UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended 03/31/2000.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period [n/a].
Commission file number: 0-28377
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COSMOZ.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 94-3319536
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 S. El Camino Real, Suite 100
San Mateo, California 94402
(Address of principal executive offices)
650/358-1188
Registrant's telephone number)
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Former Address:
55 Hawthorne Street, Suite 550
San Francisco, CA 94105
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(Former name, former address and
former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:_____
1
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes:____ No:____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
61,334,546
Part I--Financial Information
Item I. Financial Statements.
COSMOZ.COM, INC.
Consolidated Balance Sheets
March 31, 2000 and June 30, 1999
March 31, June 30,
2000 1999
----------- -----------
(UNAUDITED) (AUDITED)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 209,085 $ 424,781
Short-term investments
in marketable securities 46,069 1,565,270
Accounts receivable - trade, net 5,715 24,846
Prepaid expenses 173,167 --
Note receivable - related party -- 900,000
Amounts due from shareholders -- 188,142
----------- -----------
Total Current Assets 434,036 3,103,039
----------- -----------
Property and Equipment
Office furniture 54,009 13,127
Leasehold Improvements 9,285 --
Equipment 151,807 55,519
----------- -----------
215,101 68,646
Accumulated depreciation (20,349) (1,136)
----------- -----------
Total Property and Equipment 194,752 67,510
----------- -----------
Other Assets:
Long-term investments 585,981 145,000
Deposits 44,086 18,486
Intangible assets, net 3,852,872 1,092,943
----------- -----------
Total Other Assets 4,482,939 1,256,429
----------- -----------
Total Assets $ 5,111,727 $ 4,426,978
=========== ===========
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
COSMOZ.COM, INC.
Consolidated Balance Sheets (Continued)
March 31, 2000 and June 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, June 30,
2000 1999
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 179,595 $ 81,849
Reserve for discontinued operations 85,623 85,623
Accrued expenses - discontinued operations 116,696 116,696
Accrued expenses and other current liabilities 404,898 162,320
Due to related parties 250,000 596,875
Notes payable - other 14,589 14,589
------------ ------------
Total Current Liabilities 1,051,401 1,057,952
------------ ------------
Stockholders' Equity
Preferred stock, $0.001 par value;
50,000,000 shares authorized;
none issued or outstanding -- --
Common stock, $0.001 par value;
200,000,000 shares authorized;
61,334,546 and 58,899,546 issued
and outstanding respectively 61,334 58,899
Additional paid-in-capital 13,167,887 9,259,417
Accumulated other comprehensive
income (loss) (23,159) (45,592)
Accumulated deficit (9,145,736) (5,903,698)
------------ ------------
Total Stockholders' Equity 4,060,326 3,369,026
------------ ------------
Total Liabilities and Stockholders' Equity $ 5,111,727 $ 4,426,978
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
Consolidated Statement of Operations For the three months and the
nine months ended March 31, 1999 and
March 31, 2000
three months ended nine months ended
March 31, March 31,
1999 2000 1999 2000
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Revenues $ 498 $ 153,509 $ 498 $ 270,363
Costs of revenues -- 33,500 -- 33,500
Net revenues 498 120,009 498 236,863
Operating Expenses:
Sales and marketing -- 239,689 -- 659,439
Product development 30,000 165,839 30,000 369,822
General and administrative 112,396 635,554 112,396 1,944,133
Amortization of intangibles -- 151,385 -- 359,263
Non-recurring costs - acquisitions -- -- -- 100,462
Depreciation and amortization -- 8,781 -- 21,160
Total operating expenses 142,396 1,201,248 142,396 3,454,279
Loss from operations (141,898) (1,081,239) (141,898) (3,217,416)
Other Income (loss):
Investment loss -- (48,206) -- (48,206)
Loss on disposal of fixed assets -- (4,103) -- (4,103)
Interest income 486 1,422 -- 5,811
Interest expense -- (2,529) -- (2,660)
Dividend income -- 1,245 -- 24,534
Total other income 486 (52,171) -- (24,624)
Net loss before taxes (141,412) (1,133,410) (141,898) (3,242,040)
Provision for income tax -- -- -- --
Loss after income taxes from operations (141,412) (1,133,410) (141,898) (3,242,040)
Net loss $ (141,412) $ (1,133,410) $ (141,898) $ (3,242,040)
Net loss per share:
Net loss per share - basic $ (0.003) $ (0.018) $ (0.003) $ (0.530)
Net loss per share - diluted $ (0.003) $ (0.017) $ (0.003) $ (0.050)
Shares used in per share calculation - 44,772,046 61,279,546 43,757,046 6,112,782
basic
Shares used in per share calculation - 51,272,046 65,542,796 50,257,046 65,376,032
diluted
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statement of Operations (Continued)
three months ended nine months ended
March 31, March 31,
1999 2000 1999 2000
(UNAUDITED)
Discontinued operations:
<S> <C> <C> <C>
Revenues:
Sales $ -- -- $ 64,769 $ --
Franchise fees -- -- -- --
Less costs of revenues -- -- (16,016) --
Gross profit -- -- 48,753 --
Operating expenses:
Personnel -- -- 20,855 --
General and Administrative -- -- 97,808 --
Operating expenses -- -- 118,663 --
Loss on disposal of
operations, including a
provision of $98,685 for loss -- -- 227,535 --
contingency
Loss before taxes -- -- (297,445) --
Provision for income tax -- -- -- --
Net loss from discontinued operations -- -- (297,445) --
Net loss $ -- $ -- $ (297,445) $ --
Net loss per share:
Net loss per share - basic and $ -- $ -- $ (0.007) $ --
diluted
Shares used in per share calculation - -- -- 41,348,546 --
basic and diluted
</TABLE>
5
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<TABLE>
<CAPTION>
COSMOZ.COM, INC.
Consolidated Statement of Changes in
Shareholders' Equity
for the nine month period ended March 31, 2000
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance June 30,1999
Comprehensive income (loss) -- $ -- 58,899,546 $ 58,899 $ 9,259,417
Net loss from operations during the period -- -- -- -- --
Net unrealized gain on securities -- -- -- -- --
Issuance of commons stock for acquisition -- -- 550,000 550 1,114,800
Issuance of common stock for services -- -- 100,00 100 204,585
Compensation expense recognized on grants -- -- -- -- 201,400
Balance, September 30, 1999
Comprehensive income (loss) -- -- 59,549,546 59,549 10,780,202
Net loss from operations during the period -- -- -- -- --
Net unrealized gain on securities -- -- -- -- --
Issuance of commons stock for acquisition -- -- 1,225,000 1,225 1,721,370
Issuance of common stock for services -- -- 260,000 260 310,365
Balance, December 31, 1999
Comprehensive income (loss) -- $ -- 61,034,546 $ 61,034 $12,811,937
Net loss from operations during the period -- -- -- -- --
Net unrealized gain on securities -- -- -- -- --
Issuance of commons stock for acquisition -- -- 250,000 250 281,000
Issuance of common stock for services -- -- 50,000 50 74,950
Balance, March 31, 2000 -- $ -- 61,334,546 $ 61,334 $13,167,887
</TABLE>
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<TABLE>
<CAPTION>
COSMOZ.COM, INC.
Consolidated Statement of Changes in
Shareholders' Equity
for the nine month period ended March 31, 2000
(continued)
Accumulated
Other Total
Comprehensive Accumulated Shareholders' Comprehensive
Income (loss) Deficit Equity Income (loss)
------------- ------- ------ -------------
<S> <C> <C> <C> <C>
Balance, June 30, 1999
Comprehensive income (loss) $ (45,592) $(5,903,698) $ 3,369,026 $(1,353,0651)
Net loss from operations during the period -- (823,269) (823,269) (823,269)
Net unrealized gain on securities 44,375 -- 44,375 44,375
Issuance of commons stock for acquisition -- -- 1,115,350 --
Issuance of common stock for services -- -- 204,685 --
Compensation expense recognized on grants -- -- 201,400 --
Balance, September 30, 1999
Comprehensive income (loss) (1,217) (6,726,967) 4,111,567 (778,894)
Net loss from operations during the period -- (1,285,360) (1,285,360) (1,285,360)
Net unrealized gain on securities 6,020 -- 6,020 6,020
Issuance of commons stock for acquisition -- -- 1,722,595 --
Issuance of common stock for services -- -- 310,625 --
Balance, December 31, 1999
Comprehensive income (loss) $ 4,803 $(8,012,327) $ 4,865,447 $ (2,058,234)
Net loss from operations during the period -- (1,133,409) (1,133,409) (1,133,409)
Net unrealized gain on securities (27,962) -- (27,962) (27,962)
Issuance of commons stock for acquisition -- -- 281,250 --
Issuance of common stock for services -- -- 75,000 --
Balance, March 31, 2000 $ (23,159) $(9,145,736) $ 4,060,326 $ (3,219,605)
</TABLE>
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<TABLE>
<CAPTION>
COSMOZ.COM, INC.
Consolidated Statements of Cash Flows For the nine months
ended March 31, 2000 and 1999
2000 1999
----------- -----------
<S> <C> <C>
Operating Activities:
Net Loss $(3,242,040) $ (439,343)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating activities:
Intangible amortization 359,263 --
Stock compensation 201,400 --
Amortization and depreciation 21,160 --
Issuance of common stock for cash and services 589,900 817,868
Decrease in investment 39,019 --
Currency translation -- 7,079
Changes in operating assets and liabilities:
Accounts receivable - trade, net 19,131 8,322
Inventory -- 16,583
Reserve for discontinued operations -- 98,039
Accrued expenses -discontinued operations -- (618)
Prepaid expenses (173,167) --
Accounts payable 97,746 26,374
Deposits (25,600) (200,000)
Accrued expenses and other current liabilities 242,578 --
----------- -----------
Net cash used in operating activities (1,870,610) 334,304
----------- -----------
Investing activities:
Sale of marketable securities 1,541,637 --
Other investments (480,000) --
Disposal of property and equipment -- 124,596
Purchases of property and equipment (147,990) --
----------- -----------
Net cash provided by investing activities 913,647 124,596
----------- -----------
Financing activities:
Payments received on note receivable - related party 900,000 --
Payments on amounts due to related parties (158,733) --
----------- -----------
Net cash provided by financing activities 741,267 --
----------- -----------
(Decrease) increase in cash and cash equivalents (215,696) 458,900
Cash and cash equivalents, beginning of period 424,781 42,946
----------- -----------
Cash and cash equivalents, end of period $ 209,085 $ 501,846
=========== ===========
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued) For the nine
months ended March 31, 2000 and 1999
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 131 $ --
Taxes $ -- $ --
The following noncash transactions occurred during the year ended June 30, 1999:
Acquisition of StreetIQ.com, Inc.
Intangibles $ 800,200 $ --
Issuance of common stock for acquisition (800,200) --
----------- --------------------
Cash received $ -- $ --
=========== ====================
Acquisition of MBMagic, Inc.
Intangibles $ 315,150 $ --
Issuance of common stock for acquisition (315,150) --
----------- --------------------
Cash received $ -- $ --
=========== ====================
Acquisition of iTrack.com, Inc.
Intangibles $ 1,722,595 $ --
Issuance of common stock for acquisition (1,722,595) --
----------- --------------------
Cash received $ -- $ --
=========== ====================
Acquisition of Ivory Acquisition Corporation
Intangibles 281,250 $ --
Issuance of common stock for acquisition (281,250) --
----------- --------------------
Cash received $ -- $ --
=========== ====================
</TABLE>
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Notes to the Financial Statements
1. Summary of Significant Accounting Policies.
- ----------------------------------------------
A. General Description of Business.
Cosmoz.com, Inc.("Cosmoz" or the "Company"), a Delaware corporation,
http://www.cosmoz.com) is an Internet holding and incubator company that funds,
acquires, and develops Internet companies. The company provides strategic
consulting, business services, and seed capital to emerging companies that are
developing Internet Websites or Web-enabling technologies. The company also
showcases its portfolio of holdings through a consumer-friendly marketing
portal.
The Company was incorporated in Delaware on October 15, 1996, as MIS
International, Inc., which merged with MIS Multimedia Interactive Services Inc.,
a Canadian corporation, as of July 1, 1997. MIS Multimedia Interactive Services,
Inc., and its subsidiaries (Pretzel Franchising, Inc. ("PFI") and Wheel to Wheel
Franchising, Inc. ("WTW") were engaged in the business of developing and selling
franchises. WTW concentrated on the marketing of franchises for automotive
service centers that used recycled automotive parts, and it operated an
automotive service center in Ontario, Canada. PFI concentrated on the marketing
of franchises for "Pretzel Twister", and it operated a store in Toronto,
Ontario. These two Canadian entities are inactive as of September 30, 1998.
