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U.S. SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
/ X / Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Year Ended April 30, 2000
or
/ / Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to _____________
Commission file number: __________
SHOWSTAR ONLINE.COM, INC.
(Name of Small Business Issuer in its Charter)
COLORADO 13-4093341
(State of incorporation) (IRS Employer Identification No.)
70 WASHINGTON ST., #409, BROOKLYN, NY 112011
(Address of Principal Executive Offices) (Zip Code)
(718) 923-0593
(Issuer's Telephone Number)
Securities registered under Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
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Check whether issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange during the past 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 / /
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year: $31,893.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of June
30, 2000 was $8,133,000.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the issuer's Common Stock, no par value,
as of June 30, 2000, was 33,196,349.
Transitional Small Business Disclosure Format (check one):
YES / / NO /X/
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TABLE OF CONTENTS
Part I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Showstar Online.com, Inc. (the "Company", "Showstar" and sometimes "we,"
"us," "our" and derivatives of such words), formerly named Showstar
Entertainment Corporation, was incorporated on July 14, 1995 in the State of
Colorado as Cerotex Holdings, Inc. The Company commenced business as a developer
of computer-based management systems and continued operations on a limited basis
until March 18, 1998.
On March 19, 1998, Barry Forward and Gino Punzo gained control of the
Company through a cash purchase of Common Stock from founding stockholders. On
April 23, 1998, the Company effected an agreement with all the stockholders of
Showstar Entertainment Corporation (formerly Nucom Productions, Inc.), a Nevada
Corporation ("Showstar/Nucom"), whereby the Company issued 3,367,000 shares of
its no par Common Stock in exchange for 77% of the outstanding common stock of
Showstar/Nucom.
In May 1998 the Company changed its name to Showstar Entertainment
Corporation, assuming the name of its majority-owned subsidiary.
Effective August 25, 1998, the remaining 23% of Showstar/Nucom was acquired
through issuance of 999,066 shares of the Company's Common Stock.
On June 18, 1999, the stockholders of the Company approved a change in
corporate name to Showstar Online.com, Inc., which became effective on June 25,
1999.
From April 1998 to February 1999, Showstar engaged in merchandising and
event promotion in secondary markets in the Western United States and Canada.
These operations were discontinued in February 1999.
Showstar's United States headquarters and gallery operations are located at
70 Washington St., #409, Brooklyn N.Y. 10011, telephone (718) 923-0593. Showstar
also maintains administrative offices in an office park at 90-10551 Shellbridge
Way, Richmond, British Columbia, Canada V6X 2W9, telephone (604) 244-3966.
Showstar's fiscal year end is April 30.
GENERAL
Showstar Online.com, Inc. is a developer of Internet websites and
e-commerce solutions. One of Showstar's e-commerce solutions is the integration
of ORACLE iStore 3.0 to offer an e-commerce solution for Artstar.com customers.
In addition, Showstar, together with its contractor Shoptek e-Commerce
Solutions, has been developing a customized online catalog to showcase and sell
works of art available through individual artists, galleries and museums.
Showstar has established a unique and scalable e-commerce infrastructure by
developing and integrating several leading edge technologies, including the
incorporation of ORACLE database tools, Cold Fusion, Macromedia Flash and
LIVEPICTURE into Artstar.com. This also includes the customized development of
Artstar.com's art search engine accessing the ORACLE database.
Showstar will design each of its unique websites to provide
information-enriched content that is directed at lucrative target markets.
Showstar's flagship website property is "Artstar.com" which is targeted to art
consumers, who tend to be high-income earners in a position to purchase art.
While Showstar has not yet determined its next information-enriched website
project, possible other target markets include business travelers, home buyers
and the gay community.
Showstar's development of its website property "Artstar.com" commenced
in May 1999. Showstar launched
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e-commerce and retail activities on the website in December 1999 and thus
commenced principal operations. A marketing and public relations program
commenced in November 1999.
In March 2000 Showstar introduced its first portal development product
Showstar Webmail. Showstar WebMail was designed as a software solution for web
portals and is available in a customized form on the company's website
Artstar.com. Showstar is now marketing its webmail product to third-party
websites.
Through this website, Showstar offers a variety of products and services
under the domain name "Artstar.com." These are designed to attract viewer
traffic to the site and to generate revenue for Showstar. The products and
services offered include auctions, authentication and appraisal consulting,
buyer (corporate and individual) representation, and education in art,
collectibles and restoration.
Currently, there are various websites on the Internet that provide art
sales and auctions to collectors and aficionados, with offerings ranging from
prints or lithographs to internationally renowned collections. In the past year,
the leading auction houses, such as Sotheby's, Christie's and Butterfield and
Butterfield, have invested significantly in the development of online auction
platforms. Showstar believes, however, that there are few, if any, websites
providing a comprehensive scope of services in addition to online sales and
auctions. After researching "art sites" on the Internet, Showstar determined
that while thousands of art sites exist, these sites cater to specific market
niches, such as "Art.com" which targets the print and reproduction market. The
company with the largest brand recognition is probably "Sothebys.com", which is
world-renowned as an art institution, but focuses primarily on the "auction" of
fine art. Sotheby's, which has been in business for over 100 years, offers a
broad range of services relating to the "auction" of fine art, but does not
provide a comprehensive scope of services. This is also the case with other
companies that may be regarded as competitors of Showstar, such as "Artnet.com"
which offers an extensive historic auction sale database and provides services
around that, but again, does not provide a comprehensive focus to its customers.
Via the Internet, Showstar provides a variety of entertainment and
education products and services to those interested in art and collectibles.
Showstar's revenues are derived from a variety of sources, including online
auctions, appraisals and authentication, commissions, advertising, content
licensing, various consulting services, and merchandising. All of the
aforementioned products and services currently are marketed and sold on the
ArtStar.com website. Showstar does not buy and sell art work or collectibles for
its own account.
Contemporaneously, Showstar also is developing the capability for in-house
on-line processing of credit cards and proprietary software applications
developed during creation of the Artstar.com website.
PRINCIPAL PRODUCTS AND MARKETS
Showstar has developed an Internet website to market art and related
services. The Company has also developed additional systems and services
designed to further enhance the Artstar.com website. Currently, Showstar is
marketing its customized webmail product to third party websites.
The art site is known as Artstar.com and compromises the following three
general areas:
INFORMATION SERVICES
Artstar.com Explorer: Contains biographical information on thousands of
artists, tens of thousands of images, books, and related web links, all
searchable, carefully cross-referenced and linked, and e-commerce transaction
enabled. Everything Art-The Artstar.com Magazine: A forum for artists, art
historians, art technicians and art lovers. Inside its pages you'll find reviews
of national and international exhibits, current events related to art, antiques
and auctions worldwide, as well as factual and entertaining articles covering
many facets of art, from artistic creation to marketplace tips.
PROFESSIONAL SERVICES
In conjunction with Artstar.com Vice Presidents and experienced art experts
Kenneth Jay Linsner and
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Abraham Joel, Showstar offers a variety of art consulting services,
including: Appraisal Services: Artstar.com's network of appraisers is well
qualified and available across the country to provide accurate inventories
and valuations of property. Mediation Services: Artstar.com offers mediation
and "umpire" services in the realm of fine arts. Corporate Art Consulting
Services: Artstar.com provides comprehensive art consulting services to a
wide variety of corporate clients. This service is being managed by Connie
Vick, Showstar's senior corporate art consultant, who has over 18 years
experience working with major corporations. Restoration & Conservation:
Artstar.com's experienced conservation and restoration staff offer both
practical suggestions for the collector, as well as professional advice on
how to care for works of art, including technical information on the
preservation of objects.
RETAIL & AUCTION SALES
SALE OF ART REPRODUCTIONS: Purchasing a reproduction of any of the tens of
thousands of pieces of art contained within the Artstar.com reference databases
is as simple as clicking on the image itself. New images and reproductions for
sale are constantly being added. Currently, over 20,000 reproductions are
available. Sale of Original Works and Limited Edition Art: The original works of
a limited number of respected artists are currently available. Artstar.com
intends to add numerous additional artists (see "Planned and In-Process
Projects" below). The Artstar.com Gift Galleria: Art is not limited only to fine
art such as oil paintings. Artstar.com sends certain staff members to various
countries throughout the world to seek out and secure items that are not only
works of art but which also often have function. These items make perfect gifts
and hundreds of them are available in the Artstar.com Gift Galleria. Art-Related
Books:The Artstar.com bookstore contains new and rare art-related books.
Hundreds of new volumes are added monthly. Artstar.com also has a large
selection of fine press books.
WEB SYSTEMS AND SERVICES
Showstar has developed a full-featured web-based e-mail system. All of the
Showstar WebMail features are fully customizable, with international options
allowing regional protocols and diverse language character sets. In addition to
being included in Artstar.com, Showstar is marketing its webmail product to
other web sites and web portals.
BUSINESS STRATEGY
Showstar's business strategy is to develop and expand its revenue sources
in e-commerce/art portal operations on the Internet. Showstar's revenues are
primarily generated from sales of art, collectibles and related services, and
the sale of its portal development products (Webmail). In the future Showstar
intends to generate increased revenues from multiple sources, including the
commercial sale of content and advertising on the Internet. Showstar expects its
revenues for the foreseeable future will depend on, among other factors:
- Sale of art and collectibles;
- User traffic levels;
- Sale of Internet advertising and sponsorships;
- Licensing and sale of web portal development products (Webmail);
- The ability of Showstar to effectively integrate business to business
transactions on Artstar.com;
- The ability of Showstar to adopt fulfillment/delivery methods that
satisfactorily address customer needs;
- The effect of competition, the regulatory and tax environment, ISP
rates, and transmission costs on prices;
- The ability of Showstar to effectively compete with other companies,
some with greater financial resources, offering services in the same
manner.
DEVELOPMENT AFFILIATIONS
Showstar has relationships with certain key vendors that are intended to
expand the products and services offered by Showstar. The following lists those
vendors and the products/services each provides:
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<TABLE>
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VENDOR PRODUCT/SERVICE
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Mindquake Software................................... Back-end Database Development
Elecomm.............................................. Auction Platform
Oracle Corporation................................... Internet Commerce Server, Database technologies
Shoptek E-Commerce................................... Catalog & Shopping Cart Software
Tellan Software...................................... Transaction Processing Software
Starcom/AT&T......................................... Site Hosting
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The above vendors are providing technological services to Showstar. For
example, when Showstar conceived Artstar.com, it developed the concept of the
Artstar Explorer, a database/search engine for anything and everything art.
Mindquake Software was engaged as a subcontractor to assist Showstar in building
this component of Artstar.com. Although Mindquake provided the database
development, Showstar owned all developments, source code and intellectual
property rights. Showstar's technical staff currently are in the process of
taking over the maintenance and future development of the database/search
engine.
Showstar believes that while these companies are providing services
integral to the success of Showstar's intended operations, the failure of any of
these companies would not have a material impact on Showstar's ability to
complete the development of its portal and commence operations. Showstar
believes that each of its technological relationships can be replaced with
minimal interruption.
PLANNED AND IN-PROCESS PROJECTS
Showstar is presently developing additional systems and services, which
will be offered to the market over the next 12 months. These product offerings
will further enhance the Artstar.com website and, where appropriate, will be
made available to third parties. This includes the customized development of
Webmail for use on Artstar.com. This e-mail program was developed by Showstar in
Linux, and will be incorporated on Artstar.com over the next few months.
Showstar also has entered into a business agreement with Compucon Computers to
market and support Showstar's Linux-based Internet software solutions. Customers
desiring to use the Artstar.com website and to access any services offered on
the website, including e-mail, will not be required to purchase any software
from Showstar but will be able to access the website through the customer's own
web browser (e.g., Netscape Navigator or Internet Explorer).
ONLINE TRANSACTIONS
In order to minimize the cost of processing transactions, Showstar is
continuing its work on a proprietary credit card transaction server. This will
allow Showstar to offer the service to third parties as well as to Artstar.com,
and artists, galleries and museums who wish to do their own credit card
processing. SITE2SHOP.COM
In April 1999, Showstar entered into an agreement with Site2Shop.com to
develop an e-commerce site/solution that would be a seller of products and
services. Showstar is continuing to develop an e-commerce solution to meet this
need as well as third party opportunities.
