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U.S. SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER
SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
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SHOWSTAR ONLINE.COM, INC.
(Name of Small Business Issuer in its Charter)
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<S> <C>
COLORADO 13-4093341
(State of incorporation) (IRS Employer Identification No.)
521 WEST 23(RD) STREET, 2(ND) FLOOR, NEW YORK, NY 10011
(Address of Principal Executive Offices) (Zip Code)
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(212) 647-9223
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
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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
521 West 23(rd) Street, 2(nd) Floor, New York, N.Y. 10011, telephone
(212) 647-9223. 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.
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Showstar's development of its website property "Artstar.com" commenced in
May 1999. Showstar launched 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.
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 (portal) to market art and
related services. The site is known as Artstar.com and comprises the following
three general areas of services.
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.
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PROFESSIONAL SERVICES
In conjunction with Artstar.com Vice Presidents and experienced art experts
Kenneth Jay Linsner and 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.
BUSINESS STRATEGY
Showstar's business strategy is to develop and expand its revenue sources in
e-commerce/art portal operations on the Internet. Currently, Showstar's revenues
are primarily generated from sales of art, collectibles and related services. In
the future, Showstar intends to generate increased revenues from multiple
sources, including the commercial sale of other content, which may or may not be
art-related, and advertising on the Internet. Showstar expects its revenues for
the foreseeable future will be dependent on, among other factors:
- Sale of art and collectibles;
- Offering of appraisal, authentication and restoration services in art and
collectibles;
- User traffic levels;
- Offering of art-related products, such as chat rooms, virtual tours,
publications;
- Sale of Internet advertising and sponsorships;
- Acquisition of content;
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- The effect of competition, the regulatory and tax environment, ISP rates,
and transmission costs on our prices;
- The ability of Showstar to effectively compete with other companies, some
with greater financial resources, offering services in the same
manner--such as auction platforms, sales of art, chat rooms and
publications; and
- The ability of Showstar to adopt fulfillment/delivery methods that
satisfactorily address customer needs.
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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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
Tantalus............................. E-Commerce Integration
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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
building a proprietary credit card transaction server. This will allow Showstar
to offer the service to third parties as well as to Artstar.com,
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and artists, galleries and museums who wish to do their own credit card
processing. This service is expected to come online in the second quarter of
2000.
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. The first phase of the e-commerce solution is scheduled for launch in
the second quarter of 2000.
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 establish a joint venture in China. Under this
agreement, Showstar will provide $65,000 in cash in exchange for a 60% interest
in the joint venture, and Li Zhang will provide goods and services, as well as
access to the Chinese market, for a 40% interest in the joint venture. A copy of
the agreement is filed as an exhibit to this Form 10-SB. Showstar's intention is
to open an Asian division of Showstar's art website Artstar.com. Showstar
intends to use this relationship to explore additional opportunities in that
region, such as access to museums, art history resources and materials,
artifacts, and collections in Asia.
It is expected that once the joint venture is finalized (which cannot be
assured) and begins providing content for the Artstar.com website, it will
operate out of offices in Hong Kong and Beijing, thus providing Artstar.com with
a strong entry point into the Asian art market. It is intended that the joint
venture will give Artstar.com's clients access to some of the more unique
collections in China and lead to the establishment of Artstar.com exhibitions
throughout Asia.
SUBSCRIPTION INFORMATION SERVICES
Artstar.com also is negotiating the online rights to one of the world's
largest bodies of art auction sales records. This information includes the
details of over 2 million auctions of art since 1953 and is vital information to
anyone bidding on a serious work of art. 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.
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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 in the process of developing its marketing strategy for 2000 for
Artstar.com. In connection therewith, it has retained Neale-May & Partners, a
public relations firm based in Palo Alto, California experienced in bringing
high tech companies to market. This program is being designed to build awareness
of the Artstar.com name.
Showstar has also retained the services of Bozell Worldwide Silicon Valley,
an established advertising firm, to develop and implement Showstar's advertising
programs. This includes on and off-line advertising and will focus on media
consistent with its target demographics.
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:
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.
Many art websites are redesigning and launching "second generation"
versions.
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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 intends to enter into a contract with
a shipper that provides 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 intends to implement systems which monitors delivery.
Additionally, it will adopt a refund policy that provides for delayed processing
of credit card charges. The terms of sale will 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 shipping; 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
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.
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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, intends to file 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 20 full-time employees, of which 6 are in
administration/management, 6 are in sales and marketing, 8 are in programming
and related activities. In addition, Showstar currently utilizes the services of
approximately 25 full-time and part-time independent contractors, of which 5 are
in administration, 6 are in sales and marketing and 24 are in programming and
related activities.
RISK FACTORS
Readers should carefully consider the risks described below before deciding
whether to invest in shares of Showstar's Common Stock.
If Showstar does not successfully address the risks described below, 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.
LIMITED OPERATING HISTORY AND FINANCIAL DATA
Showstar has only a limited operating history upon which a potential
investor can evaluate our business and prospects. Showstar commenced operations
in December 1999 (previous operations have been discontinued). Showstar does not
have historical financial data for any significant period of time on which an
investor can base an evaluation of Showstar's performance and an investment in
its Common Stock.
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Showstar has incurred significant losses since inception, and expects to
continue to incur significant losses for the foreseeable future. It reported a
net loss of approximately $3.1 million for the six months ended October 31, 1999
and a net loss of approximately $3.4 million for the year ended April 30, 1999,
including $.5 million from discontinued operations. As of October 31, 1999,
Showstar reported an accumulated deficit of approximately $6.6 million. As
discussed in Item 2, "Management's Discussion and Analysis or Plan of
Operation", we will continue to experience losses until our marketing plan is
fully implemented. Our resources as of October 31, 1999 were sufficient to
provide for these losses for the next two and one-half months. Our independent
accountants expressed significant doubt about our ability to continue as a going
concern in their report dated August 14, 1999, as well as Note A to our
financial statements.
In addition, Showstar has not generated any revenues (excluding discontinued
operations) since its inception. The first phase of its art portal was launched
in October 1999 with full operations having commenced on December 7, 1999. It is
not known whether revenues over the next 12 to 18 months will be sufficient to
infer any conclusions as to the success of its art portal. In addition, Showstar
expects operating expenses, primarily in the content acquisition and marketing
areas, and capital expenditures to increase significantly as it develops and
expands its business. As a result, Showstar will need to generate significant
revenues to become profitable. In order to generate revenues, it needs to add
users, thereby increasing the fees and usage charges that it collects and
enabling it to generate additional advertising and sponsorship revenues as well
as direct marketing revenues. If Showstar does not produce revenues as much as
it expects, or if expenses increase at a greater pace than revenues, it may
never be profitable or, if it becomes profitable, it may not be able to sustain
or increase profitability on a quarterly or annual basis.
UNCERTAINTY OF MARKET FOR SHOWSTAR'S PRODUCTS
Showstar is uncertain whether a market will develop for its on-line offering
of art and collectibles and related services. The use of e-commerce for art and
collectibles is new and rapidly evolving. Additionally, the market for on-line
appraisal and authentication services is without any significant precedent.
Showstar's ability to sell its services to new users may be inhibited by, among
other factors, the reluctance of some users to switch from traditional offerings
of the aforementioned products and services to the use of e-commerce. Showstar
will need to devote substantial resources to educate and inform users about the
benefits of its products and services. This will include the devotion of both
manpower and financial resources for marketing, advertising and public
relations. Potential users may be reluctant to acquire art or use Showstar's
services due to a lack of proven credibility for these services on-line. As a
result, Showstar may not be able to generate revenues or attract significant
numbers of users in the future.
DEPENDENCE UPON CONTINUED GROWTH OF E-COMMERCE
If the market for e-commerce, in general, and Showstar's services in
particular does not grow at the rate Showstar anticipates, Showstar will not be
able to increase its number of users or generate revenues at the rate it
anticipates. To be successful, on-line art and collectible services require
validation as an effective, quality means of rendering such services and as a
viable alternative to traditional services in Showstar's primary industry. The
Internet may not prove to be a viable alternative to traditional service for art
and collectibles.
The Internet infrastructure may not be able to support the demands placed on
it, or its performance or reliability may decline. In addition, Web sites may
from time to time experience interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays frequently occur in the future,
Internet usage, as well as usage of Showstar's portal and its services, could be
adversely affected.
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FAILURE TO ESTABLISH BRAND AWARENESS
To become a leading portal in its primary industry, Showstar must establish
and strengthen the brand awareness of the Artstar.com name. If Showstar fails to
create and maintain brand awareness, it could be unable to attract sufficient
Web traffic, which would reduce its attractiveness to advertisers. Brand
recognition may become more important in the future with the growing number of
Internet sites offering similar products and services.