During the nine months ended March 31, 2000, the Company consummated
the acquisitions of Ivory Acquisition Corporation, StreetIQ, Inc., iTrack, Inc.,
and the remaining 51% interest in MB Technologies, Inc. The shareholders of
these corporations exchanged all of their shares for shares of the Company's
Common Stock in business combinations that were accounted for under the purchase
method, with the exception of the acquisition of Ivory Acquisition Corporation,
which was accounted for under the pooling of interest method.
The Company's wholly-owned Internet properties include:
o BuckInvestor.com, Inc. (www.buckinvestor.com), which provides financial and
investment information in a format targeted to investors under the age of 35; o
KingFine, Inc. (www.monsterpick.com), which operates an investment content
website and online message boards targeted to active investors; o MB
Technologies, Inc. (www.tickerzone.com), a message board community solutions
provider; o StreetIQ, Inc. (www.streetiq.com), which provides focused online
investment information and a community for women; o iTrack, Inc.
(www.itrack.com), operates an online auction monitoring service that allows
consumers to track specific products on the various online auction houses; and o
Other Company Internet properties include www.monsterquote.com;
www.profitwire.com; www.financialcontent.com; www.casinowhiz.com; and
www.cosmozmall.com.
10
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B. Basis of Presentation and Organization.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, the statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto for the fiscal quarter
ended March 31 included herein.
These financial statements represent the financial activity of
Cosmoz.com, Inc., a publicly traded company listed and traded on the NASDAQ Over
the Counter Bulletin Board ("OTC BB"). In December 1998, the Company changed its
focus from operating and franchising pretzel kiosks, retail stores and an
automotive service center (as described above) to investments and acquisitions
of Internet-related businesses and web-based technologies. The Company's
Internet acquisitions offer both a content source and an application source for
investors.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All inter-company transactions have
been eliminated. The equity and net loss attributable to the minority
shareholder interests that related to the Company's subsidiaries are shown
separately in the consolidated balance sheet and consolidated statement of
operations, respectively. Losses in excess of the minority interest in equity
would be charged against the Company.
These financial statements should be read in conjunction with the
Company's audited financial statements and related notes for the year ended June
30, 1999, (refer to Exhibit A). The results of operations for the nine month
period ended March 31, 2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending June
30, 2000.
C. Cash and Cash Equivalents, Short and Long-Term Investments.
For purposes of cash flows, the Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents, those with original maturities greater than three months and
current maturities less than twelve months from the balance sheet date are
considered short-term investments, and those with maturities greater than twelve
months from the balance sheet date are considered long-term investments.
11
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The Company often receives revenue from its ProfitWire Media Group
division ("ProfitWire", further described below) in the form of shares of stock
in lieu of cash. The Company treats such revenues as cash, and not as
investments. The Company maintains such positions only for a short time.
The Company identifies and records impairment losses on long-lived
assets when events and circumstances indicate that such assets might be
impaired. To date, no such impairment has been recorded.
D. Property and Equipment.
Property and equipment are recorded at cost and are depreciated over
the estimated useful lives of the assets using the straight-line method. The
cost and related accumulated depreciation of all property and equipment retired
or otherwise disposed of are removed from the accounts. Any gain or loss is
recognized in the current period. Various accelerated methods are used for tax
purposes. Leasehold improvements are amortized on a straight-line basis over the
term of the lease.
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful lives of the assets are added
to the property and equipment.
E. Revenue Recognition.
The Company's revenues are derived principally from two sources. The
first source is the sale of banner and sponsorship advertisements that appear on
the Company's website properties. Sponsorship advertising contracts have longer
terms (ranging from one month to one year) than standard banner advertising
contracts and also involve more integration with Cosmoz services, such as the
placement of buttons that provide users with direct links to the advertiser's
Web site. Advertising revenues on both banner and sponsorship contracts are
recognized ratably over the period in which the advertising is displayed,
provided that no significant Company obligations remain at the end of a period
and collection of the resulting receivable is probable.
The Company has agreements that provide revenue from electronic
commerce transactions. These revenues are recognized by the Company upon
notification from the advertiser of revenues earned by Cosmoz.
The Company's second source of revenues is the distribution of
advertisements and reports on behalf of growth stock companies via electronic
mail to the Company's opt-in email distribution list garnered from its family of
investment-related websites. This revenue source is derived from ProfitWire, a
recently created division.
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F. Product and Web-site Development.
Costs incurred in the development of new products or properties and
enhancements to existing products are charged to expense as incurred. Material
software development costs incurred subsequent to the establishment of
technological feasibility are capitalized. Technological feasibility is
determined based on the completion of a working model. The Company has not
incurred material software development costs and accordingly has not capitalized
any software development costs.
G. Marketable Securities.
The Company's marketable securities are classified as
available-for-sale as of the balance sheet date and are reported at fair value,
with unrealized gains and losses, net of tax recorded in shareholders' equity.
The Company invests its excess cash in mutual funds and equity securities traded
on national stock markets. Realized gains or losses and permanent declines in
value, if any, on available-for-sale securities are reported in other income or
expense as incurred. As of March 31, 2000, the Company recorded a net unrealized
loss of $5,954.00 on these types of investments.
The Company invests in equity instruments of privately held, Internet
and information technology companies for business and strategic purposes. These
investments are included in other long-term assets and when ownership interest
is less than 20% are accounted for under the cost method. For these non-quoted
investments, the Company's policy is to regularly review such investments and
the assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records impairment
losses on long-lived assets when events and circumstances indicated that such
assets might be impaired. To date, investment expenses have been recorded.
H. Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Management makes estimates that affect reserves for discontinued operations,
deferred income tax assets and reserve for discontinued operations. Any
adjustments applied to estimates are recognized in the year in which such
adjustments are determined.
I. Earnings per Share.
The Company follows SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. SFAS No. 128 replaces the presentation of primary EPS with basic EPS, and
fully diluted EPS with diluted EPS. It also requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
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Basic EPS is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. The diluted EPS calculation gives
effect to all financial securities and instruments that potentially convert into
common shares, such as stock options or warrants, which were outstanding during
the period. Shares issued during the period and shares repurchased by the
Company are weighted for the portion of the period that they were outstanding
for both basic and diluted EPS calculations.
J. Segments of an Enterprise and Related Information.
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company has reported its franchising operations in Canada as
discontinued operations, and the results of its Internet operations as
continuing operations.
K. Comprehensive Income.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and unrealized gains (losses) on
available-for-sale marketable securities and is presented in the consolidated
statements of shareholders' equity and comprehensive income. The Statement
requires only additional disclosures in the consolidated financial statements
and does not affect the Company's financial position or results of operations.
L. Business Risks and Credit Concentrations.
The Company operates in the Internet-Portal industry segment, which is
relatively new, rapidly evolving and highly competitive. The Company relies on
third-party suppliers of topical and relevant information content. There can be
no assurance that the Company will be able to continue product development and
secure content sufficient to support its operations. Financial instruments that
potentially subject the Company to significant concentration of credit risk
consist primarily of cash, cash equivalents, short and long-term investments,
and accounts receivable. Substantially all of the Company's cash, cash
equivalents, and short and long-term investments are managed by two financial
institutions. Accounts receivable are typically unsecured. The Company performs
ongoing credit evaluations of its customers' financial condition. It generally
requires no collateral and maintains reserves for potential credit losses on
customer accounts when necessary. Management estimates that no such reserves are
warranted at March 31, 2000.
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M. Foreign Currency and International Operations.
The functional currency of the Company's international subsidiaries,
PFI and WTW, is the Canadian dollar. The financial statements of these
subsidiaries are translated to US dollars using period-end rates of exchange for
assets and liabilities, and average rates of exchange for the year for revenues,
costs, and expenses. Net gains and losses resulting from foreign exchange rate
changes are included in the consolidated statement of operations and were not
significant during the periods presented. There were no foreign exchange
transactions during the nine month period ended March 31, 2000. Foreign
operations were discontinued as of August 1998, and there are no foreign assets
as of December 31, 1998.
N. Recent Accounting Pronouncements.
The FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities, effective for fiscal years beginning after
June 15, 1999. The Company is currently not engaged in hedging activities nor
does it have any derivative instruments, thus there is no impact on the current
period financial statements. The American Institute of Certified Public
Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
standard requires companies to capitalize qualifying computer software costs,
which are incurred during the application development stage and amortize them
over the software's estimated useful life. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Company has adopted SOP 98-1 and it
deemed to not have a material impact on the financial statements and related
disclosures.
O. Intangibles .
Intangible assets consist of goodwill and are being amortized on a
straight-line basis over 7 years.
2. Investments.
- ---------------
At March 31, 2000, short and long-term investments in marketable
securities were classified as available-for-sale as follows:
<TABLE>
<CAPTION>
Gross Amortized Gross Unrealized Gross Unrealized Estimated Fair
Cost Gain Loss Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mutual Funds $ 4,142 $47 $ 4,189
Corporate equity
securities,
privately-held $ 47,880 $6,000 $ 41,880
$625,000 $39,019 $585.981
- ---------------------------------------------------------------------------------------------------
Total $677,022 $47 $45,019 $632,050
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</TABLE>
Investments in corporate equity securities of privately held companies,
in which the Company holds a less than 20% equity interest, are classified as
long-term.
The Company made an investment of $375,000 in preferred stock of iPing,
Inc. ("iPing"), a New York- based Internet company that operates MrWakeup.com.
MrWakeup.com allows computer users to send or receive customized phone calls
containing headline news, horoscopes and weather from the Internet at a
requested time. The Company's investment in iPing amounted to less than a 20%
equity interest.
3. Stock Option Plan.
- ---------------------
The Board of Directors has granted management the authority to issue
non-statutory stock options to employees and consultants of the Company.
Non-statutory stock options issued as of March 31, 2000 are summarized as
follows:
<TABLE>
<CAPTION>
Options Outstanding Weighted Average Price per Share
------------------- --------------------------------
<S> <C> <C>
Balance as of June 30, 1999 200,000 $1.25
Options granted 1,273,500 $3.32
Options canceled 825,000 $3.18
Options exercised 0 0
Balance at March 21, 2000 648,500 $0.82
</TABLE>
The non-statutory stock options are for periods of three to four years. Options
to purchase 263,000 shares were vested as of March 31, 2000.
Through March 31, 2000, the Company recorded compensation expense
related to certain stock options issued with exercise prices below fair market
value of the related common stock. Under APB-25, the cost of compensation is
measured by the excess of the quoted market price of the stock over the option
price on the measurement date. This is referred to as the intrinsic value
method. The Company recorded compensation expense in the amount of $201,400 for
the nine-month period ending March 31, 2000.
Options are usually granted at the prices equal to the current fair
value of the Company's common stock at the date of grant. The vesting period is
usually related to the length of employment or consulting contract period.
On October 15, 1999, options granted to CEO Wilfred Shaw in the amount
of 2,500,000 shares expired without being exercised.
On November 17, 1999, the Company's board of directors approved the
Cosmoz.com, Inc. 1999 Stock Option Plan (the "Plan"). On December 20, 1999, the
Company's shareholders, at the Company's annual meeting, approved the Plan, and
authorized a pool of 6,000,000 shares of common stock to be issued according to
the Plan.
16
<PAGE>
4. Acquisitions.
- ----------------
On January 5, 2000, the Company concluded the acquisition of Ivory
Acquisition Corporation ("Ivory"), a fully reporting company under regulation
12(g) of the Securities Exchange Act of 1934. Ivory has no material assets or
liabilities. The business combination will be accounted for under the pooling
method of accounting. The operations of Ivory previous to the acquisition date
were de minimis.
The Company paid the transaction costs of acquisition and initial
filing in the amount of $100,000, and issued 250,000 shares of its common stock
in connection with the acquisition.
The acquisition was accounted for as a purchase in accordance with the
provisions of APB 16.
