SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 8-K12G3/A
CURRENT REPORT PURSUANT TO SECTION 12G3
OF THE SECURITIES EXCHANGE ACT OF 1934
June 19, 2000
--------------
Date of Report (Date of earliest event reported)
Price Net U.S.A., INC.
--------------------------------
(Exact Name of Registrant as specified in Charter)
Commission File No. 000-27779
Nevada 33-0775716
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(State of Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
2575 McCabe Way 92614
Irvine, California (Zip Code)
---------------------- ----------
(Address of Principal Executive Office)
Registrant's Telephone Number, Including Area Code: (949) 225-6200
Registrant's Former Name: MNS Eagle Equity Group II, Inc.
<PAGE>
Table of Contents
Form 8-K Disclosures:
Page
----
Item 1. Change in Control 1
Item 2. Acquisition or Disposition of Assets
(Includes Form 10-SB Disclosures,
Part I, Part II and Part F/S) 2
Item 3. Bankruptcy or Receivership 19
Item 4. Changes in Registrant's Certifying Accountant 19
Item 5. Other Events 19
Item 6. Resignations of Registrant's Directors 19
Item 7. Financial Statement, Proforma, Financial Information and Exhibits 20
<PAGE>
Item 1. Change in Control
-------------------------
Pursuant to a Stock Exchange Agreement (the "Exchange Agreement") dated May 12,
2000 and Supplement to the Agreement dated June 19, 2000, PRICENET U.S.A., Inc.
("PRICENET"), a Nevada corporation, acquired 100% of the common stock of MNS
Eagle Equity Group II, Inc. ("MNS"), a Nevada corporation. PRICENET issued
50,000 shares of restricted common stock and $100,000 in cash for 682,500 shares
of MNS, which represented 100% of the issued and outstanding common stock of
MNS. The transaction resulted in PRICENET USA, Inc. becoming the surviving
entity.
The Exchange Agreement was adopted by the unanimous consent of the Board of
Directors of both MNS and PRICENET on June 19, 2000. NO approval of the
shareholders of either PRICENET or MNS was required under applicable state
corporate law.
PRICENET also issued 450,000 shares of restricted common stock to three entities
for services and fees associated with the acquisition.
PRICENET's Articles of Incorporation has authorized 50,000,000 shares of common
stock at $0.001 par value. Prior to the effective date of the Exchange
Agreement, PRICENET had an aggregate of 14,257,366 shares of common stock issued
and outstanding. PRICENET's Articles of Incorporation has authorized 25,000,000
shares of preferred stock, however as of the date of this filing June 19, 2000
no preferred stock has been issued or is outstanding.
Upon closing of the Exchange Agreement and providing the shares for services and
fees, PRICENET had an aggregate of 14,757,366 shares of common stock
outstanding.
The officers of PRICENET shall continue as officers of the surviving entity
subsequent to the Exchange Agreement (see "Management" below). The directors and
by-laws of RICENET shall also continue in force without change.
A copy of the Exchange Agreement is attached hereto as an exhibit. The foregoing
description is modified by such reference.
The following table sets forth certain information regarding beneficial
ownership of the common stock of PRICENET as of June 19, 2000 (subsequent to the
issuance of 50,000 shares pursuant to the Exchange Agreement and 450,000 shares
for services and fees) by:
o Each person or entity known to be a beneficial owner of more than 5%
of the issued and outstanding common stock and;
o Directors and Officers of PriceNet
Beneficial Owner Number of Shares
Name and Title Beneficially Owned Percentage
----------------------- ------------------ ----------
Donald J. Rakemann, CEO,
Chairman of the Board 1,560,000 10.6%
(D.R. & L.R. Trust)
Donald Borba, COO,
Director 294,327 2.0%
Henry Camacho, Secretary,
Treasurer, Director 288,000 1.9%
(Camco)
Allen Kimble, CFO,
Director 0 0.0%
------------------------ ------------------ ----------
Total (as a group) 2,142,327 14.5%
1
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Item 2. Acquisition or Disposition of Assets
--------------------------------------------
(a) The consideration exchanged pursuant to the Exchange Agreement was
negotiated between MNS and PriceNet. In evaluating PriceNet as a candidate for
the proposed acquisition, MNS used criteria such as PriceNet's present stock
price as set forth in its private placements and transactions utilizing stock of
PriceNet for services, its business and anticipated operations, and PriceNet's
business name and reputation. MNS and PriceNet each determined that the
consideration for the merger was reasonable.
