AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 2000
REGISTRATION STATEMENT NO. 333-42732
================================================================================
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVERTAIN ON-LINE INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 7319 91-1921796
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION NUMBER)
OR ORGANIZATION)
341 Water St., 3rd Floor
Vancouver, B.C.
Canada V6B 1B6
604/685-0667
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
A Cage
Advertain On-Line Inc.
341 Water St., 3rd Floor
Vancouver, B.C.
Canada V6B 1B8
604/685-0667
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED
PRINCIPAL PLACE OF BUSINESS)
COPIES TO:
WILLIAM S. ROSENSTADT, ESQ.
BECKMAN, MILLMAN & SANDERS LLP
116 JOHN STREET, SUITE 1313
NEW YORK, NEW YORK 10038
(212) 406-4700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Registration
Securities to be Registered (1) Registered Security Price Fee
------------------------------- ---------- -------- ----- ---
<S> <C> <C> <C> <C>
Units 1,000,000 $ 1.50 $1,500,000(2) $ 517
Common Stock, $0.001 par value 1,000,000 _________ __________ _________
Class A Warrants 1,000,000
Common Stock, $0.001 par value,
Underlying the Warrants 1,000,000 $ 1.50 $1,500,000(2) $ 517
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Total 2,000,000 $3,000,000 $ 1,034
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</TABLE>
(1) The issuance is a unit consisting of one common share and one Class A
Warrant to buy the underlying common share at an exercise price of $1.50.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended (the
"Securities Act").
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 13, 2000
PRELIMINARY PROSPECTUS
1,000,000 Units
ADVERTAIN ON-LINE INC.
Common Stock
This is an offering of units of Advertain On-Line Inc. Advertain is
offering to sell 1,000,000 units with each unit consisting of one share of
common stock and one Class A Warrant to purchase one share of common stock at
$1.50 per share. This will be a "best efforts", self-underwritten offering with
no minimum basis. As such, no escrow account will be utilized.
Advertain's common stock is quoted on the Pink Sheets under the symbol
"AVTO". On October 25, 2000, the last reported sale price of the common stock
was $0.03 per share
Please see "Risk Factors" beginning on page 4 to read about certain factors
you should consider before buying the units offered by this prospectus.
THE DATE OF THIS PROSPECTUS IS ______________, 2000
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY.......................................................... 1
THE OFFERING................................................................ 2
SUMMARY FINANCIAL DATA...................................................... 3
RISK FACTORS................................................................ 4
FORWARD LOOKING STATEMENTS.................................................. 8
USE OF PROCEEDS............................................................. 9
DILUTION.................................................................... 10
CAPITALIZATION.............................................................. 12
SELECTED FINANCIAL DATA..................................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 14
BUSINESS.................................................................... 16
MANAGEMENT.................................................................. 21
CERTAIN TRANSACTIONS........................................................ 26
PRINCIPAL STOCKHOLDERS...................................................... 27
DESCRIPTION OF SECURITIES................................................... 28
PLAN OF DISTRIBUTION........................................................ 30
DETERMINATION OF OFFERING PRICE............................................. 30
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 30
SHARES ELIGIBLE FOR FUTURE SALE............................................. 31
LEGAL MATTERS............................................................... 31
EXPERTS..................................................................... 31
AVAILABLE INFORMATION....................................................... 31
<PAGE>
Advertain On-Line Inc.
1,000,000 UNITS
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the securities.
About Us
Advertain On-Line Inc. was initially incorporated in the State of Nevada on
September 1, 1998. Advertain intends to become a significant player in the
emerging industry where entertaining content is branded by advertisers or
advertisement is made to be entertaining. Management believes that as the demand
for and the production of "Advertainment" increase, Advertain will provide first
the research tools to create, refine and track the effectiveness of
Advertainment, and second, the network on which it can be exposed as part of a
new internet advertising model. These two goals will be managed as separate
entities within the business, although they are complimentary in function:
Advertain.com for market research, and the Advertain Advertising Network for
exposure.
On July 15, 1999, Advertain acquired all of the issued and outstanding
shares of Advertain On-Line Canada Inc. As consideration, Advertain issued
1,550,000 shares of common stock, all of which are restricted shares within the
meaning of Rule 144 promulgated under the Securities Act. The issuance of the
1,550,000 common shares of Advertain represented about 24% of the issued and
outstanding shares of common stock at July 15, 1999.
Our Offices
Our offices are located at 341 Water St., 3rd Floor, Vancouver, B.C.
Canada, V6B 1B8. Advertain's telephone number is 604/685-0667
1
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THE OFFERING
Units consisting of 1,000,000 shares of
Common Stock and 1,000,000 Class A Warrants ................. 1,000,000
Common Stock to be outstanding prior to offering............... 8,176,140
Warrants to be outstanding prior to offering................... 650,000
Common Stock to be outstanding after the offering.............. 9,176,140
Warrants to be outstanding after this offering ................ 1,650,000
Use of Proceeds
Advertain intends to use the proceeds for salaries, marketing, prizes,
general and administrative expenditures, development of the business, working
capital and other general corporate purposes.
Trading Symbol
Advertain presently trades over the Pink Sheets under the symbol "AVTO".
Risk Factors
An investment in the shares involves a high degree of risk. See "Risk
Factors" beginning on page 4 of this prospectus.
Termination
We plan to close the offering on _____________, 2000.
Plan of Distribution
There is no underwriter for the offering. Our officers intend to sell
Advertain's shares directly on a best efforts, no-minimum basis. Proceeds may be
used as received.
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<PAGE>
SUMMARY FINANCIAL DATA
(Dollar amounts and share data)
The following financial information has been derived from Advertain's
financial statements included elsewhere in this prospectus. This data should be
read in conjunction with and qualified in its entirety by those financial
statements and the related notes.
Nine Month
Year Ended Period Ended
December 31, September 30,
1999 2000
(audited) (unaudited)
----------- ----------
Balance Sheet Data:
Total assets................................ $ 300,867 $ 303,548
Current liabilities......................... $ 195,809 $ 70,968
Long-term debt.............................. $ 0 $ 0
Total shareholders' equity (deficit)........ $ 105,058 $ 232,580
Statement of Operation Data:
Revenue..................................... $ 0 $ 140,110
Expenses:
Total Expenses.......................... $ 373,367 $ 726,088
Income from operations...................... $ 0 $ 0
Loss before income taxes.................... $(373,367) $(951,636)
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RISK FACTORS
An investment in the common stock of Advertain involves a high degree of
risk. Investors could lose their entire investment. Prospective investors should
carefully consider the following factors, along with the other information set
forth in this prospectus, in evaluating Advertain, its business and prospects
before purchasing the common stock.
Advertain will cease doing business without the proceeds of this offering.
The audited financial statements incorporated in this registration
statement assume that Advertain will continue as a going concern. However,
Advertain has had losses since it started operations and requires the proceeds
of this offering to continue its operations. These matters raise substantial
doubt about Advertain"s ability to continue as a going concern. The financial
statements, either audited or unaudited, do not include any adjustments that
might result from the outcome of this uncertainty.
Advertain may continue to be unprofitable.
We were only recently organized and we have a limited operating history and
must be considered in the development stage. Our operations will be subject to
all the risks inherent in the establishment of a developing enterprise and the
uncertainties arising from the absence of a significant operating history. We
may continue to be unprofitable. For the nine months ended September 30, 2000
and the year ended December 31, 1999, we had net losses of $951,636, and
$373,367, respectively. We had no revenue from inception to the year ended
December 31, 1999 and for the nine months ended September 30, 2000 we had
revenue of $140,110. As of September 30, 2000, we had total assets of $303,548
and a shareholders' deficit of $(752,184). We continue to experience losses and
we depend upon the implementation of our business plan to continue our business.
Even if we are able to fully implement our business plan, there is no guarantee
that we will become profitable.
Our ability to continue to operate as a going concern is uncertain.
The independent auditor's report on our financial statement contains
explanatory language that substantial doubt exists as to our ability to continue
as a going concern. The report states that the Company's losses from operations
raises substantial doubt as to our ability to continue as a going concern unless
we obtain future financing or attain profitable operations. The financial
statements which accompany this prospectus do not include any adjustments that
might result from the outcome of this uncertainty
Use of proceeds not specifically allocated.
Approximately 12% of the proceeds of this offering are not specifically
allocated. In addition, Management expects to use approximately $180,000 of the
net proceeds from this offering for unallocated working capital. Management
expects to use the balance of the proceeds for general corporate purposes,
including working capital and capital expenditures in our operations.
Consequently, management will have broad discretion to allocate the proceeds of
the offering and the amounts actually expended for working capital or capital
expenditures may vary significantly depending on a number of factors, including
the amount of cash generated or used by our operations.
Our officers and directors may have conflicts of interest.
Our officers and directors will participate in business ventures which
could be deemed to be direct competitors of ours. Additional conflicts of
interest and non-arms length transactions may also arise in the future in the
event our officers or directors are involved in the management of any firm with
which we transacts business.
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Products and services are untested.
We have created a web site whose primary purpose is to collect and
distribute entertaining advertising on the Internet. The advertisements
generated by us are tested and we have a fully operational site for Internet
users to visit. No assurances can be given that we will be able produce in
sufficient quantities, advertisements for sale or that it will attract
advertisers to our site. Furthermore, there can be no assurance that Internet
users will view our Internet site in sufficient numbers to make our products and
services viable.
If Advertain is unable to keep up with the rapid technological change and its
dependence on new products, the business may never become profitable.
The market for software is characterized by rapid technological change,
frequent new product introductions and evolving industry standards. The
introduction of products incorporating new technologies and the emergence of new
industry standards could render existing products and technology obsolete and
unmarketable. The life cycle of our proposed products is difficult to estimate.
Our future success will depend largely upon our ability to develop and
introduce, on a timely basis, new products that keep pace with technological
developments and merging industry standards and address the increasingly
sophisticated needs of its customers. We cannot assure that we will be
successful in developing and marketing product enhancement or new products that
respond to technological change or evolving industry standards, that we will not
experience difficulties that could delay or prevent the successful development
introduction and marketing of these products, or that any products developed by
us will adequately meet the requirements of the marketplace and achieve market
acceptance. Management expects delays in the development and introduction of new
products and product enhancement. The length of these delays is unpredictable
and the inability to introduce new products in a timely matter would have a
materially adverse effect on us
Development of markets required for successful performance by Advertain.
We only have limited marketing activity and there can be no assurance that
our marketing program, when further developed and employed, will be successful.
Our financial performance will depend, in part, on market acceptance of our
products which will require substantial marketing efforts and expenditures of
significant funds. For additional information see "Business-Strategy."
We may not be able to protect our intellectual property.
We will rely primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
any proprietary technology that we may develop. In addition, we will seek to
avoid disclosure of any trade secrets it may develop including requiring those
persons with access to our information that is developed to execute
confidentiality agreements with us and restricting access to any of our source
codes that might be developed. We will seek to protect any software we develop
and associated documentation and other written materials under trade secret and
copyright laws, which afford only limited protection.
Despite our efforts to protect any proprietary rights, unauthorized parties
may attempt to copy aspects of any products developed by us or to obtain and use
information that we regard as proprietary. Policing unauthorized use of products
that we hope to develop is difficult and while we are unable to determine the
extent to which piracy of software exists, software piracy can be expected to be
a persistent problem. In addition, the laws of many countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that our means of protecting any proprietary rights we
may develop will be adequate or that our competitors will not independently
develop similar technology.
To date, we have not developed any proprietary rights but there can be no
assurance that if and when we develop products those third parties will not
claim infringement by us. We expect that software product
5
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developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. Any of these claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require Advertain to enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and financial condition.
Advertain may fail to capture significant market share as a result of the highly
competitive nature of its business.
We are in a development stage with limited business operations. Our
business environment is highly competitive. There are a number of companies,
which compete both directly and indirectly with our products and services, which
are more established and have much more money and other resources than us. As a
result, we may fail in our efforts to grow our business to a profitable level.
We will depend on key personnel to control our business and our business may
suffer if they are not retained.
We are not sure that we will be able to retain our employees or to identify
or rehire additional people. The need for people is particularly important in
light of the anticipated demands of future growth and the competition. Our
inability to attract, hire or retain good people could have a bad effect on us.
We are highly dependent on our key employees, including technical, sales,
marketing, information systems, financial and executive personnel due to our new
products and the new markets and new sales people we have recently hired.
Therefore, our success depends upon our ability to train and retain these people
and to identify, hire and retain additional people as the need arises.
Competition for these people is substantial.
Penny stock reform act: possible inability to sell in the secondary market.
In October 1990, Congress enacted the "Penny Stock Reform Act of 1990" (the
"90 Act") to counter fraudulent practices common in penny stock transactions.
Rule 3a51-1 of the Exchange Act defines a "penny stock" as an equity security
that is not, among other things: a) a security registered or approved for
registration and traded on a national securities exchange that meets certain
guidelines, where the trade is effected through the facilities of that national
exchange; b) a security listed on NASDAQ; c) a security of an issuer that meets
certain minimum financial requirements ("net tangible assets" in excess of
$2,000,000 if the issuer has been continuously operating for less than three
years, or $5,000,000 if the issuer has been continuously operating for more than
three years, or "average revenue" of at least $6,000,000 for the last three
years); or d) a security with a price of at least $5.00 per share for the
transaction in question or that has a bid quotation (as defined in the Rule) of
at least $5.00 per share. Under Rule 3a51-1(d)(3), Advertain's Common Stock
falls within the definition of a "penny stock". Pursuant to the 90 Act, brokers
and/or dealers, prior to effecting a transaction in a penny stock, will be
required to provide investors with written disclosure documents containing
information concerning various aspects of the market for penny stocks including
specific information about the penny stock and the transaction involving the
purchase and sale of that stock (e.g., price quotes and broker-dealer and
associated person compensation). Subsequent to the transaction, the broker will
be required to deliver monthly or quarterly statements containing specific
information about the penny stock. Because our shares are at this time
designated "penny stocks", these added disclosure requirements will likely
negatively affect the ability of purchasers herein to sell their shares in the
secondary market.
You will incur immediate and substantial dilution if the options described below
are exercised.
After this offering, we will have approximately 11,898,860 shares of common
stock authorized but unissued and not reserved for specific purposes, an
additional 2,275,000 shares of common stock unissued but reserved for issuance
under our option plans. All of these shares may be issued without any action or
approval by our stockholders. Any issuance of these additional shares of
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<PAGE>
common stock would further dilute the percentage ownership of Advertain held by
the investors in this offering.
The potential acquisition of Advertain is more difficult as a result of charter
provisions and may result in limiting potential acquiring candidates of
Advertain.
Certain provisions of Nevada law could make more difficult a merger, tender
offer or proxy contest involving us, even if those events could benefit our
stockholders. These provisions could limit the price that certain investors
might be willing to pay in the future for share of our common stock or preferred
stock.
We will not pay a cash dividend in the near future.