5. Discontinued Operations.
- ---------------------------
The Company's management and its Board of Directors decided to
discontinue operations in Canada in July 1998. Operations in Canada consisted of
operating and franchising "Pretzel Twister" stores, and the operation of an
automotive service center "Wheel to Wheel". To implement this decision, the
Company concluded the following transactions:
A. On August 31, 1998, the Company abandoned all operations of Wheel to
Wheel, including its facilities lease. The Company disposed of the assets of the
Wheel to Wheel store and used the proceeds to settle liabilities to the extent
of available funds.
B. In July 1998, the Company abandoned all operations of Pretzel
Franchising, Inc. The Company informed its franchisees that PFI will cease to
operate, and the Company-operated store in Toronto, Ontario was closed.
In consideration of the issues listed above, the Company continues to
maintain a reserve for potential loss contingencies from discontinued operations
of approximately $85,000. There are no assets from discontinued operations on
the balance sheet. The liabilities attributable to discontinued operations are
identified as such on the balance sheet.
6. Common Stock Transactions.
- -----------------------------
On January 10, 2000, the Company issued 3,375,000 shares of its common
stock having a market value of $4,218,750 to three executive officers, who are
also directors of the Company, and to one employee. This distribution was made
to secure the services of these officers and employee, and to serve as a
continuing incentive to remain with the Company. These officers and one employee
subsequently canceled all 3,375,000 shares (see "Subsequent Events", below).
The Company issued 50,000 shares of its common stock to an individual
in lieu of cash compensation which had a market value of $75,000.00 in exchange
for drafting weekly articles for publishing on the Company's websites. The
Company also issued common stock to individuals and companies in lieu of cash
compensation.
The Company has issued outstanding warrants to purchase 4,000,000
shares of its common stock at an exercise price of $0.75. The warrants expire on
February 9, 2002.
7. Related Party Transactions.
- ------------------------------
The following transactions occurred between the Company and certain related
parties:
A. Asia Pacific Ventures. Asia Pacific Ventures ("APV") is a Hong
Kong-based company, and its authorized representative was Wilfred Shaw, the
current CEO of Cosmoz. APV has loaned money to the Company in previous years.
The net of advances due from shareholders and officers consists of overpayments
by Cosmoz on loans made by APV to the Company. APV holds 9.27% of the Company's
common stock, and APV's current authorized representative is a family member of
Wilfred Shaw, current CEO of the Company. The amount due from the shareholder at
June 30, 1999 totaling $188,142 was paid in full on January 21, 2000.
B. Wilfred Shaw. The following transactions took place between the Company
and Wilfred Shaw, the CEO and Chairman of the Board of Directors: The Company
repaid to Mr. Shaw $596,875 in the form of publicly traded securities for full
settlement of the outstanding debt of the Company to Mr. Shaw. The borrowing did
not bear any interest. Mr. Shaw repaid the Company $900,000 for full settlement
of the advances made to him by the Company. The loan to Mr. Shaw did not bear
any interest. Mr. Shaw has been performing the duties of President and CEO of
Cosmoz starting July 1, 1998 to December 31, 1999, and he has received no
remuneration for his services. He has performed these services pro bono.
Mr. Shaw also did not receive any compensation for the period starting July
1, 1998 to December 31, 1999 for serving as the Chairman of the Board of
Directors. Mr. Shaw has $60,000 in director fees due from the Company for
serving as the Chairman of the Board of Directors for the period prior to June
30, 1998. The amount is included in the liabilities for discontinued operations.
C. Sharpmanagement.com, LLC. On January 10, 2000, the Company issued
1,250,000 shares of the Company's common stock that had a market value of
$1,562,500.00 to Sharpmanagment.com, LLC ("SharpManagement"). SharpManagement is
100% owned by Wilfred Shaw. The Company issued the shares to SharpManagement to
secure the services of Wilfred Shaw as CEO and Director of the Company.
SharpManagement subsequently canceled the shares (see "Subsequent Events",
below).
D. Amounts Due to Related Parties. In February, 2000, Asia Pacific
Ventures, a related party, advanced to the Company $250,000.00. The note payable
is due upon demand and bears an annual interest rate of 12%.
17
<PAGE>
8. Commitments and Contingencies.
- ---------------------------------
A. Legal. The Company is periodically involved in legal actions and
claims that arise as a result of events that occur in the normal course of
operations, including claims of alleged infringement of trademarks, copyrights
and other intellectual property rights. The Company is not currently aware of
any legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
financial position or results of operations.
B. Operating Leases. The Company signed a lease termination agreement
on March 27, 2000 with G & I Howard, LLC in connection with its previously
leased principal office at 55 Hawthorne Street, Suite 550, San Francisco,
California, 94105. The Company paid a $3,081.00 termination fee. The lease
termination agreement constitutes a full and final accord and satisfaction and
general release from any and all obligations and liabilities in connection with
the lease.
On March 1, 2000, the Company's principal executive offices relocated
to a 5,900 square foot facility at 1515 So. El Camino Real, Suite 100, San
Mateo, California 94402. The Company leases the facility under a 3-year
agreement that terminates on February 28, 2003, with no renewal option. The
aggregate annual rental rate for the entire facility for the first, second, and
third years of the lease term is $248,094, $255,182, and $262,271, respectively.
The Company is also obligated to pay 33.34% of increases in operating expenses
and property taxes paid or incurred by the landlord in the second and third
years of the lease term. All operations including system development, control,
and maintenance are performed at this facility.
9. Going Concern Uncertainties.
- -------------------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has experienced recurring
operating losses and negative cash flows from operations. The Company's
continued existence is dependent upon its ability to increase operating revenues
and/or raise additional equity financing.
In view of these matters, management believes that actions presently
being taken to expand the Company's operations and to continue its web-site
development activity provide the opportunity for the Company to return to
profitability. The Company is currently in negotiations to obtain additional
equity financing, which enable it to achieve its strategic objectives.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
10. Subsequent Events.
- ----------------------
A. Cancellation of Prior Stock Grant. As described above, on January
10, 2000, the Company issued 3,375,000 shares of its common stock having a
market value of $4,218,750 to three executive officers, who are also directors
of the Company (including SharpManagement, LLC), and to one employee. This
distribution was made to secure the services of these officers and employee, and
to serve as a continuing incentive to remain with the Company. On or about May
11, 2000, these officers and one employee executed written agreements agreeing
to cancel all 3,375,000 shares. In consideration for such cancellation, the
board has proposed that option grants in the aggregate amount of 4,367,466
options be granted under the Company's 1999 Stock Option Plan (the "Plan") to
these officers and one employee.
B. Stock Option Grants. On April 17, 2000, the Company's board of
directors granted an aggregate amount of 617,502 options to purchase the
Company's common stock. The grants were made pursuant to the Plan. 367,502 of
the options were Incentive Stock Options granted to full-time employees of the
Company, and 250,000 were Non-Statutory Stock Options granted to an outside
director in order to secure his services.
C. IPing Acquisition. On May 2, 2000, iPing, Inc. ("iPing") was
acquired by eCal Corporation ("eCal").
D. Tupelo Investment Co., Ltd. ("Tupelo"). The Company is currently
negotiating the sale of approximately 3,030,030 shares of the Company's
restricted common stock to Tupelo. Under the agreement, Tupelo would purchase
the shares at a discount from market prices and Tupelo would have registration
rights.
18
<PAGE>
Item 2. M D & A
- ---------------
Cosmoz.com, Inc. ( "Cosmoz" or the "Company") reported a net loss for the three
months ended March 31, 2000 of $1,133,410 as compared to net loss of $141,412
for the three months ended March 31, 1999. The net loss increase of $991,998 is
attributable to an increase in sales and marketing of $239,689, an increase in
product development of $135,839, an increase in general and administrative
expenses of $523,158, an increase in depreciation and amortization of
$160,166,an increase in net interest expense of $348, an increase in investment
loss of $48,206, an increase in disposal of fixed assets due to relocation for
$4,103, partially offset by an increase in net sales of $119,511.
REVENUES Consolidated net revenues for the three months ended March 31, 2000
increased to $120,009 from $498 for the three months ended March 31, 1999,
representing an increase of $119,511 or 23,998%. Management expects strong sales
for the fourth quarter in 2000.
Net revenues for Profitwire Media Group Division for the three months ended
March 31, 2000 were $103,469 as compared to zero for the same period of 1999.
The Profitwire Media Group Division was launched in January, 2000. Management's
expectation is that growth should continue due to a continuing focus on sales
team.
Net revenues for banner advertising for the three months ended March 31, 2000
were $16,540 as compared to $498 for the same period of 1999, representing an
increase of $16,042 or 3,221%. Management expects sales to remain stable, as the
Company will focus on B2B.
Management believes that the Company is well positioned to continue to grow
revenue in its current markets.
COST OF REVENUES Cost of revenues increased to $33,500 as compared to zero for
the same period of 1999, as a result of Profitwire Media Group Division. Net
revenues for the three months ended March 31, 2000 was 24.46%. Management
expects to increase net revenues as a result of the focus on building a stronger
development team.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative
expenses increased by $1,058,852 to $1,201,248 for the three months ended March
31, 2000. The increase in selling, general and administrative expenses primarily
consists of increased sales and marketing expenses of $239,689 of which $30,033
for Profitwire Media Group Division; increased product development of $135,839
for additional hiring of programmers and web site expenses; increased payroll
related costs of $86,593; increased management fee of $225,000; increased office
rent of $42,242; increased professional fees associated with SEC reporting
requirements of $62,517; increased public company expenses of $32,809, including
investor relations, stock transfer costs and press release expenses; increased
19
<PAGE>
eneral & office expenses of $73,997. Management expects selling, general and
administrative expenses as a percentage of net sales to decrease as sales
increase. Depreciation and amortization expense increased by $160,166 for the
three months ended March 31, 2000 from zero for the same period in 1999. The
increase in amortization of $151,385 is primarily attributable to acquisitions
accounted for under the purchase method of accounting. The increase in
depreciation resulted from additions of computers, furniture and leasehold
improvements.
LOSS FROM OPERATIONS Loss from operations increased by $ 939,341 to $1,081,239
for the three months ended March 31, 2000 as compared to the loss from
operations of $141,898 for the three months ended March 31, 1999. The increase
in the loss from operations is due to an increase in selling, general and
administrative expenses.
NET INTEREST Net interest income decreased by $348, to net interest income of
$138 for the three months ended March 31, 2000 from net interest income of $486
for the three months ended March 31, 1999. The decrease in net interest income
is due to short term borrowing from a related party bearing an annual interest
of 12 % and due upon demand.
NET INVESTMENT LOSS Net investment loss increased by $48,206 for the three
months ended March 31, 2000 as compared to the same period in 1999. The increase
is primarily due to investment expenses of $39,023 associated with privately
held investment; $6,000 investment loss due to market fluctuation in stocks
received for service provided by Profitwire Media Group Division and $3,183 net
investment loss from other marketable securities.
LOSS ON DISPOSAL OF FIXED ASSETS Loss on disposal of fixed assets increased by
$4,103 for the three months ended March 31, 2000 as compared to the same period
in 1999. The increase is due to writing off leasehold improvements from the
former headquarter in San Francisco.
NET LOSS Net loss for the three months ended March 31, 2000 was $1,133,410
compared to net loss of $141,412 for the three months ended March 31, 1999. The
net loss increase of $991,998 is comprised of an increase in loss from
operations of $939,341 and an increase in interest expense, investment loss and
loss on disposal of fixed assets of $52,657.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1,870,610 for the nine months ended March
31, 2000. During the nine months ended March 31, 2000, the effect of net loss of
$3,242,040 was offset by non-cash expenses, such as depreciation and
amortization expenses of $380,423, stock compensation of $201,400, issuance of
common stock for services of $589,900, decrease in investment of 39,019 due to
20
<PAGE>
related investment expenses. Cash provided by investing activities was $913,647
for the nine months ended March 31, 2000. Cash proceeds from sales of marketable
securities were $1,541,637. During the nine months, the Company invested
$105,000 in a limited partnership and $375,000 in a privately held corporation.
Capital equipment purchases were $147,990.
Cash provided by financing activities was $741,267 during the nine months ended
March 31, 2000. The Company received $900,000 from Mr. Shaw, CEO for full
settlement of the advances made to him. The Company repaid to Mr. Shaw $596,875
in the form of publicly traded securities for full settlement of the outstanding
debt of the Company to Mr. Shaw. The Company received $250,000 loan bearing an
annual interest rate of 12% and $188,142 due from a related party.
