Securities and Exchange Commission
Washington DC 20549
Form 10-SB A-2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Saratoga International Holdings Corp.
(Name of Small Business Issuer in its charter)
Nevada 98-0169082
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8756 - 122nd Avenue NE Kirkland, WA 98033
(Address of principal executive offices)
425-827-7817
Issuer's telephone number
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act:
$0.001 Par Value Voting Common Shares
(Title of Class)
Documents Incorporated by Reference: NONE
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PART I
Item 1 Description of Business
o Organization and General History
The following summarizes the organizational history of Saratoga International
Holdings Corp. herein referred to as "Saratoga".
In December 1997, Saratoga began development stage activity under the corporate
name Western Oil & Tire Distributors Inc. ("Western"), a privately owned company
originally incorporated under the name FCP Ltd. on June 1, 1993 in the State of
Washington which had no operating activity until fiscal 1998. The corporate name
was changed to Western in December, 1997. Western's original business
development plan adopted in December, 1997 was to engage in the acquisition of
retail and wholesale tire businesses and petroleum product distribution
companies ("The WOTD Project").
In July 1998 the shareholders of Western exchanged all of their common shares
for controlling interest in Knightsbridge Corporation ("Knightsbridge") a
company originally incorporated on June 17, 1996 in the State of Nevada and the
surviving corporation's name was changed to Western.
Since the former shareholders of Western owned a majority of the outstanding
stock of the surviving corporation following its July 1998 merger with
Knightsbridge, the combination of the two companies has been treated as a
recapitalization of Western and the information and historical financial
statements presented herein are those of Western.
On March 24, 1999 the corporate name was changed from Western to Saratoga
International Holdings Corp. Western had not acquired any retail and wholesale
tire businesses or petroleum product distribution companies and the WOTD
Project, in its conceptual and early development stage, was spun-off to the
shareholders of Saratoga as of March 19, 1999. Saratoga redirected its business
development activity at the e-commerce industry.
o Authorized Capital
Saratoga is authorized to issue 200,000,000 shares of non-assessable voting
common stock, par value $0.001 per share and 50,000,000 shares of preferred
stock, par value $0.001 per share with such rights and preferences as determined
from time to time by the Board of Directors. Copies of Saratoga's Articles of
Incorporation and By-Laws, including amendments thereto, are attached hereto and
incorporated herein by this reference. See Part III Item I.
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o Business Activity
Saratoga's first entry into the e-commerce industry took place in June 1999.
Saratoga formed a wholly-owned subsidiary Saratoga Telecom Corp. ("Saratoga
Telecom"), a Nevada corporation, through which it acquired the right from
Internet Interview Inc., a Florida based company, to develop a technology to
market prepaid long distance telephone calling service via the Internet as a
reseller for long distance suppliers.
The operational right acquired from Internet Interview consisted of an
operational concept and plan to enter into the business of selling virtual
prepaid phone cards over the Internet, including the technological need to
develop a web site, accounting and management software, an Internet marketing
program to establish a web site agent network and Internet links and to
establish agreements and technology necessary to accept, process and clear
credit card transactions over the Internet.
As consideration for the purchase of the rights to the technology, Saratoga
issued to the two principal shareholders of Internet Interview, Inc. Messrs
Norman Reisch and Tom Morsey, Warrants to each to purchase 500,000 shares of the
common stock of Saratoga exercisable at any time at $0.10 per share and expiring
June 16, 2004. The purchase price of the operational right was recorded at
$102,666, the value of the Warrants, estimated based on the Black-Scholes option
pricing model.
Saratoga entered into a three year employment agreement with Tom Morsey, the
former President and minority shareholder of Internet Interview, Inc. which
entitles the employee to a base salary of $5,000 monthly plus annual performance
bonus to be determined by the Board of Directors and stock options to purchase
up to 250,000 shares of Saratoga at $0.10 per share. Saratoga also entered into
a one year consulting agreement with AJAY Enterprises which entitled AJAY to a
$5,000 monthly service fee and stock options to purchase up to 250,000 shares of
Saratoga at $0.10 per share. AJAY is controlled by Norman Reisch a former
principal shareholder of Internet Interview Inc. The consulting agreement with
AJAY was terminated by mutual agreement in August, 1999. Tom Morsey currently
serves as a Director of Saratoga and President of Saratoga Telecom Corp.
Initially, the business development plan for Saratoga Telecom was based on
marketing and selling virtual prepaid long distance telephone calling service
over the Internet targeted at potential customers who originate calls from
foreign countries to the United States and to other foreign countries. The
business development plan for Saratoga Telecom has been updated to include
targeting sales of prepaid long distance telephone calling service over the
Internet for calls originating in the United States to foreign countries and for
long distance calls originating and terminating within the United States as well
as calls originating in foreign countries to the United States and to other
foreign countries. Saratoga's marketing plan has also been expanded to include
targeting sales of prepaid long distance service hard cards principally in the
United States. A recent Frost
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and Sullivan report estimates that revenues in the prepaid long distance
industry will top $9.38 billion by the year 2001. The forecast is based on
revenue estimates for prepaid telephone traffic sold by long distance companies
and resellers for service carried over the Internet as well as service carried
over conventional telephone equipment. The Internet telephone segment of this
industry is forecasted to be in excess of $1.82 billion by 2001. Saratoga
Telecom, a reseller, is pursuing sales of Internet telephone service as well as
conventional telephone equipment service.
Since acquiring the Internet prepaid long distance calling service development
right from Internet Interview, Saratoga Telecom has completed the development of
a web site (www.TalkIsCheapCard.com) which may be accessed by the customer via
the Internet to place an order for a prepaid virtual calling card. Saratoga
Telecom has also completed the development of software technology which enables
it to electronically acquire units of prepaid long distance calling service from
its suppliers, to store such units until they are sold, to accept and process
prepaid credit card sales, and to distribute such units to Saratoga Telecom's
customers. Information is provided to the customer over the Internet on the
number of long distance units acquired, the price per unit, the total amount of
the purchase and dialing instructions to access long distance calling service.
To originate a call using the "virtual" card, the customer must follow the
instructions provided over the Internet at the time the prepaid calling service
is purchased. This information can be printed out and kept in the buyer's purse
or wallet.
One of Saratoga's marketing strategies is to establish a network of "Web Site"
agents in targeted markets to direct potential customers to a Web Site
(www.TalkisCheapCard.com) developed and owned by Saratoga Telecom Corp. to
dispense long distance usage purchased online by the customers. Saratoga Telecom
currently has four active web site agents and is in the process of finalizing
agreements with several others.
Long distance telephone calling service is to be provided by long distance
service suppliers which provide telecommunications services to the markets
targeted by Saratoga Telecom. Saratoga Telecom, as an independent contractor
("reseller"), purchases units of long distance service usage from such suppliers
under non-exclusive agreements with the suppliers.
In February 2000, Saratoga acquired Virtual Media Group Inc. of Kirkland,
Washington. Saratoga issued, to the shareholders of Virtual, 1,053,940 shares of
its common stock, 1,000,000 warrants, exercisable at $0.165 per common share,
and assumed Virtual's 9% convertible debenture obligation of $1 million dollars
due 2002. The warrants are convertible at $0.165 per share and vest with the
holder over a 5 year period, subject to continued employment with Virtual, and
expire within 6 years. Using the purchase method of accounting, the estimated
value of the consideration given was based on the following
a) Saratoga's assumption of payment of approximatley $1.1 million of Virtual's
liabilities which included the convertible debentures.
b) The beneficial conversion feature of the convertible debentures valued at
approximatley $430,000, which debentures are convertible debentures valued
at a 30% discount to market at the date of conversion and which feature was
assumed by Saratoga.
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c) The 1,053,940 shares of common stock isused by Saratoga valued at
approximatley $430,000.
The beneficial conversion feature of the convertible debentures will be
accounted for as additional interest expense at the issue date, which date the
debentures first become convertible.
Virtual, which was founded in 1998, has offices in Kirkland, Washington and
Lethbridge, Alberta, Canada. Virtual's principal business development activity
to date has been in the Western Canada marketplace.
Virtual's business development plan is based on providing e-commerce solutions
for the Internet. Virtual provides technological services to its customers
including website development and hosting, database development, digital virtual
tour technology and multi media services including CD ROM's. Virtual has also
commenced development of proprietary Internet software technology which includes
a new searching technology, a multi function communications module with
specialized security features and an e-commerce module.
Virtual reported modest annual revenues from technological service fees of
approximately $50,000 for its latest fiscal year ended October 31, 1999. Virtual
plans to continue with the development of its proprietary Internet software
technology with a goal of implementing a product roll-out plan in late 2000.
Saratoga's current overall business goal to become operational is based on a
plan of acquiring and consolidating existing businesses and marketable
technologies, products and services targeted at the rapidly growing e-commerce
industry.
Item 2 Management's Discussions and Analysis or Plan of Operations
o Plan of Operations
Saratoga's current plan is to become operational by approximately July 31, 2000
by continuing with the implementation of the business development plans of its
two subsidiaries, Saratoga Telecom Corp. and Virtual Media Group Inc. Saratoga
also plans to explore the possibility of acquiring other businesses,
technologies, products and services available in the e-commerce industry.
Saratoga Telecom is in the process of establishing itself as a reseller of
prepaid long distance telephone calling service provided by major domestic and
international long distance service suppliers. Saratoga's Telecom's major
marketing strategy is based on selling prepaid long distance usage to customers
over the Internet. Saratoga Telecom has developed a Web Site
(www.TalkisCheapCard.com) to facilitate the sale of prepaid long distance usage.
By dialing up the Web Site on the Internet, customers may order and receive long
distance usage by prepaying for such usage online with a credit card.
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Upon purchasing long distance service online, a "virtual calling card" will
appear on the customer's computer monitor, complete with usage instructions and
a Personal Identification Number superimposed over the online virtual card to be
used by the customer to access his or her account. Such information can then be
printed out by the customer for record keeping and personal use by the customer.
The print out also includes instructions for the customer as to how to place a
long distance call using the Virtual card.
The units of long distance service and PINs are supplied to Saratoga Telecom,
under non-exclusive reseller agreements with long distance service suppliers who
provide telephone service to the target markets selected by the company. At
present, Saratoga Telecom, as an independent contractor, has agreements with
Teleglobe Communications Corp. and Cable and Wireless Global Card Service Inc.
to supply it with units of long distance service on an "as ordered", "as needed"
basis.
Teleglobe has the ability to create customized global connectivity, PINs and
full turn-key calling solutions to its customers. Teleglobe's sizeable portfolio
of global telecommunications services also includes domestic and international
voice services, Internet access, domestic and international private lines,
Asynchoronous Transfer Mode (ATM) services, international toll-free services and
postpaid calling services. Therefore, Saratoga Telecom has selected Teleglobe as
its principal supplier of long distance services.
Teleglobe Inc. (NYSE, TSE, ME: TGO) is a recognized leader in global
telecommunications. Through its subsidiary Teleglobe Communications Corporation,
Teleglobe develops and supplies global connectivity services to carriers,
Internet service providers, business customers and content providers worldwide.
Teleglobe also caters to an expanding international consumer customer base.
According to TeleGeography, an industry publication, Teleglobe is the
fourth-ranked long distance provider in the United States and, according to a
recent KMI Corporation study, the third largest owner of undersea fiber optic
cable systems. Teleglobe has a 50% interest in ORBCOMM, the world's first
commercial low-earth-orbit, satellite-based, data communications system.
Additional information is available at www.teleglobe.com.
Teleglobe's prepaid card service is unique in that it allows telecommunications
carriers and large corporations to deliver a global calling service completely
branded in their own name. The prepaid cards not only carry the brand of the
carrier, but when callers use the card they hear custom-branded messages
identifying the network with the retailer's name, a capability other carriers do
not offer.
Cable & Wireless Global Card Services Inc. is the American subsidiary of Cable &
Wireless of London, England, one of the world's leading providers of integrated
communications and a major global carrier of communications traffic: Internet,
data, voice and video. Its businesses around the world offer a range of services
spanning interactive
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entertainment and information, broadband data, Internet access and broadcast
television, as well as fixed and mobile voice. Cable & Wireless is one of the
world's largest carriers of international traffic and provides mobile
communications in more than 30 countries.
Cable & Wireless is listed on the Stock Exchanges of London, New York (NYSE:
CWP) and Frankfurt.
Saratoga Telecom's plan to originate customer contact and sales orders is based
on establishing a network of Web Site agents in markets targeted by the Company
to direct potential customers to Saratoga Telecom's virtual calling card Web
Site. Saratoga Telecom has engaged the services of a marketing consulting
service firm in Florida to assist it with its efforts to establish Web Site
agents in Central and South America.
Under its marketing plan, Saratoga is also pursuing a strategy of offering
private label branding of its virtual calling cards to companies involved in
international business, such as air transportation carriers, travel agencies,
financial service providers and other service and commercial businesses.
Virtual Media's current business development plan is based on expanding its
marketing efforts to sell technological service in Western Canada and in the
USA. Further development of Virtual's proprietary software technology is subject
to the availability of sufficient funds from operating revenues or proceeds from
future financings by Saratoga.
Saratoga also plans to aggressively pursue the acquisition of other products,
technologies and services through licensing and/or acquiring businesses with
proven sales and operating history which are compatible with corporate
strategies to become operational in the e-commerce industry.
To date, Saratoga's current business development activities have consisted
primarily of acquiring the Internet telecom operational right of Internet
Interview Inc., acquiring Virtual Media Group Inc., assembling a management team
and raising capital. Since inception of Saratoga's development stage activities
in December 1997 to October 31, 1999, Saratoga's net losses have totaled
approximately $2,909,000 of which approximately $1,147,000 is attributable to
the tire and petroleum business project which was spun-off to shareholders
during March, 1999. These net losses have been funded primarily with the
proceeds from the private sales of the Company's convertible debt and equity
securities as well as with the issuance of its common stock in exchange for
services.
The spin-off of the WOTD Project was accomplished by the formation of
International Internet Petroleum & Tire Distributors Corp. as a wholly owned
subsidiary of Saratoga and a distribution of International shares to Saratoga
shareholders. Saratoga issued 5,000,000 shares of its common stock to
International in connection with the spin-off transaction which has been treated
as a stock dividend to Saratoga's shareholders as of the date of the spin-off.
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During the period December 1, 1997 (inception) to October 31, 1998, Saratoga
wrote off $255,000 of an investment made by Knightsbridge prior to the reverse
merger in Language Force, Inc., an unrelated company, after management
determined that it was unlikely the investment would be realized beyond $50,000
at any time in the future. The remaining $50,000 was written off in fiscal 1999
after determining that none of the investment would be realized. Also in fiscal
1998, management concluded that approximately $99,000 of costs incurred in
connection with an attempted acquisition of a tire company would not be realized
and the $99,000 was written off.
During the periods from December 1, 1997 (inception) to October 31, 1998 and the
year ended October 31, 1999, Saratoga used cash in operating activities of
approximately $566,000 and $740,000 respectively. The use of cash was primarily
the result of net losses of approximately $951,000 in 1998 and approximately
$1,446,000 in 1999 offset by non-cash charges of approximately $292,000 in 1998
and approximately $879,000 in 1999. The non-cash charges were as follows:
Fiscal year ending
------------------
1998 1999
---- ----
Loss on impairment of investment 255,500 $50,000
Notes payable forgiven (50,000)
Issuance of options, warrants and
stock for service 407,368
Amortization 15,000 117,933
Interest expense from beneficial
conversion features and stock for 21,568 354,008
debenture interest ________ ___________
$292,118 $ 879,309
------- -------
======== ==========
Additionally, the use of cash from operations was offset by changes in assets
and liabilities of approximately $93,000 as a source of cash in 1998 and
approximately $151,000 as a use of cash in 1999.
During the three month periods ended January 31, 1999 and 2000, Saratoga used
cash in operating activities of approximately $194,000 and $359,000
respectively. This use of cash in the quarter ended January 31, 1999 was the
result of a net loss of approximately $257,000 offset by $50,071 from the
issuance of common stock for services and $49,785 from interest expense from
beneficial conversion features. Also a change in current liabilities was a use
of cash of $37,369. The use of cash in the quarter ended January 31, 2000 was
the result of a net loss of approximately $512,000 offset by common stock issued
for services of $16,880, depreciation and amortization of $14,069 and interest
expense from beneficial conversion features of $60,690. Also, a change in
current assets and liabilities of $61,883 provided cash from operating
activities.
