of Charles Corfield or
his assignee (the "HOLDER") the principal amount of Seven Hundred Thousand
Dollars ($700,000) on or before the Maturity Date (as defined below).
1. MATURITY DATE. The "Maturity Date" shall be the earlier of
(a) March 31, 1998 and (b) such date as the Company shall have received at
least $6,000,000 in gross aggregate proceeds from the sale of Series B
Preferred Stock and, if applicable, such other new series of convertible
equity securities as the Company may issue prior to March 31, 1998.
2. INTEREST. As interest on this Note, the Company shall pay
Holder, on or before the Maturity Date, the sum of $6,930 and shall issue
Holder, on the date hereof, a warrant to purchase Common Stock of the Company
at an exercise price of $0.01 per share (the "WARRANT"). Any amounts
outstanding more than 180 days after the Maturity Date shall accrue interest
at the rate of 10% per annum until paid, compounded annually, calculated on
the basis of a 365-day year, beginning on the date which is 181 days after
the Maturity Date.
3. CONVERSION. Holder may elect to convert any or all of the
unpaid principal amount of this Note into shares of the Company's Series B
Preferred Stock or, if the Company has issued a new series of convertible
equity securities on the date of conversion, such other series at a
conversion price equal to the lesser of (a) $2.00 per share and (b) the issue
price of the Series B Preferred Stock or, if applicable, such other series to
the one or more institutional, corporate or venture capital investors that
purchase in the aggregate at least $1.5 million of Series B Preferred Stock
or, if applicable, such other series.
<PAGE>
4. SECURITY INTEREST. This Note is secured by certain of the
Company's assets pursuant to a Pledge and Subordination Agreement between the
Company and Holder dated as of even date herewith (the "SECURITY AGREEMENT"),
the terms of which are incorporated herein by reference.
5. SUBORDINATION. This Note and the Collateral are subject to
the subordination provisions of the Security Agreement. No indebtedness which
does not constitute Senior Indebtedness (as defined in the Security
Agreement) shall be senior in any respect to this Note.
6. MISCELLANEOUS.
(a) Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Note
or any Note exchanged for it, and indemnity satisfactory to the Company (in
case of loss, theft or destruction) or surrender and cancellation of such
Note (in the case of mutilation), the Company will make and deliver in lieu
of such Note a new Note of like tenor.
(b) The Company hereby waives presentment for payment,
demand, protest and notice of protest for nonpayment of this Note. If the
Holder employs an attorney or take any other steps for collection of any part
hereof after any default, the Company will pay all reasonable legal fees and
expenses incurred in collecting this Note.
(c) If any provision of this Note is held to be
invalid, illegal or unenforceable for any reason, such invalidity, illegality
or unenforceability shall not affect any other provisions of this Note, and
this Note shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
(d) No renewal or extension of this Note, delay in
enforcing any right of Holder under this Note, or assignment by Holder of
this Note shall affect the liability of the Company. All rights of Holder
under this Note are cumulative and may be exercised concurrently or
consecutively at Holder's option.
(e) It is the intent of Borrower and Holder in the
execution of this Note, the Subordination Agreement and the Warrant that the
loan evidenced hereby and thereby be exempt from the restrictions of the
usury laws of the State of California. In the event that, for any reason, it
should be determined that the California usury law is applicable to such
loan, Borrower and Holder stipulate and agree that none of the terms and
provisions contained herein or therein shall be construed to create a
contract for use, forbearance or detention of money requiring payment of
interest at a rate in excess of the maximum interest rate permitted to be
charged by the laws of the State of California. In such event, if any Holder
shall collect monies or other consideration which are deemed to constitute
interest which would otherwise increase the effective interest rate on this
Note to a rate in excess of the maximum rate permitted to be charged under
the laws of the State of California, all such excess consideration shall, at
the option of Holder, be credited to the payment of the sums due hereunder or
returned to Holder.
<PAGE>
(f) This Note shall be governed by the laws of the State
of California, without reference to conflicts of laws principles.
IN WITNESS WHEREOF, this Note has been executed and delivered on the
date specified above by the Company.
JUMP! SOFTWARE, INC.
/s/ Richard Mathews
-------------------------------------
Richard Mathews
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.9
PROMISSORY NOTE
EXECUTED SEPTEMBER 25, 1997
<PAGE>
THIS INSTRUMENT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS AND HAVE BEEN TAKEN FOR
INVESTMENT ONLY AND NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF. IT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION AND QUALIFICATION UNLESS AN EXEMPTION FROM SUCH
REGISTRATION AND QUALIFICATION REQUIREMENTS IS AVAILABLE.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
$150,000 Mountain View, California
September 25, 1997
JUMP! SOFTWARE, INC., a California corporation (the "COMPANY"), for
value received, hereby promises to pay to the order of J. Earle May or his
assignee (the "HOLDER") the principal amount of One Hundred Fifty Thousand
Dollars ($150,000) on or before the Maturity Date (as defined below).