(b) PriceNet intends to continue its historical business and proposed business
as set forth more fully immediately below in the format and with the information
as set forth in Form 10-SB Part I, Part II, and Part F/S:
Capitalization
--------------
The following table sets forth (A) our actual short-term debt and capitalization
at June 19, 2000, and (B) pro forma as adjusted to reflect the capitalization
immediately after the acquisition. The information in the table should be read
in conjunction with the more detailed consolidated financial statements and
notes beginning on page F-1.
<TABLE>
<CAPTION>
Capitalization
(A) (B)
June 19, 2000 Pro forma
Actual Pro forma as adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Short-term debt ..................... $ 2,346,386 -- $ 2,346,386
============ ============ ============
Long-term debt and capital lease
obligations ........................ $ -- -- --
------------ ------------ ------------
Stockholders' equity (deficit):
Preferred stock, $.001 par value;
25,000,000 shares authorized;
none issued and
outstanding actual and as
adjusted ........................ -- -- --
Common stock, $.001 par value:
50,000,000 shares authorized;
14,257,366 issued and outstanding
actual; 14,757,366 shares issued
and outstanding as adjusted
............................... 14,257 500 14,757
Additional capital ................ 17,119,396 125,000 17,244,396
Accumulated deficit ............... (14,959,489) -- (14,959,489)
------------ ------------ ------------
Total stockholders' equity
(deficit) .................... 2,174,164 125,500 2,299,664
------------ ------------ ------------
Total capitalization .......... $ 2,174,164 $ 125,500 $ 2,299,664
============ ============ ============
</TABLE>
PART I
Description of Business
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Description of Property
Security Ownership of Certain Beneficial Owners and Management
Directors, Executive Officers, Promoters and Control Persons
Directors and Executive Officers
Certain Relationships and Related Transactions
Description of Securities
2
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PART II
Market for Common Stock Equity and Related Stockholder Matters
Legal Proceedings
Changes In and Disagreements with Accountants
Recent Sales of Unregistered Securities
Indemnification of Officers and Directors
PART F/S
Financial Statements
PART I
Description of Business (Price Net U.S.A., Inc.)
Business development or overview of background information
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The Company
The Company was originally incorporated in May 31, 1994 as GoldStar Gaming, Inc.
in the State of Nevada. The name of the Company was changed to PriceNet USA,
Inc. on March 17, 1998. The executive offices are located at 2575 McCabe Way,
Irvine, California 92614. The telephone number is (949) 225-6200 and the Web
site can be found at www.pricenetusa.com.
PRICENET shares currently trade on the National Quotation Bureau, LLC (NQB)"Pink
Sheets" under the symbol "PUSA".
The Company was founded in order to market and operate an Internet based
infrastructure that supports a home-based business. We market an extensive line
of products and services on the Internet. Customers have the service,
convenience and advantage of using the Internet from their home or office to
make purchases. We market our products and services to retail consumers as well
as business to business. We utilize a network-marketing program of independent
representatives and mall operators to sell our products and services. The mall
operators typically pay an initial set-up and training charge, and a monthly
mall maintenance fee. Our program affords the Company the advantage of a rapidly
expanding sales force without the normal upfront and ongoing costs of
maintaining a sales organization of this size. Each mall operator is compensated
on the retail purchases of products and services from their Internet shopping
mall.
On March 11, 1998 the Company, known then as Gold Star Gaming, Inc.
purchased/merged with Price Net U.S.A., Inc. The surviving entity was Gold Star
Gaming, Inc., which changed its name to Price Net U.S.A., Inc. Price Net was
organized October 7, 1997. For this purchase Gold Star issued 2,250,010 shares
of common stock and exchanged these shares with Price Net shares. The Gold Star
shareholders then gave back to the Company all of their shares except 1,100,000.
The final result left the Company with 3,350,010 shares of common stock issued
and outstanding. This purchase was properly accounted for as a reverse merger
because Gold Star was considered the nominal acquirer. A reverse merger means
that for accounting purposes the nominal acquirer is viewed as having been
acquired by the legally acquired company. Reverse merger also means that the
historical data shown on the financial statements will be that of the acquired
company.