As of March 31, 2000 the Company had cash and cash equivalents of $209,085. The
Company is negotiating the sale of approximately 3,030,030 shares of the
Company's restricted common stock to Tupelo. Under the agreement, Tupelo would
purchase the shares at a substantial discount from market prices and Tupelo
would have registration rights. The Company's capital requirements depend on
numerous factors, including the rate of market acceptance of the Company's
services, the Company's ability to maintain and expand its sale of banner and
sponsorship advertisements and electronic mail distribution services.
21
<PAGE>
PART II--Other Information
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) See Index to Exhibits.
(b)(i)The Company filed a Form 8-K during the quarter ended March 31,
2000. The items reported on the Form 8-K were Item 1: Changes in control of
registrant; Item 2: Acquisition or disposition of assets; Item 5: Other Events
(specifically, Successor Issuer Election); Item 6: Resignations of registrant's
directors; and Item 7, Unaudited financial statements were filed with Form 8-K.
The date of filing of the Form 8-K was 1/7/2000.
(ii) The Company filed a Form 8-K/A during the quarter ended March 31,
2000. The items reported on the Form 8-K/A were Item 1: Changes in control of
registrant; Item 2: Acquisition or disposition of assets; Item 5: Other Events
(specifically, Successor Issuer Election); Item 6: Resignations of registrant's
directors; and Item 7, Unaudited financial statements were filed with Form
8-K/A. The date of filing of the Form 8-K/A was 3/10/2000
COSMOZ.COM, INC.
By: /s/Wilfred Shaw
---------------
Wilfred Shaw
Chairman and Chief Executive Officer
Date: May 11, 2000
22
<PAGE>
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number of Sequential
Item Numbering
Assigned in System
Regulation Page Number
S-K Item 601 Description of Exhibit of Exhibit
- -------------- -------------------------- ------------
<S> <C> <C>
(2) 2.1. Agreement and Plan of Reorganization --
between Cosmoz.com, Inc. and Ivory Acquisition
Corporation, dated January 5, 2000. Certificate of
Ownership and Merger Merging Ivory Acquisition
Corporation into Cosmoz.com, Inc. (Incorporated by
reference to Exhibit 2 to Form 8-K/A,
File No.: 000-28377)
(3) 3.1. Articles of Incorporation of Cosmoz.com, Inc. --
(Incorporated by reference to Exhibit 3.(I) to Form
8-K/A, File No.: 000-28377)
3.2. By-Laws of Cosmoz.com, Inc. (Incorporated by --
reference to Exhibit 3.(II) to Form 8-K/A, File
No.: 000-28377)
(10) 10.1. Cosmoz.com, Inc. 1999 Stock Option Plan. 24
10.2. Owen Naccarato Director's Agreement. 31
(23) 23.1. Consent of Berg & Company, LLP. 35
(None) A. Audited Financial Statements of Cosmoz.com, Inc. 36
as of June 30, 1999 and for the year then ended.
</TABLE>
23
<PAGE>
COSMOZ.COM, INC.
1999 STOCK OPTION PLAN
1. Establishment, Purpose and Term of Plan.
-------------------------------------------------
1.1. Establishment. The Cosmoz.com, Inc. 1999 Stock Option
Plan (the "Plan") is hereby established effective as of ____________________,
1999.
1.2. Purpose. The purpose of the Plan is to advance the
interests of the Participating Company Group and its stockholders by providing
an incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.
1.3. Term of Plan. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
stockholders of the Company.
2. Definitions and Construction.
--------------------------------------
2.1. Definitions. Whenever used herein, the following
terms shall have their respective meanings set forth below:
a. "Board" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "Board" also means such Committee(s).
b. "Code" means the Internal Revenue Code of
1986, as amended, and any applicable regulations promulgated thereunder.
c. "Committee" means the Compensation Committee
or other committee of the Board duly appointed to administer the Plan and having
such powers as shall be specified by the Board. Unless the powers of the
Committee have been specifically limited, the Committee shall have all of the
powers of the Board granted herein, including, without limitation, the power to
amend or terminate the Plan at any time, subject to the terms of the Plan and
any applicable limitations imposed by law.
d. "Company" means Cosmoz.com, Inc., a Delaware
corporation, or any successor corporation thereto.
e. "Consultant" means any person, including an
advisor, engaged by a Participating Company to render services other than as an
Employee or a Director.
24
<PAGE>
f. "Director" means a member of the Board or of
the board of directors of any other Participating Company.
g. "Employee" means any person treated as an
employee (including an officer or a Director who is also treated as an employee)
in the records of a Participating Company; provided, however, that neither
service as a Director nor payment of a director's fee shall be sufficient to
constitute employment for purposes of the Plan.
h. "Exchange Act" means the Securities Exchange
Act of 1934, as amended.
i. "Fair Market Value" means, as of any date,
the value of a share of Stock or other property as determined by the Board, in
its sole discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein, subject to the
following:
i. If, on such date, there is a public
market for the Stock, the Fair Market Value of a share of Stock shall be the
closing sale price of a share of Stock (or the mean of the closing bid and asked
prices of a share of Stock if the Stock is so quoted instead) as quoted on the
Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or
regional securities exchange or market system constituting the primary market
for the Stock, as reported in the Wall Street Journal or such other source as
the Company deems reliable. If the relevant date does not fall on a day on which
the Stock has traded on such securities exchange or market system, the date on
which the Fair Market Value shall be established shall be the last day on which
the Stock was so traded prior to the relevant date, or such other appropriate
day as shall be determined by the Board, in its sole discretion.
ii. If, on such date, there is no public
market for the Stock, the Fair Market Value of a share of Stock shall be as
determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.
j. "Incentive Stock Option" means an Option
intended to be (as set forth in the Option Agreement) and which qualifies as an
incentive stock option within the meaning of Section 422(b) of the Code.
k. "Insider" means an officer or a Director of
the Company or any other person whose transactions in Stock are subject to
Section 16 of the Exchange Act.
l. "Nonstatutory Stock Option" means an Option
not intended to be (as set forth in the Option Agreement) or which does not
qualify as an Incentive Stock Option.
25
<PAGE>
m. "Option" means a right to purchase Stock
(subject to adjustment as provided in Section 4.2) pursuant to the terms and
conditions of the Plan. An Option may be either an Incentive Stock Option or a
Nonstatutory Stock Option.
n. "Option Agreement" means a written agreement
between the Company and an Optionee setting forth the terms, conditions and
restrictions of the Option granted to the Optionee and any shares acquired upon
the exercise thereof.
o. "Optionee" means a person who has been
granted one or more Options.
p. "Parent Corporation" means any present or
future "parent corporation" of the Company, as defined in Section 424(e) of the
Code.
q. "Participating Company" means the Company or
any Parent Corporation or Subsidiary Corporation.
r. "Participating Company Group" means, at any
point in time, all corporations collectively which are then Participating
Companies.
s. "Rule 16b-3" means Rule 16b-3 under the
Exchange Act, as amended from time to time, or any successor rule or regulation.
t. "Stock" means the common stock of the
Company, as adjusted from time to time in accordance with Section 4.2.
u. "Subsidiary Corporation" means any present
or future "subsidiary corporation" of the Company, as defined in Section 424(f)
of the Code.
v. "Ten Percent Owner Optionee" means an
Optionee who, at the time an Option is granted to the Optionee, owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of a Participating Company within the meaning of Section
422(b)(6) of the Code.
2.2. Construction. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation of
any provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
26
<PAGE>
3. Administration.
--------------
3.1. Administration by the Board. The Plan shall be
administered by the Board, including any duly appointed Committee of the Board.
All questions of interpretation of the Plan or of any Option shall be determined
by the Board, and such determinations shall be final and binding upon all
persons having an interest in the Plan or such Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
3.2. Administration with Respect to Insiders. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.3. Powers of the Board. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its sole discretion:
a. to determine the persons to whom, and the
time or times at which, Options shall be granted and the number of shares of
Stock to be subject to each Option;
b. to designate Options as Incentive Stock
Options or Nonstatutory Stock Options;
c. to determine the Fair Market Value of shares
of Stock or other property;
d. to determine the terms, conditions and
restrictions applicable to each Option (which need not be identical) and any
shares acquired upon the exercise thereof, including, without limitation, (i)
the exercise price of the Option, (ii) the method of payment for shares
purchased upon the exercise of the Option, (iii) the method for satisfaction of
any tax withholding obligation arising in connection with the Option or such
shares, including by the withholding or delivery of shares of stock, (iv) the
timing, terms and conditions of the exercisability of the Option, (v) the time
of the expiration of the Option, (vi) the effect of the Optionee's termination
of employment or service with the Participating Company Group on any of the
foregoing, and (vii) all other terms, conditions and restrictions applicable to
the Option or such shares not inconsistent with the terms of the Plan;
e. to approve one or more forms of Option
Agreement;
f. to amend, modify, extend, or renew, or grant
a new Option in substitution for, any Option or to waive any restrictions or
conditions applicable to any Option or any shares acquired upon the exercise
thereof;
27
<PAGE>
g. to accelerate, continue, extend or defer the
exercisability of any Option, including with respect to the period following an
Optionee's termination of employment or service with the Participating Company
Group;
h. to prescribe, amend or rescind rules,
guidelines and policies relating to the Plan, or to adopt supplements to, or
alternative versions of, the Plan, including, without limitation, as the Board
deems necessary or desirable to comply with the laws of, or to accommodate the
tax policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
i. to correct any defect, supply any omission
or reconcile any inconsistency in the Plan or any Option Agreement and to make
all other determinations and take such other actions with respect to the Plan or
any Option as the Board may deem advisable to the extent consistent with the
Plan and applicable law.
4. Shares Subject to Plan.
----------------------
4.1. Maximum Number of Shares Issuable. Subject to adjustment
as provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Six Million (6,000,000) and shall consist
of authorized but unissued or reacquired shares of Stock or any combination
thereof. If any outstanding Option for any reason expires or is terminated or
canceled or shares of Stock acquired, subject to repurchase, upon the exercise
of an Option are repurchased by the Company, the shares of Stock allocable to
the unexercised portion of such Option, or such repurchased shares of Stock,
shall again be available for issuance under the Plan.
4.2. Adjustments for Changes in Capital Structure. In the
event of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options and in the exercise price per
share of any outstanding Options. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Options are exchanged
for, converted into, or otherwise become (whether or not pursuant to an
Ownership Change Event, as defined in Section 8.1) shares of another corporation
(the "New Shares"), the Board may unilaterally amend the outstanding Options to
provide that such Options are exercisable for New Shares. In the event of any
such amendment, the number of shares subject to, and the exercise price per
share of, the outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded up or down to the nearest whole number, as
determined by the Board, and in no event may the exercise price of any Option be
decreased to an amount less than the par value, if any, of the stock subject to
the Option. The adjustments determined by the Board pursuant to this Section 4.2
shall be final, binding and conclusive.
28
<PAGE>
5. Eligibility and Open Limitations.
--------------------------------
5.1. Persons Eligible for Options. Options may be granted only
to Employees, Consultants, and Directors. For purposes of the foregoing
sentence, "Employees", "Consultants" and "Directors" shall include prospective
Employees, prospective Consultants and prospective Directors to whom Options are
granted in connection with written offers of employment or other service
relationship with the Participating Company Group. Eligible persons may be
granted more than one (1) Option.
5.2. Option Grant Restrictions. Any person who is not an
Employee on the effective date of the grant of an Option to such person may be
granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a
prospective Employee upon the condition that such person become an Employee
shall be deemed granted effective on the date such person commences service with
a Participating Company, with an exercise price determined as of such date in
accordance with Section 6.1.
5.3. Fair Market Value Limitation. To the extent that the
aggregate Fair Market Value of stock with respect to which options designated as
Incentive Stock Options are exercisable by an Optionee for the first time during
any calendar year (under all stock option plans of the Participating Company
Group, including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the
portion of such options which exceeds such amount shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5.3, options designated
as Incentive Stock Options shall be taken into account in the order in which
they were granted, and the Fair Market Value of stock shall be determined as of
the time the option with respect to such stock is granted. If the Code is
amended to provide for a different limitation from that set forth in this
Section 5.3, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code. If an Option is treated as an Incentive
Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 5.3, the Optionee may designate which
portion of such Option the Optionee is exercising. In the absence of such
designation, the Optionee shall be deemed to have exercised the Incentive Stock
Option portion of the Option first. Separate certificates representing each such
portion shall be issued upon the exercise of the Option.