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Saratoga financing activities provided cash flow of approximately $652,000 for
the period from December 1, 1997 (inception) to October 31, 1998 offset by
approximately $87,000 attributable to payment of debt, and a debt issue cost
Saratoga's financing activities provided cash flow of approximately $1,138,000
for the year ended October 31, 1999 offset by approximately $168,000
attributable to payments of debt and debt issue costs. Financing activities
provided cash flow of approximately $202,000 and $313,000 for the three month
periods ended January 31, 1999 and 2000 respectively. This cash flow was offset
by approximately $102,000 of repayment of notes payable for the three months
ended January 31, 2000. Saratoga issued approximately 36,383,000 shares of its
common stock in the year ended October 31, 1999 including approximately
8,500,000 shares for services. For the three months ended January 31, 2000,
Saratoga issued 2,639,719 shares of its common stock including 145,000 shares
for services.
Saratoga has raised approximately $2,019,000 of operating capital including
$1,333,000 in private placement offerings since inception of its business
development activities in December 1997 through January 31, 2000 and plans to
continue its efforts to raise additional operating capital through various
financing methods including private placements of its equity securities. Funding
of future operations is dependent on management's ability to raise additional
capital.
In October 1999 Saratoga issued to an unrelated company a Promissory Note for
$276,000, including a $76,000 discount. The terms of the Note, including
amendments thereto, called for a payment of $60,000 in November, 1999 and the
balance, including interest at 6.5%, due by February 29, 2000. Messrs. Patrick
F. Charles and Terrence K. Picken, officers, directors and major shareholders,
assigned shares of Saratoga they personally own or control as collateral for the
Promissory Note. The proceeds, net of the discount and $26,000 in transaction
fees, will be used as operating capital, including the funding of the continuing
development of the Saratoga Telecom technology and audit, legal and
administrative costs related to filing a registration statement with the SEC.
o Research & Development
Other than developing, updating and expanding Saratoga Telecom's Web Site and
Internet software to facilitate sales of its prepaid long distance virtual
calling card, and Virtual's Internet software to facilitate sales of its
technological services. Saratoga does not intend to undertake any activities
that may be characterized as research and development until sufficient funding
is available from future operations or financings by Saratoga. Saratoga has not
incurred any research and development expenses since its inception.
o Number of Employees
Saratoga presently has twelve (12) employees; nine (9) full time and three (3)
part time employees. During the next 12 months, management intends to hire up to
twelve
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additional employees, including technical, marketing and sales and
administrative support personnel. Saratoga believes there is an ample supply of
qualified candidates available to fill such positions. However, the continuance
of employment of existing personnel and the hiring of any additional employees
is subject to the availability of sufficient funds from operating revenues or
proceeds from future financings to pay them.
o NASD OTC Bulletin Board Quotations
Effective January 4, 1999, the NASD adopted rules and regulations requiring that
prior to any issuer having its securities quoted on the OTC Bulletin Board of
the NASD that such issuer must be a "reporting issuer" which is required to file
reports under Section 13 or 15 (d) of the Securities and Exchange Act of 1934,
as amended Saratoga is not currently a "reporting issuer," and this Registration
Statement will bring Saratoga into compliance with these listing provisions of
the OTC Bulletin Board and should prevent the NASD from "delisting" quotations
of Saratoga's common stock. Under the "phase-in" schedule of the NASD, Saratoga
has until May 17, 2000, within which to become a "reporting issuer" and to
satisfy all comments of the Securities and Exchange Commission with respect to
this Registration Statement.
Item 3 Description of Property
Neither Saratoga nor its subsidiaries own any real property. Saratoga's
executive and administrative offices are located in Kirkland Washington in 1300
square feet of office space provided to it under a month to month administrative
support services agreement with Coast Northwest Inc., a company controlled by
Patrick F. Charles and Terrence K. Picken, Officers of Saratoga. Administrative
support services provided under a verbal agreement include use of office space,
office equipment, clerical services, data processing, local and long distance
telephone service and other miscellaneous administrative support services for
which the Company pays $8,500 per month.
Saratoga Telecom Corp has a one year lease on 1500 sq. ft. of office space
located in Hallandale, Florida at a rate of approximately $1,506 per month
through June 2000. There is one two year lease renewal option on this office
space.
Saratoga believes the office space shall be adequate for its needs for the
foreseeable future.
Item 4 Security Ownership of Certain Beneficial Owners and Management
This table describes the ownership of Saratoga's outstanding common stock by (i)
each of the Company's Officers and Directors; (ii) each person who is known by
Saratoga to own more than 5% of Saratoga's outstanding common stock; and (iii)
all of Saratoga's Officers and Directors as a group:
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<TABLE>
<CAPTION>
Title of Class Name of Beneficial Owner Amount and Nature of Percent of Class
Beneficial Owner
<S> <C> <C> <C>
Common Patrick F Charles 7,710,752 (a) 14.26%
Stock 8756-122nd Avenue NE Kirkland, WA
98033
Common Terrence K. Picken 7,190,752 (b) 13.30%
Stock 8756-122nd Avenue NE Kirkland, WA
98033
Common Stock Tom Morsey 35,800 . 07%
2500 E Hallandale
Beach Blvd. Ste #210
Hallandale, FL 33009
Common Stock Samuel H. Eisenberg 200,000 .37%
Common Stock Harold P. Capozzi 200,000 .37%
Common Stock International Internet 5,000,000 (c) 9.25%
All Officers and Directors as a 15,337,304 28.37%
group (5 persons)
<FN>
(a) Includes 2,250,000 shares held by PDDE, LLC a State of Washington limited
liability company formed in February 1998 of which Patrick F. Charles is
Managing Member and owns controlling interest and 2,236,000 shares held by
Coast Northwest Management, LLC a State of Washington Limited Liability
Company formed in February 1998 of which Patrick F. Charles is a
co-Managing Member and owns a 50% interest.
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(b) Includes 2,250,000 shares held by United West Holdings LLC, a State of
Washington limited liability company formed in February 1998 of which
Terrence K. Picken is Managing Member and owns controlling interest,
1,610,000 shares held by TKY Holdings LLC, a State of Washington limited
liability company formed in February 1998 of which Terrence K. Picken is
Managing Member and owns controlling interest, and 2,236,000 shares held
by Coast Northwest Management LLC, a State of Washington limited liability
company formed in February 1998 of which Terrence K. Picken is a
co-Managing Member and owns a 50% interest.
(c) International Internet Petroleum & Tire Distributors Corp. ("IIPT") was a
wholly-owned subsidiary of the Company which was formed in March 1999 and
the shares of which were distributed to the shareholders of Saratoga in a
spin-off transaction effective March 19, 1999. Patrick F. Charles is
President, CEO and a Director of IIPT and beneficially owns 24.7% of
IIPT's outstanding common stock. Terrence K. Picken is Executive
Vice-President and Director of IIPT and beneficially owns 23.2% of IIPT's
outstanding common stock.
</FN>
</TABLE>
Item 5 Directors, Executive Officers, Promoters, and Control Persons
This table describes Saratoga's current Directors and Executive Officers.
NAME AGE TITLE
Patrick F. Charles 58 President, Chief Executive
Officer and Director
Terrence K.Picken 61 Executive Vice-President,
Tom Morsey 52 President, Saratoga Telecom
Samuel H. Eisenberg 54 Director
Harold Peter Capozzi 74 Director
Patrick F. Charles has been Saratoga's Chief Executive Officer and Chairman of
the Board of Directors since the inception of Saratoga . Mr. Charles is also a
founder, President and Chief Executive Officer of Coast Northwest Inc., a
privately owned Washington Corporation, since its inception in 1981. Coast
Northwest Inc. provides financial and management consulting services to various
clients. Mr. Charles has also served as National Director of Legislative
consulting services for PriceWaterhouseCoopers, an international accounting
firm. Mr. Charles also currently serves as a Director for Absolute Future Tech.
Inc. ("AFTI"), a publicly traded company listed on the OTC Bulletin Board. AFTI
is a temporary employment service and Internet resume service specializing in
providing skilled professionals to the high-tech industry. Mr. Charles holds a
Bachelor of Science degree in marketing from Seattle University and an MBA from
the University of Arizona.
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Terrence K. Picken has served Saratoga as Executive Vice-President and Director
since its inception. Mr. Picken is also Executive Vice President and Director of
Coast Northwest Inc. since 1992. Coast Northwest Inc. is a privately owned
company which provides business management and financial consulting services to
various clients. Mr. Picken was also a general partner with
PriceWaterhouseCoopers, an international accounting firm. Mr. Picken has over 20
years of international accounting experience and was licensed as a CPA in
California and Washington as well as a Chartered Accountant in Canada. He
graduated with a Chartered Accountant degree from the University of Manitoba,
Canada.
Tom Morsey was appointed a Director of Saratoga and has served as President of
Saratoga Telecom Corp., a wholly-owned subsidiary of the Company, since June
1999. Mr. Morsey previously was President of Internet Interview Inc. which he
co-founded in 1997 and from which the Company acquired the telecom operational
right in June 1999. In 1989, Mr. Morsey founded Telecommunications Consulting
Institute Inc. ("Telecon Inc.") which he managed and operated for over 5 years.
Telecon Inc. was a reseller of AT & T and Sprint telephone calling services and
prior to its sale to Telenational Communications Inc. of Omaha Nebraska, had
over 968 representatives nationwide offering innovative calling programs
developed by Telecon Inc.
Samuel H. Eisenberg has served as a Director of Saratoga since its inception.
Mr. Eisenberg is Senior Vice-President of Portfolio Investment Strategies
Corporation based in New York which specializes in private investment banking.
He has served in such capacity for over 5 years.
Harold P. Capozzi has been a Director of Saratoga, formerly known as
Knightsbridge Corporation, since February 1997 and was President, Chairman and
CEO of Knightsbridge from June 1997 to July 1998, the date of Knightsbridge's
merger with Saratoga. Mr. Capozzi is manager of his own investment portfolio and
is an independent business advisory consultant. For ten years, 1990 - 1999, he
served as a Director of PLC Medical Systems Inc., a publicly traded Company
listed on the American Stock Exchange and was an officer and Director of
Richland Mines Inc., (VSE), and Dynamic Associates, (NASDAQ). He is currently a
Director and Officer of Ceasar's Explorations Inc., and Blackwater Ltd., (CVE).
Mr. Capozzi holds a Bachelor of Science Degree and a Bachelor of Commerce
Degree, with First Class Honors from the University of British Columbia, and a
Teaching Degree from the University of Italy.
The Directors serve in their positions until the next annual meeting of
stockholders or until the Directors' successors have been elected and qualified.
The executive officers are appointed by the Board of Directors and serve at the
discretion of the Board.
Item 6. Executive Compensation
The following tables set forth the compensation paid by Saratoga to the named
executive officers for the periods indicated:
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SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
--------------------------------------
Securities (5)
Other (1)(3)(4) Under-
Name and annual Restricted lying All other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Award SARs Payouts sation
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Patrick F.10/31/98 93,331 0 0 0 0 0 0
Charles 10/31/99 125,665 0 0 20,458 500,000 0 0
Chief
Executive
Officer
and
Director
Terrence 10/31/98 93,331 0 0 0 0 0 0
K. Picken 10/31/99 125,665 0 0 20,458 500,000 0 0
Executive
Vice-
President
and
Director
Thomas S. 10/31/98 0 0 0 0 0 0 0
Morsey 10/31/99 24,250 0 0 0 250,000 0 0
President
of wholly-
owned
subsidiary,
Saratoga
Telecom
Corp. and
Director
(1) The restricted stock award amounts reported in column (f) above for Patrick
F. Charles and Terrence K. Picken represent a 20% discount from market
price on restricted common shares used to partially pay for salary included
in column (c) above.
(2) Thomas S. Morsey joined Saratoga Telecom Corp as its President in June
1999. He was previously co-founder and President of Internet Interview,
Inc. from which Saratoga acquired the telecom operational right in June
1999. (3) Dividends would be paid on restricted common stock shares if
dividends are declared and paid on the common stock of Saratoga in
accordance with the Articles of Incorporation, as amended.
14
<PAGE>
(4) The number and market value of aggregate restricted stock holdings of
Patrick F. Charles and Terrence K. Picken held at October 31, 1999 were
7,710,752 shares and $1,079,505 for Mr. Charles and 7,190,752 shares and
$1,006,705 for Mr. Picken.
(5) The stock options listed in column (g) above were all exercisable at date
of grant.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Percent
of
Total
Options/
Number SARs
of Granted
Securities to Exercise Market
Underlying Employees Or Base Price on
Options/SARs in Fiscal Price Expiration Date of
Name Granted (#) Year ($/Sh) Date Grant
(a) (b) (c) (d) (e) (f)
- ------------------------------------------------------------------
Patrick F. 500,000 39.2% $0.20 9/17/04
Charles
Chief
Executive
Officer and
Director
Terrence K. 500,000 39.2% $0.20 9/17/04
Picken
Executive
Vice President
and Director
Thomas S. 250,000 19.6% $0.10 6/16/04 $0.14
Morsey
President of
Wholly-owned
Subsidiary,
Saratoga
Telecom Corp.
and Director
15
<PAGE>
Effective October 1, 1999, Saratoga signed Corporate Officer Employment
Agreements (the "Agreements") with Patrick F. Charles and Terrence K. Picken.
All significant provisions of the Agreements are identical. The Agreements are
for a three year term and provide basic salary of $150,000 in the first year,
$175,000 in the second year and $200,000 in the final year. The Agreements also
provide for incentive bonuses based on pre-tax operating cash flow. A bonus of
5.0% will be paid on the first $250,000; 4.0% on the next $250,000; 3.0% on the
next $250,000; 2.0% on the next $250,000 and 1.0% on pre-tax operating cash flow
amounts over $1,000,000. The Agreements also provide that at the discretion of
the officer, monthly amounts over $10,000 or any amount not paid when due may be
paid in common shares of Saratoga based on the closing bid price at the time the
officer gives notice. In the event Saratoga issues restricted common shares
under this provision, the officer is entitled to receive additional shares based
on a factor of up to a 40% discount of the closing bid price at the time the
officer gives notice.
For common stock issued in non-monetary transactions involving marketability
discounts Saratoga's policy is to account for marketability discounts in
accordance with guidelines provided by published empirical studies and financial
research on marketability discounts.
The Agreements provide that Patrick F. Charles and Terrence K. Picken may not be
terminated for any reason unless Saratoga offers in writing to purchase all of
their shares directly or beneficially owned at market price, as defined in the
Agreements; pays in cash all amounts owing to the officer and; pays in cash an
amount for a buy-out of the remainder of the Agreement at the rate of 50% of the
regular salary.
The Agreements also require Saratoga to provide and pay for $1,000,000 and
$500,000 life insurance on the lives of Patrick F. Charles and Terrence K.
Picken, respectively, to be paid to their estates. In addition, the Agreements
require Saratoga to provide death and disability benefits to Patrick F. Charles
and Terrence K. Picken or their estates equivalent to six (6) months pay at the
time of the death or disability. Saratoga is also required to pay an automobile
allowance of $750 per month each plus automobile operating expenses. Saratoga
has paid term life insurance premiums for the benefit of Patrick F. Charles and
Terrence K. Picken in the annual amounts of $1,915 and $1,265 respectively.
In June 1999, Saratoga Telecom Corp entered into a three year Employment
Agreement with Thomas S. Morsey as part of the Agreement for Sale and Purchase
of Telecom Business Assets between Saratoga Telecom Corp and Internet Interview,
Inc. The Employment Agreement provides a base salary of $5,000 per month, an
incentive bonus to be determined by the Board of Directors, stock options to
purchase up to 250,000 shares of the Company's common stock at $.10 per share,
immediately exercisable with a term of five (5) years and a $500 per month auto
allowance. Mr. Morsey, in June, 1999, received Warrants to purchase up to
500,000 shares of the Company's common stock at $0.10 per share, in connection
with Saratoga's acquisition of operational rights to develop an Internet telecom
technology from Internet Interview, Inc., of which Mr. Morsey was the former
President and minority stockholder. The Warrants are exercisable at any time and
expire June 15, 2004. None of the warrants have been exercised at this time.