FAILURE TO ESTABLISH STRATEGIC ALLIANCES
Showstar believes that its success depends, in part, on its ability to
develop and maintain relationships with leading Internet companies, content
providers and marketing firms that will market and promote Showstar's services
and build brand awareness. If Showstar is unable to establish and maintain these
relationships, it may not be able to increase sales of its services or
cost-effectively market its products, and it may lose users.
NEED FOR ADDITIONAL CAPITAL
Showstar intends to continue to enhance and expand its art portal services
in order to maintain competitive position and meet the increasing demands for
service quality, content offerings and competitive pricing, which will require
significant marketing and promotional expenditures. Showstar expects that cash
flow from operations, if any, will not be sufficient to meet capital expenditure
and working capital requirements, and therefore, Showstar will need to raise
additional capital from other sources. If Showstar is unable to obtain
additional capital, it may be required to reduce the scope of its business or
anticipated growth, which would reduce revenues.
DIFFICULTY IN PREDICTING FUTURE PERFORMANCE
Quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside Showstar's control.
These factors include:
- The rate at which Showstar is able to attract users to purchase or
subscribe to its services.
- The amount and timing of expenses to enhance marketing and promotion
efforts and to expand Showstar's infrastructure.
- The announcement or introduction of new or enhanced services by Showstar
or its competitors.
- Technical difficulties or network interruptions.
- General economic and competitive conditions specific to Showstar's
industry.
Showstar believes that quarter-to-quarter comparison of its historical
operating results may not be a good indication of future performance, nor would
operating results for any particular quarter be indicative of future operating
results. It is likely that in some future periods operating results will be
below the expectations of public market analysts and investors. If this happens,
the trading price of Showstar's Common Stock likely would fall.
INSUFFICIENT NETWORK CAPACITY
Showstar expects the volume of traffic to its portal to increase
significantly as it expands its operations and service offerings. Its portal may
not be able to accommodate this additional volume. In the event that the
existing infrastructure is not able to handle additional traffic, Showstar may
have to enter into agreements for increased capacity. If Showstar is unable to
maintain sufficient capacity to meet the needs of its users, its reputation
could be damaged and it could lose users.
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<PAGE>
FAILURE OF COMPUTER AND COMMUNICATIONS SYSTEMS
Showstar's business depends on the efficient and uninterrupted operation of
our computer and systems and server as well as those that connect to our server.
Showstar's systems and those that connect to it are subject to disruption from
natural disasters or other sources of power loss, communications failure,
hardware or software malfunction, network failures and other events both within
and beyond Showstar's control. Any system interruptions that cause Showstar's
services to be unavailable, or difficulties for users in communicating through
Showstar's server or portal, could damage its reputation and result in a loss of
users.
SECURITY BREACHES OF COMPUTER SYSTEMS AND OPERATIONS
Showstar's computer infrastructure is potentially vulnerable to physical or
electronic computer viruses, break-ins and similar disruptive problems and
security breaches, which could cause interruptions, delays or loss of services
to its users. Showstar believes that the secure transmission of confidential
information over the Internet, such as credit card numbers, is essential in
maintaining user confidence in its services. Showstar relies on licensed
encryption and authentication technology to effect secure transmission of
confidential information, including credit card numbers. It is possible that
advances in computer capabilities, new technologies or other developments could
result in a compromise or breach of the technology Showstar uses to protect user
transaction data. A party that is able to circumvent Showstar's security systems
could misappropriate proprietary information or cause interruptions in its
operations. Security breaches also could damage Showstar's reputation and expose
it to a risk of loss or litigation and possible liability. Showstar cannot
guarantee that its security measures will prevent security breaches.
DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL PERSONNEL
Showstar's future success depends, in significant part, on the continued
service of its senior management team and key technical personnel, as well as
its continuing ability to attract and retain highly qualified technical, sales
and managerial personnel. Competition for such personnel is intense, and
Showstar cannot assure investors that it can retain our key employees or that it
can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel. The inability to attract and retain qualified personnel
would substantially impair Showstar's ability to manage its operations and
growth.
RELIANCE ON SUPPLIERS AND SHIPPERS
Showstar relies, in certain instances, on independent content suppliers to
deliver or ship art and collectibles to buyers through Showstar's portal. In
addition, Showstar uses independent shippers to ship to Artstar.com customer
around the world. While Showstar has adopted returns and credit policies and has
procured insurance to ameliorate any problems with a customer and mitigate any
financial damage to Showstar, inappropriately shipped art and collectibles may
result in costly and irreparable damage to a work of art and cause loss of
reputation and credibility. Additionally, any disruption in shipping caused by
such things as labor stoppage, catastrophe, political insurrection may impact
sales and Showstar's profitability.
THIRD PARTY INFRINGEMENT OF SHOWSTAR'S INTELLECTUAL PROPERTY
Showstar's profitability could suffer if third parties infringe upon its
intellectual property rights or misappropriate its technologies and trademarks
for their own businesses. To protect Showstar's rights to its intellectual
property, Showstar relies on a combination of trademark and patent law, trade
secret protection, confidentiality agreements and other contractual arrangements
with its employees, affiliates, strategic partners and others. Showstar does not
currently own any issued patents or trademarks. It has pending applications for
trademarks in the United States. The protective steps it has taken may be
inadequate to deter misappropriation of its proprietary information. Showstar
may be unable to detect the
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<PAGE>
unauthorized use of, or take appropriate steps to enforce, its intellectual
property rights. Effective trademark, copyright and trade secret protection may
not be available in every country in which it offers or intends to offer its
services. Failure to adequately protect its intellectual property could harm its
brand, devalue its proprietary content, and affect its ability to compete
effectively. Further, defending Showstar's intellectual property rights could
result in the expenditure of significant financial and managerial resources.
INFRINGEMENT ON THIRD PARTY'S INTELLECTUAL PROPERTY RIGHTS
Third parties may assert claims that Showstar has violated a patent or
infringed a copyright, trademark or other proprietary right belonging to them.
Showstar incorporates licensed third-party technology in some of its services.
In these license agreements, the licensors have generally agreed to indemnify
Showstar with respect to any claim by a third party that the licensed software
infringes any patent or other proprietary right. Showstar cannot give any
assurances that these provisions will be adequate to protect it from
infringement claims. Any infringement claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
INTERNATIONAL OPERATING RISKS
Showstar intends to enter additional markets and to expand its operations
outside the United States. Additionally, Showstar conducts its administrative
and technical operations in Richmond, Canada. International operations are
subject to inherent risks, including:
- Potentially weaker protection of intellectual property rights.
- Political instability.
- Unexpected changes in regulatory requirements and tariffs.
- Fluctuations in exchange rates.
- Varying tax consequences.
- Uncertain market acceptance due to language differences and other factors.
- Different laws regarding content and protection of art.
- Censorship in readership.
COMPETITION
Competition in the market for art and collectible auctions and sales is
becoming increasingly intense and is expected to increase significantly in the
future. Showstar expects competition from companies in the traditional auction
market "going on-line" as well as from established Internet auction platforms
will have an impact on its business. Many of Showstar's existing competitors and
potential competitors have longer operating histories, broader portfolios of
services, greater financial management and operational resources, greater
brand-name recognition and customer loyalty, larger subscriber bases and more
experience than Showstar has. If Showstar is unable to provide competitive
service offerings, it may lose existing users and be unable to attract
additional users. In addition, many of Showstar's competitors enjoy economies of
scale that can result in a lower cost structure for transmission and related
costs, which could cause significant pricing pressures within the industry.
RAPID TECHNOLOGICAL CHANGE
The Internet is subject to rapid technological change. Accordingly, Showstar
cannot predict the effect of technological changes on its business. In addition,
widely accepted standards have not yet developed for the technologies Showstar
uses. Showstar expects that new services and technologies will emerge in the
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market in which it competes. These new services and technologies may be superior
to the services and technologies that Showstar employs, or these new services
may render its services and technologies obsolete. To be successful, Showstar
must adapt to its rapidly changing market by continually improving and expanding
the scope of services it offers and by developing new services and technologies
to meet customer needs. Showstar's success will depend, in part, on its ability
to license leading technologies and respond to technological advances and
emerging industry standards on a cost-effective and timely basis. Furthermore,
Showstar will need to spend significant amounts of capital to enhance and expand
its services to keep pace with changing technologies.