Advertain has never declared or paid any cash dividends. Advertain
currently does not intend to pay cash dividends in the foreseeable future on the
shares of common stock. Management intends to reinvest any earnings in the
development and expansion of Advertain business. Any cash dividends in the
future to common stockholders will be payable when, as and if declared by the
Board of Directors of Advertain, based upon the Board's assessment of:
o the financial conditions of Advertain;
o earnings;
o need for funds;
o capital requirements;
o prior claims of preferred stock to the extent issued and outstanding;
and
o other factors, including any applicable laws.
Therefore, there can be no assurance that any dividends on the common stock
will ever be paid.
7
<PAGE>
FORWARD LOOKING STATEMENTS
The statements contained in this prospectus that are not historical fact
are forward-looking statements," which can be identified by the use of
forward-looking terminology as "believes," "expects," "may," "will," "should,"
or "anticipates," the negatives thereof or other variations thereon or
comparable terminology, and include statements as to the intent, belief or
current our expectations with respect to the future operations, performance or
position. These forward-looking statements are predictions. We cannot assure you
that the future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these
forward-looking statements are based upon a variety of assumptions relating to
our business, which, although considered reasonable by us, may not be realized.
Because of the number and range of the assumptions underlying our
forward-looking statements, many of which are subject to significant
uncertainties and contingencies beyond our reasonable control, some of the
assumptions inevitably will not materialize and unanticipated events and
circumstances may occur subsequent to the date of this prospectus. These
forward-looking statements are based on current information and expectation, and
we assume no obligation to update. Therefore, our actual experience and results
achieved during the period covered by any particular forward-looking statement
may differ substantially from those anticipated. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by us or
any other person that these estimates will be realized, and actual results may
vary materially. We can not assure that any of these expectations will be
realized or that any of the forward-looking statements contained herein will
prove to be accurate.
8
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USE OF PROCEEDS
The net proceeds to Advertain On-Line Inc. from the sale of 100%, 50% and
20% of the common stock offered in this offering are listed below after
deducting estimated offering expenses of $50,000 and assuming that no
commissions are to be paid for any of the shares to be sold. These proceeds are
intended to be utilized substantially as found in the table below. In the event
that we raise less than 100% of our offering, we would prioritize spending in
the following areas: prize expenditures could be reduced as would marketing to
consumers. The two functions work in a reciprocal relationship to each other.
Decreased expenditures in marketing would result in fewer consumers on our site
which would result in a reduced need for prizes.
Our priorities lie in employing people who through direct marketing efforts
can expand the business. Our current annual salaries for the six months ended
June 30, 2000 totaled $181,865. Although it may be necessary to increase a few
key employees' salaries to retain their services in our highly competitive job
market, we do not expect those increases to significantly affect our bottom
line. Further, we anticipate that the executives' salaries will remain constant
for at least the next 12 months. However, in the event that we raise a
critically low amount of capital, it would be possible to reduce staffing and
expenses to a skeletal level while simultaneously maintaining the website in a
core service capacity.
<TABLE>
<CAPTION>
Application of Approximate Approximate Approximate
Proceeds Amount at 20% Amount at 50% Amount at 100%
-------------- ------------- ------------- --------------
<S> <C> <C> <C>
Salaries............................ $ 110,000 $ 350,000 $ 700,000
Prizes.............................. 60,000 90,000 120,000
Legal............................... 15,600 43,000 83,000
Office.............................. 4,400 15,000 33,000
Marketing........................... 30,000 100,000 300,000
Investor Relations Budget........... 10,000 27,000 44,000
Unallocated Working
Capital................... 30,000 85,000 180,000
-------- -------- ---------
Total............................... 250,000 700,000 1,450,000
======== ======== =========
</TABLE>
The investor relations budget will be used primarily for the dissemination
of current corporate developments to shareholders. Advertain will release
information to the shareholders such as news releases, quarterly and annual
reports, as well as any other relevant disclosures as required by the Securities
and Exchange Commission.
The amounts apportioned above are only estimates. As of the date of this
prospectus, we anticipate expending the above total of $1,450,000 within 12
months of its receipt by us. The actual amount expended to finance any category
of expenses may be increased or decreased by our Board of Directors, in its
discretion, if required by our operating expenses or if a reapportionment or
redirection of funds, including acquisitions consistent with our business
strategy, is deemed to be in our best interest. However, as of the date of this
prospectus, we have no specific plans, arrangements, understandings or
commitments with respect to any such acquisition.
Pending use of the proceeds from this offering as set forth above, we may
invest all or a portion of the proceeds in short-term, interest-bearing
securities, U.S. Government securities, money market investments and short-term,
interest bearing deposits in major banks.
9
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DILUTION
Purchasers of the Common Stock offered hereby can expect an immediate and
substantial dilution of their investments. Set forth below is a discussion of
the dilution, which an investor would experience upon purchasing a share of
Common Stock in the Offering. The consolidated net tangible book value of
Advertain as of September 30, 2000 was $(5,906). "Consolidated net tangible book
value" is the net tangible assets of Advertain (total assets less total
liabilities and intangible assets) (see "Unaudited Financial Statements"). As of
the date hereof, there are 9,521,890(1) Shares of Advertain's common stock
outstanding. Therefore, the consolidated net tangible book value as of September
30, 2000 was a nominal amount.
After giving effect to the number of outstanding shares as of the date of
this prospectus, and in the event that all units offered hereby are sold
(2,000,000 shares), the total number of diluted shares outstanding including
this document would be 12,061,890 (2) and assuming that no commissions are paid,
the pro forma consolidated net tangible book value of the Common Stock would be
$4,792,084(3) or $0.40 per share. These figures give effect to the deduction of
all of the estimated expenses of the offering, including all printing, legal,
accounting, blue sky and other fees. The pro forma consolidated net tangible
book value of each share will have increased by approximately $0.40 per share to
the present stockholders, and decreased by approximately $1.10 per Share to the
investors herein if all 2,000,000 shares are sold.
After giving effect to the number of outstanding shares as of the date of
this prospectus, and in the event that 50% of the units offered hereby are sold
(1,000,000 shares), the total number of diluted shares outstanding including
this document would be 11,061,890 and assuming that no commissions are paid, the
pro forma consolidated net tangible book value of the Common Stock would be
$3,332,084 or $0.30 per share. These figures give effect to the deduction of all
of the estimated expenses of the offering, including all printing, legal,
accounting, blue sky and other fees. The pro forma consolidated net tangible
book value of each share will have increased by approximately $0.30 per share to
the present stockholders, and decreased by approximately $1.20 per share to the
investors herein if only 1,000,000 shares are sold.
After giving effect to the number of outstanding shares as of the date of
this prospectus, and in the event that 20% of the units offered hereby are sold
(400,000 shares), the total number of diluted shares outstanding including this
document would be 10,461,890 and assuming that no commissions are paid, the pro
forma consolidated net tangible book value of the common stock would be
$2,415,750 or $0.24 per share. These figures give effect to the deduction of all
of the estimated expenses of the offering, including all printing, legal,
accounting, blue sky and other fees. The pro forma consolidated net tangible
book value of each share will have increased by approximately $0.23 per share to
the present stockholders, and decreased by approximately $1.27 per Share to the
investors herein if only 1,000,000 Shares are sold.
Dilution represents the difference between the offering price of the shares
offered hereby and the pro forma consolidated net tangible book value per share
immediately after the completion of this private offering. Dilution arises
mainly from the arbitrary decision by management as to the offering price per
share. Dilution of the value of the shares purchased by the investors in this
offering will also be due, in part, to the lower book value of the shares
presently outstanding, and in part, to expenses incurred in connection with this
offering. The following table illustrates this dilution.
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<TABLE>
<CAPTION>
100% 50% 20%
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Offering price per share of common stock offered hereby...... $1.50 $l.50 $1.50
Net tangible book value per share before offering..... $0.00 $0.00 $0.00
Increase per share attributable to new investors..... $0.40 $0.30 $0.23
Pro forma net tangible book value per share after offering..... $0.40 $0.30 $0.23
Net tangible book value dilution per share to new investors..... $1.10 $1.20 $1.27
</TABLE>
(1) For fully diluted purposes, common shares, 380,000 warrants and 1,235,750
stock options which are either vested or that will vest in three months
following the date of this prospectus.
(2) For fully diluted purposes, including this offering, 650,000 warrants and
1,235,750 stock options which are either vested or that will vest in three
months following the date of this prospectus. This includes the 270,000
shares of common stock underlying the units issued pursuant to the August,
2000 private placement and the 1,000,000 units offered herein.
(3) Pro forma consolidated net tangible value, assumes all 650,000 warrants and
1,235,750 stock options have been exercised and the 270,000 shares of
common stock underlying the units issued pursuant to the August, 2000
private placement and the 1,000,000 units offered herein have been placed
and exercised.
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CAPITALIZATION
The following table sets forth the actual cash and capitalization of
Advertain as of September 30, 2000 and the adjusted capitalization, which gives
effect to the sale of 100% of the common stock offered in this offering as if it
occurred on September 30, 2000. It is conceivable that no shares of common stock
will be sold in this offering. This table should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus.
As of
September 30,
2000
-----------
Short-term debt................................... $ 0
Long-term debt.................................... $ 0
Stockholders equity (deficit):.................... $ 232,580
Common Stock,
$0.001 par value; 25,000,000
authorized, 7,906,140 actual,
9,176,140 fully diluted........................... $ 9,176
Additional paid in capital........................ $ 1,162,615
Accumulated deficit............................... $ (951,636)
Total stockholders equity (deficit)............... $ 232,580
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SELECTED FINANCIAL DATA
The following selected financial information concerning Advertain has been
derived from the financial statements included elsewhere in this prospectus and
should be read in conjunction with the financial statements and the related
notes. The financial information as of September 30, 2000 has been derived from
the unaudited financial statements of Advertain prepared by Accounting Services
Inc., Suite 1260, Stock Exchange Tower, 809 Granville Street, Vancouver, B.C.,
Canada, telephone 604-685-7450.
Balance Sheet Data:
Year Ended Nine Months Ended
December 31, 1999 September 30, 2000
------------ -------------
(audited) (unaudited)
Total assets............................. $ 300,867 $ 303,548
Current liabilities...................... 195,809 70,968
Long-term debt........................... 0 0
Total stockholders' equity (deficit)..... 105,058 232,580
Statement of Operations Data:
Revenue.................................. 0 0
Expenses:
Total Expenses....................... (373,367) (726,088)
Income from Operations................... 0 0
Loss before income taxes................. (373,367) (951,636)
Provision for income taxes............... 0 0
Net loss................................. (373,367) (951,636)
Net loss per share....................... (.07) (.07)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained below includes statements of Advertain
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially form those anticipated in the
forward-looking statements.
The following discussion and analysis should be read in conjunction with
the information set forth under the caption "Selected Financial Data" and the
financial statements and notes thereto included elsewhere in this prospectus.
Plan of Operation
We have suffered recurring losses from operations and have a working
capital deficiency of $(951,636) which raise substantial concern regarding our
ability to continue as a going concern. We believe that the maximum proceeds of
this offering will enable us to maintain our operations and working capital
requirements approximately for the next 12 months, without taking into account
any internally generated funds from operations. We will need to raise
approximately $1,500,000 to continue operations for the next 12 months based on
our capital expenditure requirements we expect capital to be raised pursuant to
sales of the shares of common stock registered by this registration statement.
We have the authority to issue 25,000,000 shares of common stock, $0.001
par value. Prior to this filing, we have raised all funds through private
placements.
In our attempt to position ourselves as an industry leader a great deal of
our initial resources have been and will be allocated to the collating and
analysis of market research gathered through the advertain.com website. This
analysis requires both an extensive commitment of time from skilled market
researchers, several of which will be hired with the proceeds. Also, in order to
facilitate more cost effective and profitable analysis of the data, we will need
to build specialized software capable of reproducing repetitive analysis tasks.
The human efforts and software programming efforts are both considered research
and development; the goal of this R&D will be to provide us with unparalleled
knowledge and understanding of the key ingredients of successful advertainments.
This knowledge will be used to provide products, services, and consulting to our
industry.
We believe that mergers and acquisitions may be one of the best avenues for
advancing our company and our objectives and believe it may be the most
desirable avenue to generating additional revenues within the next 12 months.
For instance, we imagine that an expedient way of further developing our market
research services could be by acquiring a small but reputable market research
company.
We further believe that after this current offering, we will require
additional funds to maintain and expand our operations. These funds may be
raised through an equity financing, a debt financing, a combination of both, or
other sources, which may result in further dilution in the equity ownership of
the shares being offered in this prospectus. There is still no assurance that,
even with the funds from this offering, we will be able to maintain operations
at a level sufficient for an investor to obtain a return on his investment in
our common stock. Currently we have $70,968 in debt. Our financial statements
report a loss of $12,303 for the fiscal period ended December 31, 1998. For this
period, we paid $4,444 in office expenses and $1,050 in management fees to the
original founding shareholders. For the period ended December 31, 1999, we
report a loss of $361,064. We paid $16,936 in office expenses and $10,103 in
license fees, $55,250 in consulting fees, $61,146 in marketing and promotion
costs and $136,308 in subcontractors and wages. For the interim period ended
September 30, 2000, we report a loss of $951,636. We paid $240,551 in marketing
and promotion and $276,339 in subcontractors and wages. After we raise
additional funds through this current offering, we anticipate an increase in the
number of employees to twenty.
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Our functional currency is the United States Dollar and our consolidated
financial statements are reported in United States Dollars unless otherwise
stated.
15
<PAGE>
BUSINESS
Formation
Advertain On-Line Inc. was initially incorporated in the State of Nevada on
September 1, 1998. Advertain intends to become a significant player in the
emerging industry where entertaining content is branded by advertisers or
advertisement is made to be entertaining. Management believes that as the demand
for and the production of "Advertainment" increase, Advertain will provide first
the research tools to create, refine and track the effectiveness of
Advertainment, and second, the network on which it can be exposed as part of a
new internet advertising model. These two goals will be managed as separate
entities within the business, although they are complimentary in function:
Advertain.com for market research, and the Advertain Advertising Network for
exposure.
On July 15, 1999, Advertain acquired all of the issued and outstanding
shares of Advertain On-Line Canada Inc. As consideration, Advertain issued
1,550,000 shares of common stock, all of which are restricted shares within the
meaning of Rule 144 promulgated under the Securities Act of 1933, as amended.
The issuance of the 1,550,000 common shares of Advertain represented about 24%
of the issued and outstanding shares of common stock at July 15, 1999.
Mission
Advertainment is defined as any entertaining, engaging, highly interactive
or highly animated web based content which is associated directly with a product
or service or commercial brand. Interactive games, product demos, cartoons,
puzzles, informational productions are examples of forms of entertainment can be
branded by advertisers.
We believe that Internet advertisers have a problem. Banners are widely
considered to be losing their efficacy and in some cases just don't work. In our
opinion, they provide very little information about a product or its use. Many
in the advertising industry have already noted that internet ads need to be
"entertaining."