16
<PAGE>
Stock Options
During October 1998, Saratoga approved a Qualified and Non-Qualified Stock
Option Plan ("the Plan"). A total of 8,000,000 shares are available for future
grants to directors, officers, employees and consultants who are in a position
to make significant contributions to the success of Saratoga.
The exercise price of each option will be determined by Saratoga's board of
directors, in its discretion, at the time of grant. The vesting period and the
expiration date shall not exceed ten years. Under the 1998 option plan,
incentive stock options that become exercisable in any fiscal year may not
exceed the fair market value of $100,000 as determined at the time the options
are granted. No options granted, to officers and directors under the Plan have
been exercised as of the date of this filing except for options on 250,000
shares exercised in January, 2000 by Harold A. Capozzi, one of Saratoga's
non-employee directors..
Compensation of Directors
Beginning in fiscal year ended October 31, 1999, non-employee directors are paid
$300 per Board of Directors meeting. The two outside directors were paid $2,100
each for the year ended October 31, 1999 and in April, 1999 each was granted
options to purchase up to 250,000 shares of the Company's common stock at $0.10
per share under Saratoga's Stock Option Plan. Such options expire within five
years from date of grant. There currently are no standard arrangements whereby
Saratoga's directors are compensated for committee participation or special
assignments.
Item 7 Certain Relationships and Related Transactions
Coast Northwest Inc. provided substantially all of Saratoga's corporate
administrative services since inception of Saratoga's development stage
activities for which Saratoga paid to Coast Northwest Inc. $96,373 for the year
ended October 31, 1999 and $73,600 for the period from inception of development
stage, activity December 1997, to October 31, 1998. At October 31, 1999 and
October 31, 1998 Saratoga owed an additional $1,127 and $10,100 respectively to
Coast Northwest Inc. for administrative support services. Saratoga's President,
Patrick F. Charles and Executive Vice-President, Terrence K. Picken,
collectively own controlling interest in Coast Northwest Inc.
Item 8 Description of Securities
Saratoga has two classes of securities authorized, consisting of 200,000,000
shares of common stock with a par value of $.001 per share and 50,000,000 shares
of preferred stock with a par value of $.001 per share.
17
<PAGE>
o Common Stock
Saratoga has authorized 200,000,000 shares of common stock with a par value
of $0.001 per share. The holders of common stock are entitled to one vote
per share on 17 all matters to be voted on by shareholders and do not have
cumulative voting rights. The shares of common stock have no pre-emptive,
subscription, conversion or redemption rights and may be issued only as
fully paid and non assessable shares. In the event of liquidation,
dissolution or winding up of the company, the holders of the common stock
are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision
has been made for each class or series of stock having preference over the
common stock. Holders of the common stock are entitled to share pro rata in
dividends and distributions with respect to the common stock, as may be
declared by the Board of Directors out of funds legally available subject
to a restriction that dividends on the common stock may not be paid until
dividends on Saratoga's issued cumulative Series A Convertible Redeemable
Preferred Stock have been paid.
PART II
Item 1 Market Price and Dividends on Saratoga's common equity and other
stockholder matters
Saratoga's common stock has traded on the OTC Bulletin Board since its merger
with Knightsbridge, July, 1998. Prior to the merger, Knightsbridge had commenced
trading on the OTC Bulletin Board in May, 1998 under the trading symbol KBDG. At
the time of the merger, the trading symbol was changed to WOTD. It was again
changed to SHCC in March 1999. The high and low sales prices for each quarter
from May 1998 to January 31, 2000 were as follows:
Quarter Ended High Low
- ------------- ---- ---
July 31, 1998 $0.500 $0.156
October 31, 1998 $0.500 $0.130
January 31, 1999 $0.220 $0.025
April 30, 1999 $0.290 $0.020
July 31, 1999 $0.220 $0.100
October 31, 1999 $0.215 $0.120
January 31, 2000 $0.328 $0.080
Quotations for Saratoga's common stock reflect inter-dealer prices, without
retail markups, markdowns or commissions and may not represent actual
transactions.
Saratoga has approximately 282 holders of its common stock.
18
<PAGE>
No dividends have been declared on Saratoga's common stock. Holders of the
common stock are entitled to share pro rata in dividends and distributions with
respect to the common stock, as may be declared by the Board of Directors out of
funds legally available subject to a restriction that dividends on the common
stock may not be paid until dividends on the cumulative Series A Convertible
Redeemable Preferred Stock have been paid.
Item 2 Legal Proceedings
Saratoga is not a party to any pending legal proceedings.
Item 3 Changes in and Disagreements with Accountants
There have not been any changes in or disagreements with Accountants.
Item 4 Recent Sales of Unregistered Securities
Prior to the merger with Knightsbridge, Saratoga, then named Western Oil & Tire
Distributors Inc. issued 6,000,000 shares of its common stock at $0.0001 par
value per share principally to its founding stockholders and to others for
services pursuant to Section 4 (2) of the Securities Act of 1933.
In accordance with an Agreement and Plan of Merger ("Merger") effective July 28,
1998, the 6,000,000 common shares of Western were exchanged for 12,000,000
shares of Knightsbridge common stock recorded at $0.001 per share par value,
11,577,000 of which were restricted and newly issued from Knightsbridge treasury
and 423,000 of which were delivered by certain stockholders of Knightsbridge.
950,000 shares of restricted common stock recorded at $0.001 par value were
newly issued as finder's fees under the Merger Agreement. The shares issued
under the Merger Agreement were issued without registration pursuant to an
exemption from registration under Section 4 (2) of the Securities Act of 1933.
In July 1998, Saratoga issued $150,000 principal amount of a 9% Series A
Subordinated Convertible Redeemable Debenture due July 24, 1999 to an accredited
investor in a private placement. The Series A Debenture and the shares of common
stock into which it was converted were exempt from registration in reliance on
Rule 504 of Regulation D of the Securities Act of 1933. The Series A Debenture
was convertible into common stock at a conversion price equal to 72.5% of the
average closing bid price of the common stock for the five (5) trading days
immediately preceding the date of receipt of the conversion notice. The Series A
Debenture plus interest thereon of $8,414 was converted to 6,345,908 shares of
common stock between October 1998 and April 1999 at an average price of
approximately $.025 per share. At the time of the sale of the Series A
Debenture, Saratoga recorded $56,897 of additional paid-in capital representing
the beneficial conversion feature value of the discount. This amount was charged
to interest expense over the expected conversion period.
19
<PAGE>
In November 1998 through January 1999 Saratoga issued 850,000 shares of common
stock valued at a total of $50,071 for an average price of $.059 per share to
J.B. Marc and Associates for financial advisory and corporate public relations
services. Such shares were issued without registration in reliance on Rule 504
of Regulation D of the Securities Act of 1933.
In December 1998, Saratoga issued $15,000 principal amount of a Subordinated
Convertible Redeemable Debenture due December, 1999 to Coast Northwest
Management LLC ("Coast LLC Debenture") a limited liability company owned by
Patrick F. Charles and Terrence K. Picken, officers, directors and controlling
shareholders of the Company in a private placement as payment of a loan to
Saratoga. The Coast LLC Debenture and the shares of common stock into which it
was converted were exempt from registration in reliance on Rule 504 of
Regulation D of the Securities Act of 1933. The Coast LLC Debenture was
convertible into common stock at a conversion price equal to 72.5% of the
average closing bid price of the common stock for the five (5) trading days
immediately preceding the date of receipt of the conversion notice. The Coast
LLC Debenture was converted to 300,000 shares of common stock on December 18,
1998 at a price of approximately $.05 per share. At the time of the sale of the
Coast LLC Debenture, Saratoga recorded $5,690 of additional paid-in capital
representing the beneficial conversion feature value of the discount. This
amount was charged to interest expense over the expected conversion period.
On January 7, 1999 Saratoga issued 3,600,000 shares of common stock for $90,000
cash to two non-U.S. resident investors, unrelated third parties, in an arms
length transaction. The shares were sold at an average of $.025 per share. The
purchase price per share of the transaction was significantly discounted from
the reported trade price of the shares due to a lack of trading volume and
sufficient history to determine per share market value. Such shares were issued
without registration in reliance on Rule 504 of Regulation D of the Securities
Act of 1933.
In January 1999 Saratoga issued $30,000 principal amount of a Subordinated
Convertible Redeemable Debenture due January 2000 to Coast Northwest Management
LLC ("Coast LLC Debenture 2") a limited liability company owned by Patrick F.
Charles and Terrence K. Picken, officers, directors and major shareholders of
Saratoga in a private placement as payment of a loan to Saratoga. The Coast LLC
Debenture 2 and the shares of common stock into which it was converted were
exempt from registration in reliance on Rule 504 of Regulation D of the
Securities Act of 1933. The Coast LLC Debenture 2 was convertible into common
stock at a conversion price equal to 72.5% of the average closing bid price of
the common stock for the five (5) trading days immediately preceding the date of
receipt of the conversion notice. $29,000 of the Coast LLC Debenture 2 was
converted to 1,250,000 shares of common stock on January 21, 1999 at a price of
approximately $.023 per share. The remaining $1,000 of the Coast LLC Debenture 2
was forgiven. At the time of the sale of the Coast LLC Debenture 2, Saratoga
recorded $11,380 of additional paid-in capital representing the beneficial
conversion feature value of the discount. This amount was charged to interest
expense over the expected conversion period.
20
<PAGE>
In January 1999 Saratoga issued $15,000 of principal amount of Subordinated
Convertible Redeemable Debentures due January 2000 to each of Patrick F. Charles
and Terrence K. Picken, officers, directors and major shareholders of Saratoga
in a private placement for a total of $30,000 in payment of services provided to
Saratoga. The Debentures and the shares of common stock into which they were
converted were exempt from registration in reliance on rule 504 of Regulation D
of the Securities Act of 1933. The Debentures were convertible into common stock
at a conversion price equal to 72.5% of the average closing bid price of the
common stock for the five (5) trading days immediately preceding the date of
receipt of the conversion notice. $14,500 of each Debenture totaling $29,000 was
converted into a total of 1,250,000 shares of common stock on January 21, 1999
at a price of approximately $.023 per share. The remaining $1,000 of the
Debentures was forgiven. At the time of the sale of the Debentures, Saratoga
recorded $11,380 of additional paid-in capital representing the beneficial
conversion feature value of the discount. This amount was charged to interest
expense over the expected conversion period.
On February 11, 1999 Saratoga issued 2,250,000 shares of common stock valued at
$.016 per share to Patrick F. Charles, an officer, director and a controlling
shareholder of Saratoga as partial payment for management services provided to
Saratoga . These shares were issued at a 20% discount from the closing market
price at the date of issuance. Such shares were issued without registration
pursuant to an exemption from registration under Section 4 (2) of the Securities
Act of 1933.
On February 11, 1999 Saratoga issued 2,250,000 shares of common stock valued at
$.016 per share to Terrence K. Picken an officer, director and major shareholder
of Saratoga as partial payment for management services provided to Saratoga.
These shares were issued at a 20% discount from the closing market price on the
date of issuance. Such shares were issued without registration pursuant to an
exemption from registration under Section 4 (2) of the Securities Act of 1933.
On February 11, 1999 Saratoga issued 25,000 shares of common stock valued at
$.016 per share to a limited liability corporation controlled by Patrick F.
Charles an Officer, Director and major shareholder of Saratoga as payment for
management services. These shares were issued at a 20% discount from the closing
market price on the date of issuance. Such shares were issued without
registration pursuant to an exemption from registration under Section 4 (2) of
the Securities Act of 1933.
On February 11, 1999 Saratoga issued 50,000 restricted shares of common stock
valued at $.016 per share to a non-U.S. resident for merger and acquisition
consulting services. These shares were issued at a 20% discount from the closing
market price on the date of issuance. Such shares were issued without
registration pursuant to an exemption from registration under Section 4 (2) of
the Securities Act of 1933.
On February 11, 1999 Saratoga issued 500,000 shares of common stock valued at
$.02 per share to Prime Ventures Corporation as payment of a fee to extend
payments under a consulting agreement. Such shares were issued without
registration in reliance on rule 504 of Regulation D of the Securities Act of
1933.
21
<PAGE>
On February 11, 1999 Saratoga issued 100,000 shares of common stock valued at
$.02 per share to Portfolio Investment Strategies Corp for merger and
acquisition consulting services. Such shares were issued without registration in
reliance on Rule 504 of Regulation D of the Securities Act of 1933.
On February 18, 1999 Saratoga issued 500,000 shares of common stock valued at
$.023 per share as payment to PMR and Associates for corporate public relations
services. Such shares were issued without registration in reliance on Rule 504
of Regulation D of the Securities Act of 1933.
Pursuant to a February 18, 1999 corporate public relations service agreement
entered into between PMR and Associates and Saratoga including amendments
thereto. PMR, in October, 1999 exercised its right to purchase 1,700,000 shares
of Saratoga common stock under warrants granted to PMR under the agreement at a
price of approximately $.029 per share. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act of 1933.
On February 18, 1999 Saratoga issued 95,000 shares of common stock valued at an
average price of $.023 per share to (4) four individuals under arrangements
whereby they provided administrative services to Saratoga. Such shares were
issued without registration in reliance on rule 504 of Regulation D or Section 4
(2) of the Securities Act of 1933.
On March 17, 1999 Saratoga issued 50,000 restricted shares of common stock
valued at $.03 per share to an independent consultant who provided merger and
acquisition services to Saratoga. These shares were issued at a 9.1% discount
from the closing market price on the date of issuance. Such shares were issued
without registration pursuant to an exemption from registration under Section 4
(2) of the Securities Act of 1933.
On March 17, 1999 Saratoga issued 250,000 shares of common stock valued at $.03
per share to Commonwealth Partners for merger and acquisition consulting
services. These shares were issued at a 9.1% discount from the closing market
price on the date of issuance. Such shares were issued without registration
pursuant to an exemption from registration under Section 4 (2) of the Securities
Act of 1933.
On March 19, 1999 Saratoga issued 5,000,000 shares of common stock valued at
$.05 per share to International Internet Petroleum & Tire Distributors Corp
("IIPT") in connection with the spin-off transaction whereby the shares of IIPT
were distributed to the stockholders of Saratoga as of March 19, 1999. These
shares were issued at approximately a 20% discount from the closing market price
on the date of issuance. Saratoga shares issued to IIPT were issued without
registration pursuant to an exemption from registration under Section 4 (2) of
the Securities Act of 1933. The issuance of these shares was accounted for as a
stock dividend.
22
<PAGE>
In March 1999, Saratoga issued $450,000 principal amount of a 9% Series B
Subordinated Convertible Redeemable Debentures due March 30, 2000 to three
accredited investors in a private placement. The Series B Debentures and the
shares of common stock into which they were converted were exempt from
registration in reliance on Rule 504 of Regulation D of the Securities Act of
1933. The Series B Debentures were convertible into common stock at a conversion
price equal to 72.5% of the average closing bid price of the common stock for
the five (5) trading days immediately preceding the date of receipt of the
conversion notice. The Series B Debentures plus interest thereon of $2,857 were
converted to 5,795,564 shares of common stock in May 1999 at an average price of
approximately $.078 per share. At the time of the sale of the Series B
Debentures, Saratoga recorded $170,691 of additional paid-in capital
representing the beneficial conversion feature value of the discount. This
amount was charged to interest expense over the expected conversion period.
On April 6, 1999 Saratoga issued 10,000 restricted shares of common stock valued
at $.04 per share to an individual for services. Such shares were issued without
registration pursuant to an exemption from registration under Section 4 (2) of
the Securities Act of 1933.
On May 17, 1999 Saratoga issued 550,000 shares of common stock valued at
approximately $.131 per share to PMR and Associates for corporate public
relations services. These shares were issued at a 3.03% discount from the
closing market price on the date of issuance. Such shares were issued without
registration pursuant to an exemption from registration under Section 4 (2) of
the Securities Act of 1933.