6. Terms and Conditions of Options. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
29
<PAGE>
6.1. Exercise Price. The exercise price for each Option shall
be established in the sole discretion of the Board; provided, however, that (a)
the exercise price per share for an Option shall be not less than the Fair
Market Value of a share of Stock on the effective date of grant of the Option,
and (b) no Option granted to a Ten Percent Owner Optionee shall have an exercise
price per share less than one hundred ten percent (110%) of the Fair Market
Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying under the
provisions of Section 424(a) of the Code.
6.2. Exercise Period. Options shall be exercisable at such
time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria, and restrictions as shall be determined by the
Board and set forth in the Option Agreement evidencing such Option; provided,
however, that (a) no Option shall be exercisable after the expiration of ten
(10) years after the effective date of grant of such Option, (b) no Incentive
Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after
the expiration of five (5) years after the effective date of grant of such
Option, and (c) no Option granted to a prospective Employee, prospective
Consultant or prospective Director may become exercisable prior to the date on
which such person commences service with a Participating Company.
6.3. Payment of Exercise Price.
-------------------------
a. Forms of Consideration Authorized. Except as
otherwise provided below, payment of the exercise price for the number of shares
of Stock being purchased pursuant to any Option shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of shares of Stock
owned by the Optionee having a Fair Market Value (as determined by the Company
without regard to any restrictions on transferability applicable to such stock
by reason of federal or state securities laws or agreements with an underwriter
for the Company) not less than the exercise price, (iii) by the assignment of
the proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"Cashless Exercise"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
b. Tender of Stock. Notwithstanding the
foregoing, an Option may not be exercised by tender to the Company of shares of
Stock to the extent such tender of Stock would constitute a violation of the
provisions of any law, regulation or agreement restricting the redemption of the
Company's stock. Unless otherwise provided by the Board, an Option may not be
exercised by tender to the Company of shares of Stock unless such shares either
have been owned by the Optionee for more than six (6) months or were not
acquired, directly or indirectly, from the Company.
c. Cashless Exercise. The Company reserves, at
any and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
d. Payment by Promissory Note. No promissory
note shall be permitted if the exercise of an Option using a promissory note
would be a violation of any law. Any permitted promissory note shall be on such
terms as the Board shall determine at the time the Option is granted. The Board
shall have the authority to permit or require the Optionee to secure any
promissory note used to exercise an Option with the shares of Stock acquired
upon the exercise of the Option or with other collateral acceptable to the
Company. Unless otherwise provided by the Board, if the Company at any time is
subject to the regulations promulgated by the Board of Governors of the Federal
Reserve System or any other governmental entity affecting the extension of
credit in connection with the Company's securities, any promissory note shall
comply with such applicable regulations, and the Optionee shall pay the unpaid
principal and accrued interest, if any, to the extent necessary to comply with
such applicable regulations.
6.4. Tax Withholding. The Company shall have the right, but
not the obligation, to deduct from the shares of Stock issuable upon the
exercise of an Option, or to accept from the Optionee the tender of, a number of
whole shares of Stock having a Fair Market Value, as determined by the Company,
equal to all or any part of the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to such Option or the shares acquired upon the exercise thereof. Alternatively
or in addition, in its sole discretion, the Company shall have the right to
require the Optionee, through payroll withholding, cash payment or otherwise,
including by means of a Cashless Exercise, to make adequate provision for any
such tax withholding obligations of the Participating Company Group arising in
connection with the Option or the shares acquired upon the exercise thereof. The
Company shall have no obligation to deliver shares of Stock until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5. Repurchase Rights. Shares issued under the Plan may be
subject to a right of first refusal, one or more repurchase options, or other
conditions and restrictions as determined by the Board, in its sole discretion,
at the time the Option is granted. The Company shall have the right to assign at
any time any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company. Upon
request by the Company, each Optionee shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder and
shall promptly present to the Company any and all certificates representing
shares of Stock acquired hereunder for the placement on such certificates of
appropriate legends evidencing any such transfer restrictions.
30
<PAGE>
7. Standard Forms of Option Agreement.
----------------------------------
7.1. Incentive Stock Options. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as an "Incentive
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Immediately Exercisable Incentive Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.2. Nonstatutory Stock Options. Unless otherwise provided by
the Board at the time the Option is granted, an Option designated as a
"Nonstatutory Stock Option" shall comply with and be subject to the terms and
conditions set forth in the form of Immediately Exercisable Nonstatutory Stock
Option Agreement adopted by the Board concurrently with its adoption of the Plan
and as amended from time to time.
7.3. Standard Term of Options. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, any Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
7.4. Authority to Vary Terms. The Board shall have the
authority from time to time to vary the terms of any of the standard forms of
Option Agreement described in this Section 7 either in connection with the grant
or amendment of an individual Option or in connection with the authorization of
a new standard form or forms; provided, however, that the terms and conditions
of any such new, revised or amended standard form or forms of Option Agreement
are not inconsistent with the terms of the Plan. Such authority shall include,
but not by way of limitation, the authority to grant Options which are not
immediately exercisable.
8. Transfer of Control.
-------------------
8.1. Definitions.
-----------
a. An "Ownership Change Event" shall be deemed
to have occurred if any of the following occurs with respect to the Company:
i. the direct or indirect sale or
exchange in a single or series of related transactions by the stockholders of
the Company of more than fifty percent (50%) of the voting stock of the Company;
ii. a merger or consolidation in which
the Company is a party;
iii. the sale, exchange, or transfer of
all or substantially all of the assets of the Company; or
iv. a liquidation or dissolution of the
Company.
31
<PAGE>
b. A "Transfer of Control" shall mean an
Ownership Change Event or a series of related Ownership Change Events
(collectively, the "Transaction") wherein the stockholders of the Company
immediately before the Transaction do not retain immediately after the
Transaction, in substantially the same proportions as their ownership of shares
of the Company's voting stock immediately before the Transaction, direct or
indirect beneficial ownership of more than fifty percent (50%) of the total
combined voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were transferred
(the "Transferee Corporation(s)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one or
more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2. Effect of Transfer of Control on Options. In the event of
a Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "Acquiring
Corporation"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. For purposes of this
Section 8.2, an Option shall be deemed assumed if, following the Transfer of
Control, the Option confers the right to purchase, for each share of Stock
subject to the Option immediately prior to the Transfer of Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Transfer of Control was
entitled. Any Options which are neither assumed or substituted for by the
Acquiring Corporation in connection with the Transfer of Control nor exercised
as of the date of the Transfer of Control shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control. Notwithstanding
the foregoing, shares acquired upon exercise of an Option prior to the Transfer
of Control and any consideration received pursuant to the Transfer of Control
with respect to such shares shall continue to be subject to all applicable
provisions of the Option Agreement evidencing such Option except as otherwise
provided in such Option Agreement. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the outstanding Options
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its sole discretion.
9. Provision of Information. At least annually, copies of the Company's
balance sheet and income statement for the just completed fiscal year shall be
made available to each Optionee and purchaser of shares of Stock upon the
exercise of an Option. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assure them
access to equivalent information.
32
<PAGE>
10. Nontransferability of Options. During the lifetime of the
Optionee, an Option shall be exercisable only by the Optionee or the Optionee's
guardian or legal representative. No Option shall be assignable or transferable
by the Optionee, except by will or by the laws of descent and distribution.
11. Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
12. Termination or Amendment of Plan. The Board may terminate or amend
the Plan at any time. However, subject to changes in applicable law, regulations
or rules that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no other amendment of the Plan that
would require approval of the Company's stockholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Optionee, unless such termination or amendment is
required to enable an Option designated as an Incentive Stock Option to qualify
as an Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
13. Stockholder Approval. The Plan or any increase in the maximum
number of shares of Stock issuable thereunder as provided in Section 4.1 (the
"Maximum Shares") shall be approved by the stockholders of the Company within
twelve (12) months of the date of adoption thereof by the Board. Options granted
prior to stockholder approval of the Plan or in excess of the Maximum Shares
previously approved by the stockholders shall become exercisable no earlier than
the date of stockholder approval of the Plan or such increase in the Maximum
Shares, as the case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that Cosmoz.com, Inc. 1999 Stock Option Plan was duly adopted by the Board on
________________, 1999.
Company:
Cosmoz.com, Inc.
By:________________________
Secretary
33
DIRECTOR'S AGREEMENT
THIS AGREEMENT is made and entered into effective as of March 20th,
2000 (the "EFFECTIVE DATE"), by and between Cosmoz.com, Inc., a Delaware
corporation ("Company") and Owen Naccarato ("Naccarato").
THE PARTIES AGREE AS FOLLOWS:
1. Retention of Naccarato/ Performance of Services. Company hereby retains
Naccarato to provide the services described on EXHIBIT A (the "Services"), and
Naccarato hereby agrees to use his best efforts to provide the Services, in
accordance with EXHIBIT A. Naccarato shall not allow any other person or entity
to perform any of the Services for or instead of Naccarato. Naccarato shall
comply with the statutes, rules, regulations and orders of any governmental or
quasi-governmental authority, applicable to the performance of the Services.
2. Compensation. In exchange for Company's retention of Naccarato, the Company
agrees to grant to Naccarato an option to purchase up to two hundred-fifty
thousand (250,000) shares of COSMOZ's Common Stock pursuant to the COSMOZ Stock
Option Plan. Both parties agree to execute an Incentive Stock Option Agreement
within 21 days following the Effective Date. The following terms shall apply to
the stock option grant pursuant to this Paragraph and the Plan: The "Date of
Option Grant" shall be the same date as the Effective Date; the "Initial Vesting
Date" shall be the same date as the Effective Date; and the "Option Expiration
Date" shall be one (1) year after the Effective Date.
3. Expenses. All reasonable expenses must get written permission by Cosmoz.com.
4. Term. This Agreement shall begin with the Effective Date and shall continue
until the date of the next occurring annual meeting of shareholders of the
Company. Upon the date of the next occurring annual meeting of shareholders of
the Company and thereafter, the Term of this Agreement may be extended for one
or more additional one (1) year terms if Naccarato is elected a Director by the
shareholders of the Company at annual shareholders meetings.
5. Removal by Shareholders. At any time, Naccarato may be removed as Director by
the shareholders of the Company at a regular or special meeting. This Agreement
shall terminate automatically upon any such vote by the shareholders to remove
Naccarato as Director. This Agreement is at the will of both parties, and either
party may terminate the Agreement at any time with or without cause. Both
parties waive any and all causes of action arising directly from the termination
of the Agreement.
6. Conflicting Obligations. Naccarato has no outstanding agreement or
obligation, and will not enter into any agreement or obligation, that is in
conflict with any of the provisions of this AGREEMENT or that would preclude
Naccarato from fully complying with all of Naccarato's obligations under this
AGREEMENT. Naccarato shall not, during the term of this AGREEMENT, improperly
use or disclose any proprietary or confidential information or trade secrets of
the Company or any third party. Naccarato shall not serve on the Board of
Directors or the Board of Advisors of any company or entity which competes
indirectly or directly with Company, as determined in the sole discretion of the
Chairman of the Board of Directors of the Company. Naccarato shall, within 10
days following the execution of this Agreement, execute the Company's standard
Non-Disclosure Agreement.
34
<PAGE>
General Provisions
- ------------------
7.1 Further Assurances. Each party shall perform any and all further acts and
execute and deliver any documents which are reasonably necessary to carry out
the intent of this AGREEMENT.
7.2 Notices. All notices or other communications required or permitted by this
AGREEMENT or by law shall be in writing and shall be deemed duly served and
given when delivered personally or by facsimile, air courier, certified mail
(return receipt requested), postage and fees prepaid, to the party at the
address indicated in the signature block or at such other address as a party may
request in writing.
7.3 Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by binding arbitration
administered by the American Arbitration Association in accordance with its
Commercial Arbitration Rules, and judgment on the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
7.4 Governing Law, Jurisdiction, and Venue. This Agreement shall be governed and
interpreted in accordance with the laws of the State of California, as such laws
are applied to agreements between residents of California to be performed
entirely within the State of California. Subject to the immediately preceding
paragraph, each party hereby consents to jurisdiction of and venue in the
federal district court for the Northern District of California, San Francisco
Division, and/or in the courts of the State of California for San Mateo County.