Macromedia, the builder of interactive CD-ROMs has helped develop online
animation and interactivity by building the Shockwave plugin which enables the
execution of Macromedia Director and Flash files directly in a browser window.
Although, the plug-in has been available for at least three years, in 1998-99,
we believe that it took the universal adoption of it by the major browsers and
the proliferation of 56K or better internet connections to make these
interactive technologies appealing for the masses.
Advertain.com -- Consumer Appeal
Presently, our staff searches for Advertainment wherever it is found on the
internet. This alone is a laborious task which provides value to others who can
find it all in our one place. In the future, we anticipate having a substantial
portion of our Advertainment brought to us by an aware industry. We hope to
organize the Advertainment and provide access to it through categories,
keywords, and lists.
Further, we believe that we will have significant consumer appeal because
our web site will empower consumers to vote and have an impact on how the
Advertainment is exposed. They will be able to interact with the Advertainment
and form opinions about whether they find it dull, mildly interesting, or
fabulously entertaining. The people will vote and give their opinion. If an ad
is disliked by web surfers it may sink to the bottom of all searches. If web
surfers consider it to be excellent entertainment and vote accordingly, the
Advertainment may rise to the top of searches.
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<PAGE>
In July 1999, our web site became operational. We found that visitors to
our web site were spending an average of over 25 minutes there on each visit. We
further found that a typical visitor was seeing more than 13 ads and voting on
between 8-10.
The web site allows visitors to see and vote on Advertainment, but for
those who enjoy the process, we offer a point system which gives them increased
odds of winning better prizes the more they vote and participate as members.
When they become members we do not ask for personally identifiable information,
just generic information like zip codes and postal codes, gender and age.
Important information for market research but not invasive for the member. Even
email addresses are optional and as a result virtually everyone gives their
correct email address.
When participating members win prizes, we award them a dollar value and we
let them choose the prize they want. Presently, there are seven prize
categories. The higher the category, the more points needed to qualify and the
more valuable the prizes.
Advertain.com
We intend to produce a report with general industry analysis for between
$300 -- $500. We expect that these reports will be produced in quarterly
volumes. The targets for this will be small ad agencies, content developers, the
webmasters, and web site development companies.
Our research shows that Jupiter Communications produces a major report on
industry trends each year for $25,000. We plan on offering an enhanced market
analysis report related to specific consumer target markets that will be
essential for any company intending to spend greater than six figures on
Advertainment. Produced at least twice a year with a $3,000 -- $5,000 price
range.
Presently we have a number of fully operational market research products
that have been developed. These include the surveying of market segments to
discover the effectiveness of a given advertainment based on advertiser design
goals. Further, our customized development consultation services are also in a
market ready state. Our advertising products are operational but are not yet in
a marketable state due to low volumes of consumer traffic; however, a
contingency for this is in place. We are developing relationships with other
businesses capable of collectively functioning as an advertising network. This
advertising network requires considerable research and development and we
estimated it will be ready for full market release in the first quarter of 2001.
We also have a number of specialized research products that we will offer
which will allow advertisers to see and test the effectiveness of specific
campaigns. We will provide demographic and psychographic profiling of members in
relation to their votes and comments. From this profiling, we anticipate being
able to provide suggestions for how to more effectively engage their target
market. Tied to this will be the ability to bring members who have already voted
on a given Advertainment back to do detailed surveys. At present, the market
research had not been completed to determine what pricing the market will bear.
Mr. Janal is an internationally respected Internet marketing consultant,
professional speaker and workshop leader, and best-selling author of eight
books, including "Dan Janal's Guide to Marketing on the Internet." As president
of Janal Communications, Mr. Janal conducts strategic planning seminars and
consultations for clients ranging from start-ups to the Fortune 1000. A former
public relations executive, Mr. Janal was on the public relations team that
launched America Online. He is also a co-founder of the ShowStoppers Media
Reception for technology reporters and companies exhibiting at Comdex, PC Expo
and InternetWorld. He has been a guest speaker at events sponsored by the U.S.
Postal Service, IBM, American Express/IDS, AT&T, Pacific Bell and the American
Chemical Society. He holds bachelor's and master's degrees in journalism from
Northwestern University's Medill School of Journalism.
The Advertain Advertising Network
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<PAGE>
Our vision for Advertainment extends well beyond its exposure on the
advertiser's site. Our goal over the next couple of years is to build a network
capable of showing Advertainment throughout the web.
Much of the Advertainment is designed to appeal to a specific demographic.
Advertainment is entertaining content for their internet sites that is tailored
to their audience's interest and the providers will actually get paid to show
the Advertainment. Unlike a banner ad, after a person clicks-through and sees an
Advertainment, it is our experience that the web surfers are likely to return to
the original site to find more of the same content. In other words, displaying
Advertainment enhances the content value of the existing internet site and makes
the advertiser money at the same time. Further, the internet site can support
their existing business model. Entertainment sites can have collections of rated
entertainment that fits their audience and that will constantly be changing to
keep people coming back. Advertisers have the potential to make money for doing
what is in their best interest without footing the bill to build the content
themselves.
We believe that there are some advantages to an Advertainment network
compared to any other form of advertising network on the internet. For example,
our experience shows that it is very difficult to launch new products or promote
upcoming events online because the cost of driving people to your site is
expensive.
We intend to charge advertisers a base rate of $0.50(cents) for each person
who sees their Advertainment on our network (an "Adview"). The revenue will be
split 50/50 with the Network. We have no way to estimate the average number of
Adviews each Publisher will be able to create since there is no correlative to
the model to base an estimate on.
Prize System
Out prize system rewards Advertain members with points for active participation
on our site. Roughly, the more advertainment an Advertain member votes on, the
greater number of points he will accrue. These points function like individual
lottery tickets. The more lottery tickets one holds the greater the odds they
will win a prize. Further, we also have prize categories with rising values. The
more points a member has, the better their odds of winning higher priced prizes.
In this way we motivate our members to actively participate which enriches our
market research database for comparative analysis. We do over 100 prize draws
per month with a total maximum of $6,500 awarded in prized in given month.
Sales Strategy
Market Research Sales
We anticipate selling our industry analysis reports in a number of direct
and distributed ways. Industry people will receive monthly top 10 listings from
our Industry Insider Newsletter with editorialized analysis. We believe that the
involvement of industry people in the editorial process will encourage industry
people to purchase the newsletter.
Additionally, we may use an affiliate sales model or other partnering
opportunities to share profits on sales generated with internet publishers whose
audiences belong to the interactive advertising community. We will try to
include deals with several of the ad industry newsletters with the idea of
having our reports bundled with theirs.
We expect the market research that we design specifically for advertisers
will also be sold in several ways such as with a direct sales force. Our
marketing efforts are also expected to create demand for research for companies
seeking test markets, focus groups and consumer feedback in cost effective and
timely fashion.
Advertain Network Traffic Sales
We will need to sell our network advertising model to the advertisers
and/or their agencies. We expect to charge a base rate of $0.50(cents) per
clickthrough to an ad that is seen on the network. We anticipate that many of
the companies using Advertain.com for market research regarding their
Advertainment will likely want to expose it on our Network. Further, many of the
companies who have produced Advertainment already will be approached directly by
a sales team. Advertainment sitting on their sites may be an under-utilized
asset and our network may make sense to those who have already spent the money
to build them.
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The initial funding from this offering will fund our projected cash
requirements for the next twelve months at which time it is anticipated that we
will seek additional funding through equity placements. No such placement has
yet been identified or negotiated. Failure to obtain the funding would severely
hamper our ability to complete our business plan.
Marketing Strategy
Advertising
Advertain will need to advertise in the upcoming months in one or two
capacities. We are presently spending $1,500 per month on a small ad campaign on
webstakes.com. This campaign produced 10,000 new members in January 2000, with
exposure to as many as 30,000 people. We have used this small campaign to bridge
the period until its aggressive PR and online marketing can take over after
which time we may stop using conventional online advertising all together.
The majority of advertising spending online will be focused on the
interactive advertising community. We have started a direct mail campaign aimed
at this audience. We will likely also do some print advertising in trade
magazines timed with advertising buys in the online advertising community.
Trade Shows
In addition to off-line advertising we intend to appear in trade shows.
During the Internet World conference in April. Advertain took part in Dan
Janal's Showstoppers event to expose its concept to the media covering the show.
Management recognizes the value of exposure during these highly visible events,
but details of when and where will be a function of the evolving PR strategy.
Internet Marketing
We intend to drive traffic using our advertising network, link exchanges,
and viral marketing. We believe that we will create branding and public
awareness for our site from our network publishers. Whenever Advertainment is
shown on our network, an additional vote window is also displayed. This vote
window will have its consumer positioning statements while also providing links
back to its site.
Through link exchanges with strategic partners we hope to gather highly
targeted traffic. For instance, this year we began a strategic relationship with
Brandera.com. They provide a number of services for the interactive advertising
community. Brandera.com and Advertain became interested in each other from a
strategic and business development perspective early in the year 2000. While
there have been a few small contracts related specifically to joint advertising
efforts or periodic link exchanges, there is no formal binding agreement between
the companies.
Besides traffic exchanged through strategically placed sponsorship graphics
on each other's sites, we have begun a joint effort to create an industry
specific contact list for Advertain. They are promoting the Advertainment
Industry Insider newsletter in exchange for editorial opportunities and branding
in it. We receive highly targeted industry traffic and they receive access to
our proprietary listings of how Industry Insiders vote as opposed to consumers.
We anticipate that this same list will later be used to sell our products and
promote our services.
Competition
There is considerable competition for consumer traffic on the Internet;
consumer traffic is needed to generate advertising sales. There is also
significant competition in the market research industry. We cope with
competition in these two different areas as follows: first, to generate consumer
traffic we provide a range of unique and free services to consumers. We provide
easy access to entertaining content which consumers find appealing and further
offer them the opportunities to win prizes merely for offering their opinions on
the advertainments they have played with. These consumer benefits attract some
consumers
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but largely act as catalysts to bring many back for repeat visits. Further,
unlike in the off-line economy, competitive partnering is often done on the
Internet. We believe that Internet consumers rarely spend all their time on one
site, thus, by partnering with our competition with link exchanges, we are
capable of attracting more well-targeted consumers.
To compete with the growing and aggressive Internet market research
industry, we have chosen to specialize. We are almost entirely unique on the
internet in our focus on Advertainment for our market research products. We
believe that we were the first company to market and appear to be the largest
and most established in regards to advertainment market research. As a result,
we have collected an enormous database of normative market research that gives
us lower margins for error and quicker, more accurate responses to advertiser
needs.
Employees
We presently employ 12 persons full time: 3 Administration, 6 Operations, 3
Sales & Marketing. Within 12 Months management anticipates having approximately
20 Employees: 3 Administrative, 2 Clerical, 9 Operations, 6 Sales & Marketing.
The employees are not subject to any collective bargaining agreements and
management feels that its relationship with its employees is good. Furthermore,
management has implemented an employee incentive program in fiscal year 2000.
For additional information see "Management -- Board of Directors and Executive
Officers."
Seasonality
Management does not believe that the change in season will have a material
affect on our financial condition or our operations.
Legal Matters
We are not currently involved in any material litigation or proceeding and
we are not aware of any material litigation or proceeding threatened against us.
There have been no suits involving Advertain, its officers or directors.
Facilities
Advertain On-Line Inc. currently operates out of office space located at
341 Water St., 3rd Floor, Vancouver, B.C. The office space aggregates
approximately 3,000 square feet. We have not leased any manufacturing space at
this time. Advertain On-Line Inc. carries $1,000,000 in liability insurance on
the current office space.
To date, we have no investment or interest in any real estate, nor do any
of our principal officers.
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MANAGEMENT
Directors and Executive Officers
The By-Laws of Advertain provide for a Board of Directors of at least one
director, whose term(s) shall be for one year.
The directors and executive officers of Advertain are as follows:
Name Age Position(s) with Advertain
---- ---- ----------------------------
A Cage....................... 34 President, CEO, Chairman and
Director
Robert Knight................ 43 CFO, Secretary and Director
Corey Rudl................... 29 Board of Directors
Randy Buchamer............... 43 Board of Directors
The advisory board of Advertain consists of the following individuals:
Dan Janal ................... 45 Member of Advisory Board
Majid Khoury ................ 39 Member of Advisory Board
A Cage currently serves as Advertain's president and director, a position
he has held since Advertain acquired Advertain On-Line Canada Inc. on June 23rd,
1999. Mr. Cage was self employed for the previous five years running a company
called Multi Mind Productions. His company specialized in computer graphic
illustration and technical communication with a very high involvement with
internet based training.
Robert Knight served as Advertain's president, secretary, treasurer and
director since inception, July 9, 1998, until June 23, 1999. Robert Knight
serves as CFO and director of Advertain since appointment May 14, 1999. Mr.
Knight serves as president, secretary, treasurer and director for Adriatic
Holdings Limited, a Company which intends to be a provider of quality electrical
products to the commercial and industrial electrical industry, since July 9,
1998. Since September 1, 1998, Mr. Knight served as president and director of
Coretech Industries, Inc., a development stage company, formed to consolidate
the yacht brokerage industry (no revenues); Centaur BioResearch Inc., which
specializes in licensing its genetic research services and databases to
pharmaceutical and biotechnology companies by the Internet (no revenues); and
SmartGate Inc., a supplier of safety sensor systems to the parking gate industry
(no revenues). Since November 1997, Mr. Knight served as president and director
of Peregrine Mineral Resources Group, Inc., a mineral exploration company (no
revenues). From June 24, 1997 to February 1, 1999, Mr. Knight served as
president and director of ANM Holdings Corporation who merged with International
Menu Solutions Corp., whose shares are publicly traded on the OTC-BB. Mr. Knight
is no longer involved with the company who recorded sales of $21,000,000 for its
most recent 9 month reporting period. From March 24, 1997 to July 1, 1998, Mr.
Knight served as president and director of AFD Capital Group, Inc. a development
stage company formed to develop quality electrical products (no revenues). From
November 12, 1996 to February 1, 1999, Mr. Knight served as president and
director of Biologistics, Inc., a development stage company formed to engage in
the business of clinical consulting, contract packaging and labeling services
for clinical studies. The company subsequently merged with Skintek Labs, Inc.