VOLATILITY OF STOCK PRICE
The market price of Showstar's Common Stock is highly volatile and could be
subject to wide fluctuations in response to factors such as:
- Actual or anticipated variations in quarterly operating results or those
of competitors;
- Announcements by Showstar or its competitors of technological innovations;
- New products or services;
- Changes in financial estimates by securities analysts;
- Conditions or trends in the Internet industry;
- Changes in the market valuations of other Internet companies;
- Announcements by Showstar or its competitors of significant acquisitions;
- Strategic partnerships or joint ventures;
- Additions or departures of key personnel;
- Sales of Showstar's capital stock.
Many of these factors are beyond Showstar's control and may materially
adversely affect the market price of Showstar's Common Stock regardless of
Showstar's financial performance.
Investors may not be able to resell their shares of Showstar's Common Stock
following periods of volatility because of the market's adverse reaction to such
volatility. In addition, the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. The trading prices of many Internet related and technology companies'
stocks have reached historical highs within the last 52 weeks and have reflected
relative valuations substantially above historical levels. During the same
period, such companies' stocks have also been highly volatile and have recorded
lows well below such historical highs. Showstar cannot give any assurances that
its stock will trade at the same levels of other Internet stocks or that
Internet stocks in general will sustain their current market prices.
FORWARD-LOOKING STATEMENTS
This Form 10-SB 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-SB entitled "Business",
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in this Form 10-SB generally. Our actual results
could differ materially from those anticipated in these forward-looking
statements as of result of various factors, including all the risks discussed in
"Risk Factors" and elsewhere in this Form 10-SB.
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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 10-SB, 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.
SHOWSTAR HAS NO PLANS TO PAY DIVIDENDS.
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.
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ITEM 2. 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, 2000. 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
- startup, including personnel, costs
- marketing costs
- content acquisition and development costs
Showstar estimates that a total of $9,063,000 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................................. $1,132,000
Plant, Prop. & Equipment.................................... 185,000
Start-up Costs.............................................. 2,232,000
Marketing Costs............................................. 5,514,000
----------
$9,063,000
==========
</TABLE>
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 also expects to continue searching for, and developing 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.
As of October 31, 1999, the balance sheet date, Showstar had $1,011,260 in
actual cash. This balance plus subsequent funding received will allow us to
continue our efforts in expanding our site and implementing our marketing plan.
Accordingly, we will require funding prior to the end of the 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 10 to 15 people, primarily in the
marketing and 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.
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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.
FORWARD-LOOKING STATEMENTS
This Form 10-SB includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Form 10-SB are forward looking. In particular, the statements herein
regarding industry prospects and future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. Showstar's
actual results may differ significantly from management's expectations. The
following discussion and the section entitled Risk Factors, describes some, but
not all, of the factors that could cause these differences.
ADDITIONAL EMPLOYEES REQUIRED
The launch of Artstar.com has created a need for additional staffing in the
technical (inputting of content), technical development, customer service and
financial areas.
While demand for Internet skill-oriented personnel is currently high,
Showstar believes that with its geographic location and implementation of
incentive and fringe benefit programs, it will be able to retain its existing
staff and compete effectively for additional personnel.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" results from computer systems and programs using two
digits (rather than four) to identify a given year. Computer systems that have
time sensitive software may interpret the date code "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations or other computer errors causing disruptions of operations. The
potential for failures encompasses all aspects of our business, including our
computer systems and IP network, and could cause, among other things,
disruptions in the operation of the Internet and the Artstr.com portal and a
temporary inability to engage in normal business activities.
SHOWSTAR'S STATE OF READINESS
Showstar may be affected by the Year 2000 issue related to its information
technology (IT) systems and non-IT systems operated by Showstar or third
parties.
Showstar's non-IT systems include:
- Internal telephone systems
- Lease office spaces
- Office equipment
Showstar believes that all hardware and software acquired by it in
connection with the development of Artstar.com is Y2K compliant. However it is
currently developing and implementing testing and validation
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procedures for all software, hardware and other IT and non-IT systems that it
believes may be affected by Year 2000 issues. Showstar also believes that the IT
systems that it has developed internally to operate its business are Year 2000
compliant because all of the software code for the systems that have been
internally developed is written with four digits to define the applicable year.
It expects, prior to December 31, 1999, to resolve any Year 2000 compliance
issues relating to off-the-shelf commercial software used in its business
through upgrades of its software or, when necessary, through replacement of
existing software with Year 2000 compliant applications. In addition, Showstar
has begun to assess its non-IT systems which it has identified as containing
embedded technology. At this point of its assessment, Showstar is not aware of
any Year 2000 issues relating to its non-IT systems which would cause
disruptions in its operations or impede our ability to provide services to our
users.
Because third parties have developed and currently support many of the
systems we use, in addition to assessing our internal systems, a significant
part of its efforts have been to ensure that externally developed IT and non-IT
systems are Year 2000 compliant. Showstar has obtained confirmation from its
principal third party vendors, suppliers and service providers, either directly
or via their Web sites, that they believe they have resolved the Year 2000
issues relating to the systems, services and products supplied to Showstar.
RISKS OF YEAR 2000 ISSUES
Showstar is not currently aware of any Year 2000 compliance issues relating
to its systems that would cause disruptions in its operations or impede its
ability to provide services. Furthermore, it cannot predict the extent to which
the Year 2000 issue will affect its vendors, suppliers or service providers, or
the extent to which it would be vulnerable if such parties fail to resolve any
Year 2000 issues on a timely basis. Any failures or disruptions could prevent
users from accessing Showstar's portal and services, which could result in loss
of users, lost revenues, increased operating costs and material disruptions in
the operation of its business.
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
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP No. 98-1). This statement is applicable to Showstar's
1999 financial statements and requires it to capitalize certain payroll and
payroll related costs and other costs that are directly related to the
development of certain of its systems. It amortizes these costs over the
anticipated life of the systems. The adoption of SOP No. 98-1 did not have a
material impact on Showstar's financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
Statement of Position 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as
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incurred. Showstar expensed these costs historically and therefore the adoption
of this standard had no impact on its results of operations, financial position
or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," (SFAS No. 133) which establishes accounting and reporting standards
for derivative instruments and hedging activities. Generally, it requires that
an entity recognize all derivatives as either an asset or liability and measure
those instruments at fair value, as well as identify the conditions for which a
derivative may be specifically designed as a hedge. SFAS No. 133 is effective
for all fiscal years beginning after June 15, 2000. Showstar does not currently
engage or plan to engage in derivative or hedging activities and therefore there
will be no material impact to its results of operations, financial position or
cash flows upon the adoption of this standard.
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 3. DESCRIPTION OF PROPERTY.
Showstar maintains United States headquarters and gallery operations in
2,500 square feet of space at 521 West 23(rd) Street, 2(nd) Floor in New York
City. The lease provides for $1,875 per month of minimum lease payments, plus
pro-rata share of operating expenses and taxes, and contains a term of 1 year.
Showstar has entered into a letter of intent to lease 8,000 square feet in a
nearby area of New York City, to which Showstar intends to move its New York
City headquarters and gallery once a lease is finalized. 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 a five-year
lease term, minimum annual lease payments and operating expense escalations.
ITEM 4. 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
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Showstar's voting securities and (b) each of Showstar's directors and executive
officers, individually and as a group, as of November 30, 1999:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
<S> <C> <C> <C>
AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- --------------------- --------------------------------------------- ---------------- ----
Common Stock Punzo Family Group(1) ....................... 3,196,666(3) 10.7%
John Punzo .................................. 1,433,333 Direct(2,3) 4.8%
Surrey, B.C.
Dean Punzo .................................. 58,333 Direct(2) 0.2%
Burnaby, B.C.
Ernesto Punzo ............................... 235,000 Direct(2) 0.8%
Coquitlam, B.C.
Barry Forward ............................... 855,000 Direct 2.9%
North Vancouver, B.C.
Kenneth Linsner ............................. 500,000 Direct 1.7%
Sloatsburg, NY
Abraham Joel ................................ 500,000 Direct 1.7%
New York, NY
Gary L. Diamond ............................. 310,000 Direct 1.1%
Los Angeles, CA
John Barson ................................. 300,000 Direct 1.0%
White Rock, B.C.
All Directors and Officers as a Group ....... 5,061,666(2) 17.3%
</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 group beneficially owns, directly
and indirectly, 2,596,666 shares of Company Common Stock, or 8.9% of all
outstanding Common Stock.
(2) Excludes shares beneficially owned by other members of the Punzo Family
Group.