In May 1999 Saratoga issued 377,742 shares of its Series A Convertible
Redeemable Preferred Stock in payment of a $377,742 Note Payable due March 3,
2003. These Series A Convertible Redeemable Preferred shares are convertible
into common stock of Saratoga one-third after April 30, 2000, another one-third
after April 30,2001, and a final one-third after April 30,2002. The conversion
rate is $1.00 divided by the average closing price for Saratoga's common stock
for the five trading days immediately prior to the notice of conversion. Such
preferred shares were issued without registration pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
In June 1999, Saratoga issued $150,000 principal amount of a 9% Series C
Subordinated Convertible Redeemable Debenture due June 11, 2001 to a corporation
in a private placement. The Series C Debenture and the shares of common stock
into which it was converted were exempt from registration in reliance on Rule
504 of Regulation D of the Securities Act of 1933. The Series C Debenture was
convertible into common stock at a conversion price equal to 72.5% of the
average closing bid price of the common stock for the five (5) trading days
immediately preceding the date of receipt of the conversion notice. The Series C
Debenture plus interest thereon of $97 was converted to 1,548,158 shares of
common stock in June 1999 at an average price of approximately $.097 per share.
At the time of the sale of the Series C Debenture, Saratoga recorded $ 56,897 of
additional paid-in capital representing the beneficial conversion feature value
of the discount. This amount was charged to interest expense over the expected
conversion period.
23
<PAGE>
On June 16, 1999 Saratoga issued 150,000 shares of common stock valued at $.112
per share to a corporation for services. These shares were issued at a 20%
discount from the closing market price on the date of issuance. Such shares were
issued without registration pursuant to an exemption from registration under
Section 4 (2) of the Securities Act of 1933.
On July 1, 1999, Saratoga issued 25,000 shares of common stock valued at $.136
per share to an individual for services. These shares were issued at a 20%
discount from the closing market price on the date of issuance. Such shares were
issued without registration pursuant to an exemption from registration under
Section 4 (2) of the Securities Act of 1933.
On July 22, 1999 Saratoga issued 220,000 shares of common stock to an individual
for corporate public relations services. The agreed value of the shares was 85%
of the average closing price of the common stock for the five (5) preceding
trading days or $.149 per share. Such shares were issued without registration
pursuant to an exemption from registration under Section 4 (2) of the Securities
Act of 1933.
In July 1999, Saratoga issued $150,000 principal amount of a 2% Series D
Subordinated Convertible Redeemable Debenture due July 30, 2001 to a company in
a private placement. The Series D Debenture and the shares of common stock into
which it was converted were exempt from registration in reliance on Rule 504 of
Regulation D of the Securities Act of 1933. The Series D Debenture was
convertible into common stock at a conversion price equal to 75% of the average
closing bid price of the common stock for the five (5) trading days immediately
preceding the date of receipt of the conversion notice. The Series D Debenture
plus interest thereon of $1,275 was converted to 1,182,261 shares of common
stock in August 1999 at an average price of approximately $.127 per share. At
the time of the sale of the Series C Debenture, Saratoga recorded $50,000 of
additional paid-in capital representing the beneficial conversion feature value
of the discount. This amount was charged to interest expense over the expected
conversion period.
On August 25, 1999 Saratoga issued 170,000 shares of common stock valued at $.15
per share to a corporation for corporate public relations services. Such shares
were issued without registration pursuant to an exemption from registration
under Section 4 (2) of the Securities Act of 1933.
On October 4, 1999 Saratoga issued 400,000 restricted shares of common stock
valued at $.14 per share to Patrick F. Charles an officer, director and a
controlling shareholder of Saratoga as reimbursement for consulting services
paid by Mr. Charles on behalf of Saratoga. Such shares were issued without
registration pursuant to an exemption from registration under Section 4 (2) of
the Securities Act of 1933.
On October 4, 1999 Saratoga issued 29,762 restricted shares of common stock to
each of Patrick F. Charles and Terrence K. Picken, officers, directors and
controlling shareholders
24
<PAGE>
of Saratoga. These shares were valued at $.112 per share and were partial
payment of their salary in accordance with employment agreements between them
and Saratoga. These shares were issued at a 20% discount from the closing market
price on the date of issuance. Such shares were issued without registration
pursuant to an exemption from registration under Section 4 (2) of the Securities
Act of 1933.
In November, 1999, Saratoga issued 1,000,000 shares of common stock valued at
$.06 per share as payment on a note payable to an unrelated third party. Such
shares were issued without registration in reliance on Rule 504 of Regulation D
of the Securities Act of 1933.
In December, 1999, Saratoga issued 115,000 shares of common stock valued at $.09
per share to employees. Such shares were issued without registration pursuant to
an exemption form registration under Section 4(2) of the Securities Act of 1933.
In January, 2000, Saratoga issued $160,000 principal amount of a 2% Series E
Subordinated Convertible Redeemable Debenture due January 20, 2001 to a
non-related company in a private placement. The Series E Debenture and the
shares of common stock into which it was converted were exempt form registration
in reliance on Rule 504 of Regulation D of the Securities Act of 1933. The
Series E Debenture was convertible into common stock at a conversion price equal
to 72.5% of the average closing bid price of the common stock for the five (5)
trading days immediately preceding the date of receipt of the conversion notice.
The E Debenture was converted to 1,244,719 shares of common stock in January,
2000 at an average price of approximately $.129 per share. At the time of the
sale of the Series E Debenture, Saratoga recorded $60,690 of additional paid-in
capital representing the beneficial conversion feature value of the discount.
This amount was charged to interest expense over the expected conversion period.
In January, 2000, Saratoga issued 250,000 shares of common stock valued at $.10
per share to a Director upon exercise of a stock option granted to the Director.
Such shares were issued without registration pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
In January, 2000, Saratoga issued 30,000 shares of common stock valued at $.20
per share to employees. Such shares were issued without registration pursuant to
an exemption from registration under Section 4(2) of the Securities Act of 1933.
Saratoga believed that each of the foregoing persons or entities to whom shares
of common stock were issued were either "accredited investors" or "sophisticated
investors" as defined in the Securities Act of 1933. Each had access to all
material information regarding Saratoga, its business and financial condition
prior to the offer and sale of the securities in question.
Saratoga took into consideration a number of factors in determining the price
per share of its common stock in the described transactions. These consisted of
(1) the "restricted"
25
<PAGE>
nature of the securities (except for those transactions under Regulation D Rule
504); (2) the limited market for Saratoga's common stock on the OTC Bulletin
Board; (3) the low book value per share; and (4) Saratoga's history of limited
revenues.
For common stock issued in non-monetary transactions involving marketability
discounts Saratoga's policy is to account for marketability discounts in
accordance with guidelines provided by published empirical studies and financial
research on marketability discounts.
Item 5 Indemnification of Officer and Directors
Section 78.751 (1) of the Nevada Revised Statutes ("NRS") authorizes a Nevada
corporation to indemnify any director, officer, employee or corporate agent "who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, except an action by or in the right of the corporation" due to
his or her corporate role. Section 78.751 (1) extends this protection "against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with the
action, suit or proceeding if he or she acted in good faith and in a manner
which he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful."
Section 78.751 (2) of the NRS also authorizes indemnification of the reasonable
defense or settlement expenses of a corporate director, officer, employee or
agent who is sued, or is threatened with a suit, by or in the right of the
corporation. The party must have been acting in good faith and with the
reasonable belief that his or her actions were not opposed to the corporation's
best interests. Unless the court rules that the party is reasonably entitled to
indemnification, the party seeking indemnification must not have been found
liable to the corporation.
To the extent that a corporate director, officer, employee, or agent is
successful on the merits or otherwise in defending any action or proceeding
referred to in Section 789.751 (1) or 78.751 (2), Section 78.751 (3) of the NRS
requires that he be indemnified "against expenses, including attorneys' fees,
actually and reasonably incurred by him or her in connection with the defense."
Section 78.751 (4) of the NRS limits indemnification under Sections 78.751 (1)
and 78.751 (2) to situations in which either (1) the stockholders (2) the
majority of a disinterested quorum of directors, or (3) independent legal
counsel determine that indemnification is proper under the circumstances.
Pursuant to Section 78.751 (5) of the NRS, the corporation may advance an
officer's or director's expenses incurred in defending any action or proceeding
upon receipt of an undertaking. Section 78.751 (6) (a) provides that the rights
to indemnification and
26
<PAGE>
advancement of expenses shall not be deemed exclusive of any other rights under
any bylaw, agreement, stockholder vote or vote of disinterested directors.
Section 78.751 (6) (b) extends the rights to indemnification and advancement of
expenses to former directors, officers, employees and agents, as well as their
heirs, executors, and administrators.
Regardless of whether a director, officer, employee or agent has the right to
indemnity, Section 78.752 allows the corporation to purchase and maintain
insurance on his behalf against liability resulting from his or her corporate
role.
Article II of the Company's Articles of Incorporation provides that any person
serving as a Director or Officer is to be indemnified and held harmless to the
fullest extent legally permissible under the General Corporate Law of the State
of Nevada.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Dated: April 28, 2000.
SARATOGA INTERNATIONAL HOLDINGS CORP.
By: /s/ Patrick F. Charles
------------------------------------------
Patrick. F. Charles
CEO, President and Director
28
<PAGE>
PART F/S
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report F-1
Consolidated Balance Sheets as of October 31, 1999 F-2
and January 31, 2000 (unaudited)
Consolidated Statements of Operations for the three
months ended January31, 1999 and 2000 (unaudited) and for
the year ended October 31, 1999 and from December 1, 1997
(inception) through October 31, 1998 and the
cumulative period during the development stage from
December 1, 1997 (inception) through January 31, 2000 F-3
(unaudited)
Consolidated Statement of Changes in Shareholders'
Equity (Deficiency) from December 1, 1997 (inception) through
October 31, 1998, for the year ended October 31,
1999 and the three months ended January
31, 2000 (unaudited) F-4 - F-7
Consolidated Statements of Cash Flows for the
three months ended January 31, 1999 and 2000, (unaudited)
for the year ended October 31, 1999 and from December
1, 1997 (inception) through October 31, 1998 and the
cumulative period during the development stage from
December 1, 1997 (inception) through January 31, 2000
(unaudited) F-8 - F-11
Notes to Consolidated Financial Statements F-12 - F-29
<PAGE>
VIRTUAL MEDIA GROUP INC.
INDEX TO FINANCIAL STATEMENTS
Page
Auditor's Report F-30
Balance Sheet as of October 31, 1999 and January 31, 2000
(Unaudited) F-31
Statements of Loss and Deficit for the year ended October
31, 1999 and for the three months ended January 31, 1999
and 2000 (Unaudited) F-32
Statements of Cash Flow for the year ended October
31, 1999 and for the three months ended January 31,
1999 and 2000 (Unaudited) F-33
Notes to Financial Statements F-34 - F-37
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
Introduction F-38
Unaudited Pro Forma Condensed Combined Balance
Sheet as of January 31, 2000 F-39
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended October 31, 1999 F-40
Unaudited Pro Forma Condensed Combined Statement of
Operations for the three months ended January 31, 2000 F-41
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements F-42
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Saratoga International Holdings Corp. and Subsidiary
Kirkland, Washington
We have audited the accompanying consolidated balance sheet of Saratoga
International Holdings Corp. and Subsidiary, (A Development Stage Company) as of
October 31, 1999, and the related consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for the year ended October 31,
1999 and for the period December 1, 1997 (inception) through October 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saratoga
International Holdings Corp. and Subsidiary, (A Development Stage Company) as of
October 31, 1999, and the results of their operations and their cash flows for
the year ended October 31, 1999 and for the period December 1, 1997 (inception)
through October 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2(a), to
the consolidated financial statements the Company is in the development stage,
has incurred net losses since inception and expects to incur net losses for the
foreseeable future. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in note 2(a). The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Feldman Sherb Horowitz & Co., P.C.