1. MATURITY DATE. The "Maturity Date" shall be March 31 1998.
2. INTEREST. As interest on this Note, the Company shall issue
Holder, on the date hereof, a warrant to purchase Common Stock of the Company
at an exercise price of $0.01 per share (the "WARRANT"). Any amounts
outstanding more than 180 days after the Maturity Date shall accrue interest
at the rate of 8% per annum until paid, compounded annually, calculated on
the basis of a 365-day year, beginning on the date which is 181 days after
the Maturity Date.
3. CONVERSION. Holder may elect to convert any or all of the
unpaid principal amount of this Note into shares of the Company's Series B
Preferred Stock or, if the Company has issued a new series of convertible
equity securities on the date of conversion, such other series at a
conversion price equal to the lesser of (a) $2.00 per share and (b) the issue
price of the Series B Preferred Stock or, if applicable, such other series to
the one or more institutional, corporate or venture capital investors that
purchase in the aggregate at least $1.5 million of Series B Preferred Stock
or, if applicable, such other series.
4. SUBORDINATION. Except as permitted in the forms of
subordination agreement requested by holders of Senior Indebtedness (as
defined below), (a) no amount shall be paid by the Company in respect of the
principal of and interest on this Note at the time outstanding, and (b) no
other action prohibited by such subordination agreements shall be taken. This
Note shall be subject to customary forms of subordination agreement requested
from time to time by holders of Senior Indebtedness, and as a condition to
the Holder's rights hereunder, the Company may require that the Holder
execute such forms of subordination agreement. "SENIOR INDEBTEDNESS" means
(i) the principal amount of indebtedness of Borrower or with respect to which
Borrower is a guarantor to banks, insurance companies, lease financing
institutions or other lending institutions regularly engaged in the business
<PAGE>
of lending money, which is for money borrowed (or purchase or lease of
equipment in the case of lease financing) by Borrower, whether secured or
unsecured and whether now existing or hereafter incurred; (ii) all interest
thereon, prepayment charges with respect thereto, all fees, costs, expenses
or other amounts payable thereunder; and (iii) all refinancings, extensions,
renewals, amendments and modifications to any of the foregoing. No
indebtedness which does not constitute Senior Indebtedness shall be senior in
any respect to this Note. Subject to the payment in full of all Senior
Indebtedness, the holder of this Note shall be subrogated to the rights of
holders of Senior Indebtedness as set forth in the forms of subordination
agreement requested by holders of Senior Indebtedness.
5. MISCELLANEOUS.
(a) Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Note
or any Note exchanged for it, and indemnity satisfactory to the Company (in
case of loss, theft or destruction) or surrender and cancellation of such
Note (in the case of mutilation), the Company will make and deliver in lieu
of such Note a new Note of like tenor.
(b) The Company hereby waives presentment for payment,
demand, protest and notice of protest for nonpayment of this Note. If the
Holder employs an attorney or take any other steps for collection of any part
hereof after any default, the Company will pay all reasonable legal fees and
expenses incurred in collecting this Note.
(c) If any provision of this Note is held to be
invalid, illegal or unenforceable for any reason, such invalidity, illegality
or unenforceability shall not affect any other provisions of this Note, and
this Note shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
(d) No renewal or extension of this Note, delay in
enforcing any right of Holder under this Note, or assignment by Holder of
this Note shall affect the liability of the Company. All rights of Holder
under this Note are cumulative and may be exercised concurrently or
consecutively at Holder's option.
(e) This Note shall be governed by the laws of the State
of California, without reference to conflicts of laws principles.
IN WITNESS WHEREOF, this Note has been executed and delivered on the
date specified above by the Company.
JUMP! SOFTWARE, INC.
/s/ Richard Mathews
-------------------------------------
Richard Mathews
President and Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,961
<SECURITIES> 0
<RECEIVABLES> 299,066
<ALLOWANCES> (172,579)
<INVENTORY> 359,129
<CURRENT-ASSETS> 491,577
<PP&E> 138,698
<DEPRECIATION> (70,785)
<TOTAL-ASSETS> 563,486
<CURRENT-LIABILITIES> 3,125,198
<BONDS> 0
0
4,439
<COMMON> 5,843
<OTHER-SE> (5,738,992)
<TOTAL-LIABILITY-AND-EQUITY> 563,486
<SALES> 1,738,367
<TOTAL-REVENUES> 1,738,367
<CGS> 806,417
<TOTAL-COSTS> 2,085,941
<OTHER-EXPENSES> (1,942)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,142
<INCOME-PRETAX> (1,430,191)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,430,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,430,991)
<EPS-BASIC> (.24)
<EPS-DILUTED> 0
</TABLE>