(3) Includes 100,000 restricted shares that become vested in the next 60 days
and options on 300,000 shares that are or will become exercisable in the
next 60 days.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth the names, positions with Showstar and ages
of the directors and executive officers of Showstar. Directors of Showstar were
elected at Showstar's annual meeting of stockholders in June 1999. All directors
are elected at each annual meeting and serve for one year and
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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.
<TABLE>
<CAPTION>
NAME OF DIRECTOR/OFFICER
DIRECTOR SINCE AGE POSITION(S) WITH COMPANY
- ------------------------ -------- ------------------------------------------
<S> <C> <C>
John Punzo................................ 44 Chairman of the Board, President & Chief
January 14, 1999 Executive Officer
Gary L. Diamond........................... 44 Director, Chief Financial Officer,
January 7, 1999 Treasurer, Secretary
Barry Forward............................. 40 Director, VP Communications
May 14, 1998
John Barson............................... 43 VP e-Commerce and Chief Technical Officer
June 15, 1999
Kenneth J. Linsner........................ 52 Vice President
April 14, 1999
Abraham Joel.............................. 56 Vice President
April 14, 1999
Dean Punzo................................ 36 Director
May 14, 1998
Ernesto Punzo............................. 54 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.
GARY L. DIAMOND, DIRECTOR, CHIEF FINANCIAL OFFICER, TREASURER & SECRETARY
Mr. Diamond is a Certified Public Accountant in the State of New York and is
a qualified valuation expert in Florida. Prior to joining Showstar on
November 15, 1998, Mr. Diamond was self-employed as a financial consultant,
providing transaction advisory services. For the period from 1994 to 1997, he
was chief financial officer and treasurer of American Casino Entertainment
Services, Ltd. From 1992-1994, he was chief financial officer of Nu-Image, Inc.
a film production and distribution company.
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.
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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.
KENNETH J. LINSNER, VICE-PRESIDENT
Since 1970, Ken Linsner has been an active, self-employed art appraiser, and
phas 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, 19(th)
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.
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.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate annual remuneration of
Showstar's Chief Executive Officer and (unless it does not exceed $100,000) of
each of the four other most highly compensated
21
<PAGE>
executive officers (collectively, the "named executive officers"), and of all
officers and directors as a group, as of April 30, 1999, our most recent and
only meaningful fiscal year end.
<TABLE>
<CAPTION>
LONG-TERM COMP
ANNUAL COMPENSATION AWARDS ALL
NAME AND --------------------------------- ------------------- OTHER
PRINCIPAL POSITION SALARY BONUS OTHER RES.STK OPTIONS COMP
- ------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John Punzo ............................ 0(1) 0 $ 97,167(2) 0 0 0
Chief Executive Officer
Gary L. Diamond ....................... $50,000(3) 0 $128,000(4) 0 0 0
Chief Financial Officer
All Officers and Directors as a $50,000(3) 0 $225,167 0 0 0
Group(2).............................
</TABLE>
(1) Mr. Punzo became President and Chief Executive Officer on January 7, 1999.
During the fiscal year ended April 30, 1999, Mr. Punzo received no
compensation for his services as Chief Executive Officer and Director.
(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 Showstar. 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 Showstar prior to commencing full-time employment
with Showstar of 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 Showstar's Common
Stock granted to Mr. Diamond as an inducement to join Showstar.
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 are filed as exhibits to this 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 July 1999 that
provides for base annual compensation of US$120,000. 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.
22
<PAGE>
KENNETH LINSNER executed an employment agreement effective July 1999 that
provides for base annual compensation of US$120,000. 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.
ITEM 7. 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.
During the year ended April 30, 1998, Showstar's subsidiary received $15,500
for working capital advances from a company owned by Barry Forward, a director
and executive officer of Showstar. Also during the year ended April 30, 1998
Showstar received $12,000 from John Wardlow, a former officer and director of
Showstar, of which Showstar repaid $5,000 during the year ended April 30, 1999.
Also during the year ended April 30, 1998, Mr. Forward forgave the $15,500
received for working capital advances. Amounts accrued and unpaid totaling
$7,000 are 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, 1999.
ITEM 8. DESCRIPTION OF SECURITIES
Set forth below is a summary of the material provisions of Showstar's
capital stock. This summary does not purport to be complete and is qualified in
its entirety by the terms of Showstar's articles of incorporation and bylaws,
copies of which are filed as exhibits to this Form 10-SB and are hereby
incorporated by reference, and applicable provisions of Colorado law.
COMMON STOCK
GENERAL
Showstar is authorized to issue up to 50,000,000 shares of its common stock,
no par value per share ("Common Stock"). At December 31, 1999, there were
30,029,327 shares of Common Stock issued and outstanding.
23
<PAGE>
The rights of holders of Common Stock are subject to the rights of holders
of any Preferred Stock that may be issued in the future. All outstanding shares
of Common Stock are duly authorized, validly issued, fully paid and
nonassessable. Upon liquidation, dissolution or winding up of Showstar, the
holders of Common Stock are entitled to share ratably in all net assets
available for distribution to stockholders after payment to creditors. The
Common Stock is not redeemable and has no preemptive or conversion rights.
VOTING RIGHTS
Holders of Showstar's Common Stock are entitled to one vote per share on all
matters submitted for stockholder vote, except matters submitted to the vote of
another class or series of shares. Holders of a majority of shares entitled to
vote constitute a quorum and action is taken by a plurality of votes cast.
DIVIDENDS
Holders of Common Stock are entitled to receive dividends out of assets
legally available for this purpose at the times and in the amounts as the Board
of Directors may from time to time determine. Holders of Common Stock will share
equally on a per share basis in any dividend declared by the Board of Directors,
subject to any preferential rights of any outstanding Preferred Stock. Dividends
consisting of shares of Common Stock may be paid only as follows: (1) shares of
Common Stock may be paid only to holders of Common Stock; and (2) the number of
shares so paid must be equal on a per share basis with respect to each
outstanding share of Common Stock.
Showstar has not paid any dividends on its Common Stock and does not
anticipate paying any cash dividends on such stock in the foreseeable future.
See the section of Part I of this Form 10-SB entitled "Showstar Has No Plans to
Pay Dividends" for more information.
MERGER OR CONSOLIDATION
In the event of a merger or consolidation, holders of Common Stock will vote
as a class, if a vote is required, with a vote of a majority of the shares
entitled to vote being necessary for approval. In any merger or consolidation,
holders of Common Stock must be treated equally per share.
PREFERRED STOCK
Showstar is authorized to issue up to 5,000,000 shares of preferred stock,
no par value per share ("Preferred Stock"). At December 31, 1999 and presently,
there are no outstanding shares of Preferred Stock.
The Board of Directors is empowered, without approval of the shareholders,
to cause shares of Preferred Stock to be issued from time to time in one or more
series, and the Board of Directors may fix the number of shares of each series
and the designation, powers, privileges, preferences and rights and the
qualifications, limitations and restrictions of the shares of each series.
The matters our Board of Directors may determine in connection with a series
of Preferred Stock include: designation of each series; the number of shares of
each series; the rate of any dividends; whether any dividends shall be
cumulative or non-cumulative; the terms of any redemption provisions; the amount
payable in the event of any voluntary or involuntary liquidation, dissolution or
winding up of affairs of Showstar; the rights and terms of any conversion or
exchange features; any restrictions on the issuance of shares of the same series
or any other series; any voting rights.
24
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 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.
<TABLE>
<CAPTION>
QUARTER ENDING HIGH BID LOW BID
- -------------- -------- --------
<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
</TABLE>
As of December 31, 1999, there were 184 holders of record of Showstar's
Common Stock.
Showstar never has paid, and has no present intention to pay in the future,
any dividends on its Common Stock. See "Dividend Policy" under Item 1,
Description of Business, in Part I hereof.
ITEM 2. LEGAL PROCEEDINGS.
Showstar is not a party to any pending legal proceeding.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
At December 31, 1999 there were 30,029,327 shares of Common Stock issued and
outstanding. Those shares were issued as follows.
In or about May 1996, a total of 1,800,000 shares of Common Stock was sold
for a total of $900 to twenty-seven investors. Showstar's majority shareholder
following the sale was Casa Bella Holdings Inc. controlling 1,710,000 shares.
All of the shares of Common Stock were issued in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended, or by
Rule 504. Form D dated April 8, 1996 relating to the Rule 504 placement was
filed with the Securities and Exchange Commission.
On March 21, 1998, Showstar completed a private placement of 2,523,000
shares of Common Stock in consideration of $2,523 to eight accredited investors
in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act.