ORIGINAL WORKS AND LIMITED EDITION ART
Artstar.com is forming relationships with several umbrella organizations
that bring together tens of thousands of artists whose works can be featured and
sold on the Artstar.com website. These organizations include the 11,000 artists
featured in Who's Who in American Art-TM-, the School of Visual Arts, and the
College of School Arts. Artstar.com is in preliminary discussions with the two
schools, but has an on-going contractual relationship with Reed-Elsevier, the
publisher of Who's Who in American Art-TM-.
CHINA JOINT VENTURE
Showstar has entered into a one-year agreement dated October 29, 1999, with
Li Zhang, an individual, to
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establish a joint venture in China.
The joint venture has been created with the set-up of Artstar China Ltd., a
company incorporated in Hong Kong- 50% owned by Showstar and 50% owned by Li
Zheng. Artstar China Ltd. has launched a web-site at Artstar.com.cn with content
and exhibits in two versions of the Chinese language. An English version is
being developed for a future release. Showstar and Artstar China Ltd. are
presently exploring the requirements and logistics of passing information from
site to site.
SUBSCRIPTION INFORMATION SERVICES
Showstar primarily intends to offer its "Subscription Information Services"
to buyers and sellers of art. This information will provide a revenue stream to
Showstar as well as enable it to market directly to the customers who purchase
the information.
National Register Publishers, a division of Reed-Elsevier, Inc., has
granted to Artstar.com the online publishing and online subscription rights for
the 11,600 entry WHO'S WHO OF AMERICAN ART-TM-, THE AMERICAN ART DIRECTORY-TM-
and THE OFFICIAL MUSEUM DIRECTORY-TM-.
ARTSTAR TRAVEL & TOURS
Artstar.com plans to offer domestic and international travel tours for the
viewing and appreciation of art & collectibles in galleries, museums and
studios, hosted and guided by art experts for the duration of the trip.
MARKETING AND ADVERTISING
As noted above, Showstar believes that its primary target market comprises
high income and high net worth potential customers. It is these people who
traditionally have been the most interested in the world of art and
collectibles.
Showstar is developing a business to business model that will integrate
artists, galleries, and suppliers into Artstar.com. These constituencies will
drive the marketing and branding efforts of the website, and its product
offerings. Following the launch of Artstar.com in November 1999, Showstar
commenced an aggressive marketing strategy through Palo Alto, California-based
Neale-May & Partners. This program introduced the Artstar.com brand to the North
American market place, enabling the company to commence a long-term marketing
strategy for the next fiscal year.
Showstar has also established a portal development sales team. This sales
team has commenced marketing Showstar Webmail to third party websites and
portals.
COMPETITION
There are a number of competitors to Showstar, both online and offline.
Some are better established and better financed. It is Showstar's goal to
create, in Artstar.com, a website with greater breadth and depth than any of the
alternate sources for components of Artstar.com, both offline and online.
OFFLINE COMPETITION
Artstar.com's offline competition includes physical publications and
physical galleries. Artstar.com seeks to enhance, rather than compete with,
these traditional businesses by extending their reach to potential clients in
new markets.
ONLINE COMPETITION
Online competitors vary:
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To the dealer and advanced collector, Artnet.com, icollector.com and, more
recently, Sothebys.com, have established presences.
To the general consumer, Art.com is the current market leader with a focus
on poster sales and framing. Art.com attracted roughly 400,000 visitors per
month in the first quarter of 1999 and has experienced more than 40 percent
growth in orders per month since January 1999.
For art auctions, there are various sites, including Sotheby's and e-Bay
(which has purchased Butterfield & Butterfield). Christie's recently changed its
plans for online auctions from a full site to merely providing coverage and
bidding on existing live auctions.
Guild.com focuses mostly on crafts, and claims over 6,000 visitors a day
and average sale prices between $1,000 and $5,000.
Additional art sites include sea-art.com (Morales Art Gallery),
howgreattheart.com, watkins-brothers.com, louvreart.com (Petit Louvre),
wholesale-art.com, paintingclasses.com, karaartservers.ch, artprice.com and
philamuseum.org. This is only a small sample of available sites.
For general art searches, the major search engines are often used, as well
as a variety of small "indexes" and resource sites, often "one-man-show"
projects. Wwar.com is one example.
For information on museums, artists and galleries, there are thousands of
sites, most small and many difficult to find.
DISTRIBUTION METHODS
In conducting auctions and on-line sales of artwork and other operations,
the individual content supplier, such as artists and collectors, will be
responsible for the packaging of the individual pieces. Showstar will arrange
the actual shipping of the pieces on "FOB origin" terms through transportation
companies it intends to contract with. Accordingly, the buyers will be
responsible for all freight and shipping costs. In order to reduce costs to the
customer and facilitate shipping, Showstar has entered into agreements with two
shippers to provide for a per piece reduction in cost through high volume use.
In order to minimize any legal issues to Showstar if there is a "fail to
deliver", Showstar has implemented procedures using an expeditor to monitor
deliveries. Additionally, it has established a refund policy that provides for
delayed processing of credit card charges. The terms of sale indicate the
responsibilities of all parties regarding shipment of all pieces.
Showstar has established a customer service group to field inquiries and to
assist customers in resolving fulfillment concerns. Customer Service procedures
include: e-mail acknowledgement of customer order; e-mail confirmation that item
purchased has been shipped; e-mail follow-up thanking customer for business; and
telephone follow-up to ensure customer satisfaction.
DISCONTINUED OPERATIONS
As noted above, until February 1999, Showstar had been in the merchandising
and event promotion businesses with its primary offices in Los Angeles,
California. In connection therewith, Showstar was planning to earn revenue from
the promotion of entertainment events, primarily in show business in secondary
event locations such as Native American Casinos, and from sales of merchandise,
primarily T-shirts, manufactured from its plant in Culver City, California.
As part of its focus in the merchandising sector, Showstar commenced
exploration of various ways it could benefit from the proliferation of
e-commerce. In September 1998, it entered into an agreement with a company
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whereby it would have been the exclusive distributor of stand-alone kiosks for
Western United States. The kiosks were to be placed in high traffic areas and
linked to a dedicated network that would offer merchandising, tickets to events
and other products.
Realizing that its future should be focused on e-commerce development, and
after incurring significant losses in the period from acquisition of its
merchandising and event promotion subsidiary (April 27, 1998) to January 31,
1999, Showstar initiated the process of discontinuing operations and phasing out
its Los Angeles office. As of April 30, 1999, this process was substantially
complete.
TRADEMARKS, COPYRIGHTS AND PROPRIETARY RIGHTS
Presently, Showstar has not sought patent protection for its proprietary
software system, although it may apply for patents on various aspects of its
programs in the future. Showstar, rather, will seek to maintain those
proprietary rights by trade secret protection, copyright notices,
non-competition and non-disclosure agreements with its employees and, as
required, with its vendors. Showstar may file for further copyrights and/or
patents for its software program applications and obtain patents where
cost-effective and feasible. There can be no assurance that meaningful
proprietary protection can be attained as a result of such filing, and any
proprietary rights that Showstar could choose to protect through legal action
may involve substantial costs.
Showstar believes its core technical competence of computer programming and
knowledge and expertise of the art and collectible market will allow it to
maintain a leading edge product that will have value in the marketplace.
Showstar is in the process of obtaining federal trademark protection for use of
the names "Artstar.com", "Everything Art" and other marketing brands related to
Showstar.
An initial response has been received from the Patent and Trademark Office
refusing registration of the trademark "Artstar.com" because the mark is similar
to a prior registered mark. Showstar, however, has filed a response to the
refusal to register and to prosecute its trademark application with respect to
the mark "Artstar.com" on the basis that its mark is distinguishable from the
prior registered mark by reason of Showstar's addition of a design element
(consisting of a stylized A and a star) used in conjunction with the mark, and
the differing and non-competitive nature of Showstar's goods and services in
comparison with the goods and services associated with the prior registered
mark. If, following Showstar's response, registration of the mark is ultimately
refused, Showstar may appeal to the Trademark Trial and Appeal Board, which has
the final authority to determine whether Showstar is entitled to secure
registration of its mark. It is uncertain, however, whether such an appeal would
result in a favorable outcome.
No response has been received by Showstar from the Patent and Trademark
Office with respect to Showstar's other pending trademark applications.
GOVERNMENT REGULATION
Showstar is subject, both directly and indirectly, to various laws and
governmental regulations relating to its business. Showstar believes it is
currently in compliance with such laws and that they do not have a material
impact on its operations. Moreover, there are currently few laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet. Such laws
and regulations may cover issues such as user privacy, pricing and
characteristics and quality of products and services. The enactment of any such
laws or regulations in the future may slow the growth of the Internet, which
could in turn decrease the demand for Showstar's services and increase
Showstar's cost of doing business or otherwise have an adverse effect on
Showstar's business, results of operations and financial condition.
EMPLOYEES
Showstar currently has 46 full-time employees, of which 6 are in
administration/management, 14 are in sales and marketing, 26 are in programming
and related activities. In addition, Showstar currently utilizes the services of
approximately 5 full-time and part-time independent contractors in programming
and related activities.
<PAGE>
RISK FACTORS
Showstar is still in its early stages of development and operation. The
"Risk Factors" contained under the "Description of Business" in Showstar's Form
10-SB, Amendment No. 2, filed with the SEC in March, 2000 (the "Form 10-SB"),
are still applicable to Showstar. Readers should carefully consider those risks,
as well as the risks mentioned in this document before deciding whether to
invest in shares of Showstar's Common Stock.
If Showstar does not successfully address those risks and the risks
mentioned in this document, there could be a material adverse effect on
Showstar's business, financial condition and results of operations. The trading
price of Showstar's Common Stock also could decline significantly, in which
event an investor could lose all or part of the investment. Showstar cannot
assure any investor that it will successfully address these risks.
FORWARD-LOOKING STATEMENTS
This Form 10KSB contains forward-looking statements that address, among
other things: e-commerce strategy; communications strategy; development of
services; expansion strategy; use of proceeds; projected capital expenditures;
liquidity; development of additional revenue sources; development and expansion
of alliances; market acceptance of Internet telephony; technological
advancement; ability to develop "brand" awareness and global expansion. These
statements may be found in the sections of this Form 10-KSB entitled
"Description of Business", "Management's Plan of Operations" and in this Form
10-KSB generally. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including all the risks discussed under "Risk Factors" in our Form 10-SB and in
this Form 10-KSB.
Showstar urges readers to consider that statements that use the terms
"believe," "do not believe," "expect," "plan," "intend," "estimate,"
"anticipate" and similar expressions are intended to identify forward-looking
statements. These statements reflect Showstar's current views with respect to
future events, and are based on assumptions and are subject to risks and
uncertainties. Showstar does not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Market data and forecasts used in this Form 10KSB, including, for example,
estimates of growth in the Internet, have been obtained from independent
industry sources. Although Showstar believes that these sources are reliable, it
does not guarantee the accuracy and completeness of historical data obtained
from these sources, and has not independently verified these data. Forecasts and
other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates
of future market size.
ITEM 2. DESCRIPTION OF PROPERTY.
Showstar maintains United States headquarters and gallery operations in
1500 square feet of space at 70 Washington St, #409, Brooklyn, N.Y., 10011. The
lease provides for minimum lease payments, plus pro-rata share of operating
expenses and taxes, and continues for a term of 5 years ending in June 2005.
Showstar has administrative and technical operations in 7,900 square feet of
office space at 90-10551 Shellbridge Way, Richmond, British Columbia, Canada
under non-cancelable leases expiring in July 2004. The leases provide for
minimum annual lease payments and operating expense escalations.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the fourth
quarter of Showstar's fiscal year ended April 30, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Showstar's Common Stock is traded on the Over-the-Counter Bulletin Board
(OTCBB) market under the symbol "ABID" (prior to May 1999, the symbol was
"SHST"). The following table sets forth the high and low bid prices for
Showstar's Common Stock during each quarter, as reported by Bloomberg LP.