(OTC-BB)which continues as an operating company. From November 1995 to September
1996, Mr. Knight served as president and director of BioQuest, Inc., a
development stage company formed to develop therapeutics and vaccines for the
effective treatment of the Human Immunodeficiency Virus (HIV), formerly Victoria
Enterprises, Inc. (after the merger between Victoria Enterprises, Inc. and
BioQuest, Inc. became effective, Mr. Knight resigned as president, secretary and
treasurer but remained a director until May 1998). Shares of BioQuest are quoted
on the "pink sheets". From December 1992 to June 1995, Mr. Knight served as
president and
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director of J.A. Industries (Canada) Inc., a private British Columbia
corporation formed to become a provider of quality electrical products to the
commercial and industrial electrical industry. Mr. Knight has had no
relationship with J.A. (Canada) Inc. since it was acquired in 1996. From June
1994 to August 1996, Mr. Knight served as a director of Everest Security Systems
Corporation, a development stage company formed to become a home alarm service
and installation company. The company subsequently merged with Everest Security
Systems Corporation (OTC BB) who had sales of $13,000,000 for its most recent 9
month reporting period. From 1991 to September 1996, Mr. Knight served as an
independent financial consultant involved in the administration of public
companies. Mr. Knight has 15 years of experience in corporate management and
finance. Mr. Knight will devote approximately fifty per cent (50%) of business
time to the operations of Advertain On-Line Inc
Corey Rudl was appointed to Advertain's board of directors on April 11,
2000. Mr. Rudl owns the Internet Marketing Center(R), a privately held
corporation, as well as four online businesses. He also consults for hundreds of
clients from "mom and pop" or "home-based" businesses to large multimillion
dollar corporations. The Internet Marketing Center specializes in showing small
businesses unique and unconventional ways to promote their business on the
internet. Mr. Rudl started his first online business in 1994 (the birth of
e-commerce on the internet). He has many large online successes "under his
belt". Mr. Rudl gets over 500,000 visitors to his web sites each month and does
over $5.2 million in sales online every year from his online businesses, not
including the millions of dollars in sales he helps generate for his clients.
Randy Buchamer, a principal in Vast Capital Group, a Vancouver, B.C.-based
venture capital firm, and a director of several other public companies joined
Advertain on March 14, 2000. Prior to his involvement in Vast Capital, Mr.
Buchamer was managing director of operations for The Jim Pattison Group, a
privately held multinational conglomerate. He has held senior management
positions at Mohawk Oil Co., including chief operating officer and chief
information officer. He was also founder and president of two software companies
with offices in Los Angeles, Toronto and Vancouver.
The Board of Advisors
The board of advisors will provide key insights into the various industries
that Advertain intends to do business in. The advisory board will ideally be
made up of seasoned professionals with experience in industries ranging from
advertising, market research, public relations, and internet commerce. This
board has no managerial function nor any form of executive power in the
organization and will be used strictly for advice, contacts, and information. It
is, however, likely that any or all of the advisory board members may be
retained by Advertain as contractors at which time contractor agreements will be
used.
Dan Janal was appointed to Advertain's advisory board on June 13, 2000. Mr.
Janal is an internationally respected Internet marketing consultant,
professional speaker and workshop leader, and best-selling author of eight
books, including "Dan Janal(1)s Guide to Marketing on the Internet." As
president of Janal Communications, Mr. Janal conducts strategic planning
seminars and consultations for clients ranging from start-ups to the Fortune
1000. A former public relations executive, Mr. Janal was on the public relations
team that launched America Online, the premier online service. He is also a
co-founder of the ShowStoppers Media Reception for technology reporters and
companies exhibiting at Comdex, PC Expo and InternetWorld. He has been a guest
speaker at events sponsored by the U.S. Postal Service, IBM, American
Express/IDS, AT&T, Pacific Bell and the American Chemical Society. He received a
bachelor of science and a master of science degrees in journalism from
Northwestern University's Medill School of Journalism in 1977 and 1978,
respectively.
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Majid Khoury was appointed to the Advertain Board of Advisors on June 9,
2000. Mr. Khoury's company, Market Explorers, provides qualitative and
quantitative research across North America in English, French, Cantonese and
Mandarin. Its research programs have been used to test advertising creative,
track the impact of advertising programs, and evaluate direct mail promotions
and sponsorships. Mr. Khoury holds an M.B.A. from Concordia University in
Montreal and a B.A. from American University in Beirut, Lebanon. A guest speaker
at numerous marketing conferences, Mr. Khoury has served as co-president of the
Professional Marketing Research Society -- BC Chapter, and has published a
number of research papers and articles.
Board of Directors and Executive Officers
To date, A Cage, Bob Knight, Cory Rudl and Randy Buchamer are the executive
officers and directors of Advertain On-Line Inc. Directors of Advertain On-Line
Inc. serve until the annual meetings of stockholders and until their respective
successors are duly elected and qualified. The executive officers are elected
annually by the Board of Directors and serve terms of one year or until their
death, resignation or removal by the Board of Directors. All members of the
Board of Directors are eligible to participate in Advertain's stock option
plans. See "Business -- Employees."
Board Committees
To date, a formal Board Committee has not been selected.
Compensation of Directors
To date, Mr. Knight has not collected any compensation for his services as
director of Advertain. Mr. Buchamer received 50,000 options on March 14, 2000,
exercisable at $0.50. Mr. Rudl received 300,000 stock options on April 11, 2000,
exercisable at $1.00.
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Executive Compensation
The following summary sets forth the cash and other compensation paid or
accrued by Advertain for the fiscal years ended December 31, 1998 and 1999,
respectively with respect to services performed by A Cage as chief executive
officer and president, Bob Knight as chief financial officer and treasurer and
Greg Spronken as chief operating officer.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Other Securities
Name and Annual Underlying All Other
Principle Position Year Salary($) Bonus Compensation Options Compensation
------------------ ---- --------- ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
A Cage
President/CEO 1998 none none none none none
1999 32,250 none none 550,000 none
Robert Knight
Treasurer/CFO 1998 none none none none none
1999 23,000(1) none none none none
</TABLE>
----------
(1) Robert Knight paid through Knight Financial Ltd., a private consulting
company.
1999 and 2000 Stock Option Plans
On May 31, 1999, Advertain adopted a employee consultant and advisory stock
option plan. Further, on January 4, 2000, Advertain adopted a employee
consultant and advisory stock option plan. The shares of common stock issued for
services rendered pursuant to the plans shall be authorized by the Board of
Directors of Advertain. Shares may be issued to persons who are, at the time of
issuance, employees or officers of, or consultants or advisors to, Advertain;
and common stock may be issued to consultants or advisors who have rendered or
are rendering and are expect to continue to render consulting or advisory
services, including professional advisory services, to Advertain.
24
<PAGE>
INDIVIDUAL GRANTS FOR FISCAL YEAR 1999
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted Fiscal Year ($/Sh) Date
---- ------- ----------- ------ ----
<S> <C> <C> <C> <C>
A Cage 550,000 68.7 0.50 9/15/09
CEO, President,
Chairman and
Director
Robert Knight 0 0 -- --
CFO, Secretary
and Director
</TABLE>
We have reserved for issuance 160,000 shares to employees, exercisable at
$0.25 and 1,115,000 shares exercisable for $0.50 in 1999. We have also reserved
for issuance 1,000,000 shares to employees, exercisable at $1.00 for 2000.
Limitation of Liability and Indemnification
Advertain's Certificate of Incorporation and By-Laws contain provisions
which may indemnify our officers and directors for expenses associated with
lawsuits brought against them in their capacities as officers and/or directors
of Advertain. The operative provisions are Article VII of our By-Laws and
Article XI of the Certificate of Incorporation. However, we are unaware of any
pending or threatened litigation against Advertain or its directors that would
result in any liability for which any director would seek indemnification or
similar protection.
The Nevada General Corporation Law and Advertain's Articles of
Incorporation and By-laws authorize indemnification of a director, officer,
employee or agent of Advertain against expenses incurred by him or her in
connection with any action, suit, or proceeding to which the person is named a
party by reason of having acted or served in such capacity, except for
liabilities arising from the person's own misconduct or negligence in the
performance of duty. In addition, even a director, officer, employee or agent of
Advertain who was found liable for misconduct or negligence in the performance
of duty may obtain indemnification if, in view of all circumstances in the case,
a court of competent jurisdiction determines that a person is fairly and
reasonably entitled to indemnification if, in view of all circumstances in the
case, a court of competent jurisdiction determines such person is fairly and
reasonably entitled to indemnification. In so far as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, or persons controlling Advertain pursuant to the foregoing provisions,
management has been informed that in the opinion of the Securities and Exchange
Commission, indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than payment by the small business issuer of expenses incurred or paid by
a director, officer, or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities being
registered, the small business issuer
25
<PAGE>
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy, as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
To date, we have not entered into any indemnification agreements with our
officers and directors. Indemnification agreements may require a company, among
other things, to indemnify its officers and directors against certain
liabilities (other than liabilities arising from willful misconduct of a
culpable nature) that may arise by reason of their status or service as
directors or officers. These agreements may require a company to advance the
expenses of its directors or officers incurred as a result of any proceeding
against them as to which they could be indemnified. In addition, these
agreements may require a company to obtain directors' and officers' insurance if
available on reasonable terms. We reserve the right to enter into
indemnification agreements in the future with our directors and officers.
Although we have not entered into any indemnification agreements, A Cage's
consulting agreement incorporates indemnification provisions which basically
protect Mr. Cage from liability and the expenses associated in defending any
lawsuit in regards to his consulting agreement with us.
CERTAIN TRANSACTIONS
During the past two years, we have not entered into a transaction with a
value in excess of $60,000 with a director, officer or beneficial owner of 5% or
more of Advertain's capital stock.
On June 1, 1999, we entered into an independent contractor agreement with
Knight Financial Ltd. Pursuant to the terms of the Agreement, the consultant
will prepare, advise, co-ordinate and supervise all administrative aspects of
operating a public company. The original term of the agreement was until
December 31, 1999 at which time the Company exercised the option to extend the
agreement for another six months. Subsequently, the Company has again extended
the consulting contract for an additional 12 months. The Company pays the
consultant $3,000 USD per month for the services performed pursuant to the
agreement.
On June 23, 1999, we entered into a consulting agreement with Cage
Consulting Ltd., a company organized in British Columbia ("Cage Consulting"),
pursuant to which Cage Consulting provides computer software development
services, technical services and computer support and marketing services. The
term of the consulting agreement is for two years and will be automatically
renewed for successive terms of two years unless either party satisfies the
notice requirements thereunder. In exchange for the serviced contemplated by the
consulting agreement, we agreed to pay $60,000 (USD) per year. Cage Consulting
may terminate the consulting agreement if: (i) at any time on not less than 90
days written notice or at any time of a Change of Control (as that term is
defined therein); (ii) if a significant employee of the Cage Consulting is under
a Permanent Disability (as that term is defined therein) on not less than 30
days written notice; or (iii) immediately, without notice, if we breach the
agreement, provided that we waive any such notice. We may terminate the
consulting agreement: (i) without notice and at any time if Cage Consulting is
in breach of its material duties or obligations; or (ii) at any time on 60 days
written notice to Cage Consulting.
Since our inception, we have not contracted with any promoters, nor have we
had any type of indirect relationship with any promoters.
26
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the shares of
voting stock of Advertain On-Line Inc. as of September 30, 2000 by: (i) each
person who is known by Advertain On-Line Inc. to beneficially own more than 5%
of common stock; (ii) Advertain's chief executive officer; (iii) each director;
and (iv) all directors and executive officers of Advertain On-Line Inc. as a
group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Amount and Nature of Shares
Percentage of Owner Beneficially Owned Ownership
------------------------------ --------------------------- ---------
<S> <C> <C>
G.M. Capital Partners, LTD.(1) 1,000,000 12.23
Place de Saint-Gervais 1
Case Postale 2049
CH-1211 Geneve 1
A Cage(2) 1,550,000 18.99%
Robert Knight(2) 0 0%
Greg Spronken(2) 0 0%
Corey Rudl(2) 0 0%
Randy Buchamer(2) 0 0%
Dan Janal(2) 0 0%
Majid Khoury(2) 0 0%
All executive officers and 1,550,000 18.99%
directors as a group (1 person)
</TABLE>
1. G.M. Capital Partners, LTD. is a corporation incorporated under the laws of
Switzerland. Mark Hartman and Martin Stuiki are the two shareholders of the
company. Marc Angst and J.A. Michie are the directors of G.M. Capital
Partners. Further, Mssrs. Angst and Michie have the authority, as granted
to them by the shareholders of G.M. Capital Partners, LTD. to vote the
shares of Advertain held by G.M. Capital Partners, LTD. Neither director
owns or has the right to vote any shares of G.M. Capital Partners, LTD.
2. All addresses are c/o Advertain On-Line Inc., 341 Water Street - 3rd Floor,
Vancouver, B.C. V6B1B8.
27
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
General. Advertain's authorized capital stock consists of 25,000,000 shares
of common stock, $.001 par value per share. As of September 30, 2000, there were
8,176,140 shares issued and outstanding held by 55 holders of record. All shares
of common stock currently outstanding are validly issued, fully paid and
non-assessable. On August 23, 2000, Advertain issued an additional 270,000
shares of common stock to one individual. Furthermore, all shares which are the
subject of this prospectus, when issued and paid for pursuant to this offering,
will be validly issued, fully paid and non-assessable. Assuming the total sale
of all units and the exercise of all warrants offered hereunder, at the
completion of this offering, the present stockholders of Advertain as of June
30, 2000 will own beneficially 80.3% of shares outstanding.
Voting Rights. Each share of common stock entitles the holder thereof to
one cumulative vote, either in person or by proxy, at meetings of stockholders.
Since holders of common stock do not have cumulative voting rights, holders of
more than fifty percent (50%) of the issued and outstanding shares of common
stock can elect all of the directors of Advertain.
Dividend Policy. All shares of common stock are entitled to participate
ratably in dividends when and as declared by Advertain's Board of Directors out
of the funds legally available therefor. Any such dividends may be paid in cash,
property or additional shares of common stock. Advertain On-Line Inc. has not
paid any dividends since its inception and presently anticipates that all
earnings, if any, will be retained for development of our business and that no
dividends on the shares of common stock will be declared in the foreseeable
future. Payment of future dividends will be subject to the discretion of our
Board of Directors and will depend upon, among other things, our future
earnings, the operating and financial condition as well as our capital
requirements, general business conditions and other pertinent facts. Therefore,
there can be no assurance that any dividends on the common stock will be paid in
the future. See "Dividend Policy."
Miscellaneous Rights and Provisions. Stockholders of common stock have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of liquidation or dissolution of
Advertain, whether voluntary or involuntary, each share of common stock is
entitled to share ratably in any assets available for distribution to holders of
the equity of Advertain after satisfaction of all liabilities, subject to the
rights of holders of preferred stock, if any such preferred stockholders should
exist at the time of such liquidation or dissolution.
Units.
The securities being offered by this prospectus are in the form of units.
The price of the units are $1.50 per unit. One unit consists of one share of
common stock and one Class A Warrant to purchase one share of common stock at a
price of $1.50 per share. The units are immediately separable upon issuance.
Class A Warrants.
The Class A Warrants offered hereby will be issued in registered form. The
following summary of the provision of the warrants is qualified in its entirety
by referenced to the Form of Warrant, a copy of which is filed as an exhibit to
the registration statement of which this prospectus is a part.