On April 3, 1998, Showstar completed the sale of 6,185,000 shares of Common
Stock in consideration of $6,185 to 12 investors made in reliance upon
Rule 504. Form D dated April 3, 1998 relating to the Rule 504 placement was
filed with the Securities and Exchange Commission.
On April 27, 1998, pursuant to a share exchange agreement of such date,
Showstar issued 3,367,000 share of Common Stock to shareholders of Showstar
Entertainment Corporation, a Nevada corporation, in exchange for 3,367,000
shares of the new subsidiary's restricted common stock. The transaction was done
in reliance upon the exemption provided by Section 4(2).
On August 20, 1998, Showstar completed the sale of 771,133 shares of Common
Stock in consideration of $578,350 to 32 investors in reliance upon Rule 504.
Form D dated August 20, 1998 relating to the
25
<PAGE>
Rule 504 placement was filed with the Securities and Exchange Commission. In
addition, on the same date, Showstar issued an additional 119,600 shares of
Common Stock to an accredited investor and consultant in consideration for
services provided in connection with the placement valued at $89,700; these
additional shares were reported on the same Form D relating to the Rule 504
placement.
Pursuant to an agreement dated August 25, 1998, Showstar issued 999,066
shares to shareholders of Showstar's Nevada subsidiary in exchange for 999,066
shares of the subsidiary's restricted common stock. This gave Showstar 100%
ownership of the Nevada operating subsidiary. The transaction was done in
reliance upon the exemption provided by Section 4(2).
On November 20, 1998 Showstar issued a $60,000 principal amount 8% Series A
Senior Subordinated Convertible Redeemable Debenture to an accredited investor
in reliance upon the exemption from registration afforded by Section 4(2). The
Debenture was converted by the investor in three parts on November 28, 1998,
December 15, 1998 and January 4, 1999. In accordance with the conversion terms
of the Debenture, Showstar issued 98,039, 160,000 and 66,667 shares of Common
Stock respectively. Issuance of the shares was made in reliance upon the
exemption provided by Section 3(9).
On January 21, 1999, Showstar sold 2,422,120 shares of Common Stock in
consideration of $212,630 to 12 investors in reliance upon Rule 504. Form D
dated January 21, 1999 relating to the Rule 504 placement was filed with the
Securities and Exchange Commission.
On March 3, 1999, Showstar sold 260,000 shares of Common Stock in
consideration of $52,000 to 2 investors in reliance upon Rule 504. Form D dated
March 3, 1999 relating to the Rule 504 placement was filed with the Securities
and Exchange Commission.
During calendar year 1999 Showstar placed shares of its Common Stock with
accredited investors in the following amounts and on the following dates in
reliance upon the exemption provided by Section 4(2):
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
DATE SHARES CONSIDERATION ACCRED. INVESTORS
- ---- --------- ----------------- -----------------
<S> <C> <C> <C>
April 15, 1999.................................. 40,000 $10,000 1
April 18, 1999.................................. 896,000 $224,000 1
May 4, 1999..................................... 307,143 $107,500 1
May 7, 1999..................................... 1,150,000 $402,480 1
May 25, 1999.................................... 230,770 $150,000 1
June 4, 1999.................................... 400,000 begin consulting 2
$10,000 of
June 24, 1999................................... 20,000 services 1
July 8, 1999.................................... 300,000 employ agmt terms 1
July 8, 1999.................................... 1,000,000 employ agmt terms 2
July 20, 1999................................... 200,000 begin consulting 1
August 19, 1999................................. 1,715,000 begin consulting 7
Sept 29 - Nov 30, 1999.......................... 2,310,455 $2,050,000 1
December 22, 1999............................... 125,000 begin consulting 1
</TABLE>
In addition, on July 8, 1999, Showstar's Board of Directors approved the
issuance of 180,000 shares of Common Stock to eight employees of Showstar as
incentive gifts from Showstar. These gifts were made in reliance upon the
exemption from registration afforded by the "no sale" rule.
26
<PAGE>
Also during calendar year 1999, Showstar placed shares of its Common Stock
with accredited investors in the following amounts and on the following dates in
transactions outside the United States and with persons who were not "U.S.
Persons":
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
DATE SHARES CONSIDERATION ACCRED. INVESTORS
- ---- --------- ----------------- -----------------
<S> <C> <C> <C>
July 15, 1999................................... 1,250,000 $625,000 1
August 25, 1999................................. 1,000,000 $500,000 2
September 28, 199............................... 133,334 $100,000 1
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Showstar's Bylaws provide that directors and officers shall be indemnified
by Showstar to the fullest extent authorized by Colorado law, as it now exists
or may in the future be amended, against all expenses and liabilities reasonably
incurred in connection with services for or on behalf of Showstar. The Bylaws
also authorize Showstar to enter into one or more agreements with any person
that provide for indemnification greater or different from that provided in the
Bylaws. To the extent that indemnification for liabilities arising under the
Securities Act may be permitted for directors, officers and controlling persons
of Showstar, Showstar has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
PART F/S
Filed as Part F/S of this registration statement on Form 10-SB are the
following financial statements:
Consolidated balance sheets of Showstar Online.com, Inc. (formerly Showstar
Entertainment Corporation) (a development stage company) and its subsidiaries as
of April 30, 1999 and October 31, 1999 (unaudited);
Related consolidated statements of operations, shareholder' equity (deficit)
and cash flows for the two year period ended April 30, 1999 and six month period
ended October 31, 1999 (unaudited) and for the period July 14, 1995 (inception)
through April 30, 1999 and October 31, 1999 (unaudited); and
The Independent Auditors' Report of Cordovano and Harvey, P.C. dated
August 14, 1999 relating to the audited portions of the foregoing financial
statements.
27
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<C> <S>
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.
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.
ITEM 2. DESCRIPTION OF EXHIBITS
See the descriptions provided above.
SIGNATURES
In accordance with Section 12 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.
<TABLE>
<S> <C> <C>
SHOWSTAR ONLINE.COM, INC.
---------------------------------------------
(Registrant)
By: /s/ JOHN PUNZO
-----------------------------------------
John Punzo
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Dated: March 28, 2000
28
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 30, 1999 AND JANUARY 31, 2000 (UNAUDITED)
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
FOR THE PERIOD FROM JULY 14, 1995 (INCEPTION) THROUGH APRIL 30, 1999
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 AND 1999 (UNAUDITED)
FOR THE PERIOD FROM JULY 14, 1995 (INCEPTION) THROUGH JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Shareholders' Equity (Deficit).... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Showstar On-Line.com, Inc. (Formerly Showstar Entertainment Corporation)
We have audited the accompanying consolidated balance sheet of Showstar
On-Line.com, Inc. (formerly Showstar Entertainment Corporation) (a development
stage company) and its subsidiaries as of April 30, 1999 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the two year period then ended and for the period July 14, 1995
(inception) through April 30, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our 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. (formerly Showstar Entertainment Corporation) and its
subsidiaries as of April 30, 1999 and the results of their operations and their
cash flows for the two year period then ended and for the period July 14, 1995
(inception) through April 30, 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 deficiency at
April 30, 1999. 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 financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Cordovano and Harvey, P.C.