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<CAPTION>
QUARTER ENDING HIGH BID LOW BID
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<S> <C> <C>
July 31, 1998.................................................................... $1.28 $0.75
October 31, 1998................................................................. $1.21 $0.36
January 31, 1999................................................................. $0.61 $0.10
April 30, 1999................................................................... $0.62 $0.26
July 31, 1999.................................................................... $1.01 $0.44
October 31, 1999................................................................. $1.89 $0.64
January 31, 2000 $1.39 $1.23
April 30, 2000 $1.23 $0.90
</TABLE>
As of June 30, 2000, there were 185 holders of record of Showstar's Common
Stock.
Showstar has never declared or paid any cash dividends on its capital
stock. Showstar does not anticipate paying any cash dividends on its capital
stock in the foreseeable future. Showstar currently intends to retain future
earnings, if any, to finance its operations and to expand its business. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon Showstar's financial condition,
operating results, capital requirements and other factors that Showstar's Board
of Directors considers appropriate.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
PLAN OF OPERATION
Showstar is projecting a loss for it's upcoming fiscal Year ending April
30, 2001. In addition, it is anticipating losses and cash flow deficits from
operations for at least the next 12 months. It is expected that this loss and
cash flow deficit will be caused primarily by:
- development completion costs
- administration and operating costs
- marketing costs
- content acquisition and development costs
Showstar estimates that a total of $8,104,000 will be spent on the
aforementioned categories. The amount projected to be spent on each category is
as follows:
<TABLE>
<S> <C>
Technical Development Costs........................................................... $1,312,000
Plant, Prop. & Equipment.............................................................. 338,000
Admin & Operating Costs............................................................... 3,691,000
Marketing Costs....................................................................... 2,763,000
----------
$8,104,000
</TABLE>
<PAGE>
These amounts exclude any revenues to be received over the next 12 months,
which are estimated to be approximately $3,000,000.
Showstar launched it's art portal in October 1999 and commenced full
operations in December 1999. Contemporaneous with the launch of these
operations, Showstar implemented an advertising and publicity campaign to
establish and increase awareness of the portal within it's targeted
demographic market-affluent art aficionados. Consistent with other Internet
marketing organizations, expenditures are heavily weighted in favor of the
marketing effort. The company realizes that these expenditures are necessary
in order to develop a profitable Internet operation by allowing it to compete
for brand awareness more effectively.
Showstar's total revenues from launch of its art portal through April 2000
were $31,893. Showstar continues to search for, and develop content that either
complements or is synergistic with its existing content. At the present time it
is difficult for Showstar to determine in detail, the nature, source or value of
the content it will attempt to acquire. In the event that Showstar targets a
content acquisition or licensing content candidate, it will in all likelihood
require funding in addition to the funding required for marketing and technical
development costs.
On May 1, 2000 Showstar acquired the assets of ALS Sportswear and the
services of Mr. Louis Bianchi. The marketing and promotional experience of ALS
will benefit Showstar in the ensuing months in helping to increase sales,
provide promotional content and expertise to the site as well as to artists and
galleries.
The Company projects that it will require additional debt or equity funding
in the amount of approximately $5,000,000 prior to the end of the next 12 months
in order to meet the needs enumerated above. We are continually engaged in
efforts to secure funding to complete our plan. Historically, we have been
successful in meeting those ongoing needs. However, there can be no assurances
that we will continue to be successful.
In estimating the amount of funding we will require for the next 12 months,
we provided for increases in manpower of 5 to 10 people, primarily in the
technical, marketing, customer service areas.
Our technical development of the Artstar site will continue in the next 12
months. Our activities in this area will focus on expanding the site to
accommodate the informational needs of our subscribers, as well as expanding our
transaction processing and server capabilities. We will continue enhancements to
our WebMail product and look for other product opportunities using the Linux
operating system.
Should Showstar not obtain funding sufficient to successfully complete the
operating plan described above, Showstar intends to respond in the following
order:
- First and immediately, reduce marketing expenditures;
- Next, reduce the size of its operations;
- Last, reduce the resources allocated to technical development.
YEAR 2000 ISSUES
The Company continues to address the impact of the Year 2000 issue upon its
business. The Year 2000 issue is the result of computer hardware and software
programs designed to use two digits rather than four digits to define the
applicable year.
To date, neither the Company nor any third party with which the Company has
material relationships, has suffered any significant adverse consequences
resulting from the transition to the Year 2000. However, it is possible that
entities including the Company and third parties which the Company has material
relationships may suffer adverse Year 2000 consequences over the near term. In
order to minimize potential adverse effects, the Company has designated
personnel and consultants to identify, test and implement solutions to Year 2000
problems, if and when they arise.
<PAGE>
INFLATION
Showstar does not believe that inflation has had a significant impact on
its consolidated results of operations or financial condition.
FOREIGN CURRENCY EXPOSURE
Showstar is exposed to fluctuations in foreign currencies relative to the
U.S. dollar because it collects revenues in U.S. dollars and incurs certain
costs in foreign currencies, primarily the Canadian dollar. As Showstar expands
its operations, it may begin to collect revenues from customers in currencies
other than the U.S. dollar. Showstar does not currently engage in any hedging
activities.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no new accounting pronouncements that have an effect on the
financial statements of the Company.
FRAUD PREVENTION
With the recent substantial growth of Internet use and e-commerce, the
Internet business community has been subject to significant credit card fraud.
It has attempted to reduce its exposure to such fraud by introducing various
advanced procedures and proprietary fraud prevention systems that monitor and
identify patterns and sources of credit card fraud and prevent fraudulent
transactions. Showstar cannot assure you that it will continue to be successful
in reducing or maintaining its current level of credit card fraud exposure.
ITEM 7. FINANCIAL STATEMENTS
Filed as part of this registration statement on Form 10-KSB are the following
financial statements:
Consolidated balance sheet of the Company as of April 30, 2000;
Related consolidated statements of operations, shareholder' equity
(deficit) and cash flows for the fiscal years ended April 30, 1999 and 2000, and
The Independent Auditors' Report of Cordovano and Harvey, P.C. dated
May 15, 2000 relating to the foregoing financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names, positions with Showstar and ages
of the directors and executive officers of Showstar. All directors are elected
at each annual meeting and serve for one year and until their successors are
elected and qualify. Officers are elected by the Board of Directors and their
terms of office are, except to the extent governed by employment contract, at
the discretion of the Board.
<PAGE>
<TABLE>
<CAPTION>
NAME OF DIRECTOR/OFFICER
DIRECTOR OR OFFICER SINCE AGE POSITION(S) WITH COMPANY
-------------------------- --- ------------------------
<S> <C> <C>
John Punzo............................................ 45 Chairman of the Board, President & Chief Executive
January 14, 1999 Officer
Russ Costin........................................... 56 Interim Chief Financial Officer and Treasurer,
July 11, 2000 Controller
Barry Forward......................................... 41 Director, Secretary
May 14, 1998
Louis Bianchi......................................... 51 Director, President ALS Sportswear
July 11, 2000
John Barson........................................... 43 VP e-Commerce and Chief Technical Officer
June 15, 1999
Kenneth J. Linsner.................................... 52 Vice President
April 14, 1999
Abraham Joel.......................................... 57 Vice President
April 14, 1999
Dean Punzo............................................ 37 Director
May 14, 1998
Ernesto Punzo......................................... 60 Director
May 14, 1998
</TABLE>
JOHN PUNZO, DIRECTOR (CHAIRMAN), PRESIDENT & CHIEF EXECUTIVE OFFICER
Mr. Punzo has been Showstar's President and Chief Executive Officer since
January 7, 1999. Since 1981, he has been a businessman and entrepreneur,
launching and operating several businesses, including a successful restaurant
operation in Vancouver, Canada. Mr. Punzo also has played a key role in
obtaining funding for a number of public and private companies. In June 1997 Mr.
Punzo filed for bankruptcy under Canadian bankruptcy law as a result of one of
his restaurant's local market demographics changing adversely and the restaurant
not being able to relocate due to restrictive lease provisions. Mr. Punzo is a
brother of Ernesto Punzo, who is a director, and is an uncle of Dean Punzo, who
also is a director.
RUSS COSTIN, INTERIM CHIEF FINANCIAL OFFICER AND TREASURER, CONTROLLER
Mr. Costin is a Certified General Accountant in the Province of British
Columbia and has served in a variety of accounting and management positions in
industry. For the five years prior to joining Showstar on June 1, 1999, Mr.
Costin operated his own public practice providing tax, accounting and
consulting services to business and private citizens.
BARRY FORWARD, DIRECTOR, VICE PRESIDENT-COMMUNICATIONS
Mr. Forward is the past president of Showstar and has been a director since
May 14, 1998. He has worked in the communications industry since 1983 as a
consultant, programmer, on-air host and journalist. Mr. Forward has developed
Internet communications strategies for corporate clients and non-profit groups.
He also has developed several online marketing projects and has operated his own
non-commercial websites since 1995.
JOHN BARSON, VICE PRESIDENT-E-COMMERCE & CHIEF TECHNICAL OFFICER
Mr. Barson joined Showstar on June 15, 1999. Prior to his employment with
Showstar, Mr. Barson was the founder and, from 1994 to 1999, served as president
of Savingsplus Internet Inc. and Shoptek e-commerce Solutions, an Internet
software developer providing end to end online electronic commerce solutions for
business. As President of Shoptek, he developed relationships with major
providers of the other components of the electronic commerce process including
major Internet providers, clearing services, banks, point of sale and online
billing services. During that period, Mr. Barson also served as an instructor in
electronic commerce at Langley College in Vancouver, British Columbia, Canada.
<PAGE>
KENNETH J. LINSNER, VICE-PRESIDENT
Since 1970, Ken Linsner has been an active, self-employed art appraiser,
and has a long and illustrious client list including the Late Mrs. Aristotle
Onassis, the Rockefeller Family, the Vanderbilt Family, the Mars Family and
others. Mr. Linsner was retained in 1986 by Philippine president Corazon Aquino
to appraise the works of art purchased by the late president and Mrs. Marcos,
and to recover and sell those pieces. He also has been Appraisal Consultant to
the Imperial Palace Museum in China. A former Lecturer in Appraisal at New York
University, Ken Linsner is a senior member of the American Society of Appraisers
and a member of the Appraisers Association of America. Mr. Linsner joined
Showstar as Vice President on April 14, 1999, and also has agreed to serve on
Showstar's Board of Directors.
ABRAHAM JOEL, VICE PRESIDENT
Abraham Joel is a New York City based conservation and restoration expert.
Prior to joining Showstar on April 14, 1999, Mr. Joel was self-employed and
operated Fine Arts Conservation studio since 1984. Under Mr. Joel's leadership,
the studio specialized in a variety of art works including old masters, 19th
Century and contemporary paintings, prints, drawings and manuscripts. For seven
years he was head of the Conservation Services Laboratory at the Detroit
Institute of Arts. At the Institute he directed and expanded the conservation
facility and was responsible for the care and transportation of numerous
international exhibitions. Mr. Joel is a member of the International Institute
of Conservators, as well as the American Institute of Conservators. Mr. Joel has
also agreed to serve on Showstar's Board of Directors.
LOUIS BIANCHI, DIRECTOR, PRESIDENT ALS SPORTSWEAR
Mr. Bianchi , who joined the Board as of July 11, 2000,has extensive
experience in merchandising, sales and promotions, new product development, and
the development of national marketing networks and distribution channels. Based
in Kirkland, Washington, he has spent the past 10 years operating ALS Sportswear
which was acquired by the Company in May, 2000.
ERNESTO PUNZO, DIRECTOR
Mr. Punzo is an entrepreneur and independent business owner who has started
several successful business ventures in Vancouver, Canada. He is currently the
chief executive officer of a company operating hair salons in the Vancouver
area. He has been a director of Showstar since May 14, 1998 and is a brother of
John Punzo.