-------------------------------------
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
January 7, 2000
F-1
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS January 31, 2000
------
(Unaudited) October 31, 1999
------------------------------ ------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 72,811 $ 241,589
Accounts receivable 10,671 -
Deferred pin costs 23,890 -
Deferred financing cost 11,300 35,475
Prepaid expense and other current 54,653 72,249
asset ------------------------------ ------------------------
TOTAL CURRENT ASSETS 173,325 349,313
PROPERTY AND EQUIPMENT - at cost, net 30,842 10,752
INTANGIBLE ASSET, net 68,950 81,733
------------------------------ ------------------------
$ 273,117 441,798
============================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable $ 98,163 $ 200,000
Loans payable - shareholders and officers 75,000 31,789
Accrued expenses and other current liabilities 113,105 58,432
------------------------------ -----------------------
TOTAL CURRENT LIABILITIES 286,268 290,221
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
8% cumulative convertible redeemable preferred stock, $.001 par value,
50,000,000 authorized, 377,742 shares, issued and outstanding,
liquidating preference of $1 377,742 377,742
Common stock, par value $0.001, 200,000,000 authorized
54,697,850 shares and 52,058,125, issued and outstanding 54,698 52,058
Additional paid in capital 2,713,460 2,393,530
Less: Common stock subscriptions - (25,000)
Deficit accumulated during the development stage (3,159,051) (2,646,753)
------------------------------ -----------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (13,151) 151,577
------------------------------ -----------------------
$ 273,117 $ 441,798
============================== =======================
</TABLE>
See notes to the consolidated financial statements
F-2
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Cumulative
Three Three During the
Months Months Development Stage
Ended Ended From December 1, (December 1, 1997
January 31, 1999 January 31, 2000 Year Ended 1997 (inception) to to January 31, 2000)
(Unaudited) (Unaudited) October 31, 1999 October 31, 1998 (Unaudited)
------------------ ------------------ ------------------- ---------------------- -------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $ - $ 6,671 $ 2,660 $ - $ 9,331
COST OF SALES - 4,798 23,810 - 28,608
------------------ ------------------ ------------------- ---------------------- -------------------------
GROSS PROFIT (LOSS) - 1,873 (21,150) - (19,277)
OPERATING EXPENSES 196,183 392,131 1,038,729 475,489 1,906,349
------------------ ------------------ ------------------- ---------------------- ------------------------
LOSS FROM OPERATIONS
(196,183) (390,258) (1,059,879) (475,489) (1,925,626)
------------------ ------------------ ------------------- ---------------------- -------------------------
OTHER INCOME
(EXPENSE):
Loss on impairment
of investments - - (50,000) (255,500) (305,500)
Write off of
terminated
acquisition costs - - - (99,043) (99,043)
Expenses of
reverse merger - - - (78,816) (78,816)
Interest expense (60,905) (122,040) (393,369) (48,357) (563,766)
Forgiveness of
note payable - - 50,000 - 50,000
Other income 1 - 7,415 6,286 13,701
------------------ ------------------ ------------------- ---------------------- -------------------------
NET OTHER EXPENSES (60,904) (122,040) (385,954) (475,430) (983,424)
------------------ ------------------ ------------------- ---------------------- -------------------------
NET LOSS (257,087) (512,298) (1,445,833) (950,919) (2,909,050)
LESS:
CUMULATIVE
PREFERRED
STOCK DIVIDEND - 7,555 15,110 - 22,665
------------------ ------------------ ------------------- ---------------------- -------------------------
NET LOSS TO
COMMON SHARES $ (257,087) $ (519,853) $ (1,460,943) $ (950,919) $ (2,931,715)
================== ================== =================== ====================== =========================
LOSS PER COMMON
SHARE, BASIC AND
DILUTED $ (0.01) $ (0.01) $ (0.04) $ (0.07) $ (0.10)
================== =================== =================== ====================== =========================
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING,
BASIC AND DILUTED 18,592,193 53,559,698 37,259,311 13,041,680 28,894,204
================== =================== ================== ====================== =========================
</TABLE>
See Notes to the consolidated financial statements
F-3
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
<CAPTION>
Additional
Common Stock Preferred Stock Paid-in
----------------- ---------------- --------------- ---------------
Shares Amount Shares Amount Capital
----------------- ---------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 1, 1997 (INCEPTION) 12,217,400 $ 12,217 - $ - $ 185,261
Reverse stock split 1-for-4 (9,163,050) (9,163) - - 9,163
Issuance of common stock pursuant to reverse
acquisition 11,577,000 11,577 - - (11,577)
Issuance of common stock for services related
to reverse acquisition 950,000 950 - - (950)
Adjustment for beneficial conversion feature
from issuance of a debenture - - - - 56,897
Issuance of common stock from conversion
of debenture 94,085 94 - - 10,138
Net loss - - - - -
-------------- ---------------- --------------- -------------- -----------
BALANCE, OCTOBER 31, 1998 15,675,435 15,675 - - 248,932
Issuance of common stock for services 8,504,524 8,505 - - 362,943
Issuance of common stock from conversion
of debentures 17,578,166 17,578 - - 957,833
Adjustment for beneficial conversion feature
from issuance of debentures - - - - 306,036
Issuance of common stock for cash
and stock subscriptions receivable 5,300,000 5,300 - - 134,700
Issuance of common stock in connection
with a spin-off of WOTD Project 5,000,000 5,000 - - 245,000
Issuance of warrants for operational right - - - - 102,166
Issuance of options and warrants for services - - - - 35,920
Issuance of 8% cumulative convertible redeemable
preferred stock - - 377,742 377,742 -
Net loss - - - - -
BALANCE, OCTOBER 31, 1999, -------------- ---------------- --------------- -------------- -----------
CARRIED FORWARD 52,058,125 $ 52,058 377,742 $ 377,742 $2,393,530
-------------- ---------------- --------------- -------------- -----------
</TABLE>
See notes to the consolidated financial statements
F-4
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
<CAPTION>
Additional
Common Stock Preferred Stock Paid-in
----------------- ---------------- --------------- ---------------
Shares Amount Shares Amount Capital
----------------- ---------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1999,
BROUGHT FORWARD 52,058,125 $ 52,058 377,742 $ 377,742 $ 2,393,530
----------------- ---------------- --------------- --------------- -----------
The following is unaudited:
Issuance of common stock for services 145,000 145 - - 16,735
Issuance of common stock from conversion
of debentures 1,244,719 1,245 - - 158,755
Adjustment for beneficial conversion feature
from issuance of debentures - - - - 60,690
Issuance of common stock for cash 1,250,000 1,250 - - 83,750
Stock subscription received - - - - -
Net loss - - - - -
----------------- ----------------- -------------- --------------- -----------
BALANCE, JANUARY 31, 2000 54,697,844 $ 54,698 377,742 $ 377,742 $2,713,460
================= ================= ============== =============== ===========
</TABLE>
See notes to the consolidated financial statements
F-5
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) (Continued)
<CAPTION>
Deficit
Common Accumulated Total
Stock During the Shareholders'
Subscriptions Development Equity
Receivable Stage (Deficiency)
------------------ --------------- ---------------
<S> <C> <C> <C>
BALANCE, DECEMBER 1, 1997 (INCEPTION) $ - $ - $ 197,478
Reverse stock split 1-for-4 - - -
Issuance of common stock pursuant to reverse
acquisition - - -
Issuance of common stock for services related
to reverse acquisition - - -
Adjustment for beneficial conversion feature
from issuance of a debenture - - 56,897
Issuance of common stock from conversion
of debenture - - 10,232
Net loss (950,920) (950,920)
------------------ --------------- ---------------
BALANCE, OCTOBER 31, 1998 - (950,920) (686,313)
Issuance of common stock for services - - 371,448
Issuance of common stock from conversion
of debentures - - 975,411
Adjustment for beneficial conversion feature
from issuance of debentures - - 306,036
Issuance of common stock for cash
and stock subscriptions receivable (25,000) - 115,000
Issuance of common stock in connection
with a spin-off of WOTD Project - (250,000) -
Issuance of warrants for operational right - - 102,166
Issuance of options and warrants for services - - 35,920
Issuance of 8% cumulative convertible redeemable
preferred stock - - 377,742
Net loss - (1,445,833) (1,445,833)
BALANCE, OCTOBER 31, 1999, ------------------ --------------- ---------------
CARRIED FORWARD $ (25,000) $ (2,646,753) $ 151,577
------------------ --------------- ---------------
</TABLE>
See notes to the consolidated financial statements
F-6
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) (Continued)
<CAPTION>
Deficit
Common Accumulated Total
Stock During the Shareholders'
Subscriptions Development Equity
Receivable Stage (Deficiency)
------------------ --------------- ------------------
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1999,
BROUGHT FORWARD $ (25,000) $ (2,646,753) $ 151,577
------------------ --------------- ------------------
The following is unaudited:
Issuance of common stock for services - - 16,880
Issuance of common stock from conversion
of debentures - - 160,000
Adjustment for beneficial conversion feature
from issuance of debentures - - 60,690
Issuance of common stock for cash - - 85,000
Stock subscription received 25,000 - 25,000
Net Loss - (512,298) (512,298)
------------------ --------------- ------------------
BALANCE, JANUARY 31, 2000 $ - $ (3,159,051) $ (13,151)
================== =============== ==================
</TABLE>
See notes to the consolidated financial statements
F-7
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three Three
Months Months
Ended Ended
January 31, 1999 January 31, 2000 Year Ended
(Unaudited) (Unaudited) October 31, 1999
---------------------- ---------------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (257,087) $ (512,298) $ (1,445,833)
Adjustment to reconcile net loss to net
cash used in operations:
Loss on impairment of investments - - 50,000
Forgiveness of note payable - - (50,000)
Issuance of options and warrants for services - - 35,920
Issuance of common stock for service 50,071 16,880 371,448
Depreciation - 1,286 -
Amortization - 12,783 117,933
Interest expense from beneficial conversion features 49,785 60,690 341,597
Interest expense from convertible
debentures exchanged for common stock 446 - 12,411
Changes in assets and liabilities:
Deferred financing cost - 24,175 (35,475)
Accounts receivable - (10,671) -
Deferred pin costs - (23,890) -
Prepaid expense and other current assets - 17,596 (72,250)
Accrued expenses and other current liabilities (37,369) 54,673 (43,556)
---------------------- ---------------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES
(194,154) (358,776) (717,805)
---------------------- ---------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
- (21,376) (10,752)
---------------------- ---------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES - (21,376) (10,752)
---------------------- ---------------------- -------------------
</TABLE>
See notes to the consolidated financial statements
F-8
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three Three
Months Months
Ended Ended
January 31, 1999 January 31, 2000 Year Ended
(Unaudited) (Unaudited) October 31, 1999
---------------------- ----------------------- ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans payable - shareholders and officers 26,450 43,211 (59,778)
Proceeds from notes payable - - 200,000
Repayment of notes payable - (101,837) -
Proceeds from long term debt 10,942 - -
Repayment of long term debt - - (10,942)
Proceeds from convertible debentures 75,000 160,000 823,000
Debt issue costs - - (97,500)
Proceeds from collection of stock
subscription receivable - 25,000 -
Proceeds from issuance of common stock 90,000 85,000 115,000
---------------------- ----------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 202,392 211,374 969,780
---------------------- ----------------------- ---------------------
NET INCREASE IN CASH 8,238 (168,778) 241,223
CASH AT BEGINNING OF PERIOD 366 241,589 366
---------------------- ----------------------- ---------------------
CASH AT END OF PERIOD $ 8,604 $ 72,811 $ 241,589
====================== ======================= =====================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest - - 73,324
====================== ======================= =====================
Income Taxes $ - $ - $ -
====================== ======================= =====================
Supplemental Disclosure of Non-Cash Flow Investing
and Financing Activities
Issuance of common stock from reverse acquisition $ - $ - $ -
====================== ====================== ======================
Issuance of common stock for stock subscription receivable $ - $ - $ 25,000
====================== ====================== ======================
Issuance of common stock from conversion of debentures $ 83,000 $ 160,000 $ 963,000
====================== ====================== ======================
Issuance of common stock in connection with a spin-off of $ - $ - $ 250,000
Western ====================== ====================== ======================
Issuance of 8% cumulative convertible redeemable preferred
for notes payable $ - $ - $ 377,742
====================== ====================== ======================
</TABLE>
See notes to the consolidated financial statements
F-9
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<CAPTION>
Cumulative
During the
Development Stage
From December 1, (December 1, 1997
1997 (inception) to to January 31, 2000)
October 31, 1998 (Unaudited)
----------------------- ------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (950,919) $ (2,909,050)
Adjustment to reconcile net loss to
net cash used in operations:
Loss on impairment of investments 255,500 305,500
Forgiveness of note payable - (50,000)
Issuance of options and warrants for services - 35,920
Issuance of common stock for service - 388,328
Depreciation - 1,286
Amortization 15,000 145,716
Interest expense from beneficial conversion features 21,336 423,623
Interest expense from convertible debentures
exchanged for common stock 232 12,643
Changes in assets and liabilities:
Deferred financing cost - (11,300)
Accounts receivable - (10,671)
Deferred pin costs - (23,890)
Prepaid expense and other current assets - (54,654)
Accrued expenses and other current liabilities 92,978 104,095
----------------------- ------------------------
NET CASH USED IN OPERATING ACTIVITIES (565,873) (1,642,454)
----------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - (32,128)
----------------------- ------------------------
NET CASH USED IN INVESTING ACTIVITIES - (32,128)
-------------------------------------------------
</TABLE>
See notes to the consolidated financial statements
F-10
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<CAPTION>
Cumulative
During the
Development Stage
From December 1, (December 1, 1997
1997 (inception) to to January 31, 2000)
October 31, 1998 (Unaudited)
----------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans payable - shareholders and officers 41,567 25,000
Proceeds from notes payable - 200,000
Repayment of notes payable - (101,837)
Proceeds from long term 461,122 461,122
debt Repayment of long term debt (72,438) (83,380)
Proceeds from convertible debentures 150,000 1,133,000
Debt issue costs (15,000) (112,500)
Proceeds from collection of stock subscription receivable - 25,000
Proceeds from issuance of common stock - 200,000
----------------------- ------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 565,251 1,746,405
----------------------- ------------------------
NET INCREASE IN CASH (622) 71,823
CASH AT BEGINNING OF PERIOD 988 988
----------------------- ------------------------
CASH AT END OF PERIOD $ 366 $ 72,811
======================= ========================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period: $ 26,789 $ -
Interest ======================= ========================
Income Taxes $ - $ -
======================= ========================
Supplemental Disclosure of Non-Cash Flow Investing
and Financing Activities
Issuance of common stock from reverse acquisition $ 12,527 $ 12,527
======================= ========================
Issuance of common stock for stock subscription receivable $ - $ 25,000
======================== =======================
Issuance of common stock from conversion of debentures $ 10,000 $ 1,133,000
======================== =======================
Issuance of common stock in connection with a spin-off of Western $ - $ 250,000
======================== =======================
Issuance of 8% cumulative convertible redeemable preferred stock
for notes payable $ - $ 377,742
======================== =======================
</TABLE>
See notes to the consolidated financial statements
F-11
<PAGE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at January 31, 2000 and the three months ended January 31, 1999
and 2000 are unaudited)
1. ORGANIZATION AND HISTORY
The following summarizes the organizational history of Saratoga International
Holdings Corp. and subsidiary (herein referred to as "Saratoga".
In December 1997, Saratoga began development stage activity under the corporate
name Western Oil & Tire Distributors Inc. ("Western"), a privately owned company
originally incorporated on June 1, 1993 in the State of Washington under the
corporate name FCP Ltd. which had no operating activity until fiscal 1998. The
corporate name was changed to Western in December 1997. Western's original
business development plan, adopted in December, 1997, was to engage in the
acquisition of retail and wholesale tire businesses and petroleum product
distribution companies ("The WOTD Project")
In July 1998, the shareholders of Western exchanged all of their common shares
for controlling interest in Knightsbridge Corporation a company originally
incorporated on June 17, 1996 in the State of Nevada. Western was merged into
Knightsbridge on July 28, 1998 and Knightsbridge changed its name to Western,
the surviving corporation.
Since the former shareholders of Western owned a majority of the outstanding
stock following its July, 1998, merger with Knightsbridge this exchange of
shares has been accounted for as a reverse merger. Knightsbridge was a
non-operating public shell with an investment in a private company that was
recorded at approximately $306,000 and liabilities totaling approximately
$113,000 on the date of the reverse merger. (See Note 10.) Accordingly, the
combination of the two companies is recorded as a recapitalization of
shareholders' equity of Western pursuant to which Western is treated as the
continuing entity for accounting purposes and the historical financial
statements presented are those of Western. Pro-forma information has not been
presented since the transaction was deemed a capital stock transaction rather
than a business combination.
On March 24, 1999, the corporate name was changed from Western to Saratoga
International Holdings Corp. and the operations of the company's petroleum and
tire business was spun-off to the shareholders of Saratoga as of March 19, 1999
(See Note 3). Saratoga redirected its business development activity at the
e-commerce industry.
In June 1999, Saratoga formed a wholly-owned subsidiary Saratoga Telecom Corp.
through which it acquired an operational right from Internet Interview Inc. to
develop a technology to market prepaid long distance telephone calling service
via the Internet as a reseller for long distance suppliers servicing foreign
based markets such as Central and South America.
Saratoga has been in the development stage since its inception in accordance
with statement of Financial Accounting Standards No. 7.
F-12
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The accompanying financial statements have been prepared assuming that
Saratoga will continue as a going concern. Saratoga, since its
inception, December 1, 1997 through January 31, 2000 has incurred net
losses of approximately $2,909,000 and has had negative cash flow from
operations of approximately $1,664,000. These conditions raise
substantial doubt about its ability to continue as a going concern.
Management expects to incur additional losses for the foreseeable
future and recognizes the need to raise capital to achieve their
business plans. Saratoga has raised approximately $2,019,000 of
operating capital since inception for its business development
activities and plans to continue its efforts to raise additional
operating capital through various financing methods including private
placements of its equity securities. Funding of future operations is
dependent on management's ability to raise additional capital.
Saratoga's ability to continue as a going concern is dependent upon
profitable operations and support from shareholders. Unless Saratoga
can generate positive cash flow from operations and raise additional
capital, the company may be unable to continue in existence. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary
should Saratoga be unable to continue in existence.
b. Principles of Consolidation
The consolidated financial statements include the accounts of Saratoga
and its Subsidiary, Saratoga Telecom Corp. All material intercompany
transactions and balances have been eliminated.
c. Investments
Investments are carried at cost except, where in the opinion of
management, there has been a loss in value other than a temporary
decline in which case the carrying value is reduced to its estimated
value.
d. Intangible Asset
The cost of the operational right acquired in June 1999 is being
amortized on a straight line basis over 2 years.
e. Income Taxes
Saratoga utilizes the asset and liability method of accounting for
income taxes as set forth in FASB Statement No. 109, "Accounting for
Income Taxes." Under the asset and liability method, deferred taxes
are determined based on the difference between
F-13
<PAGE>
the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
f. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
g. Fair Value of Financial Instruments
Saratoga's financial instruments consist primarily of cash, accrued
expenses, and loans payable which approximate fair value because of
their short maturities. Saratoga's investments were estimated by
management to have been impaired and as such have been written down
from their original cost to their estimated fair value at October 31,
1999 (see Notes 3 and 10. Saratoga's note payable approximates the
fair value of such instrument based upon management's best estimate of
interest rates that would be available to Saratoga for a similar
financial arrangement at October 31, 1999.
h. Stock Options
Saratoga accounts for all transactions under which employees, officers
and directors receive options to purchase shares of stock in Saratoga
in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." In
accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," Saratoga
adopted the pro forma disclosure requirements of SFAS 123.
Accordingly, no compensation has been recognized in the results of
operations for the employees, officers and directors stock option plan
other than for options issued to non-employees for consulting
services.
i. Loss Per Share
Saratoga has adopted the provisions of Financial Accounting Standards
No. 128, "Earnings per share". This statement requires that Saratoga
report basic and diluted earnings (loss) per share for all periods
reported. Basic net income (loss) per share is computed by dividing
net income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. For the
year ended October 31, 1999, and the three months ended January 31,
2000, Saratoga added undeclared and not recorded cumulative Series
A Convertible Preferred stock dividends of $15,110 and $7,555
respectively to the net loss in order to arrive at the net loss
available to common shareholders in accordance
F-14
<PAGE>
with SFAS No. 128. Diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding for the period, adjusted for the dilutive effect of
common stock equivalents, consisting of stock options and warrants at
October 31, 1999.
The weighted average shares outstanding for the period November 1,
1997 (inception) to the closing date of the reverse merger with
Knightsbridge were the 11,577,000 shares issued to Western's
shareholders. Subsequent to the merger, the weighted average shares
outstanding used to calculate earnings per share was the actual number
of shares outstanding of the surviving entity.