Denver, Colorado
August 14, 1999
F-2
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 15,737 $ 572,601
Accounts receivable....................................... -- 5,950
Accounts receivable, former employee...................... 4,400 --
Deposit for consignment inventory......................... -- 15,723
Prepaid content acquisition............................... -- 51,823
Advances to Vendors....................................... 10,923 30,871
----------- -----------
TOTAL CURRENT ASSETS.................................... 31,060 676,968
INVESTMENT IN JOINT VENTURE................................. -- 25,000
EQUIPMENT AND FURNITURE, less $93 and $165,000 (unaudited)
of accumulated depreciation (Note C)...................... 11,891 1,054,363
INTANGIBLE ASSETS, less $108 and $948 (unaudited) of
accumulated amortization.................................. 5,492 4,652
----------- -----------
$ 48,443 $ 1,760,983
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable, trade................................... $ -- $ 202,759
Accrued expenses.......................................... 58,701 --
Accrued stock compensation (Note E)....................... 760,275 470,275
Loan payable.............................................. -- 335,300
Accrued interest payable.................................. 7,500 --
Due to related party (Note B)............................. 557,384 521,884
Advances payable (Note G)................................. 210,500 110,500
----------- -----------
TOTAL CURRENT LIABILITIES............................... 1,594,360 1,640,718
----------- -----------
COMMITMENTS (NOTE I)........................................ -- --
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par value, 5,000,000 shares
authorized, -0- and -0-, respectively issued and
outstanding............................................. -- --
Common stock, no par value, 50,000,000 shares authorized,
18,771,625 and 31,350,438, respectively issued and
outstanding............................................. 1,665,255 8,840,055
Contributed capital....................................... 74,000 74,000
Outstanding common stock options.......................... 239,750 239,750
Deferred stock compensation............................... (483,334) (440,001)
Cumulative translation adjustments........................ (1,206) (1,906)
Deficit accumulated during development stage.............. (3,040,382) (8,591,633)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT).................... (1,545,917) 120,265
----------- -----------
$ 48,443 $ 1,760,983
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED JULY 14, 1995 ENDED JULY 14, 1995
APRIL 30, (INCEPTION) JANUARY 31, (INCEPTION)
----------------------- THROUGH ------------------------- THROUGH
1999 1998 APRIL 30, 1999 2000 1999 JANUARY 31, 2000
----------- --------- -------------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Sales................................ $ -- $ -- $ -- $ 5,950 $ -- $ 5,950
Commissions.......................... -- -- -- 10,778 -- 10,778
----------- --------- ----------- ----------- ----------- -----------
TOTAL REVENUE...................... -- -- -- 16,728 -- 16,728
COSTS AND EXPENSES
Cost of sales........................ -- -- -- 3,520 -- 3,520
Stock based compensation (Note E).... 16,691 -- 516,691 1,820,633 81,525 2,337,324
Consulting........................... 154,186 -- 154,186 634,651 67,073 788,837
Investor relations, related party
(Note B)........................... 107,067 -- 107,067 -- 107,067 107,067
Investor relations................... 130,569 -- 130,569 100,624 102,730 231,193
Web-sit set up....................... 18,303 -- 18,303 80,520 -- 98,823
Professional fees.................... 86,956 5,000 91,956 194,297 58,791 286,253
Consulting fees paid by shareholders
(Note B)........................... 466,500 -- 466,500 -- 466,500 466,500
Travel and entertainment............. 29,716 -- 29,716 171,159 3,212 200,875
Depreciation and amortization........ 67,509 -- 67,509 166,347 50,632 233,856
General & administrative............. 12,421 36 20,771 955,326 10,385 976,097
Advertising, marketing and selling... 13,500 -- 13,500 1,236,470 -- 1,249,970
Technical development................ 31,021 -- 31,021 134,341 -- 165,362
----------- --------- ----------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES........... (1,634,439) (5,036) (1,647,789) (5,497,888) (947,915) (7,145,677)
OTHER (EXPENSE)
Interest............................. (48,000) -- (48,000) (4,000) (46,000) (52,000)
----------- --------- ----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE TAXES..................... (1,682,439) (5,036) (1,695,789) (5,485,160) (993,915) (7,180,949)
INCOME TAXES (Note F)
Current.............................. 620,090 969 621,059 2,045,965 370,730 2,667,024
Deferred............................. (620,090) (969) (621,059) (2,045,965) (370,730) (2,667,024)
----------- --------- ----------- ----------- ----------- -----------
NET LOSS FROM CONTINUING
OPERATIONS....................... (1,682,439) (5,036) (1,695,789) (5,485,160) (993,915) (7,180,949)
DISCONTINUED OPERATIONS (Note A)
Net loss from entertainment division
operations, net of $-0-, $-0- and
$-0-and $-0- in income taxes....... (367,293) -- (367,293) (66,091) (204,266) (433,384)
Loss on disposal of entertainment
division, net of $-0- in income
taxes.............................. (977,300) -- (977,300) -- (977,300) (977,300)
----------- --------- ----------- ----------- ----------- -----------
NET LOSS........................... $(3,027,032) $ (5,036) $(3,040,382) $(5,551,251) $(2,175,481) $(8,591,633)
=========== ========= =========== =========== =========== ===========
NET LOSS PER COMMON SHARE:
Basic--continuing operations......... $ (0.11) * $ (0.22) $ (0.07)
Diluted--continuing operations....... $ (0.11) * $ (0.22) $ (0.07)
Basic--discontinued operations....... $ (0.08) * * $ (0.08)
Diluted--discontinued operations..... $ (0.08) * * $ (0.08)
NUMBER OF SHARES USED FOR COMPUTING NET
LOSS PER SHARE:
Basic................................ 15,906,801 2,525,667 25,442,258 14,980,749
Diluted.............................. 15,906,801 2,525,667 25,442,258 14,980,749
</TABLE>
- ------------------------------
* Less than $.01 per share
See accompanying notes to consolidated financial statements
F-4
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PEFERRED STOCK COMMON STOCK OUTSTANDING DEFERRED
------------------- ----------------------- CONTRIBUTED COMMON STOCK STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS COMPENSATION
-------- -------- ---------- ---------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <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................. -- -- 1,800,000 900 -- -- --
NET LOSS FOR THE YEAR ENDED
APRIL 30, 1997............... -- -- -- -- -- -- --
-------- ------- ---------- ---------- ------- -------- ---------
BALANCE AS OF APRIL 30, 1997... 350,000 3,500 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.................. (350,000) (3,500) -- -- 3,500 -- --
NET LOSS FOR THE YEAR ENDED
APRIL 30, 1998............... -- --
-------- ------- ---------- ---------- ------- -------- ---------
BALANCE AS OF APRIL 30, 1998... -- -- 13,875,000 12,975 3,500 -- --
Amounts due to affiliate and
officer, forgiven (Note B)....... -- -- -- -- 50,500 -- --
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.......................... -- -- -- -- -- 239,750 --
Deferred stock compensation........ -- -- -- -- -- -- (483,334)
Beneficial conversion of
convertible debenture............ -- -- -- -- 20,000 -- --
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 74,000 239,750 (483,334)
Deferred stock compensation........ -- -- -- -- -- -- 43,333
Sale of common stock, pursuant to
private offering, net of $97,000
in offering costs (unaudited).... -- -- 8,121,670 4,964,500 -- -- --
Stock issued for services valued at
market price of stock
(unaudited)...................... -- -- 2,460,000 1,195,100 -- -- --
Stock issued to employees valued at
market price of stock
(unaudited)...................... -- -- 430,000 232,200 -- -- --
Stock issued to employees for
accrued stock compensation
(unaudited)...................... -- -- 1,050,000 517,500 -- -- --
Stock issued for payment of third
party advances (unaudited)....... -- -- 517,143 265,500 -- -- --
Comprehensive loss
Net loss for the nine months
ended January 31, 2000
(unaudited).................... -- -- -- -- -- -- --
Cumulative translation adjustment
(unaudited).................... -- -- -- -- -- -- --
Comprehensive loss (unaudited)..... -- -- -- -- -- -- --
-------- ------- ---------- ---------- ------- -------- ---------
BALANCE AS OF JANUARY 31, 2000
(Unaudited).................. -- $ -- 31,350,438 $8,840,055 $74,000 $239,750 $(440,001)
======== ======= ========== ========== ======= ======== =========
<CAPTION>
CUMULATIVE
TRANSLATION ADJ.