DEAN PUNZO, DIRECTOR
Mr. Punzo has been part of the management team that has operated a fine
dining establishment in Vancouver, Canada. Most recently, he also has been
active in the Internet business, developing websites for third parties. Mr.
Punzo has been a director of Showstar since May 14, 1998 and is a nephew of John
and Ernesto Punzo.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's initial registration statement on Form 10-SB became effective
on or about April 5, 2000. All of the Directors and officers at that time (see
table above in this Item 9) inadvertently failed to file Form 3's, "Initial
Statement Of Beneficial Ownership Of Securities," on or prior to that effective
date. All of these individuals have since filed their Form 3's. The Company is
not aware of any other late filings with respect to its fiscal year ended
April 30, 2000.
ITEM 10. EXECUTIVE COMPENSATION
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate annual remuneration of
Showstar's Chief Executive Officer and the three other executive officers
whose annual salary and bonus exeeded $100,000 in fiscal year ended April 30,
2000 (collectively, the "named executive officers"), for the fiscal years
ended April 30, 1999 and 2000, our most recent and only meaningful fiscal
years. All amounts are in U.S. dollars unless otherwise noted. For this
purpose, compensation paid in Canadian dollars has been converted to U.S.
dollars based upon a conversion rate of $1.00 CAN equal to $0.70 US.
<TABLE>
<CAPTION>
LONG-TERM COMP
ANNUAL COMPENSATION AWARDS
------------------- ------ ALL
NAME AND OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER RES.STK OPTIONS COMP
------------------ ---- ----------- ----- ----------- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
John Punzo 1999 0(1) $97,162(2)
Chief Executive Officer 2000 $139,936 1,000,000 1,000,000
Gary L. Diamond 1999 $50,000(3) $128,000(4)
Chief Financial Officer 2000 $76,002
Abraham Joel 1999 $3,750 500,000 250,000
Vice President 2000 $115,000
Ken Linsner 1999 $3,750 500,000 250,000
Vice President 2000 $115,000
</TABLE>
(1) Mr. Punzo became President and Chief Executive Officer on January 7,
1999. During the fiscal year ended April 30, 1999, Mr. Punzo did not
receive compensation as CEO.
(2) Prior to becoming Chief Executive Officer, Mr. Punzo, or companies he
owned an interest in, received fees for providing various investor
relations and advisory services to the Company. These fees aggregated
$97,167 in the fiscal year ended April 30, 1999.
(3) Includes (a) $20,000 of fees received by Mr. Diamond for part-time
financial services performed for the Company prior to commencing
full-time employment with the Company and (b) $30,000 in salary
received by Mr. Diamond during the fiscal year ended April 30, 1999.
(4) Reflects the value at $0.32 per share of 400,000 shares of the
Company's Common Stock granted to Mr. Diamond as an inducement to
join the Company.
EMPLOYMENT AGREEMENTS
In the first quarter (ended July 31, 1999) of the current fiscal year,
Showstar executed employment agreements with Messrs. Punzo, Barson, Joel and
Linsner. (The agreements were filed as exhibits to the Showstar Form 10-SB.) The
following summaries of the agreements are qualified in their entirety by the
terms of the actual agreements, which are incorporated herein by reference. John
Punzo executed an employment agreement with Showstar, effective May 27, 1999,
that provides for base salary of $150,000 per annum, a restricted stock award of
1,000,000 shares that vests at the rate of 100,000 shares every three months and
stock options on 1,000,000 shares exercisable at $.50 per share that vest at the
rate of 100,000 shares every three months. The agreement is for an initial term
of five years followed by automatic annual renewals unless terminated at the end
of any term by 90 days' prior written notice from either party to the other.
John Barson executed an employment contract with Showstar to serve for up to
three years as Chief Technical Officer of Showstar. The agreement provides for a
base salary of CAN$120,000 per annum, which is equivalent to US$84,000 based
upon an exchange rate of $0.70. Pursuant to such employment agreement, Mr.
Barson also received 300,000 shares of Showstar's Common Stock in July 1999. The
agreement further provides that Mr. Barson shall receive another 200,000 shares
of Common Stock upon the first anniversary of his employment (March 2000), and
options at $.50 and $1.00 to acquire another 150,000 shares on each subsequent
anniversary of his employment. Abraham Joel executed an employment agreement
effective April 14, 1999 that provides for base compensation of US$10,000 per
month ($7,500 per month for April through June 1999). In addition, Mr. Joel
received 500,000 shares of Company Common Stock as an incentive to join
Showstar. The agreement provides for a term of 3 years and stock options on
250,000 shares. Kenneth Linsner executed an employment agreement effective April
<PAGE>
14, 1999 that provides for base compensation of US$10,000 per month ($7,500 per
month for April through June 1999). In addition, Mr. Linsner received 500,000
shares of Company Common Stock as an incentive to join Showstar. The agreement
provides for a term of 3 years and stock options on 250,000 shares.
OPTION GRANTS IN FISCAL YEAR 2000
The following table sets forth the option grants in fiscal year ended
April 30, 2000, made to the "named executive officers" in the Summary
Compensation Table above. Grants were only made to John Punzo. No stock
appreciation rights were granted in fiscal year ended April 30, 2000. All
amounts are in U.S. dollars unless otherwise noted.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS
NAME AND UNDERLYING THE OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE
PRINCIPAL POSITION GRANTED FISCAL YEAR 2000 ($/SH) EXPIRATION DATE
------------------- ----------------------- ------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
John Punzo
Chief Executive Officer 1,000,000 28% $0.50 May 27, 2009
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number of shares of Showstar's Common
Stock beneficially owned by (a) each person or group known to Showstar to be
the beneficial owner of more than 5% of any class of Showstar's voting
securities and (b) each of Showstar's four officers named above and all
directors and executive officers as a group, as of June 30, 2000:
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS
-------------- ------------------------------------ ----------------------- ----------
(1) (2) (3) (4)
<S> <C> <C> <C>
Common Stock Punzo Family Group(1) 1,495,000(2) 4.30%
John Punzo 1,633,333(2,3) 4.70%
Surrey, B.C.
Gary Diamond 310,000 0.89%
Los Angeles, CA
Kenneth Linsner 600,000(4) 1.73%
Sloatsburgh, NY
Abraham Joel 600,000(4) 1.73%
New York, NY
All Other Directors and Officers as a Group
(5 individuals) 2,038,333(5) 5.86%
---------
Total 6,676,666 19.20%
</TABLE>
(1) Various members of the Punzo family have agreed to invest in and to
vote their shares of Showstar's Common Stock, owned directly and
indirectly, as a group in order to influence control and direction of
Showstar. Members of the group include John Punzo, Dean Punzo, Ernesto
Punzo, Steve Punzo, Gino Punzo, Lynn Evans and Emma Piccolo. The amount
shown excludes 1,633,333 shares reported separately in the table as
owned by John Punzo and 283,333 shares included in the Officer and
Directors as a group number with respect to Dean and Ernesto Punzo.
The Punzo Family Group, including those separately reported shares,
beneficially owns, including restricted shares and options that
become vested on or before September 30, 2000, directly and
indirectly, 3,411,666 shares of Company Common Stock, or 9.81 % of
all outstanding Common Stock.
(2) Excludes shares beneficially owned by other members of the Punzo Family
Group. Includes options for 400,000 shares that are currently
exercisable or will become exercisable on or before September 30, 2000.
(3) Includes 400,000 restricted shares that become vested on or before
September 30, 2000 and options on
<PAGE>
400,000 shares that are or will become exercisable on or before
September 30, 2000.
(4) Includes options on 100,000 shares that are or will become exercisable
on or before September 30, 2000.
(5) Includes restricted shares that become vested in the next 60 days and
options on 225,000 shares that are or will become exercisable on or
before September 30, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended April 30, 1999, Showstar paid $97,167 in
fees to John Punzo and a company in which he had an interest for investor
relations and advisory services to Showstar. Showstar also issued 119,600
common shares valued at $89,700 to that company as payment for assisting
Showstar in its private stock placements during the year ended April 30,
1999. The $89,700 has been deducted from the proceeds of the placements as
placement costs on Showstar's financial statements.
During the fiscal year ended April 30, 1999, Flavio Bidese, Steve Punzo
and Bonnie Klassen, members of John and Gino Punzo's family, transferred
1,515,000 shares of Showstar's Common Stock owned by them to various
companies and individuals in satisfaction of services rendered to Showstar.
In connection therewith, Showstar recorded an expense of $466,500 and
included such amount in "Indebtedness to Related Parties" as of April 30,
1999.
During the fiscal year ended April 30, 1999, Gino Punzo, a director of
Showstar until January 1999, advanced $40,300 for working capital and CAFE DE
MEDICI, a restaurant owned by Gino Punzo, provided meeting and catering
services to Showstar. These services were valued at approximately $8,084.
These amounts were included in "Indebtedness to Related Parties" as of April
30, 1999.
Showstar's Nevada subsidiary, Showstar Entertainment Corporation,
entered into two different management contracts with Gordon Thompson, a
former officer, and Mr. Forward, whereby the subsidiary would pay these
officers $5,000 each per month commencing June 1, 1997 (as amended) for a
period of five years. Amounts accrued but unpaid totaling $65,000 are
included in "Indebtedness to Related Parties" as of April 30, 1998. During
the fiscal year ended April 30, 1999, Mr. Thompson entered into a settlement
agreement with Showstar which provided for the cancellation of indebtedness
of $35,000, which is reflected as a reduction of administrative costs for the
year ended April 30, 1999. The remaining $30,000 is included as a liability
owing to Mr. Forward as of April 30, 1999and was paid during the fiscal year
ended April 30, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Index to Exhibits
<TABLE>
<S> <C>
2.* Articles of Incorporation and Bylaws.
2.01* Articles of Incorporation-Cerotex Holdings, Inc.
2.02* Amendment to the Articles of Incorporation-Name Change from Cerotex Holdings, Inc. to Showstar Entertainment
Corporation
2.03* Amendment to the Articles of Incorporation-Name Change from Showstar Entertainment Corporation to Showstar
Online.com, Inc.
2.04* Bylaws of Showstar-Name Change from Cerotex Holdings, Inc. to Showstar Entertainment Corporation to Showstar
Online.com, Inc.
6.* Significant Contracts.
6.01* Content Licensing Agreement with National Register Publishing, a division of Reed Elsevier Inc.
6.02* Supplier Agreement-Leiberman's Gallery, LLP
6.03* Agreement dated October 29, 1999 regarding Proposed China Joint Venture
6.04* John Punzo Employment Contract dated May 27, 1999.
<PAGE>
6.05* Kenneth Jay Linsner Employment Contract dated April 14, 1999.
6.06* Abraham Joel Employment Contract dated April 14, 1999.
6.07* Connie Vick Employment Contract dated September 23, 1999.
6.08* John Barson Employment Contract dated August 30, 1999.
6.09* David Udow Employment Contract dated March 15, 1999.
27. Financial Data Schedule.
</TABLE>
* Filed previously with Company's Form 10-SB.
THERE WERE NO REPORTS FILED ON FORM 8-K DURING THE LAST FISCAL QUARTER COVERED
BY THIS FORM 10-KSB.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
SHOWSTAR ONLINE.COM, INC.
(Registrant)
By: /s/ John Punzo
---------------------------------------------
John Punzo
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Showstar On-Line.com, Inc.
We have audited the accompanying consolidated balance sheet of Showstar
On-Line.com, Inc. (a development stage company) and its subsidiaries as of
April 30, 2000 and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the two years
ended April 30, 2000 and 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatements. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Showstar
On-Line.com, Inc. and its subsidiaries as of April 30, 2000 and the results
of their operations and their cash flows for each of the two years ended
April 30, 2000 and 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note A to the consolidated financial statements, the Company has a
substantial dependence on the success of its development stage activities,
significant losses since inception, lack of liquidity and a working capital
deficit at April 30, 2000. These factors raise a substantial doubt about the
ability of the Company to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The consolidated
financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
Cordovano and Harvey, P.C.