7.5 Entire Agreement/ Modification. This AGREEMENT sets forth the entire
agreement between the parties pertaining to the subject matter hereof and
supersedes all prior written agreements, and all prior or contemporaneous oral
agreements and understandings, express or implied. No modification to this
AGREEMENT, nor any waiver of any rights, shall be effective unless assented to
in writing by the party to be charged, and the waiver of any breach or default
shall not constitute a waiver of any other right or any subsequent breach or
default.
7.6 Assignment. The rights contained in this AGREEMENT are of a unique character
and may not be assigned in whole or in part by either party without the prior
written consent of the other party; provided, however, that Company shall be
entitled to assign this AGREEMENT to a successor to all or substantially all of
its assets, whether by sale, merger, or otherwise.
7.7 Severability. If any of the provisions of this AGREEMENT are determined to
be invalid or unenforceable, the remaining provisions shall be deemed severable
and shall continue in full force and effect to the extent the economic benefits
conferred upon the parties by this AGREEMENT remain substantially unimpaired.
35
<PAGE>
7.8 Attorneys' Fees. Should any litigation be commenced between the parties
concerning the rights or obligations of the parties under this AGREEMENT, the
party prevailing in such litigation shall be entitled, in addition to such other
relief as may be granted, to a reasonable sum as and for its attorneys' fees in
such litigation. This amount shall be determined by the court in such litigation
or in a separate action brought for that purpose. In addition to any amount
received as attorneys' fees, the prevailing party also shall be entitled to
receive from the party held to be liable, an amount equal to the attorneys' fees
and costs incurred in enforcing any judgement against such party. This Section
is severable from the other provisions of this AGREEMENT and survives any
judgment and is not deemed merged into any judgment.
7.9 Construction. The headings of this AGREEMENT are for convenience only and
are not to be considered in construing this AGREEMENT. The language of this
AGREEMENT shall be construed according to its fair meaning and not strictly for
or against any party.
7.10 Counterparts. This AGREEMENT may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed and delivered this
AGREEMENT effective as of the date first written above.
Cosmoz.com, Inc Owen Naccarato:
1515 So. El Camino Real 19300 Fairchild, Suite 260
San Mateo, CA 94402 Irvine, CA 92612
Fax: 650.358.0188 Fax: 818.255.4997
By: /s/ Wilfred Shaw /s/ Owen Naccarato
---------------- --------------
Wilfred Shaw, CEO Owen Naccarato
36
Consent of Independent Certified Public Accountants
We consent to the inclusion in this Form 10-QSB of our report dated December 16,
1999, with respect to the Financial Statements of Cosmoz.com, Inc., for the year
ended June 30, 1999.
By: /s/ Berg & Company, LLP
- ---------------------------
Berg & Company LLP
May 12, 2000
37
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Cosmoz.com, Inc.
We have audited the accompanying consolidated balance sheet of Cosmoz.com, Inc.,
a Delaware Corporation, as of June 30, 1999, and the related consolidated
statement of operations, changes in shareholders' equity, and cash flows for the
fiscal year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cosmoz.com, Inc. as of June 30,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/Berg & Company, LLP
- ----------------------
Berg & Company
San Francisco, CA
December 16, 1999
38
<PAGE>
COSMOZ.COM, INC.
Consolidated Financial Statements
JUNE 30, 1999
Consolidated Balance Sheet
ASSETS
------
Current Assets:
Cash and cash equivalents (Note 1) $ 424,781
Short-term investments in marketable securities (Note 1) 1,565,270
Accounts receivable - trade, net (Note 1) 24,846
Note receivable - related party (Note 9) 900,000
Amounts due from shareholders 188,142
-----------
Total Current Assets 3,103,039
-----------
Property and Equipment (Note 1):
Office furniture 13,127
Equipment 55,519
-----------
68,646
Accumulated depreciation (1,136)
-----------
Total Property and Equipment 67,510
-----------
Other Assets:
Long-term investments (Note 3) 145,000
Deposits 18,486
Intangible assets, net (Note 1) 1,092,943
-----------
Total Other Assets 1,256,429
-----------
Total Assets $ 4,426,978
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 81,849
Reserve for discontinued operations (Note 7) 85,623
Accrued expenses - discontinued operations 116,696
Accrued expenses and other current liabilities 162,320
Due to related parties (Note 9) 596,875
Notes payable - other 14,589
-----------
Total Current Liabilities 1,057,952
-----------
Stockholders' Equity
Preferred stock, $0.001 par value; 50,000,000 shares
authorized;
none issued or outstanding --
Common stock, $0.001 par value; 200,000,000 shares
authorized;
58,899,546 issued and outstanding 58,899
Additional paid-in-capital 9,259,417
Accumulated other comprehensive income (loss) (45,592)
Accumulated deficit (5,903,698)
-----------
Total Stockholders' Equity 3,369,026
-----------
Total Liabilities and Stockholders' Equity $ 4,426,978
===========
See accompanying notes to consolidated financial statements.
39
<PAGE>
Consolidated Statement of Operations
For the year ended June 30, 1999
Revenues:
Net revenues (Note 1) $ 47,912
Costs of revenues --
47,912
Operating Expenses:
Sales and marketing 105,741
Product development 117,626
General and administrative 594,090
Amortization of intangibles 26,656
Other - non-recurring costs 16,315
Depreciation and amortization 1,136
Total operating expenses 861,564
Loss from operations (813,652)
Other Income (loss):
Interest income 4,608
Interest expense (12)
Miscellaneous income, net 328
Total other income 4,924
Net loss before taxes (808,728)
Provision for income tax (800)
Loss after income taxes from operations (809,528)
Extraordinary loss (Note 6) (200,000)
Net loss from continuing operations $(1,009,528)
Discontinued Operations (Note 7):
Revenues:
Sales $ 64,769
Franchise fees --
Less costs of revenues (16,016)
Gross profit 48,753
Operating expenses:
Personnel 20,855
General and Administrative 98,308
Operating expenses 119,163
Loss on disposal of operations, including a
provision of $98,685 for loss contingency 227,535
Loss before taxes (297,945)
Provision for income tax --
Net loss from discontinued operations (297,945)
Net loss $(1,307,473)
-----------
Net loss per share (Note 1):
Basic Fully Diluted
Continuing operations:
Before extraordinary loss $ 0.0 $ 0.017
Extraordinary loss 0.00 0.004
Total continuing operations 0.02 0.021
Discontinued operations 0.00 0.006
Net loss per share $ 0.02 $ 0.027
--------- ------------
Shares used in per share calculation - basic 46,118,595
-----------
Shares used in per share calculation - diluted 46,299,005
-----------
See accompanying notes to consolidated financial statements.
40
<PAGE>
Consolidated Statement of Changes in
Shareholders' Equity
for the year ended June 30, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Shareholders' Comprehensive
Shares Amount Capital Income Deficit Equity Income
---------- ----------- ----------- ----------- ----------- ----------- -----------
(loss) (loss)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 41,348,546 $ 41,348 $ 4,335,141 $ -- $(4,596,225) (219,736) $ --
Comprehensive income (loss):
Net loss from operations
during the period -- -- -- -- (1,307,473) (1,307,473) (1,307,473)
Foreign currency
translation adjustment -- -- -- (10,887) -- (10,887) (10,887)
Net unrealized loss on -- -- -- (34,705) -- (34,705) (34,705)
securities
Sale of common stock,
net of issuance costs -- -- 708,758 -- -- 717,383 --
Issuance of commons
stock for acquisitions -- -- 1,134,743 -- -- 1,135,943 --
Conversion of short-term
debt to common stock -- -- 2,747,250 -- -- 2,750,000 --
Issuance of common
stock for services -- -- 267,629 -- -- 272,605 --
Compensation expense
recognized on option grants -- -- 65,896 -- -- 65,896 --
Balance, June 30, 1999 58,899,546 $ 58,899 $ 9,259,417 $ (45,592) $(5,903,698) $ 3,369,026 $(1,353,065)
---------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
41
<PAGE>
Consolidated Statement of Cash Flows
For the year ended June 30, 1999
Operating Activities:
Net $(1,307,473)
Loss
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating
activities:
Intangible amortization 26,656
Stock 65,896
compensation
Amortization and depreciation 1,136
Loss on discontinued operations 98,039
Issuance of common stock for services 272,605
Changes in operating assets and liabilities:
Accounts receivable - trade, net (16,025)
Other Accounts receivable 33,230
Prepaid expenses (18,487)
Inventory 16,583
Accounts payable & accrued 129,593
liabilities
-----------
Net cash used in operating (698,247)
activities
-----------
Investing activities:
Purchases of marketable securities (1,599,975)
Cash acquired in acquisitions 11,543
Other investments (145,000)
Proceeds from disposal of property and equipment 78,902
Purchases of property and equipment (68,646)
-----------
Net cash used in investing (1,723,176)
activities -----------
Financing activities:
Proceeds from issuance of common 717,383
stock
Conversion of debt to common stock 2,750,000
Payments on notes payable (361,000)
Loan to related party (900,000)
Due to related party 596,875
-----------
Net cash provided by financing activities 2,803,258
-----------
Increase in cash and cash 381,835
equivalents
Cash and cash equivalents, beginning of period 42,946
-----------
Cash and cash equivalents, end of period $ 424,781
===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 12
Taxes $ --
The following noncash transactions occurred during the year ended June 30, 1999:
Acquisition of BuckInvestor, Inc.
Intangibles $ 1,006,700
Issuance of common stock for acquisition (1,012,700)
-----------
Cash received $ (6,000)
===========
Acquisition of MBMagic, Inc.
Intangibles $ 112,900
Issuance of common stock for acquisition (112,900)
-----------
Cash received $ --
===========
42
EXHIBIT A
---------
DESCRIPTION OF SERVICES
-----------------------
Responsibilities As Director. Naccarato shall have all responsibilities of a
Director of the Company imposed by Delaware or applicable law, the Articles of
Incorporation and Bylaws of the Company. These responsibilities shall include,
but shall not be limited to, the following:
1. Naccarato shall use his best efforts to attend scheduled meetings of
the Company's Board of Directors, as well as meetings of the Company's
shareholders;
2. Naccarato shall act as a fiduciary and shall represent the shareholders
and the interests of the Company as a fiduciary; and
3. Naccarato shall participate as a full voting member of the Company's
Board of Directors and shall assist in setting overall objectives, approving
plans and programs of operation, shall advise on matters of mergers,
acquisitions, consolidations, financing, and shall advise on and assist with
formulating general operating policies.
4. Naccarato shall offer advice and counsel to the other members of the
Board of Directors, to the Company's Officers and Employees.
5. Naccarato shall serve on Board Committees, as they may from time to
time be formed by the Board.
6. Naccarato shall, if requested, review management performance, and
report to the Board of Directors or Officers of the Company.
43
<PAGE>
1. Summary of Significant Accounting Policies
-------------------------------------------
A. General Description of Business
Cosmoz.com, Inc., ("Cosmoz" or the "Company"), a Delaware corporation,
(http://www.cosmoz.com), offers through the World Wide Web a network of branded,
technology and community-driven Websites focused on the following categories:
personal finance and investing, search and directory, commerce, and games. The
Company also develops Web-related software. Cosmoz's properties include:
BuckInvestor.com, Inc., (http://www.BuckInvestor.com) the Web's premier
financial site aimed at investors under the age of 30, KingFine, Inc.
(http://www.kingfine.com) a financial discussion community on the Web focusing
on business and finance news, and MB Technologies, Inc.,
(http://www.mbmagic.com), a community driven message board site. The Company
also provides venture or seed capital to emerging companies that are developing
Internet Websites or Web-enabling technologies.
The Company was incorporated in Delaware on October 15, 1996, as MIS
International, Inc., which merged with MIS Multimedia Interactive Services Inc.,
a Canadian corporation, as of July 1, 1997. MIS Multimedia Interactive Services
Inc. and its subsidiaries, (Pretzel Franchising, Inc. and Wheel to Wheel
Franchising, Inc.) were engaged in the business of developing and selling
franchises. Wheel to Wheel Franchising, Inc., (WTW), concentrated on the
marketing of franchises for automotive service centers that used recycled
automotive parts, and it operated an automotive service center in Ontario,
Canada. Pretzel Franchising, Inc., (PFI) concentrated on the marketing of
franchises for "Pretzel Twister" and it operated a store in Toronto, Ontario.