Rights to purchase common stock. Each Class A Warrant will be separable
immediately and will entitle the registered holder thereof to purchase one share
of common stock (subject to the adjustment described below) for a period of 2
years commencing on the effective date of this prospectus at a price of $1.50
per share of common stock. A holder of Class A Warrants may exercise the
warrants by surrendering
28
<PAGE>
the certificate evidencing the warrants to the warrant agent (as that term is
defined in the Form of Warrant), together with the form of election to purchase
on the reverse side of such certificate properly completed and executed and the
payment of the exercise price and any transfer tax. If less than all of the
warrants evidenced by a warrant certificate are exercised, a new certificate
will be issued for the remaining number of warrants. Holders of the Class A
Warrants may sell the Class A Warrants if a market exists rather than exercise
them. However, there can be no assurance that a market will develop or continue
as to the Class A Warrants.
For a holder of a warrant to exercise the Class A Warrants, there must be a
current registration statement on file with the Commission and various state
securities commissions. Advertain will be required to file post-effective
amendments to the registration statement when events require an amendment. While
it is our intention to file post-effective amendments when necessary, there is
no assurance that the registration statement will be kept effective. If the
registration statement is not kept current for any reason, the Class A Warrants
will not be exercisable, and holder thereof may be deprived of value. Moreover,
if the shares of common stock underlying the Class A Warrants are not registered
or qualified for sale in the state in which a Class A Warrant holder resides,
such holder might not be permitted to exercise the Class A Warrants. If we are
unable to qualify the common stock underlying the Class A Warrants for sale in
certain states, holders of the Class A Warrants in those states will have no
choice but to either sell the Class A Warrants or allow them to expire.
We have authorized and reserved for issuance a number of underlying shares
of common stock sufficient to provide for the exercise of the Class A Warrants.
When issued, each share of common stock will be fully paid and nonassessable.
Class A Warrant holders will not have any voting or other rights as
shareholders of the Advertain unless and until Class A Warrants are exercised
and shares issued pursuant thereto.
Redemption Rights. Any or all of the Class A Warrants may be redeemed by
Advertain at a price of $.01 per warrant, upon the giving of not less than
thirty (30) days' nor more than sixty (60) days' written notice at any time
after the date of this prospectus, provided that the closing bid price of the
common stock for all twenty (20) consecutive trading days ending three (3) days
of the notice of redemption has equaled or exceeded $3.00 per share. The right
to purchase the common stock represented by the Class A Warrants so called for
redemption will be forfeited unless the Class A Warrants are exercised prior to
the date specified in the foregoing notice of redemption.
Adjustments. The exercise price and the number of shares of common stock
issuable upon the exercise of each Class A Warrant are subject to adjustment in
the event of a stock dividend, recapitalization, merger, consolidation or
certain other events.
For the life of the Class A Warrants, the holders thereof are given the
opportunity, at a nominal cost, to profit from a rise in the market price of the
common stock of Advertain. The exercise of the Class A Warrants will result in
the dilution of the then book value of the common stock of Advertain held by the
public investors and would result in a dilution of their percentage ownership of
Advertain. The terms upon which we may obtain additional capital may be
adversely affected through the period that the Class A Warrants remain
exercisable. The holders of these Class A Warrants may be expected to exercise
them at a time when we would, in all likelihood, be able to obtain equity
capital on terms more favorable than those provided for by the Class A Warrants.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Liberty Transfer
Co., 191 New York Avenue, Huntington, NY 11743-2711.
29
<PAGE>
PLAN OF DISTRIBUTION
Management plans on limiting its marketing efforts of the securities
offered pursuant to this prospectus to personal contacts of management.
Management will not receive any compensation for those marketing and sales
efforts.
This offering is a "best-efforts", no-minimum offering, and will not be
underwritten nor will any underwriter be engaged for the marketing, distribution
or sale of any shares registered in this prospectus. We plan to close the
offering on ___________, 2000. However, we reserve the right to terminate the
Offering without notice ant any time prior to the sale of all the Units offered
in the prospectus. We may sell Units from time to time in one or more
transactions at a price of $1.50 per share.
The Units will be offered by our executive officers to prospective
investors. Pursuant to Rule 3a4-1 of the Exchange Act of 1934, the officers will
not be deemed "brokers" as defined in the Exchange Act of 1934 by his
participation in the offering.
To comply with the securities laws of certain jurisdictions, as applicable,
the common stock may be offered and sold only through registered or licensed
brokers or dealers. In addition, the common stock may not be offered or sold in
certain jurisdictions unless they are registered or otherwise comply with the
applicable securities laws of such jurisdictions by exemption, qualification or
otherwise.
DETERMINATION OF OFFERING PRICE
The price of the shares being offered bears no relationship to the assets,
book value or net worth of Advertain and should not be considered as an
indication of our actual value. The offering price of the shares was determined
arbitrarily by management. For additional information see "Dilution."
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Advertain trades publicly on the Pink Sheets under the symbol AVTO. Sales
of substantial amounts of the common stock in the public market could adversely
affect the market price of the common stock from time to time in the public
market and could impair our ability to raise additional capital through the sale
of equity securities in the future.
Price Range of Common Stock
Advertain has been trading on the Pink Sheets under the symbol AVTO since
January 19, 2000. The following table sets for the high and low closing prices
for the common stock for the periods indicated. As of September 30, 2000, there
were approximately 54 holders of record of the common stock. On September 30,
2000, the closing sales price of Advertain's common stock was $0.25 per share.
The following quotes were taken from the "Bloomberg Professional" website.
High Low
---- ---
Third Quarter through
September 30, 2000...................... $0.75 $0.25
Second Quarter through
June 30, 2000........................... $1.55 $0.60
First Quarter through
March 31, 2000.......................... $1.99 $1.00
30
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 8,176,140 shares of common stock currently outstanding, 4,935,000
shares are freely tradable without restriction or the need for further
registration under the Securities Act. The remaining 3,241,140 shares are held
by affiliates of Advertain On-Line Inc. and are "restricted securities," as that
term is defined under Rule 144, promulgated under the Securities Act and will
continue to be restricted after this offering. The restricted securities will
become freely tradable if they are subsequently registered under the Securities
Act or to the extent permitted by Rule 144 or some other exemption from
registration under the Securities Act. However, other than the shares being
registered hereunder, we have not granted any registration rights with regard to
any additional shares of common stock. Furthermore, none of the restricted
shares are currently eligible for resale under Rule 144 without regard to volume
limitations.
No prediction can be made as to the effect, if any, that sales of shares in
the public market of Advertain's common stock, or even the availability of such
shares for sale, may have on the market prices of the common stock prevailing at
any point in time in the future. Sales of shares of common stock by existing
stockholders in the public market, or the availability of such shares for sale,
could adversely affect the market price of the common stock. Such an adverse
effect on the common stock could impair Advertain's ability to raise capital
through the sale of its equity securities. See "Risk Factors."
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for Advertain On-Line Inc. by the law firm of Beckman, Millman &
Sanders, LLP, 116 John Street, Suite 1313, New York, New York 10038.
EXPERTS
Davidson & Co. independent certified public accountants, have audited our
financial statements for the fiscal year ended December 31, 1999, as set forth
in their report, included in this prospectus and registration statement. Our
financial statements are included in this prospectus and registration statement
in reliance on their report, given on their authority as experts in accounting
and auditing.
AVAILABLE INFORMATION
Prior to filing this prospectus, we have not been required to deliver
annual reports. However, once we become a reporting company, we shall deliver
annual reports to securities holders as required by the Securities Exchange Act
of 1934 (the "Exchange Act"). Also, we shall deliver annual reports to
securities holders as required by the rules or regulations of any exchange upon
which our shares may be traded.
Prior to the filing of this prospectus, we have not filed reports with the
Commission. Once we become a reporting company, management anticipates that
Forms 3, 4, 5, 10-KSB, 10-QSB, 8-K and Schedules 13D along with appropriate
proxy materials will have to be filed as they come due. If we issue additional
shares, then we may file additional registration statements for those shares.
The public may read and copy any materials Advertain On-Line Inc. files
with the Commission at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the Commission. The Internet address of the
Commission's Web site is http://www.sec.gov.
31
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Advertain On-Line Inc.
Unaudited Interim Consolidated Financial Statements - September 30, 2000
Interim Consolidated
Consolidated Balance Sheet.................................. F-2
Consolidated Statement of Operations........................ F-3
Consolidated Statement of Cash Flows........................ F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Notes to Financial Statements............................... F-6-F-8
Audited Consolidated Financial Statements - December 31, 1999
Independent Auditor's Report................................ F-9
Consolidated Balance Sheet.................................. F-10
Consolidated Statement of Operations........................ F-11
Consolidated Statement of Cash Flows........................ F-12
Consolidated Statement of Changes in Stockholders' Equity F-13
Notes to Financial Statements............................... F-14-F-21
Pro-Forma Consolidated Financial Statement - December 31, 1999
Company Report.............................................. F-22
Consolidated Statement of Operations........................ F-23
Notes to Financial Statements............................... F-24
Advertain On-Line Canada Inc.
Audited Financial Statements - June 23, 1999
Auditor's Report............................................ F-25
Balance Sheet............................................... F-26
Statement of Operations and Deficit......................... F-27
Statement of Cash Flows..................................... F-28
Note to the Financial Statements............................ F-29-F-32
F-1
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
(Unaudited - Prepared by Management)
<TABLE>
<CAPTION>
==================================================================================================================
September 30, December 31,
2000 1999
------------------------------------------------------------------------------------------------------------------
(Audited)
<S> <C> <C>
ASSETS
Current
Cash $ 5,803 $ 43,549
Funds held in trust 5,000 11,929
Accounts receivable 20,033 10,721
Prepaid expenses 2,222 --
Due from related parties 19,730 --
----------- -----------
52,788 66,199
Capital assets, net of accumulated amortization 65,062 56,679
Web site 185,698 185,698
----------- -----------
$ 303,548 $ 308,576
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 27,436 $ 33,654
Due to related parties 43,532 56,754
Promissory note payable -- 105,401
----------- -----------
70,968 195,809
----------- -----------
Stockholders' equity
Capital stock
Authorized
25,000,000 Common shares with a par value of $0.001 per share
Issued
8,176,140 Common shares 8,176 6,985
Additional paid-in capital 1,162,615 228,765
Subscriptions received in advance 13,425 242,675
Deficit accumulated during the development stage (951,636) (365,658)
----------- -----------
232,580 112,767
----------- -----------
$ 303,548 $ 308,576
==================================================================================================================
</TABLE>
F-2
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - Prepared by Management)
<TABLE>
<CAPTION>
========================================================================================================
Period From
Incorporation
on
Nine month September 1,
Period Ended 1998 to
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------
(Audited)
<S> <C> <C>
EXPENSES
Amortization $ 29,705 $ 9,523
Consulting 17,686 55,250
Interest and bank charges 9,456 6,392
Management fees 24,028 --
Marketing and promotion 240,551 61,377
Office and miscellaneous 31,582 14,502
Printing 8,474 --
Professional fees 46,698 55,626
Rent 12,735 5,609
Subcontractors and wages 276,339 136,862
Telephone and internet 11,186 11,059
Travel and promotion 11,251 6,461
Transfer agent and listing fees 6,397 2,997
----------- -----------
Loss before other items (726,088) (365,658)
----------- -----------
OTHER ITEMS
Sales 139,846 --
Interest income 264 --
----------- -----------
140,110 --
----------- -----------
Loss for the period (585,978) (365,658)
Deficit, beginning of period (365,658) --
----------- -----------
Deficit, end of period $ (951,636) $ (365,658)
========================================================================================================
Basic and diluted loss per share $ (0.07) $ (0.07)
========================================================================================================
Weighted average number of shares outstanding 7,797,714 5,169,684
========================================================================================================
</TABLE>
F-3
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - Prepared by Management)
<TABLE>
<CAPTION>
===========================================================================================================================
Period From
Incorporation
on
Nine Month September 1,
Period Ended 1998 to
September 30, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------------------------
(Audited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $(585,978) $(365,658)
Item not affecting cash
Amortization 29,705 9,523
Change in non-cash working capital items
(Increase) decrease in funds held in trust 6,929 (11,929)
(Increase) decrease in accounts receivable (9,312) (9,110)
(Increase) decrease in prepaids (2,222) --
(Increase) decrease in due from related parties (19,730) --
Increase (decrease) in accounts payable (6,218) 25,712
Increase (decrease) in due to related parties (13,222) 1,314
Increase (decrease) in promissory note payable (105,401) 4,734
---------
Net cash used in operating activities (705,449) (345,414)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets (38,088) (46,286)
Acquisition of cash on purchase of subsidiary -- 49,824
--------- ---------
Net cash provided by investing activities (38,088) 3,538
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from shares issued 935,041 142,750
Subscriptions received in advance (229,250) 242,675
--------- ---------
Net cash provided by financing activities 705,791 385,425
--------- ---------
Change in cash position during the period (37,746) 43,549
Cash, beginning of period 43,549 --
--------- ---------
Cash, end of period $ 5,803 $ 43,549
===========================================================================================================================
Supplemental disclosure for non-cash operating, investing, and financing activities
Shares issued for purchase of subsidiary $ -- $ 93,000
Cash paid during the period for interest -- --
Share issued for settlement of debt 135,041 --
===========================================================================================================================
</TABLE>
F-4
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited - Prepared by Management)
PERIOD FROM INCORPORATION ON SEPTEMBER 1, 1998 TO SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
====================================================================================================================================
Common Stock Deficit
-------------------------- Accumulated
Additional During the
Number Paid-in Development
of Shares Amount Capital Stage Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 14, 1998, shares issued for cash
at $0.001 per share 1,000,000 $ 1,000 $ -- $ -- $ 1,000
September 14, 1998, shares issued for cash
at $0.001 per share 50,000 50 -- -- 50
March 15, 1999, shares issued for cash at
$0.01 per share 4,000,000 4,000 36,000 -- 40,000
March 25, 1999, shares issued for cash at
$0.05 per share 35,000 35 1,715 -- 1,750
June 23, 1999, shares issued for the
acquisition of Advertain On-Line
Canada Inc. 1,550,000 1,550 91,450 -- 93,000
September 14, 1999, shares issued for cash
at $0.25 per share 400,000 400 99,600 -- 100,000
October 4, 1999, shares returned and
cancelled at $0.001 per share (50,000) (50) -- -- (50)
Loss for the period -- -- -- (365,658) (365,658)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 6,985,000 6,985 228,765 (365,658) (129,908)
January 11, 2000, shares issued for
settlement of debt at $0.001 per share 23,000 23 11,477 -- 11,500
January 28, 2000, shares issued for a
private placement at $0.50 per share 500,000 500 249,500 -- 250,000
March 1, 2000, shares issued for a
private placement at $1.00 per share 280,000 280 279,720 -- 280,000
March 1, 2000, shares issued for
settlement of debt at $0.001 100,000 100 105,301 -- 105,401
April 24, 2000 issued 5,300 shares of $0.001 par
value common stock for settlement of debt 5,300 5 5,295 -- 5,300
May 8, 2000 issued 12,840 shares of $0.001 par
value common stock for settlement of debt 12,840 13 12,827 -- 12,840
August 24, 2000, shares issued for a private
placement at $1.00 per share 270,000 270 269,730 -- 270,000
Loss for the period -- -- -- (585,978) (585,978)
---------- ---------- ---------- ---------- ----------
Balance, September 30, 2000 8,176,140 $ 8,176 $1,162,615 $ (951,636) $ 219,155
====================================================================================================================================
</TABLE>
F-5
<PAGE>
ADVERTAIN ON-LINE, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
At September 30, 2000
(unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies
Organization:
On September 1, 1998 Advertain On-Line Inc. (f/k/a/ Silverwing Systems
Corporation, the "Company") was incorporated under the laws of Nevada and
intends to capitalize on opportunities within the internet advertising industry.