Denver, Colorado
May 15, 2000
F-2
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
APRIL 30, 2000
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash ...................................................................... $ 0
Accounts receivable ....................................................... 40,133
GST receivable ............................................................ 110,697
Inventory ................................................................. 33,717
Prepaid expenses .......................................................... 13,745
------------
TOTAL CURRENT ASSETS 198,292
INVESTMENTS, AT COST ............................................................ 266,096
PROPERTY & EQUPIPMENT, less $105,732,
accumulated depreciation (Note C) ......................................... 525,402
WEBSITE & SOFTWARE, less $168,714,
accumulated amortization (Note A) ......................................... 799,180
INTANGIBLE ASSETS, less $1,321
accumulated amortization .................................................. 4,278
------------
$ 1,793,248
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable, trade ................................................... $ 471,771
Accrued expenses .......................................................... 151,657
Accrued stock compensation (Note E) ....................................... 470,275
Loan payable .............................................................. 250,000
Accrued interest payable .................................................. 19,125
Due to related party (Note B) ............................................. 514,884
Advances payable (Note G) ................................................. 100,000
------------
TOTAL CURRENT LIABILITIES 1,977,712
------------
COMMITMENTS (NOTE I) ........................................................... -
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par value, 5,000,000 shares
authorized, -0- issued and outstanding ................................ -
Common stock, no par value, 50,000,000 shares
authorized, 33,196,349 issued and outstanding ......................... 9,992,545
Contributed capital ....................................................... 74,000
Outstanding common stock warrants ......................................... 354,576
Outstanding common stock options .......................................... 429,535
Deferred stock compensation ............................................... (305,001)
Cumulative translation adjustments ........................................ (41,021)
Deficit accumulated during development stage .............................. (10,689,098)
------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (184,464)
------------
$ 1,793,248
============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended July 14, 1995
April 30, (Inception)
----------------------------- through
2000 1999 April 30, 2000
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Sales .................................................................... $ 5,350 $ - $ 5,350
Commissions .............................................................. 26,543 - 26,543
------------ ------------ ------------
TOTAL REVENUE 31,893 - 31,893
COSTS AND EXPENSES
Cost of sales ............................................................ 3,520 - 3,520
Stock based compensation, consulting (Note E) ............................ 2,761,184 516,691 3,277,875
Consulting ............................................................... 1,096,552 154,186 1,250,738
Investor relations, related party (Note B) ............................... - 107,067 107,067
Investor relations ....................................................... 95,662 130,569 226,231
Web-sit set up ........................................................... 216,879 18,303 235,182
Professional fees ........................................................ 294,905 86,956 386,861
Consulting fees paid by shareholders (Note B) ............................ - 466,500 466,500
Travel and entertainment ................................................. 287,268 29,716 316,984
Depreciation and amortization ............................................ 277,598 67,509 345,107
General and administrative ............................................... 1,129,485 12,421 1,150,256
Advertising, marketing and selling ....................................... 1,446,927 13,500 1,460,427
Technical development .................................................... - 31,021 31,021
------------ ------------ ------------
TOTAL COSTS AND EXPENSES (7,609,980) (1,634,439) (9,257,769)
INTEREST EXPENSE ............................................................... (12,283) (48,000) (60,283)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (7,590,370) (1,682,439) (9,286,159)
INCOME TAXES (Note F)
Current .................................................................. 2,818,684 620,090 3,439,743
Deferred ................................................................. (2,818,684) (620,090) (3,439,743)
------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (7,590,370) (1,682,439) (9,286,159)
DISCONTINUED OPERATIONS (Note A)
Net loss from entertainment division operations,
net of $-0-, $-0-, and $-0- in income taxes ............................ (58,346) (367,293) (425,639)
Loss on disposal of entertainment division,
net of $-0-, $-0-, and $-0- in income taxes ............................ - (977,300) (977,300)
------------ ------------ ------------
NET LOSS $ (7,648,716) $ (3,027,032) $(10,689,098)
============ ============ ============
NET LOSS PER COMMON SHARE:
Basic - continuing operations ............................................ $ (0.29) $ (0.11)
Diluted - continuing operations .......................................... $ (0.29) $ (0.11)
Basic - discontinued operations .......................................... * $ (0.08)
Diluted - discontinued operations ........................................ * $ (0.08)
NUMBER OF SHARES USED FOR COMPUTING NET LOSS PER SHARE:
Basic .................................................................... 26,038,895 15,906,801
Diluted .................................................................. 26,038,895 15,906,801
*Less than $.01 per share
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Peferred Stock
--------------------------------
Shares Amount
------------ ------------
<S> <C> <C>
BALANCE, July 14, 1995 (inception) -- $ --
Issuance of preferred stock for cash ............................................ 350,000 3,500
------------ ------------
BALANCE AS OF APRIL 30, 1996 . 350,000 3,500
Sale of common stock, pursuant to private offering .............................. -- --
NET LOSS FOR THE YEAR ENDED APRIL 30, 1997 ...................................... -- --
------------ ------------
BALANCE AS OF APRIL 30, 1997 . 350,000 3,500
Sale of common stock, pursuant to private offering .............................. -- --
Sale of common stock, pursuant to private offering .............................. -- --
Issuance of common stock for outstanding shares of subsidiary ................... -- --
Return and cancellation of preferred stock ...................................... (350,000) (3,500)
NET LOSS FOR THE YEAR ENDED APRIL 30, 1998 ...................................... -- --
------------ ------------
BALANCE AS OF APRIL 30, 1998 . -- --
Amounts due to affiliate and officer, forgiven (Note B) ......................... -- --
Issuance of common stock for outstanding shares of subsidiary ................... -- --
Sale of common stock, pursuant to private offering, net of $89,700 offering costs -- --
Sale of common stock, pursuant to private offering .............................. -- --
Outstanding stock options, 350,000 .............................................. -- --
Deferred stock compensation ..................................................... -- --
Beneficial conversion of convertible debenture .................................. -- --
Conversion of debenture for common stock ........................................ -- --
Comprehensive loss
Net loss for the year ended April 30, 1999 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 1999 . -- --
Deferred stock compensation ..................................................... -- --
Sale of common stock, pursuant to private offering,
net of $209,000 cash and $185,785 non-cash offering costs ...................... -- --
4,514,729 warrants issued in connection with stock sold in private offering ..... -- --
Stock issued for services valued at market price of stock ....................... -- --
Stock issued to employees valued at market price of stock ...................... -- --
Stock issued to employees for payment of accrued stock compensation ............. -- --
Stock issued for payment of third party advances and accrued liabilities ........ -- --
Outstanding stock options, 302,424 .............................................. -- --
Stock issued pursuant to exercise of warrants ................................... -- --
Comprehensive loss
Net loss for the year ended April 30, 2000 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 2000 . -- $ --
============ ============
<CAPTION>
Common Stock
--------------------------------
Shares Amount
------------ ------------
<S> <C> <C>
BALANCE, July 14, 1995 (inception) -- $ --
Issuance of preferred stock for cash ............................................ -- --
------------ ------------
BALANCE AS OF APRIL 30, 1996 . -- --
Sale of common stock, pursuant to private offering .............................. 1,800,000 900
NET LOSS FOR THE YEAR ENDED APRIL 30, 1997 ...................................... -- --
------------ ------------
BALANCE AS OF APRIL 30, 1997 . 1,800,000 900
Sale of common stock, pursuant to private offering .............................. 2,523,000 2,523
Sale of common stock, pursuant to private offering .............................. 6,185,000 6,185
Issuance of common stock for outstanding shares of subsidiary ................... 3,367,000 3,367
Return and cancellation of preferred stock ...................................... -- --
NET LOSS FOR THE YEAR ENDED APRIL 30, 1998 ...................................... -- --
------------ ------------
BALANCE AS OF APRIL 30, 1998 . 13,875,000 12,975
Amounts due to affiliate and officer, forgiven (Note B) ......................... -- --
Issuance of common stock for outstanding shares of subsidiary ................... 999,066 749,300
Sale of common stock, pursuant to private offering, net of $89,700 offering costs 890,733 578,350
Sale of common stock, pursuant to private offering .............................. 2,682,120 264,630
Outstanding stock options, 350,000 .............................................. -- --
Deferred stock compensation ..................................................... -- --
Beneficial conversion of convertible debenture .................................. -- --
Conversion of debenture for common stock ........................................ 324,706 60,000
Comprehensive loss
Net loss for the year ended April 30, 1999 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 1999 . 18,771,625 1,665,255
Deferred stock compensation ..................................................... -- --
Sale of common stock, pursuant to private offering,
net of $209,000 cash and $185,785 non-cash offering costs ...................... 8,232,781 4,766,715
4,514,729 warrants issued in connection with stock sold in private offering ..... -- (406,326)
Stock issued for services valued at market price of stock ....................... 3,284,500 1,996,651
Stock issued to employees valued at market price of stock ...................... 430,000 232,200
Stock issued to employees for payment of accrued stock compensation ............. 1,050,000 517,500
Stock issued for payment of third party advances and accrued liabilities ........ 852,443 593,800
Outstanding stock options, 302,424 .............................................. -- --
Stock issued pursuant to exercise of warrants ................................... 575,000 626,750
Comprehensive loss
Net loss for the year ended April 30, 2000 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 2000 . 33,196,349 $ 9,992,545
============ ============
<CAPTION>
Outstanding
Contributed Common Stock
Capital Warrants
------------ ------------
<S> <C> <C>
BALANCE, July 14, 1995 (inception) $ -- $ --
Issuance of preferred stock for cash ............................................ -- --
------------ ------------
BALANCE AS OF APRIL 30, 1996 . -- --
Sale of common stock, pursuant to private offering .............................. -- --
NET LOSS FOR THE YEAR ENDED APRIL 30, 1997 ...................................... -- --
------------ ------------
BALANCE AS OF APRIL 30, 1997 . -- --
Sale of common stock, pursuant to private offering .............................. -- --
Sale of common stock, pursuant to private offering .............................. -- --
Issuance of common stock for outstanding shares of subsidiary ................... -- --
Return and cancellation of preferred stock ...................................... 3,500 --
NET LOSS FOR THE YEAR ENDED APRIL 30, 1998 ...................................... -- --
------------ ------------
BALANCE AS OF APRIL 30, 1998 . 3,500 --
Amounts due to affiliate and officer, forgiven (Note B) ......................... 50,500 --
Issuance of common stock for outstanding shares of subsidiary ................... -- --
Sale of common stock, pursuant to private offering, net of $89,700 offering costs -- --
Sale of common stock, pursuant to private offering .............................. -- --
Outstanding stock options, 350,000 .............................................. -- --
Deferred stock compensation ..................................................... -- --
Beneficial conversion of convertible debenture .................................. 20,000 --
Conversion of debenture for common stock ........................................ -- --
Comprehensive loss
Net loss for the year ended April 30, 1999 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 1999 . 74,000 --
Deferred stock compensation ..................................................... -- --
Sale of common stock, pursuant to private offering,
net of $209,000 cash and $185,785 non-cash offering costs ...................... -- --
4,514,729 warrants issued in connection with stock sold in private offering ..... -- 406,326
Stock issued for services valued at market price of stock ....................... -- --
Stock issued to employees valued at market price of stock ...................... -- --
Stock issued to employees for payment of accrued stock compensation ............. -- --
Stock issued for payment of third party advances and accrued liabilities ........ -- --
Outstanding stock options, 302,424 .............................................. -- --
Stock issued pursuant to exercise of warrants ................................... -- (51,750)
Comprehensive loss
Net loss for the year ended April 30, 2000 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 2000 . $ 74,000 $ 354,576
============ ============
<CAPTION>
Outstanding Deferred
Common Stock Stock
Options Compensation
------------ ------------
<S> <C> <C>
BALANCE, July 14, 1995 (inception) $ -- $ --
Issuance of preferred stock for cash ............................................ -- --
------------ ------------
BALANCE AS OF APRIL 30, 1996 . -- --
Sale of common stock, pursuant to private offering .............................. -- --
NET LOSS FOR THE YEAR ENDED APRIL 30, 1997 ...................................... -- --
------------ ------------
BALANCE AS OF APRIL 30, 1997 . -- --
Sale of common stock, pursuant to private offering .............................. -- --
Sale of common stock, pursuant to private offering .............................. -- --
Issuance of common stock for outstanding shares of subsidiary ................... -- --
Return and cancellation of preferred stock ...................................... -- --
NET LOSS FOR THE YEAR ENDED APRIL 30, 1998 ......................................