DEFICT ----------------
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........ -- -- 43,333
Sale of common stock, pursuant to
private offering, net of $97,000
in offering costs (unaudited).... -- -- 4,964,500
Stock issued for services valued at
market price of stock
(unaudited)...................... -- -- 1,195,100
Stock issued to employees valued at
market price of stock
(unaudited)...................... -- -- 232,200
Stock issued to employees for
accrued stock compensation
(unaudited)...................... -- -- 517,500
Stock issued for payment of third
party advances (unaudited)....... -- -- 265,500
Comprehensive loss
Net loss for the nine months
ended January 31, 2000
(unaudited).................... (5,551,251) -- (5,551,251)
Cumulative translation adjustment
(unaudited).................... -- (700) (700)
-----------
Comprehensive loss (unaudited)..... -- -- (5,551,951)
----------- ------- -----------
BALANCE AS OF JANUARY 31, 2000
(Unaudited).................. $(8,591,633) $(1,906) $ 120,265
=========== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE NINE MONTHS JULY 14, 1995
ENDED JULY 14, 1995 ENDED (INCEPTION)
APRIL 30, (INCEPTION) JANUARY 31, THROUGH
---------------------- THROUGH ------------------------- JANUARY 31,
1999 1998 APRIL 30, 1999 2000 1999 2000
----------- -------- -------------- ----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET LOSS.................................. $(3,027,032) $(5,036) $(3,040,382) $(5,551,251) $(2,175,481) $(8,591,633)
Transactions not requiring cash:
Depreciation and amortization........... 67,509 -- 67,509 166,347 50,632 233,856
Expenses paid by principal
shareholder........................... 466,500 -- 466,500 -- 466,500 466,500
Loss on disposal of discontinued
operations............................ 977,300 -- 977,300 -- 977,300 977,300
Interest recorded from beneficial
conversion of debenture............... 20,000 -- 20,000 -- 20,000 20,000
Write off of accounts receivable........ 4,556 -- 4,556 -- -- 4,556
Stock compensation expense.............. 516,691 -- 516,691 1,820,633 81,525 2,337,324
Changes in current assets and current
liabilities:
Accounts receivable, inventory and
prepaid expenses...................... 3,706 -- 3,706 (89,044) 18,372 (85,338)
Accounts payable and accrued expenses... 20,209 5,000 29,159 144,058 (34,839) 173,217
----------- ------- ----------- ----------- ----------- -----------
NET CASH (USED IN) OPERATING
ACTIVITIES.......................... (950,560) (36) (954,960) (3,509,257) (595,991) (4,464,217)
----------- ------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of equipment......... 10,000 -- 10,000 -- -- 10,000
Investment in joint venture............. -- -- -- (25,000) -- (25,000)
Cash acquired with acquisition of
Showstar/Nucom........................ -- 20,815 20,815 -- -- 20,815
Purchases of property and equipment and
domain name........................... (53,300) -- (53,300) (1,207,979) (36,481) (1,261,279)
----------- ------- ----------- ----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES................ (43,300) 20,815 (22,485) (1,232,979) (36,481) (1,255,464)
----------- ------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from advances, related parties
(Note B).............................. 40,300 -- 40,300 -- 40,300 40,300
Proceeds from advances (Note G)......... 102,500 -- 102,500 335,300 102,500 437,800
Repayments of advances, related parties
(Note B).............................. (5,000) -- (5,000) -- (5,000) (5,000)
Cash paid for stock offering costs...... -- -- -- (97,000) -- (97,000)
Proceeds from issuance of preferred
stock................................. -- -- 3,500 -- -- 3,500
Proceeds from issuance of common
stock................................. 790,980 8,708 800,588 5,061,500 578,350 5,862,088
Proceeds from issuance of convertible
debenture............................. 52,500 -- 52,500 -- 52,500 52,500
----------- ------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.......................... 981,280 8,708 994,388 5,299,800 768,650 6,294,188
----------- ------- ----------- ----------- ----------- -----------
CUMULATIVE TRANSLATION ADJUSTMENT......... (1,206) -- (1,206) (700) -- (1,906)
----------- ------- ----------- ----------- ----------- -----------
NET CHANGE IN CASH.................... (13,786) 29,487 15,737 556,864 136,178 572,601
Cash, beginning of period................. 29,523 36 -- 15,737 36 --
----------- ------- ----------- ----------- ----------- -----------
CASH, END OF PERIOD................... $ 15,737 $29,523 $ 15,737 $ 572,601 $ 136,214 $ 572,601
=========== ======= =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.................. $ 5,000 $ -- $ 5,000 $ -- $ 5,000 $ 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 $ 3,367 $ -- $ -- $ 3,367
=========== ======= =========== =========== =========== ===========
999,066 shares of common stock issued
for acquisition of subsidiary (Note
D).................................... $ 749,300 $ -- $ 749,300 $ -- $ 749,300 $ 749,300
=========== ======= =========== =========== =========== ===========
517,143 shares of common stock issued
for payment of advances and accrued
liabilities........................... $ -- $ -- $ -- $ 265,500 $ -- $ 265,500
=========== ======= =========== =========== =========== ===========
2,890,000 shares of common stock issued
for compensation...................... $ -- $ -- $ -- $1,427,300 $ -- $ 1,427,300
=========== ======= =========== =========== =========== ===========
1,050,000 shares of common stock issued
for payment of accrued stock
compensation.......................... $ -- $ -- $ -- $ 517,500 $ -- $ 517,500
=========== ======= =========== =========== =========== ===========
Amounts due to related parties, forgiven
by affiliate and officer reclassified
as contributed capital................ $ 50,500 $ -- $ 50,500 $ -- $ -- $ 50,500
=========== ======= =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<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
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 is to provide
a variety of entertainment and education products and services to those
interested in art and collectibles. As of April 30, 1999 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, 1999, 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.
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.
F-7
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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,
-------------------- SIX MONTHS ENDED
1999 1998 OCTOBER 31, 1999
--------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Operating revenue............................... $ 265,416 $ -- $ --
========= ======== ========
Net loss from discontinued operations........... $(367,293) $ -- $(50,768)
Current tax benefit............................. 137,000 -- 9,773
Deferred tax expense............................ (137,000) -- (9,773)
--------- -------- --------
Net of income taxes............................. $(367,293) $ -- $(50,768)
========= ======== ========
</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 revenue as of April 30, 1999, and has incurred losses of
$(3,027,032), $(5,036) and $(6,400,863) for the years ended April 30, 1999 and
1998 and for the period July 14, 1995 (inception) through October 31, 1999
(unaudited), respectively. The Company has a lack of liquidity and a working
capital deficiency at April 30, 1999. These factors among others may indicate
that the Company will be unable to continue as a going concern.
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 $9.1 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.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of October 31, 1999 and the six months
ended October 31, 1999 and 1998 are unaudited, and certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring items,
F-8
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements have been included.
The results of operations for the interim period are not necessarily indicative
of the results for an entire fiscal year.
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. Showstar Online
Canada, Inc. had no significant operations or accounting transactions during the
year ended April 30, 1999. 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.
CASH EQUIVALENTS
For the purposes of the statement 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, 1999 are for advances due from a former
employee. All other receivables have been fully allowed for in the allowance for
doubtful accounts of $9,615.
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.
F-9
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999, there were
350,000 vested stock options outstanding and commitments to issue 1,725,000
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.
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
F-10
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
payable, accrued compensation, and other accrued liabilities approximate fair
value due to the short-term maturity of the instruments.
INTANGIBLE ASSETS
Intangible assets consisted of goodwill associated with the acquisition of
Showstar/Nucom. The principal activities of Showstar/Nucom was the concert event
promotion and merchandising operations. Even though those operations had not
fully commenced, the Company discontinued the operations in February 1999.
Concurrent with the decision to discontinue the operations, the Company wrote
off all unamortized goodwill totaling $854,338 to loss on disposal of
discontinued operations. Remaining intangible assets consist of the cost to
acquire the domain name Artstar.com and will be amortized over sixty months.
Amortization expense for the year ended April 30, 1999 was $67,509.
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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the following new accounting pronouncements for the
year ended April 30, 1999. There was no effect on the financial statements
presented from the adoption of the new pronouncements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits," requires additional disclosures about pension and
other post-retirement benefit plans, but does not change the measurement or
recognition of those plans.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," requires an entity to recognize all derivatives as either an asset
or liability and measure those instruments at fair value, as well as identify
the conditions for which a derivative may be specifically designed as a hedge.
F-11
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A: ORGANIZATION, BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires that
entities capitalize certain internal-use software costs once certain criteria
are met.
SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
provides, among other things, guidance on the reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred.
The Company will continue to review these new accounting pronouncements over
time to determine if any additional disclosures are necessary based on evolving
circumstances.
NOTE B: RELATED PARTY TRANSACTIONS
During the year ended April 30, 1997, an officer advanced the Company
$3,950, of which was unpaid at April 30, 1997. During the year ended April 30,
1998 the advances were repaid by the Company's subsidiary.
Amounts recorded at April 30, 1999 as due to related party totaling $557,384
are unpaid amounts for the following:
During the year ended April 30, 1998, the Company's subsidiary received
$15,500 from an affiliate for working capital advances. Also during the year
ended April 30, 1998 the Company received $12,000 from a former officer and
director of the Company, of which the Company repaid $5,000 during the year
ended April 30, 1999 and the affiliate forgave the $15,500 received for working
capital advances. The $15,500 liability has been reclassified as contributed
capital. Amounts accrued and unpaid totaling $7,000 are included in due to
related parties.
The Company's subsidiary, Showstar/Nucom entered into a management contract
with a former officer and director of the Company, whereby the subsidiary would
pay the former officer $5,000 per month, each commencing January 1, 1997,
subsequently amended to June 1, 1997 and terminating in five years. The board of
directors and the former officer mutually terminated the agreement effective
August 26, 1998. The former officer forgave $35,000, related to the contract,
due from the Company. The $35,000 liability has been reclassified as contributed
capital.