Development Stage:
The Company is currently in the development stage and has no significant
operations to date.
Income Taxes:
Income Taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
difference, which will either be taxable or deductible when the assets and
liabilities are offset future taxable income and tax credits that are available
to offset federal income taxes. Due to the Company's net operating loss there
are no income taxes currently due. Also, there were no material differences
between recorded book basis and tax basis at September 30, 2000
Statement of Cash Flow
For Purposes of the statement of cash flows, the Company considers demand
deposits and highly liquid-debt instruments purchased with a maturity of three
months or less to be cash equivalent.
Cash paid for interest and taxes in the period ended July 30, 2000 was $-0-
Net (Loss) Per Common Share
The net (loss) per common share is computed by dividing the net (loss) for the
period by the weighted average number of shares outstanding at September 30,
2000
Note 2 - Capital Stock
Common Stock:
The Company initially authorized 25,000,000 shares of $0.001 par value common
stock. of which 8,176,140 shares of common stock have been issued as of the date
of this report.
The Company has declared no dividends through September 30, 2000.
F-6
<PAGE>
ADVERTAIN ON-LINE, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
At September 30, 2000.
(unaudited)
Note 3 - Acquisition of Advertain On-Line Canada
On July 15, 1999 the Company entered into an agreement to acquire 100% of the
shares of Advertain On-Line Canada Inc. by the issuance of 1,550,000 shares of
$0.001 par value common stock. Also, as part of the transaction, a founding
shareholder and director of the Company agreed to cancel 50,000 shares of $0.001
par value common stock and return such shares to treasury.
Note 4 - Certain Transaction
On September 14, 1998 the Company issued to 1,000,000 shares of $0.001 par value
common stock to one investor for cash at $0.001 per share. The Company also
issued 50,000 shares of $0.001 par value common stock to an officer and director
of the Company for services rendered at a deemed value of $0.001 per share.
On March 15, 1999 the Company issued 4,000,000 shares of $0.001 par value common
stock for cash at $0.01 per share.
On March 25, 1999 the Company issued 35,000 shares of $0.001 par value common
stock for cash at $0.05 per share.
On July 15, 1999 the Company entered into an agreement to purchase 100% of the
shares of Advertain On-Line Canada Inc. by the issuance of 1,550,000 shares to
the shareholder of Advertain On-Line Canada Inc. As part of the agreement, an
officer and director of the Company agreed to cancel 50,000 shares of $0.001 par
value common stock and return said shares to treasury.
On September 14, 1999 the Company issued 400,000 shares of $0.001 par value
common stock for cash at $0.25 per share.
On January 11, 2000 the Company issued 23,000 shares of $0.001 par value common
stock for settlement of debt.
On January 28, 2000 the Company issued 500,000 shares of $0.001 par value common
stock for cash at $0.50 per share.
On March 1, 2000 the Company issued 280,000 shares of $0.001 par value common
stock for cash at $1.00 per share.
On March 1, 2000 the Company issued 100,000 shares of $0.001 par value common
stock
F-7
<PAGE>
for settlement of debt.
On April 24, 2000 the Company issued 5,300 shares of $0.001 par value common
stock for settlement of debt.
On May 8, 2000 the Company issued 12,840 shares of $0.001 par value common stock
for settlement of debt.
On August 23, 2000 the Company issued 270,000 shares of $0.001 par value common
stock for cash at $1.00 per share.
F-8
<PAGE>
DAVIDSON & COMPANY Chartered Accountants A Partnership of
Incorporated
Professionals
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Advertain On-Line Inc.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
We have audited the consolidated balance sheet of Advertain On-Line Inc.
(formerly Silverwing Systems Corporation) as at December 31, 1999 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the period from incorporation on September 1, 1998 to
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform an 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 audit provides a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and the results of its operations and the changes in its stockholders' equity
and cash flows for the period from incorporation on September 1, 1998 to
December 31, 1999 in accordance with generally accepted accounting principles in
the United States of America.
The accompanying financial statements have been prepared assuming that Advertain
On-Line Inc. (formerly Silverwing Systems Corporation) will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company's loss
from operations raises substantial doubt as to the Company's ability to continue
as a going concern unless the company attains future profitable operations
and/or obtains additional financing. Management's plans in regard to these
matters are discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
"DAVIDSON & COMPANY"
Vancouver, Canada Chartered Accountants
March 1, 2000
A Member of SC INTERNATIONAL
Suite 1200, Stock Exchange Tower, 609 Granville Street, P.O. Box 10372,
Pacific Centre, Vancouver, BC, Canada, V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
F-9
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1999
-------------------------------------------------------------------------------
ASSETS
Current
Cash $ 43,549
Funds held in trust (Note 4) 11,929
Accounts receivable 10,721
---------
66,199
Capital assets (Note 5) 56,513
Web site (Note 6) 178,155
---------
$ 300,867
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 33,804
Due to related parties (Note 10) 56,604
Promissory note payable (Note 7) 105,401
---------
195,809
---------
Stockholders' equity
Capital stock
Authorized
25,000,000 common shares with a
par value of $0.001 per share
Issued
6,985,000 common shares 6,985
Additional paid-in capital 228,765
Subscriptions received in advance (Note 14b) 242,675
---------
Deficit accumulated during the development stage (373,367)
---------
105,058
---------
$ 300,867
=========
Nature and continuance of operations (Note 1)
Subsequent events (Note 14)
The accompanying notes are an integral part of
these consolidated financial statements.
F-10
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM INCORPORATION ON SEPTEMBER 1, 1998 TO DECEMBER 31, 1999
--------------------------------------------------------------------------------
EXPENSES
Amortization $ 7,014
Consulting 55,250
Foreign exchange gain 8,348
Interest and bank charges 6,743
Marketing and promotion 61,146
Office and miscellaneous 16,936
Professional fees 55,588
Rent 5,588
Subcontractors and wages 136,308
Telephone and internet 11,014
Travel and promotion 6,435
Transfer agent and listing fees 2,997
-----------
Loss for the period, being deficit accumulated
during the development stage $ 373,367
===========
Basic and diluted loss per share $ (0.07)
===========
Weighted average number of shares outstanding 5,149,684
===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-11
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM INCORPORATION ON SEPTEMBER 1, 1998 TO DECEMBER 31, 1999
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $(373,367)
Item not affecting cash
Amortization 7,014
Change in non-cash working capital items
Increase in funds held in trust (11,929)
Increase in accounts receivable (9,110)
Increase in accounts payable 25,862
Increase in due to related parties 1,164
Increase in promissory note payable 4,734
---------
Net cash used in operating activities (355,632)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets (43,611)
Acquisition of cash on purchase of subsidiary 57,367
---------
Net cash provided by investing activities 13,756
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from shares issued 142,750
Subscriptions received in advance 242,675
---------
Net cash provided by financing activities 385,425
---------
Change in cash position during the period 43,549
Cash position, beginning of period --
---------
Cash position, end of period $ 43,549
=========
Supplemental disclosure for non-cash operating, investing,
and financing activities
Shares issued for purchase of subsidiary $ 93,000
Cash paid during the period for interest --
Cash paid during the period for income taxes --
=========
The accompanying notes are an integral part of
these consolidated financial statements.
F-12
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM INCORPORATION ON SEPTEMBER 1, 1998 TO DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Subscrip- Deficit
Common Stock tions Accumulated
------------------------- Additional Received During the
Number Paid-in In Development
of Shares Amount Capital Advance Stage Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
September 14, 1998, shares issued for
cash at $0.001 per share 1,000,000 $ 1,000 $ -- $ -- $ -- $ 1,000
September 14, 1998, shares issued for
cash at $0.001 per share 50,000 50 -- -- -- 50
March 15, 1999, shares issued for
cash at $0.01 per share 4,000,000 4,000 36,000 -- -- 40,000
March 25, 1999, shares issued for
cash at $0.05 per share 35,000 35 1,715 -- -- 1,750
June 23, 1999, shares issued for the
acquisition of Advertain On-Line
Canada Inc. 1,550,000 1,550 91,450 -- -- 93,000
September 14, 1999, shares issued for
cash at $0.25 per share 400,000 400 99,600 -- -- 100,000
October 4, 1999, shares returned and
cancelled at $0.001 per share (50,000) (50) -- -- -- (50)
Subscriptions received in advance -- -- -- 242,675 -- 242,675
Loss for the period -- -- -- -- (373,367) (373,367)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 6,985,000 $ 6,985 $ 228,765 $ 242,675 $ (373,367) $ 105,058
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-13
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
--------------------------------------------------------------------------------
1. NATURE AND CONTINUANCE OF OPERATIONS
Silverwing Systems Corporation ("Silverwing"), a Nevada corporation, was
incorporated on September 1, 1998 and was inactive until March 14, 1999. On
June 23, 1999, the Company completed the acquisition of Advertain On-Line
Canada Inc. ("Advertain Canada"), a Canadian company operating in
Vancouver, British Columbia, Canada. Silverwing changed its name to
Advertain On-Line Inc. on July 14, 1999.
Advertain Canada was incorporated in order to create, design, establish and
operate a web site, named "Advertain.com", whose primary purpose is to
collect and distribute entertaining advertising on the Internet.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As at
December 31, 1999, the Company had a working capital deficiency of
$129,610. The Company incurred a loss of $373,367 for the period from
inception to December 31, 1999. The Company anticipates expending
approximately $1,200,000 over the next twelve month period in pursuing its
anticipated plan of operations. The Company anticipates covering these
costs by operating revenues and additional equity financing. The Company
has, subsequent to year end, completed an offering of 500,000 common shares
at $0.50 per share pursuant to Regulation D, Rule 504 and an offering of
280,000 units at $1.00 per unit to persons who are "Non -- U.S. Persons" in
accordance with Regulation S of the United States Securities Act of 1933,
as amended. The total proceeds of $530,000, of which $242,675 was received
at year end, will help the Company to complete its anticipated plan of
operations. If the Company is unable to complete its financing requirements
or achieve revenue as projected, it will then modify its expenditures and
plan of operations to coincide with the actual financing completed and
actual operating revenues. 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 the Company be unable to continue in existence.
2. SIGNIFICANT ACCOUNTING POLICIES
In preparing these financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, the reported amount of revenues, and expenses for
the year. Actual results in future periods could be different from these
estimates made in the current year. The following is a summary of the
significant accounting policies of the Company:
Principles of consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Advertain Canada. All significant
inter-company balances and transactions have been eliminated.
F-14
<PAGE>
Reporting on costs of start-up activities
In April 1998, the American Institute of Certified Public Accountant's
issued Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5") which provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998 with initial
adoption reported as the cumulative effect of a change in accounting
principle. The Company adopted SOP 98-5 during the current period.
Web site
The Company capitalized the web site which was acquired on the acquisition
of Advertain Canada. The web site cost will be assessed annually by the
company's management to determine if there has been an impairment on the
web site's value. The web site cost will be amortized over 5 years once the
Company has commenced commercial operations, which are expected to start in
the year 2000.
Capital assets
Capital assets are recorded at cost and are amortized over their useful
lives using the declining balance method at the following annual rates:
Computer equipment 30%
Office furniture 20%
Computer software 100%
Financial instruments
The Company's financial instruments consist of cash, funds held in trust,
accounts receivable, accounts payable and accrued liabilities, due to
related parties and promissory note payable. Unless otherwise noted, it is
management's opinion that the Company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments. The fair value of these financial instruments approximate
their carrying values, unless otherwise noted.
Foreign currency translation
The Company accounts for foreign currency transactions and translation of
foreign currency financial statements under Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52").
Transaction amounts denominated in foreign currencies are translated at
exchange rates prevailing at transaction dates. Carrying values of monetary
assets and liabilities are adjusted at each balance sheet date to reflect
the exchange rate at that date. Non-monetary assets and liabilities are
translated at the exchange rate on the original transaction date. Gains and
losses from restatement of foreign currency monetary and non-monetary
assets and liabilities are included in income. Revenues and expenses are
translated at the rates of exchange prevailing on the dates such items are
recognized in earnings.
Loss per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). Under SFAS 128, basic and diluted earnings per share are to be
presented. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding in the year. Diluted earnings per share takes into
consideration common shares outstanding (computed under basic earnings per
share) and potentially dilutive common shares.
F-15
<PAGE>
Segmented information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the manner in which
public companies report information about operating segments in annual and
interim financial statements. The statement is effective for fiscal years
beginning after December 15, 1997.
Income taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax
asset or liability is recorded for all temporary differences between
financial and tax reporting and net operating loss carryforwards. Deferred
tax expenses (benefit) results from the net change during the year of
deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee is required to
pay for the stock.
Accounting for derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS 137
to defer the effective date of SFAS 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not anticipate that the
adoption of the statement will have a significant impact on its financial
statements.
Comprehensive income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components (revenue, expenses, gains and
losses). The purpose of reporting comprehensive income is to present a
measure of all changes in stockholders' equity that result from recognized
transactions and other economic events of the year, other than transactions
with owners in their capacity as owners. SFAS No. 130 is effective for
financial statements issued for periods beginning after December 15, 1997.
The adoption of SFAS 130 has no impact on total stockholders' equity during
the current period.
3. ACQUISITION OF ADVERTAIN ON-LINE CANADA INC.
On June 23, 1999, the Company acquired all the issued and outstanding share
capital of Advertain Canada. As consideration, the Company issued 1,550,000
common shares at a deemed value of
F-16
<PAGE>
$93,000, all of which are restricted shares within the meaning of Rule 144
promulgated under the Securities Act of 1933, as amended.
Advertain Canada was incorporated under the laws of British Columbia on
January 28, 1999. Its purpose is to create, design, establish and operate a
web site called "Advertain.com" whose primary purpose is to collect and
distribute entertaining advertising on the Internet.
The issue of 1,550,000 common shares by the Company represented only 24% of
the issued and outstanding common shares at June 23, 1999. Therefore, the
acquisition of Advertain Canada was accounted for by the purchase method of
accounting. The cost of the acquisition should be based on the fair value
of the consideration given, except where the fair value of the
consideration given is not clearly evident, then fair value of the net
assets acquired is used. At June 23, 1999, the Company's common shares were
not publicly traded, so there was no obtainable market price per share.