------------ ------------
BALANCE AS OF APRIL 30, 1998 . -- --
Amounts due to affiliate and officer, forgiven (Note B) ......................... -- --
Issuance of common stock for outstanding shares of subsidiary ................... -- --
Sale of common stock, pursuant to private offering, net of $89,700 offering costs -- --
Sale of common stock, pursuant to private offering .............................. -- --
Outstanding stock options, 350,000 .............................................. 239,750 --
Deferred stock compensation ..................................................... -- (483,334)
Beneficial conversion of convertible debenture .................................. -- --
Conversion of debenture for common stock ........................................ -- --
Comprehensive loss
Net loss for the year ended April 30, 1999 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 1999 . 239,750 (483,334)
Deferred stock compensation ..................................................... -- 178,333
Sale of common stock, pursuant to private offering,
net of $209,000 cash and $185,785 non-cash offering costs ...................... -- --
4,514,729 warrants issued in connection with stock sold in private offering ..... -- --
Stock issued for services valued at market price of stock ....................... -- --
Stock issued to employees valued at market price of stock ...................... -- --
Stock issued to employees for payment of accrued stock compensation ............. -- --
Stock issued for payment of third party advances and accrued liabilities ........ -- --
Outstanding stock options, 302,424 .............................................. 189,785 --
Stock issued pursuant to exercise of warrants ................................... -- --
Comprehensive loss
Net loss for the year ended April 30, 2000 ................................ -- --
Cumulative translation adjustment ......................................... -- --
Comprehensive loss .............................................................. -- --
------------ ------------
BALANCE AS OF APRIL 30, 2000 . $ 429,535 $ (305,001)
============ ============
<CAPTION>
Cumulative
Translation Adj.
Deficit ----------------
Accumulated Other
During Comprehensive
Dev. Stage Income (Loss) Total
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, July 14, 1995 (inception) $ -- $ -- $ --
Issuance of preferred stock for cash ............................................ -- -- 3,500
------------ ------------ ------------
BALANCE AS OF APRIL 30, 1996 . -- -- 3,500
Sale of common stock, pursuant to private offering .............................. -- -- 900
NET LOSS FOR THE YEAR ENDED APRIL 30, 1997 ...................................... (8,314) -- (8,314)
------------ ------------ ------------
BALANCE AS OF APRIL 30, 1997 . (8,314) -- (3,914)
Sale of common stock, pursuant to private offering .............................. -- -- 2,523
Sale of common stock, pursuant to private offering .............................. -- -- 6,185
Issuance of common stock for outstanding shares of subsidiary ................... -- -- 3,367
Return and cancellation of preferred stock ...................................... -- -- --
NET LOSS FOR THE YEAR ENDED APRIL 30, 1998 ...................................... (5,036) -- (5,036)
------------ ------------ ------------
BALANCE AS OF APRIL 30, 1998 . (13,350) -- 3,125
Amounts due to affiliate and officer, forgiven (Note B) ......................... -- -- 50,500
Issuance of common stock for outstanding shares of subsidiary ................... -- -- 749,300
Sale of common stock, pursuant to private offering, net of $89,700 offering costs -- -- 578,350
Sale of common stock, pursuant to private offering .............................. -- -- 264,630
Outstanding stock options, 350,000 .............................................. -- -- 239,750
Deferred stock compensation ..................................................... -- -- (483,334)
Beneficial conversion of convertible debenture .................................. -- -- 20,000
Conversion of debenture for common stock ........................................ -- -- 60,000
Comprehensive loss
Net loss for the year ended April 30, 1999 ................................ (3,027,032) -- (3,027,032)
Cumulative translation adjustment ......................................... -- (1,206) (1,206)
------------
Comprehensive loss .............................................................. -- -- (3,028,238)
------------ ------------ ------------
BALANCE AS OF APRIL 30, 1999 . (3,040,382) (1,206) (1,545,917)
Deferred stock compensation ..................................................... -- -- 178,333
Sale of common stock, pursuant to private offering,
net of $209,000 cash and $185,785 non-cash offering costs ...................... -- -- 4,766,715
4,514,729 warrants issued in connection with stock sold in private offering ..... -- -- --
Stock issued for services valued at market price of stock ....................... -- -- 1,996,651
Stock issued to employees valued at market price of stock ...................... -- -- 232,200
Stock issued to employees for payment of accrued stock compensation ............. -- -- 517,500
Stock issued for payment of third party advances and accrued liabilities ........ -- -- 593,800
Outstanding stock options, 302,424 .............................................. -- -- 189,785
Stock issued pursuant to exercise of warrants ................................... -- -- 575,000
Comprehensive loss
Net loss for the year ended April 30, 2000 ................................ (7,648,716) -- (7,648,716)
Cumulative translation adjustment ......................................... -- (39,815) (39,815)
------------
Comprehensive loss .............................................................. -- -- (7,688,531)
------------ ------------ ------------
BALANCE AS OF APRIL 30, 2000 . $(10,689,098) $ (41,021) $ (184,464)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
April 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ................................................................................ $ (7,648,716) $ (3,027,032)
Transactions not requiring cash:
Depreciation and amortization ...................................................... 277,598 67,509
Expenses paid by principal shareholder ............................................. -- 466,500
Loss on disposal of discontinued operations ........................................ -- 977,300
Interest recorded from beneficial conversion of debenture .......................... -- 20,000
Write off of accounts receivable ................................................... -- 4,556
Stock compensation expense ......................................................... 2,761,184 516,691
Changes in current assets and current liabilities:
Accounts receivable, inventory and prepaid expenses ................................ (182,969) 3,707
Accounts payable and accrued expenses .............................................. 576,353 20,209
------------ ------------
NET CASH (USED IN)
OPERATING ACTIVITIES (4,216,550) (950,560)
------------ ------------
INVESTING ACTIVITIES
Proceeds from sale of equipment .................................................... -- 10,000
Investment in joint venture and savings plus ....................................... (266,096) --
Cash acquired with acquisition of Showstar/Nucom ................................... -- --
Purchases of property and equipment and domain name ................................ (1,592,076) (53,300)
------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,858,172) (43,300)
------------ ------------
FINANCING ACTIVITIES
Proceeds from advances, related parties (Note B) ................................... 321,300 40,300
Proceeds from advances (Note G) .................................................... 250,000 102,500
Repayments of advances, related parties (Note B) ................................... -- (5,000)
Cash paid for stock offering costs ................................................. (209,000) --
Proceeds from issuance of preferred stock .......................................... -- --
Proceeds from issuance of common stock ............................................. 5,736,500 790,980
Proceeds from issuance of convertible debenture .................................... -- 52,500
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,098,800 981,280
------------ ------------
CUMULATIVE TRANSLATION ADJUSTMENT ....................................................... (39,815) (1,206)
------------ ------------
NET CHANGE IN CASH (15,737) (13,786)
Cash, beginning of period ............................................................... 15,737 29,523
------------ ------------
CASH, END OF PERIOD $ (0) $ 15,737
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................. $ -- $ 5,000
============ ============
Cash paid for income taxes ......................................................... $ -- $ --
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
3,367,000 shares of common stock issued for acquisition
of subsidiary (Note D) ........................................................... $ -- $ --
============ ============
999,066 shares of common stock issued for acquisition
of subsidiary (Note D) .......................................................... $ -- $ 749,300
============ ============
852,443 shares of common stock issued for payment of advances and accrued liabilities. $ 593,800 $ --
============ ============
3,714,500 shares of common stock issued for compensation ........................... $ 2,228,851 $ --
============ ============
1,050,000 shares of common stock issued for payment of accrued stock compensation .. $ 517,500 $ --
============ ============
Amounts due to related parties, forgiven by affiliate and officer
reclassified as contributed capital .............................................. $ -- $ 50,500
============ ============
<CAPTION>
July 14, 1995
(Inception)
through
April 30, 2000
------------
<S> <C>
OPERATING ACTIVITIES
Net loss ................................................................................ $(10,689,098)
Transactions not requiring cash:
Depreciation and amortization ...................................................... 345,107
Expenses paid by principal shareholder ............................................. 466,500
Loss on disposal of discontinued operations ........................................ 977,300
Interest recorded from beneficial conversion of debenture .......................... 20,000
Write off of accounts receivable ................................................... 4,556
Stock compensation expense ......................................................... 3,277,875
Changes in current assets and current liabilities:
Accounts receivable, inventory and prepaid expenses ................................ (179,262)
Accounts payable and accrued expenses .............................................. 605,512
------------
NET CASH (USED IN)
OPERATING ACTIVITIES (5,171,510)
------------
INVESTING ACTIVITIES
Proceeds from sale of equipment .................................................... 10,000
Investment in joint venture and savings plus ....................................... (266,096)
Cash acquired with acquisition of Showstar/Nucom ................................... 20,815
Purchases of property and equipment and domain name ................................ (1,645,376)
------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,880,657)
------------
FINANCING ACTIVITIES
Proceeds from advances, related parties (Note B) ................................... 361,600
Proceeds from advances (Note G) .................................................... 352,500
Repayments of advances, related parties (Note B) ................................... (5,000)
Cash paid for stock offering costs ................................................. (209,000)
Proceeds from issuance of preferred stock .......................................... 3,500
Proceeds from issuance of common stock ............................................. 6,537,088
Proceeds from issuance of convertible debenture .................................... 52,500
------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 7,093,188
------------
CUMULATIVE TRANSLATION ADJUSTMENT ....................................................... (41,021)
------------
NET CHANGE IN CASH (0)
Cash, beginning of period ............................................................... --
------------
CASH, END OF PERIOD $ (0)
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................. $ 5,000
============
Cash paid for income taxes ......................................................... $ --
============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
3,367,000 shares of common stock issued for acquisition
of subsidiary (Note D) ........................................................... $ 3,367
============
999,066 shares of common stock issued for acquisition
of subsidiary (Note D) .......................................................... $ 749,300
============
852,443 shares of common stock issued for payment of advances and accrued liabilities. $ 593,800
============
3,714,500 shares of common stock issued for compensation ........................... $ 2,228,851
============
1,050,000 shares of common stock issued for payment of accrued stock compensation .. $ 517,500
============
Amounts due to related parties, forgiven by affiliate and officer
reclassified as contributed capital .............................................. $ --
============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION
Showstar Online.com, Inc. (the "Company") was incorporated under the laws of
Colorado as Cerotex Holdings, Inc. on July 14, 1995. On April 27, 1998 the
Company changed its name to Showstar Entertainment Corporation and on June
25, 1999 changed its name to Showstar Online.com, Inc. The Company was formed
to engage in the business of developing computer based real estate investment
programs. However, since its inception, the Company has engaged solely in
organizational activities, developing business segments related to the
entertainment industry and internet website development and, the sale of its
no par value preferred and common stock. The Company has been in the
development stage since its inception.
On March 19, 1998, new shareholders gained control of the Company and
effected an agreement, dated April 23, 1998, with the shareholders of
Showstar Entertainment Corporation (formerly Nucom Productions, Inc.
"Showstar/Nucom") whereby the Company would issue 3,367,000 shares of its no
par value common stock in exchange for 77% of the issued and outstanding
common stock of Showstar/Nucom. Showstar/Nucom was a development stage
company in the entertainment industry focusing on the integration of
entertainment bookings, merchandise and the creation of entertainment
products. On August 28, 1998, the Company acquired the remaining 23% of the
outstanding common stock of Showstar/Nucom. - See Note D.
NATURE OF BUSINESS - CONTINUING OPERATIONS
In May 1999, the Company began development of an Internet portal website
catering to art and collectibles. The Company's planned operations are to
provide a variety of entertainment and education products and services to
those interested in art and collectibles. During the year ended April 30,
2000 the Company was in the process of developing its Internet portal, as a
new business segment. No significant operations had commenced as of April 30,
2000, therefore, the Company has remained in the development stage.