The Business
Internet Shopping Mall Concept
The Company markets an extensive line of products and services on the Internet.
Customers have the service, convenience and advantage of using the Internet from
their home or office to make purchases.
Marketing through Networking
The Company markets their products and services to retail consumers as well as
business to business. Price Net uses a network-marketing program of independent
representatives and mall operators to sell their products and services. The mall
operators typically pay an initial set-up and training charge, and a monthly
mall maintenance fee. This program offers the Company the advantage of a rapidly
expanding sales force without the normal upfront and ongoing costs of
maintaining a sales organization of this size. Each mall operator is compensated
on the retail purchases of products and services from their Internet shopping
mall.
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Revenue
The Company receives revenue from retail product sales, services, the sale of
online shopping mall sites, and monthly mall site fees. The Company has over one
million retail products available on its shopping sites. Services available
include long distance telephone service, Internet service provider (ISP)
service, prepaid legal service, income tax audit protection service and Internet
site maintenance and upgrading. Online shopping mall sites are sold by the
company's network of Independent Representatives (IR). Each site is considered
an Independent Mall Operator (IMO).
When initially established, each Independent Mall Operator (IMO) receives a
unique reference number for their site. This number is used to track all
Internet retail activity for their site. Each IMO provides access codes to
customers so the customers will purchase items on their shopping site. PriceNet
has associations with various merchandise distributors that actually capture,
process and provide customer support for all Internet retail sales. One a
monthly basis the distributors provide data and submit sales commissions to the
Company, who then distributes commissions to the IMOs and IRs. On December 31,
1998 the malls sites began processing retail product sales orders. During 1999
product sales increased but were still not yet a significant source of revenue.
To maintain active online, each IMO must pay a nominal monthly service fee.
Most, if not all of our IMO retail sales are made over the Internet primarily
through credit card purchases. We use credit card processing companies to
provide risk management services, pre-approve purchases and verify the integrity
of the credit cards.
Independent Representative (IR) Commissions
An IR is considered an independent contractor working their own businesses
similar to other network marketing companies in the industry. Each IR receives
commissions from the following potential sources. Commissions are paid on
independent Internet Mall Operator site sales, retail product sales, service
sales and Mall merchandise sales. These are the same sources for which the
Company receives revenue. Each IR receives a greater commission for sales that
he or she directly makes and a lesser commission on sales his or her
organization makes. These commissions vary depending on how large of an
organization an IR has and the particular products and services being sold.
Accounts Receivable
Accounts receivable consists of amounts owed by independent representatives for
mall site sales, advances to independent representatives for future commissions,
loans and advances to employees and funds due from long distance telephone
service providers.
Expenses
Because of our rapidly expanded mall sales during fiscal 1999, we have
substantially expanded our infrastructure and increased our capital expenditures
and capital lease obligations relating to property and equipment. Research and
development costs are expensed as incurred and consist primarily of salaries,
supplies and contract services.
Since inception, we have incurred significant losses and, as of March 31, 2000,
had an accumulated deficit of $(13.3) million. We expect operating losses and
negative cash flow to continue through at least the second quarter of 2000. We
expect to incur additional costs and expenses related to:
. purchases of equipment for our operations and network infrastructure;
. the expansion of our operations into other foreign countries;
. the continued development of our Web site transaction processing and
network infrastructure;
. development and improvement of additional products and services; and
. the hiring of additional personnel.
We have a limited operating history on which to base an evaluation of our
business and prospects. During 1997 and 1998, we were in our "start up" mode and
our revenues were minimal compared to our general and administrative costs
associated with establishing our infrastructure. During mid-1999 our revenues
grew at a extremely rapid pace and our costs associated with those revenues
increased accordingly. Because of the rapid expansion of both revenues and costs
that transpired for the later half of fiscal 1999, it is not very meaningful to
compare 1999 to 1998.