For all periods presented, diluted net loss per share was the same as
basic net loss per share since the inclusion of stock options and
warrants would have been anti-dilutive.
j. Revenue Recognition.
At the time a PIN is issued to a customer revenue from the sale of the
virtual prepaid calling card is deferred, and such revenue is
recognized as income based on customer usage over the life of the
card. The cost of the virtual prepaid calling card is deferred at the
time of purchase. Upon issuance of a PIN to a customer, the related
cost is recognized as a cost of sale based on customer usage over the
life of the card.
k. Property and Equipment.
Property and equipment are recorded at cost. Depreciation is provided
on a straight-line method based on the estimated useful lives of the
respective assets. Property and equipment are being depreciated over
three years. Maintenance, repairs and minor renewals are charged to
operations as incurred. Upon the sale or retirement of property and
equipment, the related costs and accumulated depreciation are
eliminated from the accounts and gains or losses are reflected in
operations.
Software Development Costs. In March 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 is effective for all fiscal periods
beginning after December 5, 1998. SOP 98-1 requires the capitalization
of costs, including payroll costs, incurred in connection with the
development or purchase of software for internal use. The adoption of
SOP 98-1 does not have a material impact on the financial statements
of the Company. Saratoga had no software development costs from
December 1, 1997 (inception) through October 31, 1998. In the fiscal
year ended October 31, 1999, $5,395 of these costs were capitalized
and an additional $17,116 were capitalized in the three months ended
January 31, 2000. These costs are now being amortized over a two year
period.
F-15
<PAGE>
l. Impairment of Long-Lived Assets.
In the event that facts and circumstances indicate that an asset may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the assets carrying
amount to determine if a write down to market is required. At October
31, 1999 the Company does not believe that any impairment of
long-lived assets has occurred.
m. Interim Financial Statements
The accompanying consolidated financial statements (unaudited) for the
three months ended January 31, 1999 and 2000, have been prepared in
accordance with generally accepted accounting principles for the
interim financial information and, in the opinion of the Company,
include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation thereof.
n. Recent Accounting Pronouncement
Saratoga does not currently hold any derivative instruments and has
not held any derivative instruments since its inception and therefore
is not impacted by SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" issued by the FASB in June 1998, effective for
all fiscal periods beginning after June 15, 1999.
3. SPIN OFF AND PURCHASE OF INTANGIBLE ASSET
In March 1999, Saratoga formed International Internet Petroleum & Tire
Distributors, Inc. ("International") as a wholly owned subsidiary
incorporated under Nevada law. Saratoga transferred to International the
trade name "Western Oil & Tire Distributors, Inc." along with all of the
rights, title and interest to the petroleum and tire business and related
business development plan ("the WOTD Project"). Saratoga then distributed
the common stock and Class A and B Warrants of International to Saratoga
shareholders in a spin-off transaction effective March 19, 1999. Saratoga
issued 5,000,000 shares of its common stock, valued at $250,000, to
International in connection with the spin-off transaction which has been
treated as a stock dividend to Saratoga's shareholders as of the date of
the spin-off.
The operational right acquired from Internet Interview consisted of a
conceptual plan which identified the need for software and technology to
enter into the business of selling virtual prepaid phone cards over the
Internet. The conceptual plan included the technological need to develop a
web site, accounting and management software, an Internet marketing program
to establish a web site agent network and Internet links and to establish
agreements and technology necessary to accept, process and clear credit
card transactions over the Internet.
F-16
<PAGE>
As consideration for the purchase of the rights to the technology, Saratoga
issued to the two principal shareholders of Internet Interview, Inc. Messrs
Norman Reisch and Tom Morsey, Warrants to each to purchase 500,000 shares
of the common stock of Saratoga exercisable at any time at $0.10 per share
and expiring June 16, 2004. The purchase price of the operational right was
recorded at $102,666, the value of the Warrants, estimated based on the
Black-Scholes option pricing model.
This amount was recorded as an intangible asset and is being charged to
amortization expense over two years. Because of the conceptual nature of
the operational right, management concluded it would become technologically
obsolete over a two year period. No amortization expense was charged to
operations in fiscal 1998. Amortization expense charged to operations in
fiscal 1999 was $20,433. Amortization expense charged to operations for the
three months ended January 31, 2000 was $12,823.
4. CONCENTRATION OF CREDIT RISK
Saratoga maintains cash balances at two commercial banks. Accounts at these
financial institutions are insured by the Federal Deposit Insurance
Corporation up to $100,000.
5. LOANS PAYABLE-SHAREHOLDERS AND OFFICERS
At October 31, 1999, and January 31, 2000 the Balances consisted of the
following:
October 31, 1999 January 31, 2000
(Unaudited)
Loan payable to Patrick F. Charles $ 15,331 $ 37,500
Loan payable to Terrence K. Picken 15,331 37,500
------------- -----------
$ 30,662 $ 75,000
============= ===========
The loans payable are non-interest bearing, uncollateralized, and have
no specific due date for repayment. Patrick F. Charles is a shareholder
and Chief Executive Officer of Saratoga and Terrence K. Picken is a
shareholder and Vice President of Saratoga.
6. NOTE PAYABLE
In October 1999 Saratoga issued to an unrelated company a Promissory Note
for $276,000, including a $76,000 discount. The terms of the Note,
including amendments thereto, called for a payment of $60,000 in November,
1999 and the balance, including interest at 6.5%, due by February 29, 2000.
Messrs. Patrick F.
F-17
<PAGE>
Charles and Terrence K. Picken, officers, directors and major shareholders,
assigned shares of Saratoga they personally own or control as collateral
for the Promissory Note.
7. INCOME TAXES
As of October 31, 1999, and January 31, 2000 Saratoga has available unused
federal, net operating loss carryforwards of approximately $2,397,000 and
$2,909,000 respectively that may be applied against future taxable income
and that expire in 2020. Saratoga has established a valuation allowance
with respect to the available unused federal net operating loss
carryforwards because the likelihood of realization of this benefit cannot
be presently determined.
October 31, 1999 January 31, 2000
(Unaudited)
---------------- ----------------
Deferred tax asset:
Net operating loss carryforward $ 815,000 $ 989,000
------- -------
Valuation Allowance
Net deferred tax asset 815,000 989,000
-------------- ----------------
$ 0 $ 0
============== ================
8. RELATED PARTY TRANSACTIONS
Coast Northwest Inc., a management consulting firm, provided substantially
all of Saratoga's corporate administrative services since inception of
Saratoga's development stage activities for which Saratoga incurred expense
of $97,500 for the year ended October 31, 1999 and $83,700 for the period
from inception of development stage activity, December 1997, to October 31,
1998 and $25,500 for the three months ended January 31, 2000. At October
31, 1999 and October 31, 1998 Saratoga owed $1,177 and $10,100,
respectively to Coast Northwest Inc. for administrative support services.
Saratoga's President, Patrick F. Charles and Executive Vice-President,
Terrence K. Picken, collectively own controlling interest in Coast
Northwest Inc. (see Notes 9 and 11).
9. SHAREHOLDERS' EQUITY
Stock Split and Authorization of Shares
Prior to and in conjunction with Saratoga merger with Knightsbridge
Corporation in July 1998, the Board of Directors of Knightsbridge approved
a 1 for 4 reverse stock split including the reduction of authorized common
stock from 200,000,000 shares to 50,000,000 shares. All per share data in
these statements reflect the reverse stock split.
F-18
<PAGE>
In March 1999, the board of directors of Saratoga approved the increase of
authorized common stock from 50,000,000 shares to 200,000,000 shares. The
stockholders also approved the authorization of the issuance of a new class
of 50,000,000 shares of $.001 par value preferred stock. The preferred
stock of Saratoga can be issued in series. With respect to each series
issued, the Board of Directors of Saratoga will determine, among other
things, the number of shares in the series, voting rights and term,
dividend rates and terms, liquidation preferences and redemption and
conversion privileges.
8% Convertible Redeemable Preferred Stock
In May 1999, Saratoga issued nonvoting restricted cumulative Series A
convertible redeemable preferred stock as payment for the outstanding
balance of $377,742 on a note payable. Upon the declaration of the board of
directors, the Preferred Stock pays a dividend at 8% per share and any
unpaid dividends are cumulative. The shares of Preferred Stock are
convertible into common stock, over a three year period, at the rate of
125,914 preferred shares each year beginning one year from date of issue.
At the holder's option, each preferred share, valued at $1.00 each, plus
unpaid cumulative dividends on such shares may be converted into common
shares based on the published trade price of the common shares at date of
conversion notice. In addition, upon written notice to the holders,
Saratoga has the right to redeem shares, at its discretion, at $1.00 per
share plus any accumulated unpaid dividends and the preferred Stock has a
liquidation preference over common stock of $1.00 per share plus any
accumulated unpaid dividends.
Common Stock Issuances
The following is a summary of common stock issued by Saratoga effective
with and following the reverse merger transaction with Knightsbridge
Corporation and the related 1 for 4 reverse stock split in July 1998:
In July 1998, 11,577,000 restricted common shares were issued to Western's
shareholders under a share exchange agreement to give effect to the reverse
merger transaction with Knightsbridge.
In addition, 950,000 restricted common shares were issued as finder's fees
for introducing Western to Knightsbridge (see Note 1).
The total of 12,527,000 shares issued in connection with the reverse merger
transaction were recorded at $0.001 per share.
F-19
<PAGE>
Shares of common stock of Saratoga issued subsequent to the reverse merger
through January 31, 2000 are summarized as follows:
Average Number
Per Of
Transaction Share Shares
Date Description Value Valuation Issued
- ---- ----------- ----------- --------- -------
11/98-1/99 Issued for $ 50,071 $0.059 850,000
services
1/99 Private $ 90,000 $0.025 3,600,000
placement for
cash
2/99 Issued for $ 26,485 $0.021 1,245,000
services
2/99 Issued for $ 72,400 $0.016 4,525,000
services
provided by
Officers
2/99 Private $ 50,000 $0.029 1,700,000
Placement for
cash
3/99 Issued for $ 9,000 $0.030 300,000
services
3/99 Issued to $250,000 $0.050 5,000,000
International
in connection with
the WOTD Project
Spin-off transaction
(See Note 3)
4/99 Issued for $ 400 $0.040 10,000
services
5/99 Issued for $ 72,000 $0.131 550,000
services
6/99 Issued for $ 16,800 $0.112 150,000
services
7/99 Issued for $ 36,126 $0.147 245,000
services
F-20
<PAGE>
8/99 Issued for $ 25,500 $0.150 170,000
services
10/99 Issued for $ 56,000 $0.14 400,000
services
10/99 Issued to $ 6,666 $0.112 59,524
Officers for
salaries
12/99-1/00 Issued for $ 16,880 $0.116 145,000
services
(Unaudited)
11/99-1/00 Issued for $ 85,000 $0.068 1,250,000
cash
(Unaudited)
The "Per Share Valuation" set forth above is based on the recorded value of the
transaction divided by the number of shares issued as consideration for each
transaction.
o Debentures Converted to Common Stock
In July 1998, Saratoga issued 9% series A subordinated convertible redeemable
debenture for $150,000 due July 1999, under an exemption from registration
afforded by Rule 504, Regulation D, of the Securities act of 1933. The series A
debenture was convertible into common stock of Saratoga at 72.5% of the average
closing bid price of the common stock for the five days immediately preceding
the date of notice of conversion by the holder.
During October 1998, the holder converted $10,000 of principal plus accrued
interest into 94,085 shares of common stock. During the period from January 21,
1999, to April 6, 1999, the holder converted the principal balance of $140,000
at October 31, 1999, plus accrued interest of $8,182 into 6,251,823 shares of
common stock.
In March 1999, Saratoga issued 9% series B subordinated convertible redeemable
debentures for $450,000 due March 30, 2000, under an exemption from registration
afforded by Rule 504, Regulation D, of the Securities act of 1933. The series B
debentures were convertible into common stock of Saratoga at 72.5% of the
average closing bid price of the common stock for the five days immediately
preceding the date of notice of conversion by the holder.
In May 1999, the holders of these series B debentures converted the principal
balance of $450,000 plus accrued interest of $2,857 into 5,795,564 shares of
common stock.
F-21
<PAGE>
In June 1999, Saratoga issued 9% series C subordinated convertible redeemable
debentures for $150,000 due June 11, 2001, under an exemption from registration
afforded by Rule 504, Regulation D, of the Securities act of 1933. The series C
debentures were convertible into common stock of Saratoga at 72.5% of the
average closing bid price of the common stock for the five days immediately
preceding the date of notice of conversion by the holder.
In June 1999, the holders of these series C debentures converted the principal
balance of $150,000 plus accrued interest of $97 into 1,548,158 shares of common
stock.
In July 1999, Saratoga issued a 2% series D subordinated convertible redeemable
debenture for $150,000 due July 30, 2001, under an exemption from registration
afforded by Rule 504, Regulation D, of the Securities act of 1933. The series D
debenture is convertible into common stock of Saratoga at 75% of the average
closing bid price of the common stock for the five days immediately preceding
the date of notice of conversion by the holder.
In August 1999, the holder of this series D debenture converted the principal
balance of $150,000 plus accrued interest of $1,275 into 1,182,621 shares of
common stock.
In December 1998, Saratoga issued $15,000 principal amount of a Subordinated
Convertible Redeemable Debenture due December, 1999 to Coast Northwest
Management LLC a limited liability company owned by Patrick F. Charles and
Terrence K. Picken, officers, directors and controlling shareholders of Saratoga
in a private placement as payment of a loan to Saratoga. The Coast LLC Debenture
and the shares of common stock into which it was converted were exempt from
registration in reliance on Rule 504 of Regulation D of the Securities Act of
1933. The Coast LLC Debenture was convertible into common stock at a conversion
price equal to 72.5% of the average closing bid price of the common stock for
the five trading days immediately preceding the date of receipt of the
conversion notice. In December 1998, the holder of this Debenture converted the
principal balance of $15,000 into 300,000 shares of common stock.
In January 1999 Saratoga issued $30,000 principal amount of a Subordinated
Convertible Redeemable Debentures due January 2000 to Coast Northwest Management
LLC ("Coast LLC Debenture 2") a limited liability company owned by Patrick F.
Charles and Terrence K. Picken, officers, directors and controlling shareholders
of Saratoga in a private placement as payment of a loan to Saratoga. The Coast
LLC Debenture 2 and the shares of common stock into which it was converted were
exempt from registration in reliance on Rule 504 of Regulation D of the
Securities Act of 1933. The Coast LLC Debenture 2 was convertible into common
stock at a conversion price equal to 72.5% of the average closing bid price of
the common stock for the five (5) trading days immediately preceding the date of
receipt of the conversion notice. In January 1999 the holder of this Debenture
converted $29,000 of the principal balance into 1,250,000 shares of common
stock. The remaining $1,000 of the Coast LLC Debenture 2 was forgiven.
In January 1999 Saratoga issued $15,000 of principal amount of Subordinated
Convertible Redeemable Debentures (the "Debentures") due January 2000 to each of
Patrick F. Charles and Terrence K. Picken, officers, directors and controlling
shareholders of Saratoga in a
F-22
<PAGE>
private placement for a total of $30,000 in payment of services provided to
Saratoga. The Debentures and the shares of common stock into which they were
converted were exempt from registration in reliance on rule 504 of Regulation D
of the Securities Act of 1933. The Debentures were convertible into common stock
at a conversion price equal to 72.5% of the average closing bid price of the
common stock for the five (5) trading days immediately preceding the date of
receipt of the conversion notice. $29,000 principal amount of these Debentures
were converted to 1,250,000 shares of common stock in January, 1999. The
remaining $1,000 of the Debentures was forgiven.
In January, 2000, Saratoga issued a 2% Series E Subordinated Convertible
Redeemable Debenture for $160,000 due January 20, 2001, under an exemption from
registration afforded by Rule 504, Regulation D, of the Securities Act of 1933.
The Series E Debenture is convertible into common stock of Saratoga at 72.5% of
the average closing bid price of the common stock for the five days immediately
preceding the date of notice of conversion by the holder.
In January, 2000, the holder of this Series E Debenture converted the principal
balance of $160,000 into 1,244,719 shares of common stock.