NATURE OF BUSINESS - DISCONTINUED OPERATIONS
From April 23, 1998 to February 1999, the Company, through its wholly-owned
subsidiary, Showstar/Nucom, commenced limited operations in both
merchandising and concert event promotion. The operations of Showstar/Nucom
were less than planned principal operations, therefore the activities were
accounted for as though Showstar/Nucom was in the development stage.
F-7
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
NATURE OF BUSINESS - DISCONTINUED OPERATIONS, CONTINUED
In December 1998, the Company adopted a plan to abandon the operations in
both merchandising and concert events to focus on the development of
e-commerce Internet portals, primarily directed at art collectors and
investors. The Company abandoned the operations in February 1999 and sold all
property and equipment used in the discontinued abandoned operations.
The Company recorded a loss on the disposal of the discontinued operations of
$977,300. Where appropriate, the consolidated financial statements reflect
the operating results of the discontinued operations separately from
continuing operations. Operating results for the discontinued operations were:
<TABLE>
<CAPTION>
April 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating revenue............................... $ - $ 265,416
========= =========
Net loss from discontinued operations........... $ (58,346) $(367,293)
Current tax benefit........................... 11,665 137,000
Deferred tax expense.......................... (11,665) (137,000)
--------- ---------
Net of income taxes........................... $ (58,346) $(367,293)
========= =========
</TABLE>
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company is a development stage company
with no significant revenue as of April 30, 2000, and has incurred losses of
$(7,648,716), $(3,027,032) and $(10,689,098) for the years ended April 30, 2000
and 1999 and for the period July 14, 1995 (inception) through April 30, 2000
(unaudited), respectively. The Company has a lack of liquidity and a working
capital deficit at April 30, 2000. These factors among others may indicate that
the Company will be unable to continue as a going concern.
F-8
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
BASIS OF PRESENTATION, CONTINUED
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon the planned principal
activities of its Internet portal to produce sufficient cash flow to meet its
obligations on a timely basis, successful completion of additional financing
and, ultimately to attain profitability. Capital expenditures and operating
costs are estimated to be approximately $8.1 million in the next twelve months.
Management is continually engaged in efforts to secure funding to meet the cash
requirements for the next twelve months. Historically the Company has been
successful in meeting ongoing cash requirements, however there can be no
assurances that the Company will continue to be successful in obtaining the
funds necessary to meet the anticipated cash requirements. The Company plans to
continue to finance its operations and satisfy cash requirements with a
combination of debt financing, stock sales and, in the longer term, revenues
from operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEVELOPMENT STAGE COMPANY
The Company is in the development stage in accordance with Statement of
Financial Accounting Standard (SFAS) No. 7.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Showstar
Online.com, Inc. and its wholly owned subsidiaries Showstar Entertainment
Corporation, a Nevada company that has done business as Showstar Productions,
Inc. and Showstar Online Canada, Inc., a Canadian registered company. All
activity of Showstar Productions, Inc. is shown in the accompanying
consolidated financial statements as discontinued operations. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-9
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
CASH EQUIVALENTS
For the purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable at April 30, 2000 are for amounts due from customers which
have been collected subsequent to April 30, 2000, therefore no allowance for
doubtful accounts has been recorded.
Goods and Services Tax ("GST") receivable is due from Canada. The Company has
filed for the refund and expects reimbursement within ninety days.
EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which is estimated to be three to five years.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the consolidated statements of operations.
WEBSITE AND SOFTWARE
In accordance with the provisions of Statement of Position 98-1, "Accounting For
the Costs of Computer Software Developed for Internal Use", the cost of
developing and implementing the Company's internet portal (website) was expensed
until the Company determined that the portal would result in future economic
benefit and management was committed to funding the project. Thereafter, all
direct external implementation and development costs were capitalized and
amortized using the straight-line method over the remaining estimated useful
lives, not exceeding three years. The Company capitalized internet portal costs
of $967,894 during the year ended April 30, 2000. The Company recorded
depreciation expense of $168,714 related to the capitalized internet portal
costs.
F-10
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" (SFAS 128). The Company adopted SFAS 128 for the
two-year period ended April 30, 1999. Under SFAS 128, net loss per share-basic
excludes dilution and is determined by dividing loss available to common
shareholders by the weighted average number of common shares outstanding during
the period. Net loss per share-diluted reflects the potential dilution that
could occur if securities and other contracts to issue common stock were
exercised or converted into common stock. As of April 30, 2000, there were
1,219,091 vested stock options outstanding and warrants to issue 3,939,729
common shares which were not included in the calculation of net loss per
share-diluted because they were antidilutive.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future income taxes.
ACCOUNTING AND TAX YEAR-END
The Company changed its year-end for financial accounting reporting and income
tax purposes from December 31 to April 30, commencing with the fiscal year
beginning May 1, 1997 and ending April 30, 1998.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" permits the use of
either a fair value based method or the method defined in Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") to
account for stock-based compensation arrangements. Companies that elect to use
the method provided in APB 25 are required to disclose pro forma net income and
earnings per share that would have resulted from the use of the fair value based
method. The Company has elected to continue to determine the value of
stock-based compensation arrangements under the provisions of APB 25 and,
accordingly, has included pro forma disclosures under SFAS No. 123 in Note E.
F-11
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, accounts receivable,
prepaid expenses, accounts payable, accrued compensation, and other accrued
liabilities approximate fair value due to the short-term maturity of the
instruments.
INTANGIBLE ASSETS
Intangible assets consist of the cost to acquire the domain name Artstar.com and
are amortized over sixty months. Amortization expense for the year ended April
30, 2000 was $1,213.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of non-U.S. subsidiaries are translated to U.S.
Dollars at end-of-period exchange rates. The effects of this translation for
non-U.S. subsidiaries are reported in other comprehensive income (loss).
Remeasurement of assets and liabilities of non-U.S. subsidiaries that use a
currency other than the U.S. dollar as their functional currency are included
in income as transaction gains and losses. Income statement elements of all
non-U.S. subsidiaries are translated to U.S. Dollars at average-period
exchange rates and are recognized as part of revenues, costs and expenses.
The functional currency of the Company's foreign subsidiary is the local
currency, the Canadian dollar.
INVESTMENTS AT COST
The Company invested $216,096 in an internet related company. The investment at
April 30, 2000 consisted of a less than 20% ownership in the company, therefore
it has been accounted for using the cost method. The Company plans to increase
the ownership in the company to 40% which would then require the Company to
account for the investment using the equity method.
The Company entered into a joint venture agreement whereby the Company's joint
venture partner will supply the Company with content for the Company's web-site.
The agreement provides for an initial $25,000 investment with obligations to
invest additional $40,000. The $65,000 investment will give the Company a sixty
six percent interest in the joint venture. At April 30, 2000 the total
investment was less than fifty percent ($50,000) and has been accounted for at
cost. Once the investment exceeds fifty percent, the Company will account for
the investment on a consolidated basis.
F-12
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE B: RELATED PARTY TRANSACTIONS
Amounts recorded at April 30, 2000 as due to related party totaling $514,884
are unpaid amounts for the following:
During the year ended April 30, 1999 an officer advanced the Company $40,300
for working capital. An entity controlled by the officer provided meals on
behalf of the Company totaling $8,084. $48,384 is included in current
liabilities as due to related parties.
During the year ended April 30, 1999, three shareholders transferred, from
their own portfolios, 1,515,000 shares of the Company's common stock to third
parties who performed certain consulting and promotional services. The
Company has recognized $466,500 of expense, based on the fair value of the
common stock and a corresponding liability to the shareholders. At April 30,
2000, $466,500 is included in indebtedness to related parties in the
accompanying consolidated financial statements.
During the year ended April 30, 1999, the Company engaged an entity
controlled by a director of the Company to assist with public and investor
relations and to assist the Company in its fund raising. The Company paid the
entity $107,067 for public and investor relations fees which is included in
the financial statements as investor relations, related party. The Company
also issued the entity 119,600 common shares valued at $89,700 as payment for
assisting the Company in its private stock offering during the year ended
April 30, 1999. The $89,700 has been deducted from the proceeds of the
offering as offering costs.
NOTE C: PROPERTY AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<S> <C>
Office equipment and furniture........................ $ 151,438
Computer equipment.................................... 479,696
---------
631,134
Less accumulated depreciation......................... (105,732)
---------
$ 525,402
=========
</TABLE>
Depreciation expense for the years ended April 30, 2000 and 1999 totaled
$105,639 and $93, respectively.
F-13
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE D: ACQUISITION OF SUBSIDIARY
On April 23, 1998 the Company entered into an agreement with the shareholders of
Showstar/Nucom to purchase approximately 77% of the outstanding common stock of
Showstar/Nucom (3,367,000 shares) in exchange for 3,367,000 newly issued shares
of the Company. The transaction closed May 14, 1998 and was recorded as though
it occurred on April 30, 1998. It was accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations". At April 30, 1998, the fair value of the net assets of
Showstar/Nucom approximated the book value of ($111,562), of which 77 percent
totaled ($85,903). There was substantially no activity recorded in the
accounting records of Nucom during the period April 23, 1998 through April 30,
1998.
The board of directors of the Company valued the 3,367,000 shares at $.001 per
share for a total fair value of $3,367. At the time of the valuation the
Company's stock was not trading and did not have a market value. The excess of
the purchase price over the fair value of net assets received totaled $89,270
and has been recorded as goodwill on the consolidated financial statements of
the Company. The goodwill was amortized on a straight-line basis over sixty
months.
On August 28, 1998, the Company purchased the remaining 23% outstanding common
shares of Showstar/Nucom in exchange for 999,066 shares of the Company's common
stock. The transaction was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations". The total purchase price of $749,300 was based on the market
value of the Company's common stock which was considered to be $.75 per share as
during the period of the acquisition the Company was in the midst of an offering
of its shares for $.75. The excess of the purchase price over the fair value of
net assets received totaled $832,469 and has been recorded as goodwill on the
consolidated financial statements of the Company. On August 28, 1998 the fair
value of the minority interest in Showstar/Nucom's net assets was ($83,169). The
goodwill was amortized on a straight-line basis over sixty months.
During February 1999 the Company discontinued the operations of Showstar/Nucom
and wrote of the remaining unamortized goodwill of $854,338. See Note A.
F-14
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE E: STOCK BASED COMPENSATION
STOCK BASED COMPENSATION FOR THE YEAR ENDED APRIL 30, 2000:
NON-EMPLOYEES
The Company issued 3,284,500 shares of its common stock to various entities as
payment for investor relations, financial consulting and computer services
rendered to the Company after April 30, 1999 and prior to April 30, 2000. The
transactions were valued at $.25 to $1.00 per share which was the market price
on the date that the services were rendered which were from June 1999 to April
2000. $1,996,651 was recorded as stock based compensation. The Company also
issued to a third party options to purchase 50,000 shares of the Company's
common stock. The options expire in December 2001 and are exercisable at $.75
per share. The market value of the Company's common stock on the date of grant
was $1.42. The fair value of the options was $.08 per share and the Company
recorded $4,000 in stock based compensation.
EMPLOYEES
On July 20, 1999 the Company issued 430,000 shares of its common stock to
various employees. The transactions were valued at $.54 per share which was the
market price on that date. $232,200 was recorded as stock based compensation.
The services rendered by the employees were performed during the year ended
April 30, 2000.
On May 26, 1999 the Company entered into an employment agreement with John Punzo
the Company's President, Chief Executive Officer and Chairman of the Board. The
agreement is effective as of May 26, 1999 and expires on December 31, 2004, with
one-year automatic renewal privileges. The Company agreed to pay Mr. Punzo a
base salary of $12,500 per month and a cash bonus based on 5% of pretax profits.