Showstar/Nucom entered into a management contract with an officer and
director of the Company, whereby the subsidiary would pay the officer $5,000 per
month, each commencing January 1, 1997, subsequently amended to June 1, 1997 and
terminating in five years. The board of directors and the officer mutually
terminated the agreement effective August 26, 1998, at which time the Company
owed the officer $30,000 for services rendered pursuant to the management
contract. The officer also advanced the Company $5,500 for working capital
during the year ended April 30, 1999. Amounts accrued and unpaid totaling
$35,500 are included in due to related parties. Subsequent to April 30, 1999 the
Company issued the officer 60,000 shares of its restricted common stock as
satisfaction of the liability.
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.
F-12
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B: RELATED PARTY TRANSACTIONS (CONTINUED)
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, 1999, $466,500
is included in indebtedness to related parties in the accompanying consolidated
financial statements.
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>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1999
--------- -----------
(UNAUDITED)
<S> <C> <C>
Office equipment and furniture.............................. $ 1,668 $ 78,120
Computer equipment.......................................... 9,014 380,294
Software.................................................... 1,302 410,396
------- --------
11,984 868,810
Less accumulated depreciation............................... (93) (67,917)
------- --------
$11,891 $800,893
======= ========
</TABLE>
Depreciation expense for the years ended April 30, 1999, 1998 and for the
period July 14, 1995 (inception) through October 31, 1999 (unaudited) totaled
$93, $-0-, and $67,917, respectively.
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
F-13
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D: ACQUISITION OF SUBSIDIARY (CONTINUED)
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 off the remaining unamortized goodwill of $854,338. See
Note A.
NOTE E: STOCK BASED COMPENSATION
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 nine months ended January 31, 2000 the
Company issued 150,000 shares of common stock to the consultant as full payment
of the consulting agreement.
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
F-14
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E: STOCK BASED COMPENSATION (CONTINUED)
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.
STOCK BASED COMPENSATION FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
NON-EMPLOYEES
On June 4, 1999 the Company issued 400,000 shares of its common stock to two
individuals as payment for financial services rendered to the Company after
April 30, 1999 and prior to June 4, 1999. The transaction was valued at $.67 per
share which was the market price on that date. $268,000 was recorded as stock
based compensation.
On June 24, 1999 the Company issued 20,000 shares of its common stock to an
individual as payment for consulting services rendered to the Company after
April 30, 1999 and prior to June 24, 1999. The transaction was valued at $.50
per share which was the market price on that date. $10,000 was recorded as stock
based compensation.
On July 20, 1999 the Company issued 200,000 shares of its common stock to an
entity as payment for investor relations services rendered to the Company after
April 30, 1999 and prior to July 20, 1999. The transaction was valued at $.62
per share which was the market price on that date. $124,000 was recorded as
stock based compensation.
The Company issued 1,840,000 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 January 31, 2000. The
transactions were valued at $.25 to $.68 per share which was the market price on
the date that the services were rendered which were from June 1999 to
January 2000. $793,100 was recorded as stock based compensation.
F-15
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E: STOCK BASED COMPENSATION (CONTINUED)
STOCK BASED COMPENSATION FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
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.
At April 30, 1999 the Company had $483,334 of deferred stock compensation
expense, and subsequent to April 30, 1999 increased the deferred stock
compensation balance to $833,334. During the nine months ended January 31, 2000
the Company recognized $393,333 as expense, leaving a deferred stock
compensation balance at January 31, 2000 of $440,001. See Note J.
SUMMARY
A summary of the status of the Company's stock option awards as of
April 30, 1999, and the changes during the year ended April 30, 1999 is
presented below:
<TABLE>
<CAPTION>
FIXED OPTIONS NUMBER
- ------------- ---------
<S> <C>
Outstanding at April 30, 1998............................... --
Granted..................................................... 1,650,000
Exercised................................................... --
Canceled.................................................... --
---------
Outstanding at April 30, 1999............................... 1,650,000
=========
</TABLE>
The weighted average exercise price per share for the fully-vested 350,000
outstanding options at April 30, 1999 was $1.25. The weighted average exercise
price per share for the non-vested 1,300,000 outstanding options at April 30,
1999 was $.69. No pro forma information is presented for the non-vested options
at April 30, 1999, as the expense would be charged to future periods as the
options vest.
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 $1.25 and $.685, respectively on
the date of grant for options granted with an exercise price greater than
F-16
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E: STOCK BASED COMPENSATION (CONTINUED)
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.................................................. $(3,027,032)
Net loss per share--basic and diluted..................... $ (0.11)
Pro Forma:
Net loss.................................................. $(3,027,032)
Net loss per share--basic and diluted..................... $ (0.11)
</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.
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>
1999 1998
-------------- --------------
<S> <C> <C>
U.S. statutory federal rate................................. 34.00% 15.00%
State income tax, net of federal benefit.................... 3.30% 4.25%
Net operating loss for which no tax benefit is currently
available................................................. -37.30% -19.25%
-------------- --------------
0.00% 0.00%
============== ==============
</TABLE>
Income taxes from operations for the years ended April 30, 1999 and 1998,
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, 1998 to April 30, 1999 was $619,021. Net operating loss
carryforwards will expire in 2019.
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.
F-17
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G: ADVANCES 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, 1999
the advance was not repaid and the Company accrued $8,000 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. Subsequent to April 30, 1999 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.
The Company also received $2,500 in working capital advances from an individual.
The amount was unpaid as of April 30, 1999.
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.
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.
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
During the nine months ended January 31, 2000 the Company sold 8,121,670
shares of its common stock for total gross cash proceeds of $5,061,500. The
Company paid $97,000 in offering costs.
F-18
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
2000....................................................... $28,900
2001....................................................... $28,900
2002....................................................... $28,900
2003....................................................... $28,900
2004....................................................... $28,900
</TABLE>
NOTE J: SUBSEQUENT EVENTS
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 nine months ended January 31, 2000, the Company recorded
compensation expense of $93,333 and deferred the remaining $256,667 which is
recorded as a contra account in shareholders' equity. (unaudited)
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.
NOTE K: UNAUDITED INTERIM FINANCIAL INFORMATION
During the three months ended January 31, 2000 the Company received a loan
payable of $335,300. The loan is non-interest bearing, convertible into shares
of the Company's common stock at $1.00 per share and due upon demand. Subsequent
to January 31, 2000 the Company converted the debt into 335,300 shares of its
common stock.
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
F-19
<PAGE>
SHOWSTAR ONLINE.COM, INC.
(FORMERLY SHOWSTAR ENTERTAINMENT CORPORATION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K: UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
Company a sixty six percent interest in the joint venture. At January 31, 2000
the total investment was less than fifty percent and has been accounted for at
cost. Once the investment exceeds fifty percent, the Company will account for
the investment on a consolidated basis.
NOTE L: YEAR 2000 COMPLIANCE
The Year 2000 issue ("Y2K") is the result of computer programs written using
two digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities. The Company has assessed its current
computer systems and has determined, based on the opinions of its software and
hardware vendors, the overall systems to be Y2K compliant. However, there is no
certainty that the Company will not experience Y2K issues.
The Company cannot determine the extent to which the Company is vulnerable
to third parties' failure to remediate their own Y2K problems. As a result,
there can be no guarantee that the systems of other companies on which the
Company's business relies will be timely converted, or that failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would have a material adverse affect on the Company. In view of the
foregoing, there can be no assurance that the Y2K issue will not have a material
adverse effect on the Company's business.
F-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> APR-30-1999 APR-30-1999
<PERIOD-START> MAY-01-1998 MAY-01-1999
<PERIOD-END> APR-30-1999 JAN-31-2000
<CASH> 15,737 572,601
<SECURITIES> 0 0
<RECEIVABLES> 4,400 5,950
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 31,060 676,968
<PP&E> 11,984 1,219,963
<DEPRECIATION> 93 165,600
<TOTAL-ASSETS> 48,443 1,760,983
<CURRENT-LIABILITIES> 1,594,360 1,640,718
<BONDS> 0 0
0 0
0 0
<COMMON> 1,665,255 8,840,055
<OTHER-SE> (3,211,172) (8,719,790)
<TOTAL-LIABILITY-AND-EQUITY> 48,443 1,760,983
<SALES> 0 0
<TOTAL-REVENUES> 0 16,728
<CGS> 0 3,520
<TOTAL-COSTS> 1,634,439 5,497,888
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 48,000 4,000
<INCOME-PRETAX> (1,682,439) (5,485,160)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,682,439) (5,485,160)
<DISCONTINUED> (1,344,593) (66,091)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,027,032) (5,551,251)
<EPS-BASIC> (.19) (.22)
<EPS-DILUTED> (.19) (.22)
</TABLE>