For common stock issued in non-monetary transactions involving marketability
discounts Saratoga's policy is to account for marketability discounts in
accordance with guidelines provided by published empirical studies and financial
research on marketability discounts.
In an Emerging Issues Task Force meeting sponsored by the Financial Accounting
Standards Board, held on March 13, 1997, the Securities and Exchange Commission
("SEC") announced their position on the accounting for the issuance of
convertible debt securities with a nondetachable conversion feature that is
"in-the-money" at the date of issue. Those securities are usually convertible
into common stock at the lower of a conversion rate fixed at the date of issue
or a fixed discount to the common stock's market price at the date of
conversion, creating a "beneficial conversion feature". The SEC's position is
that the beneficial conversion feature should be recognized and measured by
allocating a portion of the proceeds equal to the intrinsic value of that
feature to additional paid-in capital. The amount is calculated at the date of
issuance as the difference between the conversion price and the fair value of
the common stock into which the security is convertible, multiplied by the
number of shares into which the security is convertible. The discount resulting
from the allocation of proceeds, in effect, increases the interest rate of the
security and should be amortized as a charge to interest expense over the period
from the date the security is issued to the date it first becomes convertible.
The beneficial conversion feature of the debentures were accounted for as
additional interest expense, and as a result, such interest expense was charged
to operations for the year ended October 31, 1999 and for the period December 1,
1997 (inception) through October 31, 1998, amounted to approximately $340,000
and $21,000, respectively.
F-23
<PAGE>
o Stock Options and Warrants
During October 1998, Saratoga approved a Qualified and Non-Qualified Stock
Option Plan ("1998 option Plan"). A total of 8,000,000 shares are available for
future grants to directors, officers, employees and consultants who are in a
position to make significant contributions to the success of Saratoga.
The exercise price of each option will be determined by Saratoga's board of
directors, in its discretion, at the time of grant, provided that such exercise
price shall not be lower than the fair market value at the time of grant in the
case of options that are intended to constitute incentive stock options.
Further, at the time of grant and at the discretion of the board of directors,
the vesting period and the expiration date shall not exceed ten years. Under the
1998 option plan, incentive stock options that become exercisable in any fiscal
year may not exceed the fair market value of $100,000 as determined at the time
the options are granted.
The following table summarizes the activity with regard to options and warrants
for the period December 1, 1997 (inception) to October 31, 1998, the year ended
October 31,1999 and the three months ended January 31, 2000 (unaudited)
<TABLE>
Stock options Warrants
------------------------------------------ ---------------------------------------------
<CAPTION> Weighted Average Weighted Average
Exercise Exercise
Shares Price Exercisable Shares Price Exercisable
------------------------------------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
01-Dec-97 - - - - - -
Granted - - - - - -
------------------------------------------ ---------------------------------------------
Outstanding at
31-Oct-98 - - -
a)Granted 250,000 $ 0.100 250,000
b)Granted 1,525,000 $ 0.167 1,525,000
c)Granted 250,000 $ 0.100 250,000
d)Granted 150,000 $ 0.180 150,000
e)Granted 1,700,000 $ 0.029 1,700,000
f)Granted 1,000,000 $ 0.100 1,000,000
g)Granted 2,000,000 $ 0.175 2,000,000
h)Exercised (1,700,000) (1,700,000)
------------------------------------------ ---------------------------------------------
Outstanding at
31-Oct-999 2,175,000 $ 0.15 2,175,000 3,000,000 $ 0.15 3,000,000
b)Exercised (250,000) $ 0.100 (250,000)
Outstanding at ------------------------------------------ ---------------------------------------------
31-Jan-00 1,925,000 $ 0.16 1,925,000 3,000,000 $ 0.15 3,000,000
========================================== =============================================
F-24
<PAGE>
<FN>
a) Officers, directors and employees - exercise price less than grant date
fair value of $0.14 - Weighted Average remaining life, 4.6 years
b) Officers, directors and employees - exercise price greater than grant date
fair value of $0.14 Weighted Average remaining life 4.7 years
c) For services - exercise price less than grant date fair value of $0.14 -
Weighted Average remaining life, 4.6 years
d) For services - exercise price greater than grant date fair value of $0.17 -
Weighted Average remaining life, 3.7 years
e) For services - exercise price greater than grant date fair value of $0.023
f) Purchase of operational rights from Interview - exercise price less than
grant date fair value of $0.14 - Weighted average reminaing life 4.6 years
g) For services - exercise price greater than grant date fair value of $0.135
- Weighted Average remaining life, 1.5 years
</FN>
</TABLE>
Saratoga granted 400,000 options under the 1998 stock plan to various
consultants for services rendered in fiscal 1999. The options expire from two to
five years from the date of grant, are currently exercisable and have an
exercise price ranging from $.10 to $.20 per share. Saratoga has recorded
approximately $34,000 of consulting costs relating to these options.
As of October 31, 1999, options to purchase 1,775,000 shares have been granted
to employees, officers and directors under the 1998 stock plan. The options have
an exercise price ranging from $.10 to $.20 per share, expire five years from
the date of grant and all options granted to employees, officers and directors
are exercisable.
In February, 1999, Saratoga entered into a corporate public relations service
agreement with PMR and Associates whereby PMR provides investor relation
services to Saratoga. In connection therewith, Saratoga issued Warrants
entitling PMR to purchase up to 1,700,000 shares of common stock at $0.029 per
share. These Warrants had a one year life and were exercised in fiscal 1999.
In May 1999, Saratoga extended the corporate public relations services contract
with PMR and Associates. In connection therewith Saratoga issued warrants
entitling PMR to purchase up to 1,000,000 shares of its common stock at $0.15
per share and 1,000,000 shares at $0.20 per share. The warrants are exercisable
at any time and expire May 18, 2001. None have been exercised at this time.
All of the PMR Warrants were fully vested and exercisable immediately when
issued. The issue date was the measurement date and the Warrants were valued
using the Black-Scholes option pricing model, including the following
significant assumptions; risk free interest rate of 6%; expected lives ranging
from 3 months to 2 years; expected volatility of 50%; and expected dividends of
$0. Approximately $7,500 was charged to consulting expense for these Warrants.
In June 1999, Saratoga issued 1,000,000 common stock purchase warrants
("warrants") at an exercise price of ten cents per share to purchase 1,000,000
shares of the Company's
F-25
<PAGE>
common stock. Management has estimated the value of the
warrants, based on the Black-Scholes option pricing model, in order to record a
$102,666 intangible asset as a result of the operational right purchased from
Internet Interview Inc. (see Notes 1, 2(d) and 3).
In January, 2000, an option for 250,000 shares was exercised. The share price at
date of grant was $0.065 per share. The exercise price was $0.10 and the price
on date of exercise was $0.328.
o Stock Option Compensation
For disclosure purposes of employees and officers stock option compensation, the
fair value of options is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
stock options granted during fiscal 1999: annual dividends of $0; expected
volatility of 50%; risk-free interest rate of 6%; and expected lives ranging
from 2 years to 5 years. The weighted average fair values of stock options
granted to employees and officers during the fiscal year 1999 was approximately
$125,000 and Saratoga's pro forma loss and net loss per share would have been as
follows:
Year Ended
October 31, 1999
----------------
Net loss applicable to
common share
As reported $1,460,943
==========
Pro forma $1,586,035
==========
Net loss per common share
As reported $0.04
=====
Pro forma $0.04
=====
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Saratoga's
employee stock options have characteristics significantly different from those
of traded options, and since changes in subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options and warrants.
F-26
<PAGE>
10. NON-RECURRING EXPENSES
Saratoga's merger with Knightsbridge (see Note 1) was effective July 28, 1998.
Prior to such merger, Knightsbridge, under former management, entered into an
agreement to acquire controlling interest in a language translation technology
company, Language Force Inc. ("LFI") in exchange for cash and shares of
Knightsbridge. Shares called for by the agreement were issued by both parties
and placed in an escrow account to be released subject to and pending
finalization of the transaction. Knightsbridge also advanced to LFI
approximately $306,000 in connection with the transaction. The agreement between
Knightsbridge and LFI was never fulfilled and the parties are seeking in
negotiations to rescind the agreement. Knightsbridge is also seeking to recover
the cash it advanced to LFI and return of the 2,000,000 (post reverse stock
split) shares issued to LFI and being held in escrow. Saratoga believes it will
recover the 2,000,000 shares of its common stock held in escrow and is pursuing
negotiations with LFI to recover the sums of cash advanced to LFI. The escrow
agent is holding the shares of both companies until this matter is resolved and
will dispose of the shares in accordance with the terms of the resolution. These
2,000,000 shares are treated for accounting purposes as unissued shares because
they are not entitled to a vote on shareholder matters. They were not considered
outstanding for purposes of computing loss per share.
Prior to Western's reverse merger transaction with Knightsbridge, Prime Ventures
Corporation, was engaged by Knightsbridge to manage the LFI matter. At the time
of the reverse merger, Saratoga entered into a ten-month consulting service
agreement with Prime Ventures principally to continue with its efforts to manage
the LFI matter toward a final resolution and to provide Saratoga with other
business advisory services as needed from time to time.
In June 1999, Saratoga agreed to a further extension of Prime Ventures services
to manage the LFI matter. Under their June 1, 1999 agreement, Prime Ventures and
Saratoga agreed upon the following payment and incentive terms:
Saratoga agreed to pay $10,000 toward legal fees regarding the LFI matter
recoverable from the first cash proceeds, if any, from the LFI settlement. Prime
Ventures and another creditor agreed to settle $95,000 of amounts owing to them
by Saratoga, including the forgiveness of $50,000 of a note payable, in exchange
for an assignment of the cash proceeds, if any, from the LFI settlement.
If any LFI shares are received from the LFI settlement, the first 300,000 LFI
shares are to be the property of Saratoga, the balance, if any, in excess of
300,000 shares is to be split based on future negotiations between Saratoga and
Prime Ventures.
Settlement of the LFI matter is subject to the prior approval of Saratoga's
Board of Directors.
Due to the uncertainty of the outcome of Saratoga's negotiations with LFI, the
investment in LFI has been written off in the amount of $255,500 in fiscal 1998
and $50,000 in fiscal 1999.
F-27
<PAGE>
Under the reverse merger agreement dated July 28, 1998 between Knightsbridge and
Western they agreed to issue four additional shares of Saratoga's common stock
to the former shareholders of Western for each share of Saratoga's stock issued
to LFI ("LFI shares") which is released from escrow and not returned to
Saratoga's treasury. If all of the 2,000,000 LFI shares currently held in escrow
are released from escrow and none returned to its treasury, Saratoga will be
required to issue 8,000,000 additional common shares to former stockholders of
Western. Management believes it is unlikely these shares will ever be issued.
These shares have not been considered in the loss per share calculation because
they would be anti-dilutive. Both parties have agreed that the original
agreement should be rescinded and have agreed to binding arbitration to resolve
the manner in which to finalize rescission of the agreement. An arbitration
hearing is scheduled for this matter in May, 2000.
In fiscal 1998, Saratoga wrote off $99,043 relating to the acquisition of a
retail tire company because the agreement expired and was terminated.
11. COMMITMENTS AND CONTINGENCIES
In June 1999, Saratoga entered into an employment agreement with the former
Chief Executive Officer and minority shareholder of Internet Interview Inc.
which entitles this employee to a base salary plus performance bonus and stock
options to purchase up to 250,000 shares of Saratoga. Further, in connection
with the acquisition of the telecom operation right from Internet Interview Inc.
Saratoga entered into a consulting agreement with AJAY Enterprises Inc. which
entitles AJAY to a monthly service fee and stock options to purchase up to
250,000 shares of Saratoga. Ajay is controlled by a former principal shareholder
of Internet Interview Inc. The consulting service agreement with AJAY was
terminated by mutual agreement in August, 1999 except for the stock options
granted to Ajay. The fair value of the options for 250,000 shares of common
stock granted to AJAY was approximately $21,000 and was charged to consulting
expense in fiscal year 1999. The options were fully vested and exercisable when
they were issued in June 1999, therefore, the issue date was used as the
measurement date.
The Black Scholes option pricing model was used to determine the fair value of
the options, which is a more reliable measurement than the services received
from AJAY. The following significant assumptions were applied: risk free
interest rate of 6 percent, expected life of five years; expected volatility of
50%; and expected dividends of $0.
On October 1, 1999 Saratoga entered into three year employment agreements with
Patrick F. Charles, Chief Executive Officer of the Company and Terrence K.
Picken, Executive Vice President of the Company. Each agreement provides for a
base salary for each of the three years plus performance bonus and stock options
to purchase up to 500,000 shares each of Saratoga's common stock. The agreement
provides that at each Officers option, part of the payments may be paid in
common stock of Saratoga.
Saratoga Telecom has an operating lease on 1500 square feet of office space at a
rate of $1,506 per month through June, 2000.
F-28
<PAGE>
12. SUBSEQUENT EVENT
In February 2000, Saratoga acquired Virtual Media Group Inc. of Kirkland,
Washington. Saratoga issued, to the shareholders of Virtual, 1,053,940 shares of
its common stock, 1,000,000 warrants, exercisable at $0.165 per common share,
and assumed Virtual's 9% convertible debenture obligation of $1 million dollars
due 2002. The warrants are convertible at $0.165 per share and vest with the
holder over a 5 year period, subject to continued employment with Virtual, and
expire within 6 years. Using the purchase method of accounting, the estimated
value of the consideration given was based on the following:
a) Saratoga's assumption of payment of approximatley $1.1 million of Virtual's
liabilities which included the convertible debentures.
b) The beneficial conversion feature of the convertible debentures valued at
approximately $430,000, which debentures are convertible to common shares
at a 30% discount to market at the date of conversion and which feature was
assumed by Saratoga.
c) The 1,053,940 shares of common stock isused by Saratoga valued at
approximatley $430,000.
The beneficial conversion feature of the convertible debentures will be
accounted for as additional interest expense at the issue date, which date the
debentures first become convertible.
F-29
<PAGE>
Virtual Media Group Inc.
Financial Statements
October 31, 1999
Auditors' Report
To the Shareholders of Virtual Media Group Inc.:
We have audited the balance sheet of Virtual Media Group Inc. as at October 31,
1999 and the statements of loss and deficit and cash flows for the year from
November 1, 1998 (date of commencement of business) to October 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards required that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
It is our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at October 31, 1999 and the
results of its operations and the changes in cash flows for the year then ended
in accordance with generally accepted accounting principles.
/s/ Kenway Mack Slusarchuk Stewart
----------------------------------
April 24, 2000 Kenway Mack Slusarchuk Stewart
Calgary, Alberta, Canada Chartered Accountants
F-30
<PAGE>
VIRTUAL MEDIA GROUP INC.
Balance Sheets
(stated in US dollars)
Assets
October 31, January 31,
1999 2000
---------- -----------
Current assets: (unaudited)
Cash $ 209 $ 1,018
Accounts receivable 8,470 3,976
---------- -----------
8,679 4,994
---------- -----------
Capital assets (Note 3):
Cost 37,247 37,905
Less - Accumulated amortization 12,742 14,533
---------- ------------
24,505 23,372
---------- ------------
$ 33,184 $ 28,366
========== ============
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 1,746 $ 169
Due to shareholders (Note 4) 42,992 48,809
Bank loan (Note 5) 17,165 19,874
----------- ------------
61,903 68,852
----------- ------------
Share capital (Note 6) 78 58
Deficit (28,797) (40,544)
----------- ------------
(28,719) (40,486)
----------- ------------
$ 33,184 $ 28,366
=========== ============
F-31
<PAGE>
<TABLE>
Virtual Media Group Inc.
Statements of Loss and Deficit
(stated in US dollars)
For the Year from November 1, 1998 (Date of Commencement of Business)
to October 31, 1999
Three months ended
October 31, January 31,
---------------------------------
<CAPTION>
1999 1999 2000
--------------- -------------- --------------
<S> <C> <C> <C>
(unaudited) (unaudited)
Revenue $ 40,204 $ 4,483 $ 9,423
Direct costs 30,385 3,714 9,330
--------------- -------------- --------------
Gross margin 9,819 769 93
General and administrative expenses 37,827 2,540 11,410
--------------- -------------- --------------
Loss before the following (28,008) (1,771) (11,317)
Interest on bank loan (789) - (430)
--------------- -------------- --------------
Net loss (28,797) (1,771) (11,747)
Deficit, beginning of period - - (28,797)
--------------- -------------- --------------
Deficit, end of period $ (28,797) $ (1,771) $ (40,544)
=============== ============== ==============
</TABLE>
F-23
<PAGE>
<TABLE>
Virtual Media Group Inc.