The Company granted Mr. Punzo a 1,000,000 restricted stock bonus which vests at
the rate of 100,000 shares at the end of each successive three-month period
during the term of the agreement with the result that all 1,000,000 grant shares
will vest after thirty months from the date of the agreement. The market value
of the 1,000,000 share stock bonus on the date of grant was $.35 per share or
total compensation of $350,000. In the event of termination, all unvested grant
shares will vest immediately.
For the year ended April 30, 2000, the Company recorded compensation expense of
$128,333 and deferred the remaining $221,667 which is recorded as a contra
account in shareholders' equity.
F-15
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE E: STOCK BASED COMPENSATION, CONTINUED
The Company also granted Mr. Punzo options to purchase 1,000,000 shares of the
Company's common stock exercisable at $.50 per share. The options vest at the
rate of 100,000 shares at the end of each successive three-month period during
the term of the agreement with the result that all 1,000,000 grant shares will
vest after thirty months from the date of the agreement. In accordance with APB
25, the Company did not record compensation expense as the exercise price of the
options was less than the market price of the Company's common stock on the date
of grant.
STOCK BASED COMPENSATION FOR THE YEAR ENDED APRIL 30, 1999:
On October 19, 1998 the Company entered into a consulting agreement with an
unrelated third party to provide investor communications services to the
Company. Upon signing the agreement, the Company agreed to issue the consultant
75,000 shares of the Company's common stock. The market price of the stock as of
October 19, 1998 was $.437, therefore the Company has recorded stock
compensation of $32,775. The Company also granted the consultant 150,000 options
that were fully vested as of October 19, 1998. The options are exercisable at
$.75 and expire on October 15, 2001. The Company determined the fair value of
the options in accordance with SFAS 123 to be $.325 and have accordingly
recorded compensation expense of $48,750.
On March 15, 1999, pursuant to an employment agreement, the Company issued
200,000 shares of the Company's common stock to its Vice President of Internet
Marketing. The Company has recorded stock compensation expense of $70,000 based
on the $.35 market price of the Company's free-trading common stock as of the
date of the grant. The shares were issued as a bonus for signing the agreement.
Further the Company granted the officer options to purchase 800,000 shares of
the Company's common stock for $.50 per share. The options begin vesting on
April 11, 2001 and expire on April 11, 2009. In accordance with APB 25, the
Company did not recognize any compensation expense in connection with the
granting of the options.
On March 25, 1999 the Company entered into a consulting agreement with an
unrelated third party to provide financial public relations services to the
Company. Upon signing the agreement, the Company agreed to issue the consultant
350,000 shares of the Company's common stock. The market price of the stock as
of March 25, 1999 was $.35, therefore the Company has recorded stock
compensation of $122,500. During the year ended April 30, 2000 the Company
issued 150,000 shares of common stock to the consultant as full payment of the
consulting agreement.
F-16
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE E: STOCK BASED COMPENSATION, CONTINUED
On March 24, 1999 the Company entered into a consulting agreement with an
unrelated third party to provide marketing, sales and public relations services
to the Company. Upon signing the agreement, the Company agreed to issue the
consultant 100,000 shares of the Company's common stock. The market price of the
stock as of March 24, 1999 was $.35, therefore the Company has recorded stock
compensation of $35,000. The Company also granted the consultant 200,000 options
that were fully vested as of March 24, 1999. The options are exercisable at
100,000 for $1.25 and 100,000 for $2.00 and expire on March 24, 2004. The
Company determined the fair value of the options in accordance with SFAS 123 to
be $.69 and $1.22, respectively, and have accordingly recorded compensation
expense of $191,000.
On April 14, 1999 the Company entered into agreements with two officers of the
Company for the officers to provide art expertise with respect to the Company's
new division, Artstar.com. Each officer was granted 500,000 shares, which vest
over fifteen months, as of April 14, 1999 when the Company's market price for
its common stock was $.50. In accordance with APB 25, the Company recorded
compensation expense of $16,666 and deferred the remaining $483,334 which will
be expensed over the remaining vesting period. Further the Company granted each
of the officers options to purchase 250,000 shares of the Company's common stock
for $1.00 per share. The options begin vesting on October 14, 1999 and expire on
April 14, 2009. In accordance with APB 25, the Company did not recognize any
compensation expense in connection with the granting of the options. During the
year ended April 30, 2000, the Company expensed $400,000 leaving a deferred
compensation balance of $83,334.
F-17
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE E: STOCK BASED COMPENSATION, CONTINUED
SUMMARY:
<TABLE>
<CAPTION>
Weighted
Average
Options and Weighted Weighted Exercise
Employee Executive Warrants Average Average Price-
Stock Employment Issued to Exercise Fair Currently Currently
Options Options Non-employees Price Price Exercisable Exercisable
-------- ---------- ------------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, April 30, 1998 - - - $ - $ - - $ -
Options and warrants granted............. - 800,000 850,000 0.57 0.34 350,000 1.25
-------- ---------- ------------- -------- ------- ----------- -----------
Outstanding, April 30, 1999 - 800,000 850,000 0.57 0.34 350,000 1.25
Warrants issued.......................... - - 4,514,729 1.00 0.09 4,514,729 1.00
Options granted.......................... - 1,000,000 302,424 2.21 0.63 869,091 1.27
Warrants exercised....................... - - (575,000) 1.00 0.09 (575,000) 1.00
-------- ---------- ------------- -------- ------- ----------- -----------
Outstanding, April 30, 2000 - 1,800,000 5,092,153 $ 1.00 $ 0.16 5,158,820 $ 1.17
========= ========== ============= ======== ======= =========== ===========
</TABLE>
All options and warrants were granted above their fair value.
<TABLE>
<CAPTION>
April 30, 2000
----------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Number Exercise
Range of Exercisable Price Outstanding Price Life Exercisable Price
--------------------------- ----------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ .50 - $1.00 6,438,729 $ 0.85 3.07 4,706,396 $ 0.95
$1.01 - $2.00 200,000 $ 1.63 4.00 200,000 $ 1.63
$2.01 - $2.50 252,424 $ 2.50 1.67 252,424 $ 2.50
----------- ----------
6,892,153 5,158,820
=========== ==========
</TABLE>
F-18
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE E: STOCK BASED COMPENSATION, CONTINUED
SFAS 123
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 encourages the use of a fair value based method of
accounting for compensation expense associated with stock option awards and
similar plans. SFAS 123 permits the continued use of the intrinsic value based
method prescribed by APB 25, but requires additional disclosures, including pro
forma calculations of net earnings and earnings per share, as if the fair value
method of accounting prescribed by SFAS 123 had been applied for the applicable
periods.
The fair value of each option granted has been estimated as of the grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.63 percent, expected volatility of 60
percent, expected life of two to five years, and no expected dividends. During
the year ended April 30, 1999, the weighted-average exercise price and fair
values of options granted were $2.21 and $.63, respectively on the date of grant
for options granted with an exercise price greater than the market price of the
stock. There were no options granted with exercise prices that equaled or were
less than the market price of the underlying stock on date of grant.
Had compensation expense been determined based on the fair value at the grant
date, and charged to expense over vesting periods, consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share would have
equaled the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
As reported:
Net loss............................................ $(7,648,716)
Net loss per share - basic and diluted.............. $ (0.29)
Pro Forma:
Net loss............................................ $(7,787,183)
Net loss per share - basic and diluted.............. $ (0.30)
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
Company believes that the existing option valuation models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards.
F-19
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE F: INCOME TAXES
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate at April 30, follows:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
U.S. statutory federal rate....................... 34.00% 34.00%
State income tax, net of federal benefit.......... 3.14% 3.30%
Net operating loss for which no tax benefit
is currently available.......................... (37.14)% (37.30)%
-------- -------
0.00% 0.00%
======== ========
</TABLE>
Income taxes from operations for the years ended April 30, 2000 and 1999,
consisted of the following components: (1) current tax benefit resulting from
the net loss before income taxes, and (2) deferred tax expense resulting from
the valuation allowance recorded against the deferred tax asset (which is
substantially comprised of net operating losses). The change in the valuation
allowance from April 30, 1999 to April 30, 2000 was $2,197,625.
Net operating loss carryforwards will expire through 2020.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the asset will be realized. At that
time, the allowance will either be increased or reduced; reduction could result
in the complete elimination of the allowance if positive evidence indicates that
the value of the deferred tax asset is no longer impaired and the allowance is
no longer required.
NOTE G: ADVANCES AND NOTE PAYABLE
On April 15, 1998, the Company received $100,000 as a non-interest bearing
working capital advance from an unaffiliated individual. As of April 30, 2000
the advance was not repaid and the Company accrued $16,000 in interest. The
advance is due upon demand.
During the year ended April 30, 1999 the Company received working capital
advances from an unrelated third party totaling $100,000. The Company accrued
interest on the advances of $12,500. Prior to April 30, 1999 the Company repaid
$5,000, leaving an unpaid balance of $7,500 for interest and the $100,000
principal balance. During the year ended April 30, 2000 the Company satisfied
the unpaid principal and accrued interest by issuing 307,143 shares of the
Company's common stock to the individual. The number of shares was based on the
$.35 market price of the common stock on the date the Company converted the
advances to equity.
F-20
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE G: ADVANCES AND NOTE PAYABLE, CONTINUED
In November 1998 the Company issued a $60,000 convertible debenture to an
unrelated third party. The debenture was immediately convertible into shares of
the Company's common stock based on 75% of the market price of the common stock
on the date of conversion. The Company's common stock was trading at $.32 per
share on the date issuance of the debenture. The total beneficial conversion to
the investor on that date was $20,000 and was charged to interest expense with a
corresponding credit to contributed capital. Total cash proceeds from the
debenture was $52,500 with the $7,500 difference being recorded as interest
expense. The Company converted the debenture to 324,706 shares of the Company's
common stock.
During the year ended April 30, 2000 the Company received a loan payable of
$321,300. The loan is non-interest bearing, convertible into shares of the
Company's common stock at $1.00 per share and due upon demand. Prior to April
30, 2000 the Company converted the debt into 321,300 shares of its common stock.
The Company received $250,000 in exchange for a promissory note dated March 14,
2000. The note bears interest at ten percent per annum and principal and
interest are due September 14, 2000.
NOTE H: PRIVATE STOCK OFFERINGS
On March 31, 1998 the Company sold 2,523,000 shares of its restricted common
stock at $.001 per share for total proceeds of $2,523. On April 1, 1998,
pursuant to an exemption under Rule 504, Regulation D of the Securities and
Exchange Act of 1933, the Company sold 6,185,000 of its restricted common stock
at $.001 per share for total proceeds of $6,185. From May 15, 1998 to July 23,
1998, pursuant to an exemption under Rule 504, Regulation D of the Securities
and Exchange Act of 1933, the Company sold 771,133 common shares at $.75 per
share for total proceeds of $578,350. The Company also issued 119,600 shares of
common stock to a related party for offering costs valued at $89,700. From
January to March 1999 the Company sold 2,682,120 common shares for total
proceeds of $264,630.
During the year ended April 30, 2000 the Company sold 8,232,781 shares of its
common stock for total gross cash proceeds of $5,161,500. The Company paid
$209,000 cash and granted 252,424 options valued at $185,785 as offering costs.
In connection with the offering, the Company issued 4,514,729 warrants whereby
$406,326 of the proceeds from the sale of the common stock units was allocated
to the warrants. Prior to April 30, 2000, 575,000 warrants were exercised at
$1.00 per share for total proceeds of $575,000.
F-21
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
NOTE I: COMMITMENTS
LEASES
The Company conducts its administrative and technical operations from leased
premises located in Richmond, British Columbia under a non-cancelable lease
expiring in April 2004. The lease provides for a five year lease term, minimum
annual lease payments and operating expense escalations. Minimum annual lease
payments for each of the succeeding five years ending April 30 are as follows:
<TABLE>
<S> <C>
2001.................. $28,900
2002.................. $28,900
2003.................. $28,900
2004.................. $28,900
</TABLE>
NOTE J: SUBSEQUENT EVENT
The Company acquired all of the assets of ALS Sportswear ("ALS") in exchange for
350,000 shares of the Company's restricted common stock. ALS is a product order
fulfillment and distribution facility.
F-22