During 1999, the Company consummated the acquisitions of BuckInvestor.com, Inc.,
and KingFine, Inc. The shareholders of these corporations exchanged all of their
shares for shares of the Company's Common Stock in business combinations that
were accounted for under the pooling of interest method for KingFine, Inc., and
under the purchase method for BuckInvestor.com, Inc.
All financial information has been retroactively adjusted to reflect the
combined operations of the Company and KingFine, Inc., as if it were a
wholly-owned subsidiary of the Company since inception.
1. Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
B. Basis of Presentation and Organization
These financial statements represent the financial activity of
Cozmos.com, Inc., a publicly traded company listed and traded on the
NASDAQ Over the Counter Bulletin Board. During the year ended June 30,
1999, the Company changed its focus from operating and franchising
pretzel kiosks and in-line stores under the name "Pretzel Twister" and
operating an automotive service center, "Wheel to Wheel" in Canada to
becoming a major force in Internet related businesses and web-based
technologies. The Company has acquired a number of websites whose
central theme is to provide both a content source and an application
source for investors.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All inter-company
transactions have been eliminated. The equity and net loss attributable
to the minority shareholder interests that related to the Company's
subsidiaries are shown separately in the consolidated balance sheet and
consolidated statement of operations, respectively. Losses in excess of
the minority interest in equity would be charged against the Company.
C. Cash and Cash Equivalents, Short and Long-Term Investments
For purposes of cash flows, the Company considers all highly liquid
investments purchased with a maturity of three months or less to be
cash equivalents, those with original maturities greater than three
months and current maturities less than twelve months from the balance
sheet date are considered short-term investments, and those with
maturities greater than twelve months from the balance sheet date are
considered long-term investments.
The Company invests in equity instruments of privately-held information
technology companies for business and strategic purposes. These
investments are included in other long-term assets and are accounted
for under the cost method when ownership is less than 20%. For these
non-quoted investments, the Company's policy is to regularly review the
assumptions underlying the operating performance and cash flow
forecasts in assessing the carrying values.
C. Cash and Cash Equivalents, Short and Long-Term Investments
(continued)
The Company identifies and records impairment losses on long-lived
assets when events and circumstances indicated that such assets might
be impaired. To date, no such impairment has been recorded.
D. Property and Equipment
Property and equipment are recorded at cost and are depreciated over
the estimated useful lives of the assets using the straight-line
method. The cost and related accumulated depreciation of all property
and equipment retired or otherwise disposed of are removed from the
accounts. Any gain or loss is recognized in the current year. Various
accelerated methods are used for tax purposes. Leasehold improvements
are amortized on a straight-line basis over the term of the lease.
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful lives of the assets
are added to the property and equipment.
44
<PAGE>
E. Income Taxes
The Company accounts for its income taxes using the Financial
Accounting Standards Board Statements of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which requires the
establishment of a deferred tax asset or liability for the recognition
of future deductible or taxable amounts and operating loss and tax
credit carryforwards. Deferred tax expense or benefit is recognized as
a result of timing differences between the recognition of assets and
liabilities for book and tax purposes during the year.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards, and then a valuation
allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be
realized.
F. Revenue Recognition
The Company's revenues are derived principally from the sale of banner
and sponsorship advertisements. The Company's standard rates for banner
advertising currently range from approximately $3 per thousand
impressions for run of network to approximately $30 per thousand
impressions for highly targeted audiences and properties. To date, the
duration of the Company's banner advertising commitments has ranged
from one week to 2 months.
Sponsorship advertising contracts have longer terms (ranging from one
month to one year) than standard banner advertising contracts and also
involve more integration with Cosmoz services, such as the placement of
buttons that provide users with direct links to the advertiser's Web
site. Advertising revenues on both banner and sponsorship contracts are
recognized ratably over the period in which the advertising is
displayed, provided that no significant Company obligations remain at
the end of a period and collection of the resulting receivable is
probable.
Company obligations typically include guarantees of minimum number of
"impressions," or times that an advertisement appears in pages viewed
by users of the Company's on-line properties. To the extent minimum
guaranteed impressions are not met, the Company defers recognition of
the corresponding revenues until the remaining guaranteed impression
levels are achieved. The Company has agreements that provide revenue
from electronic commerce transactions. These revenues are recognized by
the Company upon notification from the advertiser of revenues earned by
Cosmoz.
G. Product and Web-site Development
Costs incurred in the development of new products or properties and
enhancements to existing products are charged to expense as incurred.
Material software development costs incurred subsequent to the
establishment of technological feasibility are capitalized.
Technological feasibility is determined based on the completion of a
working model. The Company has capitalized any software development
costs.
45
<PAGE>
H. Advertising Costs
All advertising costs are expensed as incurred. Advertising expense
totaled approximately $93,157 in 1999.
I. Marketable Securities
The Company's marketable securities are classified as
available-for-sale as of the balance sheet date and are reported at
fair value, with unrealized gains and losses, net of tax recorded in
shareholders' equity. The Company invests its excess cash in mutual
funds and equity securities traded on national stock markets. Realized
gains or losses and permanent declines in value, if any, on
available-for-sale securities are reported in other income or expense
as incurred. As of June 30, 1999, the Company recorded a net unrealized
loss of $34,705 on these types of investments.
The Company invests in equity instruments of privately-held, Internet
and information technology companies for business and strategic
purposes. These investments are included in other long-term assets and
are accounted for under the cost method when ownership is less than
20%. For these non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance
and cash flow forecasts in assessing the carrying values. The Company
identifies and records impairment losses on long-lived assets when
events and circumstances indicated that such assets might be impaired.
To date, no such impairment has been recorded.
J. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Management makes estimates that affect reserves for discontinued
operations, deferred income tax assets and reserve for discontinued
operations. Any adjustments applied to estimates are recognized in the
year in which such adjustments are determined.
46
<PAGE>
K. Earnings per Share
The Company follows SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 replaces the presentation of
primary EPS with "basic EPS," and fully diluted EPS with "diluted EPS."
It also requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. The dilutive EPS
calculation gives effect to all dilutive potential common shares, such
as stock options or warrants, which were outstanding during the period.
Shares issued during the period and shares repurchased by the Company
are weighted for the portion of the period that they were outstanding
for both basic and diluted EPS calculations.
L. Segments of an Enterprise and Related Information
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that a
public business enterprise report financial and descriptive information
about its reportable operating segments on the basis that is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company has reported its
franchising operations in Canada as discontinued operations, and the
results of its Internet operations as continuing operations.
M. Comprehensive Income
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and unrealized gains (losses) on available for sale marketable
securities and is presented in the consolidated statements of
shareholders' equity and comprehensive income. The Statement requires
only additional disclosures in the consolidated financial statements
and does not affect the Company's financial position or results of
operations.
N. Business Risks and Credit Concentrations
The Company operates in the Internet-Portal industry segment, which is
relatively new, rapidly evolving and highly competitive. The Company
relies on third-party suppliers of topical and relevant information
content. There can be no assurance that the Company will be able to
continue product development and secure content sufficient to support
its operations.
47
<PAGE>
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash,
cash equivalents, short and long-term investments, and accounts
receivable. Substantially all of the Company's cash, cash equivalents,
and short and long-term investments are managed by two financial
institutions.
Accounts receivable are typically unsecured. The Company performs
ongoing credit evaluations of its customers' financial condition. It
generally requires no collateral and maintains reserves for potential
credit losses on customer accounts, when necessary. Management
estimates that no such reserves are warranted at June 30, 1999. One
customer comprises 100% of account receivable, and it accounted for
approximately 60% of revenue from continuing operations for the year
then ended.
O. Foreign Currency and International Operations
The functional currency of the Company's international subsidiaries,
PFI and WTW, is the Canadian dollar. The financial statements of these
subsidiaries are translated to US dollars using year-end rates of
exchange for assets and liabilities, and average rates of exchange for
the year for revenues, costs, and expenses. Translation gains (losses),
which are deferred and accumulated as a component of shareholders'
equity, were $14,398 for the year ended June 30, 1999. Net gains and
losses resulting from foreign exchange transactions are included in the
consolidated statement of operations and were not significant during
the periods presented.
International operations were discontinued during the year, and there
are no international assets as of June 30, 1999.
P. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities,
effective for fiscal years beginning after June 15, 1999. The Company
is currently determining the additional disclosures, if any, that may
be required under this pronouncement. In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position
98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed of Obtained for Internal Use." This standard requires
companies to capitalize qualifying computer software costs, which are
incurred during the application development stage and amortize them
over the software's estimated useful life. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The Company is
currently evaluating the impact of SOP 98-1 on its financial statements
and related disclosures.
48
<PAGE>
Q. Intangibles
Intangibles assets consist of goodwill and are being amortized on a
straight-line basis over 7 years.
2. Income Taxes
------------
The components of income(loss) before taxes are as follows::
1999
--------------
United States $ (1,007,928)
Canada (297,945)
--------------
$ (1,305,873)
==============
The Company paid $800 in state taxes for the year ended June 30, 1999.
No provision for federal taxes in the US has been recorded for the year
ended June 30, 1999. The Company incurred net operating losses for this
period. The Company has incurred net operating losses from its
operations in Canada (discontinued in August 1998), and accordingly no
provision for Canadian income taxes is recorded.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate as follows:
1999
----
Income tax benefit at the federal statutory rate of 34% $ (342,696)
State income tax, net of federal benefit 800
Non-deductible charges 24,122
Valuation allowances 160,253
Other 158,321
Income tax provision 800
49
<PAGE>
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The components of net deferred
income tax assets and liabilities are as follows:
Federal State
--------- ---------
Deferred income tax assets:
Net operating loss carryforwards $ 342,696 $ 84,666
Unrealized investment loss (68,000) (16,800)
Nondeductible reserves and expenses (102,643) (25,359)
Capital loss (11,800) (2,915)
Depreciation 1,843 455
State tax 1,786 --
Valuation allowance (136,000) (33,600)
--------- ---------
Net deferred tax asset 27,882 6,447
--------- ---------
Deferred income tax liabilities:
Intangible assets (4,823) (1,194)
--------- ---------
Net assets $ 23,049 $ 5,253
========= =========
Due to the uncertainty surrounding the realization of deferred tax assets, the
Company has recorded a valuation allowance against its net deferred tax asset.
The Company has loss carryforwards of approximately $1,007,928 from continuing
operations, which may be used to offset future United States income taxes and
which begin to expire in 2015.
3. Investments
-----------
At June 30, 1999, short and long-term investments in marketable securities were
classified as available-for-sale as follows:
---------- ---------- ---------- ----------
Gross Gross Gross Estimated
Amortized Unrealized Unrealized
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
Corporate equity $ 596,875 $ -- $ (44,375) $ 552,500
securities
Mutual Funds:
Equity securities 301,524 11,260 -- 312,784
Debt securities 701,576 -- (1,590) 699,986
Total short-term
investments 1,599,975 11,260 (45,965) 1,565,270
Corporate equity
securities,
privately-held 145,000 -- -- 145,000
---------- ---------- ---------- ----------
Total $1,744,975 $ 11,260 $ (45,965) $1,710,270
========== ========== ========== ==========
50
<PAGE>
Investments in corporate equity securities of privately-held companies, in which
the Company holds a less than 20% equity interest, are classified as long-term.
4. Stock Option Plan
-----------------
The Board of Directors has granted management the authority to issue
non-statutory stock options to employees and consultants of the Company.
Non-statutory stock options issued as of June 30, 1999 are summarized as
follows:
Options Outstanding Weighted Average
Price per Share
------------------- ----------------
Options granted 200,000 $ 1.25
Options canceled - -
Options exercised - -
------- ------
Balance at June 30, 1999 200,000 $ 1.25
The non-statutory stock options are for periods of three to four years.
Options to purchase 125,000 shares were vested as of June 30,1999.
Through June 30, 1999, the Company recorded compensation expense
related to certain stock options issued with exercise prices below fair
market value of the related common stock. Under APB-25, the cost of
compensation is measured by the excess of the quoted market price of
the stock over the option price on the measurement date. This is
referred to as the intrinsic value method. The Company recorded
compensation expense in the amount of $65,896.
The Company has adopted only the disclosure provisions of SFAS No. 123.