Statements of Cash Flows
(stated in US dollars)
For the Year from November 1, 1998 (Date of Commencement of Business)
to October 31, 1999
Three months ended
October 31, January 31,
<CAPTION> ---------------------------------
1999 1999 2000
<S> <C> <C> <C>
--------------- -------------- --------------
Operating activities: (unaudited) (unaudited)
Loss $ (28,797) $ (1771) $ (11,747)
Items not involving cash
Amortization 12,742 263 1,791
--------------- -------------- --------------
(16,055) (1,508) (9,956)
--------------- -------------- --------------
Changes in working capital balances
Accounts receivable (8,470) (471) 4,494
Accounts payable 1,746 - (1,577)
--------------- -------------- --------------
(6,724) (471) 2,917
--------------- -------------- --------------
(22,779) (1,979) (7,039)
--------------- -------------- --------------
Investing activities:
Purchases of capital assets (37,247) (6,133) (657)
--------------- -------------- --------------
Financing activities:
Advances from shareholders 42,992 8,217 5,816
Proceeds from bank loan 17,165 - 2,709
Proceeds on issue of share capital 78 58 (20)
--------------- -------------- --------------
60,235 8,275 8,505
--------------- -------------- --------------
Increase in cash 209 163 809
Cash, beginning of period - - 209
--------------- -------------- --------------
Cash, end of period $ 209 $ 163 $ 1,018
=============== ============== ==============
</TABLE>
F-33
<PAGE>
Virtual Media Group Inc.
Notes to Financial Statements
(stated in US dollars)
1. Nature of Organization
Virtual Media Group Inc. ("The Company") was incorporated on October 20,
1998. The Company is engaged in the business of designing internet world
wide sites, online databases and promotional CD ROMS.
2. Significant Accounting Policies
Basis of Presentation
The financial statements are stated in United States dollars, "the
reporting currency". The transactions of the Company have been recorded
during the period in Canadian dollars, "the functional currency". The
translation of Canadian dollars into United States dollars have been made
at the period end exchange rate for current balance sheet items and the
average exchange rate for capital assets, revenues, expenses, and losses.
Translation adjustments for the periods presented are not material.
These financial statements have been prepared by management in accordance
with generally accepted accounting principles in Canada, which are not
materially different from generally accepted accounting principles in the
United States.
Interim Financial Statements
The accompanying financial statements for the three months ended January
31, 2000 and three months ended January 31, 1999 have not been audited.
Nothing has come to our attention that causes us to believe that the
interim financial information is not, in all material respects, in
accordance with generally accepted accounting principles.
Measurement Uncertainty
Financial statements are based on representations that often require
estimates to be made in anticipation of future transactions and events and
include measurements that may, by their nature, be approximations.
Credit Risk Management
The Company is exposed to credit risk on the accounts receivable from its
customers. The accounts receivable of the Company is from one customer.
Capital assets
Capital assets are amortized using the declining balance method at
the following rates:
Software - 50%
Equipment - 10%
F-34
<PAGE>
Future Income Taxes
Income taxes are accounted for by the future method of income tax
allocation.
Revenue Recognition
Revenue is recorded using the percentage-of-completion method.
<TABLE>
Virtual Media Group Inc.
Notes to Financial Statements
(stated in US dollars)
3. Capital Assets
October 31, January 31,
1999 2000
________________________________ _________________________________
<CAPTION> (unaudited)
<S> <C> <C> <C> <C>
Accumulated Accumulated
Cost Amortization Cost Amortization
______________ ______________ ______________ ______________
Software $ 22,628 $ 11,314 $ 22,628 $ 12,762
Equipment 14,619 1,428 15,277 1,771
-------------- -------------- -------------- --------------
$ 37,247 $ 12,742 $ 37,905 $ 14,533
============== ============== ============== ==============
</TABLE>
Software includes $13,600 of capitalized wages related to proprietary
software development.
4. Due to Shareholders
The amount due to shareholders is payable on demand, is unsecured and
bears no interest. The loan has been repaid subsequent to year end.
Consequently, this amount has been classified as a current liability.
5. Bank Loan
The loan bears interest at the bank's daily interest floating rate plus
2%. As the loan was repaid after year end, it has been classified as a
current liability. The Company made payments of interest only until the
time of repayment. The assets of the company are pledged as security for
the loan under a general security agreement.
F-35
<PAGE>
6. Share Capital
Authorized -
Unlimited number of the following classes of shares:
Class "A" common voting shares
Class "B" common voting shares
Class "C" common voting shares
Class "D" common voting shares
Class "E" common voting shares
Class "F" common non-voting shares
Class "G" common non-voting shares
Class "H" common non-voting shares
Class "A" preferred voting, redeemable, non-cumulative shares
Class "B" preferred voting, redeemable, non-cumulative shares
Class "C" preferred non-voting, redeemable, non-cumulative shares
Class "D" preferred non-voting, redeemable, non-cumulative shares
Issued -
<TABLE>
<CAPTION>
October 31, January 31,
1999 2000
<S> <C> <C>
______________ ______________
(unaudited)
71 Class "A" common shares (30 - January 31, 2000) $ 46 $ 26
30 Class "B" common shares 19 19
20 Class "C" common shares 13 13
-------------- --------------
$ 78 $ 58
============== ==============
</TABLE>
On January 21, 2000, the Company redeemed 31 Class "A" common shares for
$0.65 per share.
7. Income Taxes
The Company has losses of $26,700 which can be utilized to reduce taxable
income in future years. These losses expire in 2006. The potential income
tax benefits of these losses has not been recognized in these financial
statements.
8. Nature of operations
The Company earned $ 17,600 (41.99%) of its revenue from one customer.
F-36
<PAGE>
9. Subsequent Event
On January 26, 2000, the Company became a wholly owned subsidiary of
Virtual Media Group Inc., a Corporation incorporated under the laws of the
State of Washington, which was in turn acquired by Saratoga International
Holdings Corp. on February 16, 2000.
F-37
<PAGE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Introduction to Pro Forma Condensed Combined Financial Information of Saratoga
International Holdings Corp.
The following unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the combined financial position or results of operations for future periods or
the results of operations or financial position that actually would have been
realized had Saratoga and Virtual Media Group been a combined company during the
specified periods. The unaudited pro forma condensed combined financial
statements, including related notes, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical
consolidated financial statements and related notes thereto of Saratoga and
Virtual, included elsewhere in this filing.
The following unaudited pro forma condensed combined financial statements give
effect to the acquisition of Virtual using the purchase method of accounting.
The pro forma condensed combined financial statements are based on the
respective historical audited and unaudited consolidated financial statements
and related notes of Saratoga and Virtual. The pro forma adjustments are
preliminary and are based on management's estimates of the value of tangible and
intangible assets acquired. The actual adjustments may differ from those
presented in these pro forma financial statements. A change in the pro forma
adjustments would result in a reallocation of the purchase price affecting the
value assigned to the long-term tangible and intangible assets or, in some
circumstances, result in a charge to the statement of operations. The effect of
these changes on the statement of operations will depend on the nature and
amounts of the assets and liabilities adjusted.
The unaudited pro forma condensed combined balance sheet assumes that the
acquisition took place on January 31, 2000, and combines Saratoga's unaudited
January 31, 2000 consolidated balance sheet with the unaudited January 31, 2000
balance sheet of Virtual. The pro forma condensed combined statement of
operations for the year ended October 31,1999 assumes the acquisition took place
November 1, 1998 and combines Saratoga's audited consolidated statement of
operations for the year ended October 31, 1999 with Virtual's audited statement
of operations for the year ended October 31, 1999. The pro forma condensed
combined statement of operations for the three months ended January 31, 2000
assumes the acquisition took place November 1, 1999 and combines Saratoga's
unaudited consolidated statement of operations for the three months ended
January 31, 2000 with Virtual's unaudited statement of operations for the three
months ended January 31, 2000.
F-38
<PAGE>
<TABLE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JANUARY 31, 2000
<CAPTION>
ASSETS Historical Historical Pro Forma
------
Saratoga Virtual Adjustments Pro Forma
----------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 72,811 $ 1,018 $ 870,000(1) $ 943,829
Accounts receivable 10,671 3,976 14,647
Deferred pin costs 23,890 - - 23,890
Deferred financing cost 11,300 - - 11,300
Prepaid expense and other current assets 54,653 - - 54,653
----------------- ------------- ---------------- ----------------
TOTAL CURRENT ASSETS 173,325 4,994 870,000 1,048,319
PROPERTY AND EQUIPMENT - at cost, net 30,842 23,372 - 54,214
INTANGIBLE ASSET, net 68,950 - 472,601(3)(6) 541,551
----------------- ------------- ---------------- ----------------
$ 273,117 $ 28,366 $ 1,342,601 $ 1,644,084
================= ============= ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ - $ 169 $ - $ 169
Note payable 98,163 19,874 - 118,037
Loans payable - shareholders and officers 75,000 48,809 - 123,809
Debentures Payable - - 1,000,000(1) 1,000,000
Accrued expenses and other current liabilities 113,105 - - 113,105
----------------- ------------- ---------------- ----------------
TOTAL CURRENT LIABILITIES 286,268 68,852 1,000,000 1,355,120
COMMITMENTS AND CONTINGENCIES - - - -
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock 377,742 - - 377,742
Common stock 54,698 58 1,054 (3)
(58)(6) 55,752
Additional paid in capital 2,713,460 - 431,061 (3)
428,571 (2) 3,573,092
Deficit accumulated during the development stage (3,159,051) (40,544) (130,000)(1)
- - 40,544 (6)
- - (428,571)(2) (3,717,622)
----------------- ------------- ---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (13,151) (40,486) 302,115 288,964
----------------- ------------- ---------------- ----------------
$ 273,117 $ 28,366 $ 1,342,601 $ 1,644,084
================= ============= ================ ================
</TABLE>
<TABLE>
See Notes to the unaudited pro forma conddensed combined financial statements
F-39
<PAGE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
<CAPTION> Historical Historical Pro Forma
Saratoga Virtual Adjustments Pro Forma
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 2,660 $ 40,204 $ - $ 42,864
COST OF SALES 23,810 30,385 - 54,195
---------------- -------------- ---------------- ----------------
GROSS PROFIT (LOSS) (21,150) 9,819 - (11,331)
OPERATING EXPENSES
1,038,729 37,827 94,520(4) 1,171,076
---------------- -------------- ---------------- ----------------
LOSS FROM OPERATIONS
(1,059,879) (28,008) (94,520) (1,182,407)
---------------- -------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Loss on impairment of investments (50,000) - - (50,000)
Interest expense (393,369) (789) (428,571)(2) (822,729)
Forgiveness of note payable 50,000 - - 50,000
Other income 7,415 - - 7,415
---------------- ------------- ----------------- ----------------
NET OTHER EXPENSES
(385,954) (789) (428,571) (815,314)
---------------- ------------- ----------------- ----------------
NET LOSS (1,445,833) (28,797) (523,091) (1,997,721)
LESS:
CUMULATIVE PREFERRED STOCK DIVIDEND 15,110 - - 15,110
---------------- ------------- ----------------- ----------------
NET LOSS TO COMMON SHARES $ (1,460,943) $ (28,797) $(523,091) $ (2,012,831)
================ ============ ================== ================
LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.04) $ (0.05)
================ ================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, BASIC AND DILUTED
37,259,311 5,095,441 (5) 42,354,752
================ =================== ================
</TABLE>
<TABLE>
See Notes to the unaudited pro forma condensed combined financial statements
F-40
<PAGE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
THREE MONTHS ENDED JANUARY 31, 2000
<CAPTION>
Historical Historical Pro Forma
Saratoga Virtual Adjustments Pro Forma
---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 6,671 $ 9,423 $ - $ 16,094
COST OF SALES 4,798 9,330 - 14,128
---------------- -------------- ---------------- ----------------
GROSS PROFIT 1,873 93 - 1,966
OPERATING EXPENSES 392,131 11,410 23,360 (4) 427,171
---------------- -------------- ---------------- ----------------
LOSS FROM OPERATIONS (390,258) (11,317) (23,630) (425,205)
---------------- -------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (122,040) (430) (428,571)(2) (551,041)
---------------- -------------- ---------------- ----------------
NET OTHER EXPENSES (122,040) (430) (428,571) (551,041)
---------------- -------------- ---------------- ----------------
NET LOSS (512,298) (11,747) (452,201) (976,246)
LESS:
CUMULATIVE PREFERRED STOCK DIVIDEND 7,555 - - 7,555
---------------- -------------- ---------------- ----------------
NET LOSS TO COMMON SHARES $ (519,853) $ (11,747) $ (452,201) $ (983,801)
================ ============== ================ ================
$ (0.01) $ (0.02)
================ ================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, BASIC AND DILUTED 53,559,698 5,095,441 (5) 58,655,139
================ ================ ================
</TABLE>
See Notes to the unaudited pro forma condensed combined financial statements
F-41
<PAGE>
SARATOGA INTERNATIONAL HOLDINGS CORP. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
The following adjustments were applied to Saratoga's Consolidated Financial
Statements and the financial data of Virtual to arrive at the unaudited Pro
Forma Condensed Combined Financial Statements.
(1) Gives effect to the receipt of $870,000 in cash from the issuance of
$1,000,000 in convertible debentures, less the cost of issuance of
$130,000.
(2) Gives effect to the beneficial conversion feature related to the issuance
of convertible debentures and the amortization thereon as a charge to
interest expense on the issue date when the debenture first becomes
convertible.
(3) Gives effect to the stock of $432,115 issued in the merger of Saratoga with
Virtual and the intangible asset of $458,615, the excess of the purchase
price over the fair market value of the net assets acquired, accounted for
under the purchase method.
(4) Amortization of the intangible asset assuming an asset life of five years.
(5) Saratoga issued 1,053,940 common shares in the purchase of Virtual plus the
effect of 4,041,501 common shares for the conversion of the $1,000,000
debenture assumed.
(6) The equity accounts of Virutal were eliminated and allocated to intangible
assets.
F-42
<PAGE>
PART III
ITEM 1 INDEX OF EXHIBITS
Exhibit
Number Description **
- ------ --------------
2* Agreement and Plan of Merger dated
July 24, 1998 between Knightsbridge and
Western Oil & Tire Distributors Inc.
2.1* Share Exchange Agreement dated as of
February 2, 2000 by and between Saratoga
International Holdings Corp. and Virtual
Media Group Inc.
3.1* Articles of Incorporation, as amended
for Parent Company, Saratoga
International Holdings Corp.
3.2* Articles of Incorporation, as amended
for Subsidiary, Saratoga Telecom Corp.
3.3* By-Laws for Parent Company, Saratoga
International Holdings Corp.
3.4* By-Laws for Subsidiary, Saratoga Telecom
Corp.
4* Specimen Stock Certificate
5* $276,000 Note Purchase Agreement dated
October 30, 1999
10.1* Teleglobe Agreement dated August 18, 1999
10.2* Agreement for Sale and Purchase of
Telecom Business Assets dated June 15,
1999 between Saratoga Telecom Corp. and
Internet Interview Inc.
10.3* Corporate Officer Employment Agreements
with Patrick F. Charles and Terrence K.
Picken, each dated October 1, 1999
10.4* Warrant Agreement between Saratoga
International holdings Corp. and Tom
Morsey, President of Saratoga Telecom
Corp. dated June 16, 1999
10.5* Stock Option Plan
21 Subsidiaries of the Registrant
27 Financial Data Schedule
E-1
<PAGE>
** Summaries of all Exhibits contained within this Registration Statement are
modified in their entirety by reference to these Exhibits.
* Exhibits were previously filed.
E-2
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE SMALL
BUSINESS ISSUER
The Registrant has two wholly-owned subsidiaries.
o Saratoga Telecom Corp. incorporated in the State of Nevada in 1999.
o Virtual Media Group Inc. incorporated in the state of Washington in 2000.
E-3
<PAGE>
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