Therefore, the cost of the acquisition was determined by the fair value of
the net assets of Advertain Canada which was determined as follows:
Current assets $ 58,978
Capital assets 19,916
Web site 178,155
--------
257,049
--------
Accounts payable and accrued liabilities (7,942)
Due to related parties (55,440)
--------
Promissory note payable (100,667)
--------
(164,049)
--------
Net fair value $ 93,000
========
4. FUNDS HELD IN TRUST
Funds held in trust are for security on the corporate credit cards. These
funds accrue interest from 3.5% to 5.37% per annum.
5. CAPITAL ASSETS
Accumulated Net
Cost Amortization Book Value
------ ---------- --------
Computer equipment $47,376 $ 5,081 $42,295
Office furniture 4,229 365 3,864
Computer software 11,922 1,568 10,354
------- ------- -------
$63,527 $ 7,014 $56,513
======= ======= =======
6. WEB SITE
Acquired cost (Note 3) $178,155
========
F-17
<PAGE>
7. PROMISSORY NOTE PAYABLE
Principal amount $100,000
Accrued interest 5,401
--------
$105,401
========
The promissory note payable accrues interest at 9% per annum and is
repayable together with interest on May 31, 2000. Subsequent to the year
end (Note 14e), the promissory note payable was settled by the issue of
100,000 units.
8. CAPITAL STOCK
In connection with a private placement offering completed on September 14,
1998, the Company issued 1,000,000 shares of common stock under Regulation
D, subject to Rule 144 of the Securities Act of 1933 as amended, for
proceeds of $1,000.
In connection with a private placement offering completed on September 14,
1998 the Company issued 50,000 shares of common stock under Regulation D,
subject to Rule 144 of the Securities Act of 1933 as amended, for proceeds
of $50. These shares were returned to the Company and cancelled on October
4, 1999.
In connection with a private placement offering completed on March 15, 1999
the Company issued 4,000,000 shares of common stock under Regulation D,
subject to Rule 504 of the Securities Act of 1933 as amended, for proceeds
of $40,000.
In connection with a private placement offering completed on March 25, 1999
the Company issued 35,000 shares of common stock under Regulation D,
subject to Rule 504 of the Securities Act of 1933 as amended, for proceeds
of $1,750.
In connection with the acquisition of Advertain On-Line Canada Inc. on June
23, 1999, the Company issued 1,550,000 shares of common stock under
Regulation D, subject to Rule 144 of the Securities Act of 1933 as amended,
with a value of $93,000.
In connection with a private placement offering completed on September 14,
1999 the Company issued 400,000 shares of common stock under Regulation D,
subject to Rule 504 of the Securities Act of 1933 as amended, for proceeds
of $100,000.
9. STOCK OPTIONS
The Company has the following stock options outstanding:
Vested stock options
Number Exercise
of Shares Price Expiry Date
------- ------- -----------
160,000 $0.25 May 31, 2009
553,000 0.50 May 31, 2009
Non-vested stock options
F-18
<PAGE>
The Company has granted 110,000 stock options exercisable at $0.50 per
share that become vested in allotments of 27,500 shares every six months
from March 1, 2000 to September 1, 2001. These options are exercisable from
their vesting date to May 31, 2009.
The Company has granted 195,000 stock options exercisable at $0.50 per
share that become vested in allotments of 48,750 shares every six months
from June 1, 2000 to December 1, 2001. These options are exercisable from
their vesting date to May 31, 2009.
The Company has granted 257,000 stock options exercisable at $0.50 per
share that have not been allocated. These options will be exercisable from
their vesting date to May 31, 2009.
10. RELATED PARTY TRANSACTIONS
During the period, the Company entered into the following transactions with
related parties:
a) The Company paid consulting fees of $32,250 to the director and
president of the Company. On June 23, 1999, the Company agreed to a
consulting agreement with the president to pay a consulting fee of
$60,000 per annum. This agreement is for two years and is
automatically renewable for successive two year terms unless either
party gives written notice of non-renewal not less than six months
prior to expiry of any term.
The president has advanced to the Company short-term loans of $35,774,
which are non-interest bearing with no specific terms of repayment.
The Company has a note payable to the president for $15,010 of which
$13,694 is principal and $1,316 is accrued interest. The note is
payable on demand and accrues interest at the Royal Bank of Canada's
prime rate plus 4%.
b) A relative of the president loaned the Company $5,820. The loan was
repaid subsequent to the period end by the issue of 23,000 common
shares (Note 14a).
c) The Company paid or accrued consulting fees of $23,000 to a Company
owned by a former director and officer of the Company.
11. INCOME TAXES
The Company's total deferred tax asset is as follows:
Net operating loss carry forward $ 197,405
Losses utilized to reduce future income tax liability (81,950)
--------
115,455
--------
Valuation allowance (115,455)
========
Future income taxes result from timing differences between amounts reported
on the financial statements and amounts reported for income tax purposes.
The future income tax liability of $81,950 relates to the timing
differences in the web site. This amount will be reduced during the
amortization of the web site.
The Company has an operating loss carryforward of approximately $112,469
which expires in the year 2019. The Company's subsidiary, Advertain Canada,
has Canadian operating losses carryforward of approximately $346,011 which
expires in the year 2006. The Company provided a full valuation allowance
on the net operating loss carry forward because of the uncertainty
regarding realizability.
F-19
<PAGE>
12. SEGMENTED INFORMATION
The Company's operates in Canada. Its administration and research and
development facilities are in Canada. The Company's loss for the period
incurred as follows:
Canada $260,897
U.S.A 112,470
--------
$373,367
========
The Company's assets are as follows:
Canada $366,141
U.S.A 16,676
--------
$382,817
========
13. STOCK BASED COMPENSATION EXPENSE
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, compensation cost for stock options is
measured as the excess, if any, of quoted market price of the Company's
stock at the date of grant over the option price. No stock based
compensation has resulted from the use of this standard.
Following is a summary of the status of the plan during 1999:
Weighted
Average
Number Exercise
of Shares Price
---------- --------
Granted 1,275,000 $0.47
Forfeited -- --
Exercised -- --
---------
Outstanding at December 31, 1999 1,275,000 0.47
========= =====
Following is a summary of the status of options outstanding at December 31,
1999:
Outstanding Options Exercisable Options
------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
-------------- ------ ---- ----- ------ -----
$0.25 160,000 9.5 $0.25 160,000 $0.25
0.50 1,115,000 9.5 0.50 553,000 0.50
Compensation
Had compensation cost been recognized on the basis of fair value pursuant
to Statement of Financial Accounting Standards No. 123, net loss and loss
per share would have been adjusted as follows:
F-20
<PAGE>
Net loss
As reported $ (373,367)
==========
Pro forma $ (449,124)
==========
Basic and diluted loss per share
As reported $ (0.07)
==========
Pro forma $ (0.09)
==========
The fair value of each option granted is estimated using the Black Scholes
Model. The assumptions used in calculating fair value are as follows:
Risk-free interest rate 6.085%
Expected life of the options 2 years
Expected volatility 0.001%
Expected dividend yield --
14. SUBSEQUENT EVENTS
The following events occurred subsequent to period end:
a) On January 11, 2000, the Company settled a loan of $5,820 from a
related party by issuing 23,000 restricted shares under rule 144 of
the Securities Act of 1933, as amended.
b) On January 28, 2000, the Company issued pursuant to a private
placement, 500,000 common shares at $0.50 per share for total proceeds
of $250,000. The private placement was issued in accordance with
Regulation D, Rule 504 of the United States Securities Act of 1933, as
amended.
c) On January 4, 2000, the Company adopted a stock option plan of
1,000,000 common shares. These options referred to as the "2000 Stock
Option Plan" have not been allocated to any individuals, nor has the
exercise price been determined. However, once the options are granted
they will expire on December 31, 2010.
d) On March 1, 2000, the Company issued pursuant to a private placement,
280,000 units at $1.00 per share. Each unit consisted of one common
share of the company and a warrant, which entitles the holder thereof,
to purchase another common share of the Company at $1.00 per share
until March 1, 2002. The private placement was issued in accordance
with Regulation S of the United States Securities Act of 1933, as
amended.
e) On March 1, 2000, the Company settled the promissory note payable of
$105,401 by issuing 100,000 units. Each unit consisted of one common
share of the Company and a warrant, which entitles the holder thereof,
to purchase another common share of the Company at $1.00 per share
until March 1, 2002. The private placement was issued in accordance
with Regulation S of the United States Securities Act of 1933, as
amended.
F-21
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
AND
ADVERTAIN ON-LINE CANADA INC.
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro-forma consolidated statement of operations for the
period from incorporation on September 1, 1998 to December 31, 1999 (the
"Pro-forma Financial Statements") of Advertain On-line Inc. (formerly Silverwing
Systems Corporation) (the "Company") give effect to the following transaction as
of the beginning of the period indicated for purposes of the statements of
operations:
i) the acquisition by the Company of 100% of the outstanding capital
stock of Advertain On-Line Canada Inc. on June 23, 1999.
Pro-forma adjustments to the statements of operations reflect adjustments only
for dates prior to the date a transaction was consummated.
The Pro-forma Financial Statements have been prepared by the Company based upon
the financial statements of the Company and Advertain On-Line Canada Inc. The
Pro-forma Financial Statements give effect to the acquisition under the purchase
method of accounting and to certain assumptions and adjustments described more
fully in the accompanying notes. These Pro-forma Financial Statements may not be
indicative of the results that actually would have occurred if the transactions
had been completed on the dates indicated or of the results which may be
obtained in the future. The Pro-forma Financial Statements should be read in
conjunction with the financial statements and notes thereto of the Company and
Advertain On-Line Canada Inc. included elsewhere in this Form SB-2.
F-22
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Advertain Advertain
On-Line Advertain On-Line
Inc. On-Line Canada
Period From Canada Inc.
Incorporation Inc. Period From
on Period From Incorporation
September 1, June 24, on
1998 to 1999 to January 28,
December 31, December 31, 1999 to Pro-Forma
1999 1999 June 23, 1999 Consolidated
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EXPENSES
Amortization $ -- $ 7,030 $ 1,451 $ 8,481
Consulting fee 55,250 -- 5,090 60,340
Equipment rental -- -- 1,544 1,544
Foreign exchange -- -- 9,683 9,683
Interest and bank charges 370 6,022 1,394 7,786
Marketing and promotion 4,280 57,097 6,958 68,335
Office and miscellaneous 2,494 14,501 4,862 21,857
Professional fees 46,511 9,115 1,697 57,323
Rent and security 568 5,041 4,369 9,978
Subcontractors and wages -- 136,862 51,084 187,946
Telephone and internet -- 11,059 2,213 13,272
Transfer agent fee 2,997 -- -- 2,997
Travel and promotion -- 6,461 2,354 8,815
----------- ----------- ----------- -----------
Loss, being deficit end of period $ 112,470 $ 253,188 $ 92,699 $ 458,357
================================================================================================================================
Basic and fully diluted loss per share $ (0.09)
================================================================================================================================
Weighted average number of share outstanding 5,149,684
====================================================================================================================================
</TABLE>
See notes to the pro-forma consolidated financial statements.
F-23
<PAGE>
ADVERTAIN ON-LINE INC.
(formerly Silverwing Systems Corporation)
(A Development Stage Company)
NOTES TO THE PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Business combination of Advertain On-Line Inc. (formerly Silverwing Systems
Corporation) ("Advertain USA") and Advertain On-Line Canada Inc.
("Advertain Canada")
Effective June 23 , 1999, a business combination occurred between Advertain
USA and Advertain Canada, whereby Advertain USA legally acquired Advertain
Canada as a wholly-owned subsidiary and continues to operate under the name
of Advertain On-Line Inc. The terms of the combination provided that the
common shares of Advertain Canada were exchange for an aggregate of
1,550,000 common shares of Advertain USA.
2. PRO-FORMA FINANCIAL INFORMATION
Management has prepared and provided certain pro-forma interim consolidated
financial information to assist readers to understand the nature and effect
of the combination on the unaudited financial statements of Advertain USA
and Advertain Canada.
The pro-forma financial information is unaudited and has been prepared from
the unaudited financial statements of Advertain USA and Advertain Canada
for the period from the date of incorporation on September 1, 1998 to
December 31, 1999.
Pro-forma statement of operations and earnings per share:
The pro-forma consolidated statement of operations reflect a simple
combination of the results of operations of Advertain USA and Advertain
Canada for the period from the date of incorporation on September 1, 1998
to December 31, 1999 and includes the impact of the calculation of
pro-forma basic and fully diluted earnings per share which is based on the
number of shares that would have been outstanding for the period had the
business combination taken place at the beginning of the fiscal period.
F-24
<PAGE>
AUDITORS' REPORT
To the Directors of
Advertain On-Line Canada Inc.
We have audited the balance sheet of Advertain On-Line Canada Inc. as at June
23, 1999 and the related statements of operations and deficit and cash flows for
the period from incorporation on January 28, 1999 to June 23, 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 Canadian generally accepted auditing
standards. Those standards require 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at June 23, 1999 and the
results of its operations and its cash flows for the period from incorporation
on January 28, 1999 to June 23, 1999 in accordance with generally accepted
accounting principles.
Vancouver, Canada Chartered Accountants
February 29, 2000
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA
- U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph when the financial statements are affected by
conditions and events that cast substantial doubt on the Company's ability to
continue as a going concern, such as those described in Note 1 to the financial
statements. The above opinion in our report to the directors dated February 29,
2000 is expressed in accordance with Canadian reporting standards which do not
permit a reference to such events and conditions in the auditors' report when
these are adequately disclosed in the financial statements.
Vancouver, Canada Chartered Accountants
February 29, 2000
F-25
<PAGE>
ADVERTAIN ON-LINE CANADA INC.
BALANCE SHEET
(Expressed in United States Dollars)
AS AT JUNE 23, 1999
================================================================================
ASSETS
Current
Cash $ 49,824
Accounts receivable 1,611
---------
51,435
Capital assets (Note 4) 19,916
Web site 2
---------
$ 71,353
================================================================================
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY
Current
Accounts payable and accrued liabilities $ 7,942
Promissory note payable (Note 5) 100,667
Due to related parties (Note 7) 55,440
---------
164,049
---------
Shareholders' capital deficiency
Capital stock (Note 6) 3
Deficit (92,699)
---------
(92,696)
---------
$ 71,353
================================================================================
Nature and continuance of operations (Note 1)
On behalf of the Board:
________________________________Director _____________________________Director
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
ADVERTAIN ON-LINE CANADA INC.
STATEMENT OF OPERATIONS AND DEFICIT
(Expressed in United States Dollars)
PERIOD FROM INCORPORATION ON JANUARY 28, 1999 to JUNE 23, 1999
================================================================================
EXPENSES
Amortization $ 1,451
Consulting fee 5,090
Equipment rental 1,544
Foreign exchange 9,683
Interest and bank charges 1,394
Marketing and promotion 6,958
Office and miscellaneous 4,862
Professional fees 1,697
Rent and security 4,369
Subcontractors and wages 51,084
Telephone and internet 2,213
Travel and promotion 2,354
--------
Loss, being deficit end of period $ 92,699
================================================================================
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
ADVERTAIN ON-LINE CANADA INC.