If the Company had elected to recognize compensation expense using the
minimum value option pricing method at the grant date for awards under
this plan consistent with the methodology prescribed by SFAS No. 123,
the Company's net loss and loss per share would be reduced to the pro
forma amounts indicated below for the year ended June 30, 1999:
Net Loss
As reported $ (1,305,873)
Pro forma $ (1,311,049)
Basic and diluted loss per common share
As reported $ (0.028)
Pro forma $ (0.028)
Options are granted at the prices equal to the current fair value of
the Company's common stock at the date of grant. The vesting period is
usually related to the length of employment or consulting contract
period.
The fair value of these options was estimated at the date of grant
using the minimum value option-pricing model with the following
weighted-average assumptions for the year ended June 30, 1999: dividend
yield of 0%; risk-free interest rate of 5.5%; and expected life of 3 to
4 years.
5. Acquisitions
------------
A. Acquisition of BuckInvestor.com, Inc.
On May 5, 1999, the Company completed the acquisition of all
outstanding shares of BuckInvestor.com, Inc. ("BuckInvestor.com"), a
privately-held online financial information content provider, through
the issuance of 900,000 shares of Cosmoz Common Stock, a market value
of $1,012,500 at the time of the transaction. The acquisition was
accounted for as a purchase in accordance with the provisions of APB
16.
Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
fair values at the date of the acquisition. The excess purchase price
over the estimated fair value of the assets acquired and liabilities
assumed has been allocated to goodwill. Results of operations for
BuckInvestor.com have been included with those of the Company
subsequent to the date of acquisition. The Company estimated that the
economic useful life of the goodwill was seven years. Upon acquisition,
the historical financial results of BuckInvestor.com were de minimis.
B. Acquisition of KingFine, Inc.
On June 10, 1999, the Company completed the acquisition of all
outstanding shares of KingFine, Inc. ("KingFine"), a privately-held
online financial information content provider and operator of an online
message board, through the issuance of 200,000 shares of Cosmoz Common
Stock for all of KingFine's outstanding shares. The acquisition was
accounted for as a pooling of interests. The consolidated financial
statements for the year ended June 30, 1999 and the accompanying notes
reflect the Company's financial position and the results of operations
as if KingFine was a wholly-owned subsidiary of the Company since
inception.
C. Acquisition of MB Technologies, Inc.
On May 6, 1999 the Company completed the acquisition of 49% of all the
outstanding shares of MB Technologies, Inc. ("MB"), privately-held
operator of online message boards. Under the terms of the acquisition,
51
<PAGE>
the Company exchanged 100,000 shares of Cosmoz Common Stock with a
market value of $ 112,800 for 98 shares of MB Technologies. The
difference between the amount paid and the value of the pro rata share
of MB's stockholders' equity was recorded as goodwill. The Company
estimated that the economic useful life of the goodwill was seven
years. The Company has an option to purchase the remaining 51% interest
in MB from its shareholders. The financial results of MB were de
minimis for the year ended June 30, 1999.
The Company exercised its option to purchase the remaining 51% interest
in MB on July 30, 1999 for 150,000 shares of Cosmoz Common Stock with a
market value of $315,000.
6. Extraordinary Loss
------------------
During 1999, the Company terminated its acquisition of Investors Guru,
a website specializing in providing financial content to investors.
Under the terms of the purchase agreement, the Company forwarded an
initial payment of $200,000 to the owners of Investors Guru, which was
lost when the acquisition was terminated prior to completion.
Accordingly, the Company has recorded a one-time charge of $200,000 for
the failed acquisition.
7. Discontinued Operations
-----------------------
The Company's management and its Board of Directors decided to
discontinue operations in Canada as of July 1998. Operations in Canada
consisted of operating and franchising "Pretzel Twister" stores, and
the operation of an automotive service center "Wheel to Wheel". To
implement this decision, the Company concluded the following
transactions:
A. On August 31, 1998, the Company abandoned all operations of Wheel to
Wheel, including its facilities lease. The Company disposed of the
assets of the Wheel to Wheel store and used the proceeds to settle
liabilities to the extent of available funds.
B. In July 1998, the Company abandoned all operations of Pretzel
Franchising, Inc. The Company informed its franchisees that PFI will
cease to operate, and the Company operated store in Toronto, Ontario
was closed.
In consideration of the issues listed above, the Company continues to
maintain a reserve for potential loss contingencies from discontinued
operations of approximately $85,000.
There are no assets from discontinued operations on the balance sheet. The
liabilities attributable to discontinued operations are identified as such on
the balance sheet.
52
<PAGE>
8. Common Stock Transactions
-------------------------
The company concluded several private placement offerings of its common
stock during 1999 and converted short-term debt into common stock. The
Company raised approximately $3,500,000 in cash from these placements.
The Company also issued common stock to individuals and companies in
lieu of cash compensation.
On February 10, 1999 the Company issued warrants to purchase 4,000,000
shares of its common stock at an exercise price of $0.75. The warrants
are for a three- year period and expire on February 9, 2002.
9. Related Party Transactions
--------------------------
The following transactions occurred between the Company and certain related
parties:
A. Asia Pacific Ventures
Asia Pacific Ventures (APV) is a company whose headquarters are in Hong
Kong, and its authorized representative was Wilfred Shaw, the current
CEO of Cosmoz. APV has loaned money to the Company in previous years.
The net of advances due from shareholders and officers consists of
overpayments by Cosmoz on loans made by APV to the Company.
Additionally, APV is a shareholder holding greater than 10% of the
outstanding common stock of the company and whose current authorized
representative is a family member of Wilfred Shaw, current CEO of the
Company. The amounts due from shareholder at June 30, 1999 was
$188,142.
B. Advances from Shareholders that were converted to common stock
during the year ended June 30, 1999, are noted as follows:
Shares Amount
------ ------
Note payable to shareholders 2,750,000 $ 2,750,000
--------- ------------
2,750,000 $ 2,750,000
========= ============
C. Wilfred Shaw
The following transactions took place between the Company and Wilfred
Shaw, the CEO and Chairman of the Board of Directors: The Company
received an advance from Wilfred Shaw of $596,875 in the form of
publicly traded securities. The borrowing does not bear any interest,
and it was due on demand. Subsequent to June 30, 1999, the corporate
equity securities were returned to Mr. Shaw in full settlement of the
outstanding debt.
51
<PAGE>
On May 2, 1999, the company advanced Mr. Shaw $900,000 in a
non-interest bearing note. Subsequent to June 30, 1999, Mr. Shaw repaid
the Company in full.
D. Common Stock transactions
On April 12, 1999, the Company sold 8,625,000 shares of stock for $.083
per share. The total proceed from these transactions was $717,383. Of
this amount, the Company sold 1,025,000 of these shares to a family
member of Wilfred Shaw, the CEO and Chairman of the Board of Directors
of Cosmoz.
E. Wing Yu
Mr. Wing Yu, an officer of the Company, held a 25% in KingFine which
was acquired by Cosmoz on June 10,1999. As a result of this
transaction, Mr. Yu received 50,000 shares of Cosmoz Common Stock in
exchange for his 25% interest in KingFine.
10. Commitments and Contingencies
-----------------------------
A. Legal
The Company is periodically involved in legal actions and claims that
arise as a result of events that occur in the normal course of
operations, including claims of alleged infringement of trademarks,
copyrights and other intellectual property rights. The Company is not
currently aware of any legal proceedings or claims that the Company
believes will have, individually or in the aggregate, a material
adverse effect on the Company's financial position or results of
operations.
B. Operating Leases
The Company is obligated under a three year non-cancelable operating
lease agreement for its office facilities. Rent expense for the year
ended June 30, 1999 was $12,384.
Future lease payments for fiscal years 2000, 2001 and 2002 are $73,944,
$73,944, and $61,620, respectively.
11. Going Concern Uncertainties
---------------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company
has experienced recurring operating losses and negative cash flows from
53
<PAGE>
operations. During 1999, a new management team was hired to develop
Internet operations. The Company's continued existence is dependent
upon its ability to increase operating revenues and/or raise additional
equity financing.
In view of these matters, management believes that actions presently
being taken to expand the Company's operations and to continue its
web-site development activity provide the opportunity for the Company
to return to profitability. The discontinuation of the operations in
Canada and its focus on strategic technological investments will
improve the Company's cash flow, profitability, and ability to raise
additional capital so that it can meet its strategic objectives.
Management raised additional capital during the year, and is currently
in the process of negotiating additional equity financing with
potential investors. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
12. Risks Presented by the Year 2000 Issue
--------------------------------------
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields
containing a 2 digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, such systems may be
unable to accurately process certain date-based information.
The Company has completed its process of assessing the Year 2000 issue,
and management does not anticipate the Year 2000 issue to have a
significant impact on its operations or financial operations. The
Company has not incurred material costs to date in this process, and
currently does not believe that the cost of additional actions will
have a material effect on its results of operations or financial
condition.
Although Cosmoz currently believes that its systems are Year 2000
compliant in all material respects, the current systems and products
may contain undetected errors or defects with Year 2000 date functions
that may result in material costs. The Company is not aware of any
material operational issues or costs associated with preparing its
internal systems for the Year 2000, the Company may experience serious
unanticipated negative consequences (such as significant downtime for
one or more Cosmoz's Internet properties) or material costs caused by
undetected errors or defects in the technology used in its internal
systems. In addition the Company utilizes third-party equipment,
software and content, including non-information technology systems
("non-IT systems"), such as its building equipment and non-IT systems
embedded microcontrollers that may not be Year 2000 compliant. The
Company has assessed that there are no material effects on operations
from these third-parties providing service to the Company.
54
<PAGE>
13. Subsequent Events
-----------------
A. MB Technologies, Inc.
On July 30, 1999 the Company exercised its option to purchase the
remaining 51% interest in MB Technologies for 150,000 shares Cosmoz's
common stock totaling $315,000. The acquisition will be accounted for
as a purchase in accordance with the provisions of APB 16.
B. StreetIQ.com, Inc.
On August 9, 1999, the Company completed the acquisition of all
outstanding shares of StreetIQ.com, Inc. ("StreetIQ"), a privately-held
online financial information content provider and publisher of "whisper
numbers", through the issuance of 400,000 shares of Cosmoz's Common
Stock, with a market value of $800,000. The acquisition will be
accounted for as a purchase in accordance with the provisions of APB
16. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
fair values at the date of the acquisition. The excess purchase price
over the estimated fair value of the assets acquired and liabilities
assumed will allocated to goodwill. Results of operations for StreetIQ
will be included with those of the Company subsequent to the date of
acquisition. The Company estimated that the economic useful life of the
goodwill was seven years. Upon acquisition, the historical financial
results of StreetIQ were de minimis.
C. iTrack.com, Inc.
On October 7, 1999 entered into an asset purchase agreement to acquire
all the assets of iTrack.com, Inc. ("iTrack"), a privately-held online
auction monitoring site. Under the proposed terms of the acquisition,
iTrack will be acquired by Cosmoz in exchange for a maximum of
1,275,000 shares of Cosmoz's Common Stock. The acquisition is expected
to be completed by the second quarter of fiscal year 2000. The
historical operating results of iTrack are not considered to be
significant.
D. iPing, Inc.
The Company made an investment of $375,000 in preferred stock of iPing,
Inc. ("iPing"), a New York based internet company that operates
MrWakeup.com. MrWakeup.com is a service provider that allows users to
set customized phone calls to send information such as headline news,
horoscopes and weather from the Internet at a requested time. The
investment in iPing was for a less than a 20% equity interest.
<PAGE>
E. Non-statutory stock options
During the period July 1, 1999 to December 3, 1999, the Company issued
non-statutory stock options to its employees allowing them to purchase
up to 1,045,000 shares of common stock. The stock options issued are
summarized below:
Weighted Average
Range of Number Exercise Price
Exercise prices Outstanding per Share
--------------- ----------- ---------
Less than $0.99 400,000 $ 0.88
$1.00 to $1.50 180,000
$1.51 to $2.00 65,000
$2.01 to $5.00 250,000 5.00
$5.01 to $10.00 150,000 10.00
1,045,000
The exercise period for the options range from two to four years from
the date of the grant, and have various vesting requirements.
F. Merger
The Company has agreed to merge with Decurian Corporation, a fully
reporting company under regulation 12(g) of the Securities Exchange Act
of 1934. Decurian has no material assets or liabilities. The business
combination will be accounted for as a reverse merger. To conclude this
transaction, Cosmoz has agreed to pay $100,000 plus issue 250,000
shares of common stock to the sole shareholder of Decurian Corporation.
Additionally, the Company will issue a warrant to acquire up to 250,000
shares at a price of $1 per share.
55
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