STATEMENT OF CASH FLOWS
(Expressed in United States Dollars)
PERIOD FROM INCORPORATION ON JANUARY 28, 1999 to JUNE 23, 1999
================================================================================
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Loss for the period $ (92,699)
Item not affecting cash
Amortization 1,451
Change in non-cash working capital items
Increase in accounts receivable (1,611)
Increase in accounts payable and accrued liabilities 5,162
Increase in due to related parties 42,025
Increase in promissory note payable 100,667
---------
Net cash used in operating activities (54,995)
---------
FINANCING ACTIVITIES
Proceeds from sale of shares 1
---------
Net cash provided by financing activities 1
---------
INVESTING ACTIVITIES
Capital assets acquired (5,172)
---------
Net cash used in investing activities (5,172)
---------
Increase in cash during the period 49,824
Cash, beginning of period --
---------
Cash, end of period $ 49,824
================================================================================
Supplemental disclosure for non-cash operating, investing, and financing
activities (Note 8)
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
ADVERTAIN ON-LINE CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 23, 1999
================================================================================
1. NATURE AND CONTINUANCE OF OPERATIONS
The Company was incorporated on January 28, 1999 under the Company Act of
British Columbia. The Company was originally incorporated under the name of
Multimind Productions Inc. and changed its name on May 17, 1999 to
Advertain On-Line Canada Inc.
On January 28, 1999, the Company agreed to a purchase and sale between the
Company and its sole shareholder, Mr. A Cage, whereby, Mr. Cage agreed to
transfer his proprietorship business into the Company in exchange for
shares of the Company as outlined in Note 3.
The principal business of the Company commencing January 28, 1999 was to
continue in the development of the web site, Advertain.com, whose primary
purpose is to collect and distribute entertaining advertising on the
Internet.
On June 23, 1999, the Company entered into a plan of and agreement of
reorganization with Silverwing Systems Corporation, which later changed its
name to Advertain On-Line Inc. The end result of this transaction was that
the Company became a subsidiary of Silverwing Systems Corporation.
The Company's financial statements have been prepared on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As at June
23, 1999, the Company had a working capital deficiency of $112,614. The
Company incurred a loss of $92,699 for the period from inception to June
23, 1999. Funding to date has been provided by the issue of a promissory
note payable and loans from related parties. Continuance of operations is
dependent upon funding from the parent company Advertain On-Line Inc.,
through the issue of its capital stock in order to continue the development
of technology as well as the future sale and marketability.
2. SIGNIFICANT ACCOUNTING POLICIES
In preparing these financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
for the year. Actual results in future periods could be different from
these estimates made in the current year. The following is a summary of the
significant accounting policies of the Company:
Start-up and development costs
Since Inception, certain expenditures have been incurred primarily for web
site development, business development, market development and financing
purposes. While these expenditures are intended to benefit future periods,
the Company follows the accounting policy of expensing as incurred those
expenditures.
Capital assets
Capital assets are recorded at cost and are amortized over their useful
lives using the declining balance method at the following annual rates:
Computer equipment 30%
Office furniture 20%
F-29
<PAGE>
ADVERTAIN ON-LINE CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 23, 1999
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Financial instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and accrued liabilities, promissory note payable and due
to related parties. Unless otherwise noted, it is management's opinion that
the Company is not exposed to significant interest, currency or credit
risks arising from these financial instruments. The fair value of these
financial instruments approximate their carrying values, unless otherwise
noted.
Foreign currency translation
Financial statements of the Company have been translated into United States
dollars at the rate of exchange on June 23, 1999.
Segmented information
The Company conducts substantially all of its operations in Canada in one
business segment.
3. ACQUISITION OF PROPRIETORSHIP
On January 28, 1999, the Company agreed to acquire from its sole
shareholder, Mr. A Cage, his proprietorship business in exchange for 3,900
Class A common shares and 6,000 Class B common shares of the Company. At
the conclusion of this transaction, Mr. Cage remained the sole shareholder
owning 100% of the issued and outstanding shares of the Company.
Since this was a non-arms length transaction, this acquisition was
accounted for using the continuity of interest method. The following is a
summary of the net assets acquired:
Capital assets $ 16,195
--------
Accounts payable and accrued liabilities (2,780)
Due to related parties (13,415)
--------
(16,195)
--------
Net assets acquired $ --
========
4. CAPITAL ASSETS
================================================================================
Accumulated Net
Cost Amortization Book Value
--------------------------------------------------------------------------------
Computer equipment $18,516 $ 1,316 $17,200
Office furniture 2,851 135 2,716
------- ------- -------
$21,367 $ 1,451 $19,916
================================================================================
F-30
<PAGE>
ADVERTAIN ON-LINE CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 23, 1999
================================================================================
5. PROMISSORY NOTE PAYABLE
===========================================================================
Principal amount $ 100,000
Accrued interest 667
---------
$ 100,667
===========================================================================
The promissory note payable accrues interest at 9% per annum and is
repayable together with interest on May 31, 2000.
6. CAPITAL STOCK
===========================================================================
Number
of Shares Amount
---------------------------------------------------------------------------
Authorized
4,000 Class A voting common shares without par value 6,000
Class B non-voting common shares without par value
Issued
Class A common shares issued
For cash at $0.01 per share 100 $ 1
For acquisition of proprietorship 3,900 1
------- -------
Balance as at June 23, 1999 4,000 $ 2
==================
Class B common shares
For the acquisition of proprietorship 6,000 $ 1
------- -------
Balance as at June 23, 1999 6,000 $ 1
===========================================================================
7. DUE TO RELATED PARTIES
a) The Company paid a consulting fee of $5,090 to a director and officer
of the Company. The director and officer advanced short-term loans of
$35,758 to the Company. These loans are non-interest bearing with no
specific terms of repayment. The Company has a note payable to the
director and officer for $13,980 of which $13,415 is principal and
$565 is accrued interest. The note is payable on demand and accrues
interest at the Royal Bank of Canada's prime rate plus 4%.
b) A relative of a director and officer of the Company loaned the Company
$5,702. The loan was non-interest bearing and was repaid by the parent
company Advertain On-Line Inc. on January 11, 2000.
F-31
<PAGE>
ADVERTAIN ON-LINE CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 23, 1999
================================================================================
8. SUPPLEMENTAL DISCLOSURE FOR NON-CASH OPERATING, FINANCING AND OPERATING
ACTIVITIES
===========================================================================
Cash paid during the period for interest $ --
===========================================================================
Cash paid during the period for income taxes $ --
===========================================================================
Significant non-cash transactions for the period:
a) The Company issued 3,900 Class A common shares, with a deemed value of
$1, to the director and officer of the Company for his proprietorship.
b) The Company issued 6,000 Class B common shares, with a deemed value of
$1, to the director and officer of the Company for his proprietorship.
c) The Company acquired the capital assets of $16,915, by assuming the
debt of accounts payable and accrued liabilities of $2,780 and due to
related party of $13,415 from the director and officer as outlined in
Note 3.
9. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's financial statements have been prepared in accordance with
United States Generally Accepted Accounting Principles which conform in all
material respects with Canadian Generally Accepted Accounting Principles.
F-32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Advertain's Certificate of Incorporation and By-Laws contain provisions
which may indemnify our officers and directors for expenses associated with
lawsuits brought against them in their capacities as officers and/or directors
of Advertain. The operative provisions are Article VII of our By-Laws and
Article XI of the Certificate of Incorporation. However, we are unaware of any
pending or threatened litigation against Advertain or its directors that would
result in any liability for which any director would seek indemnification or
similar protection.
The Nevada General Corporation Law and Advertain's Articles of
Incorporation and By-laws authorize indemnification of a director, officer,
employee or agent of Advertain against expenses incurred by him or her in
connection with any action, suit, or proceeding to which the person is named a
party by reason of having acted or served in such capacity, except for
liabilities arising from the person's own misconduct or negligence in the
performance of duty. In addition, even a director, officer, employee or agent of
Advertain who was found liable for misconduct or negligence in the performance
of duty may obtain indemnification if, in view of all circumstances in the case,
a court of competent jurisdiction determines that a person is fairly and
reasonably entitled to indemnification if, in view of all circumstances in the
case, a court of competent jurisdiction determines such person is fairly and
reasonably entitled to indemnification. In so far as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, or persons controlling Advertain pursuant to the foregoing provisions,
management has been informed that in the opinion of the Securities and Exchange
Commission, indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than payment by the small business issuer of expenses incurred or paid by
a director, officer, or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy, as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
To date, we have not entered into any indemnification agreements with our
officers and directors. Indemnification agreements may require a company, among
other things, to indemnify its officers and directors against certain
liabilities (other than liabilities arising from willful misconduct of a
culpable nature) that may arise by reason of their status or service as
directors or officers. These agreements may require a company to advance the
expenses of its directors or officers incurred as a result of any proceeding
against them as to which they could be indemnified. In addition, these
agreements may require a company to obtain directors' and officers' insurance if
available on reasonable terms. We reserve the right to enter into
indemnification agreements in the future with our directors and officers.
Although we have not entered into any indemnification agreements, A Cage's
consulting agreement incorporates indemnification provisions which basically
protect Mr. Cage from liability in regards to his consulting agreement with us.
Item 25. Other Expenses Of Issuance And Distribution
The following table sets forth an itemization of all estimated expenses in
connection with the issuance and distribution of the securities being
registered:
II-1
<PAGE>
SEC Registration Fee........................................ 1,034
Blue Sky Fees and Expenses................................... 7,500
Transfer Agent Fees.......................................... 1,500
Accounting Fees and Expenses................................. 10,000
Legal Fees and Expenses...................................... 20,000
Printing and Engraving....................................... 2,500
Miscellaneous................................................ 7,466
------
Total........................................ 50,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In September, 1998, we sold 1,050,000 restricted shares of common stock,
$0.001 par value, at $0.001 per share pursuant to Section 4(2) and Rule 506 of
Regulation D of the Securities Act to 2 investors for a total consideration of
$1,050. We cancelled and returned to treasury 50,000 shares upon the completion
of the acquisition of Advertain On-Line Canada, Inc.
In March, 1999, we sold 4,000,000 shares of common stock, $0.001 par value,
at $0.01 per share to ten investors pursuant to Section 3(b) and Rule 504 of
Regulation D of the Securities Act for a total consideration of $40,000.
In March, 1999, we sold 35,000 shares of common stock, $0.001 par value, at
$0.05 per share to thirty-five investors pursuant to Section 3(b) and Rule 504
of Regulation D of the Securities Act for a total consideration of $1,750.
In September, 1999, we sold 400,000 shares of common stock, $0.001 par
value, at $0.25 per share to four investors pursuant to Section 3(b) and Rule
504 of Regulation D of the Securities Act for a total consideration of $100,000.
In October, 1999, 50,000 shares of common stock, $0.001 par value, were
returned from Knight Financial Ltd. and cancelled.
In September, 1999, we issued 1,550,000 shares of common stock, $0.001 par
value, at $0.001 per share to one investor pursuant to Section 3(b) and Rule 504
of Regulation D of the Securities Act as part of the acquisition of Advertain
On-Line Canada Inc.
In January, 2000, we sold 500,000 shares of common stock, $0.001 par value,
at $0.50 per share to twenty-one investors pursuant to Section 3(b) and Rule 504
of Regulation D of the Securities Act for a total consideration of $250,000.
In January, 2000, we settled a loan of $5,820 which did not bear any
interest and could be prepaid at any time. We issued 23,000 restricted shares at
a price of $0.50 per share pursuant to Section 5(a) and Rule 903 of Regulation S
of the Securities Act in full satisfaction of such loan.
In March, 2000, we sold 280,000 units consisting of 280,000 shares of
common stock, $0.001 par value, and 280,000 warrants exercisable into common
stock at $1.00 per share for two years. The units were sold at $1.00 per share
to two investors pursuant to Section 5(a) and Rule 903 of Regulation S of the
Securities Act for a total consideration of $280,000.
In March, 2000, we settled a promissory note payable to Dinostar
Investments Ltd. in the amount of $105,401 by issuing 100,000 units, with each
unit consisting of one share of common stock and one
II-2
<PAGE>
warrant entitling the holder to purchase an additional share of common stock at
$1.00 until March 1, 2002. The units were issued pursuant to Regulation S of the
Securities Act.
In April, 2000, we sold 5,300 shares of common stock at $1.00 per share to
one investor pursuant to Section 5(a) and Rule 903 of Regulation S of the
Securities Act for a total consideration of $5,300.
In May, 2000, we sold 12,840 shares at $1.00 per share to one investor
pursuant to Regulation S of the Securities Act for consideration of $12,840.
In August, 2000, we offered 270,000 units consisting of 270,000 shares of
common stock $0.001 par value and 270,000 warrants exercisable into common stock
at $1.00 per share for two years. The units are offered at $1.00 per share
pursuant to Section 3(b) and Rule 504 of Regulation D of the Securities Act.
II-3
<PAGE>
INDEX TO EXHIBITS
Item 27. Exhibits
Exhibit
Number Description of Exhibit
------- ---------------------
3.1 Articles of Incorporation.**
3.2 Certificate of Amendment of Articles of Incorporation, dated
August 18, 1999. 3.3 By-Laws.**
4.1 Specimen Common Stock Certificate*
5.1 Opinion of Beckman, Millman & Sanders, LLP.
10.1 Silverwing Systems Corporation 1999 Employee, Consultant and
Advisor Stock Compensation Plan, dated May 31, 1999.**
10.2 Independent Contractor Agreement between Silverwing Systems
Corporation and Knight Financial LTD., dated June 1, 1999.**
10.3 Consulting Agreement between Silverwing Systems Corporation
and Cage Consulting LTD., dated June 23, 1999.**
10.4 Advertain On-Line Inc. 2000 Employee, Consultant and Advisor
Stock Compensation Plan, dated January 4, 2000.**
10.5 Form of Warrant Agreement.*
23.1 Consent of Beckman, Millman & Sanders, LLP (included in
Exhibit 5.1).
23.2 Consent of Davidson & Co.
27.1 Financial Data Schedule for the twelve months ended December
31, 1999 and the six months ended June 30, 2000.
----------
* To be filed by amendment.
** Previously filed.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned small business issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and (iii)
include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Bellingham, State of Washington on November 13, 2000.
ADVERTAIN ON-LINE INC.
By: /s/ A Cage
--------------------------------------
A Cage
President, Chief Executive Officer and
Chairman of the Board
In accordance with the requirements of the Securities Act, this
registration statement was signed by the following persons in the capacities
indicated on November 13, 2000.
SIGNATURES TITLE
/s/ Robert Knight
-----------------------
Robert Knight Chief Financial Officer, Secretary and
Director
/s/ Corey Rudl
-----------------------
Corey Rudl Director
/s/ Randy Buchamer
-----------------------
Randy Buchamer Director
II-5