You must also consider our prospects in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
e-commerce. Such risks for us include, but are not limited to, an evolving and
unpredictable business model and management of growth. To address these risks,
we must, among other things, maintain and expand our customer base, implement
and successfully execute our business and marketing strategy, continue to
4
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develop and upgrade our technology and systems that we use to process customers'
orders and payments, improve our Web site, provide superior customer service,
respond to competitive developments and attract, retain and motivate qualified
personnel. We cannot assure you that we will be successful in addressing such
risks, and our failure to do so could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Year 2000
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the recent
change in the century. If not corrected, many computer software applications
could fail or create erroneous results by, at or beyond the year 2000. We use
software, computer technology and other services internally developed and
provided by third-party vendors that may fail due to the year 2000 phenomenon.
For example, we are dependent on the financial institutions involved in
processing our customers' credit card payments for Internet services and third
parties that provide our Internet access. We are also dependent on
telecommunications and Internet vendors to maintain our network.
We have reviewed the year 2000 compliance of our internal software. This review
has included testing to determine how our systems will function at and beyond
the year 2000. Based upon our review, we believe that our internal software is
year 2000 compliant.
We have assessed the year 2000 readiness of our third-party supplied software,
computer technology and other services, which include software used in
accounting, database and security systems. The failure of such software or
systems to be year 2000 compliant could have a material negative impact on our
corporate accounting functions and the operation of our Web site. As part of the
assessment of the year 2000 compliance of these systems, we have sought
assurances from these vendors that their software, computer technology and other
services are year 2000 compliant. In spite of our review and assessments, it is
possible that something was omitted or missed during our evaluation. The failure
of our software and computer systems and of our third-party suppliers to be year
2000 complaint would have a material adverse effect on us.
We also contacted all of our credit card processing companies, Internet service
providers, local terminating parties and long distance carriers to determine
their year 2000 compliance.
The year 2000 readiness of the general infrastructure necessary to support our
operations is difficult to assess. For instance, we depend on the integrity and
stability of the Internet to provide our services. We also depend on the year
2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations consists
of a network of computers and telecommunications systems located throughout the
world and operated by numerous unrelated entities and individuals, none of which
has the ability to control or manage the potential year 2000 issues that may
impact the entire infrastructure. Our ability to assess the reliability of this
infrastructure is limited and relies solely on generally available news reports,
surveys and comparable industry data. Based on these sources, we believe most
entities and individuals that rely significantly on the Internet carefully
reviewed and attempted to remediate issues relating to year 2000 compliance, but
it is not possible to predict whether these efforts will be successful in
reducing or eliminating the potential negative impact of year 2000 issues. A
significant disruption in the ability of consumers to reliably access the
Internet or portions of it or to use their credit cards would have an adverse
effect on demand for our services and would have a material adverse effect on
us.
Competition
Dependence on a Few Major Customers
Intellectual Properties
The Company has no patents, trademarks, licenses or any other intangible
assets that would impact its value or earnings.
Government Compliance
The Company has no specific compliance issues with any federal or state
agency.
Research and Development of Advertising Activities
The Company estimates it spends approximately 50% of its time on research
and development activities related to marketing strategies or techniques. The
Company believes research on consumer trends is one of its competitive
advantages.
Environmental Regulation
The cost and effects of compliance with environmental laws for federal,
state or local governments are inconsequential.
Employees
As of June 19, 2000, PRICENET had 21 full-time employees, including 7 in
Marketing and sales and 14 in operations and general management. None of the
employees is a member of any union or collective bargaining organization.
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PRICENET considers its relationship with its employees to be excellent. A
significant portion of PRICENET's public relations and marketing is performed by
independent contractors from whom the Company expects to acquire new customer
billings. As of June 19, 2000, the Company had approximately 1,200 active
independent contractors concentrating primarily on marketing and public
relations to improve the Company's visibility in branding its names and
services. All of these sales and marketing representatives work on a
month-to-month basis.
Compliance Issues
PRICENET has voluntarily elected to include in the Form 8-K the information
required in the Form 10-SB registration statement under the Securities Exchange
Act of 1934. Following the effective date of this Form 8-K, PRICENET will be
required to comply with the reporting requirements of the Exchange Act. PRICENET
will file annual, quarterly and other reports with the Securities and Exchange
Commission. PRICENET will also be subject to the proxy solicitation requirements
of the Exchange Act and, accordingly, will furnish an annual report with audited
financial statements to its stockholders.
Available Information
Copies of this Form 8-K may be inspected, without charge, at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0300 for further information on the
operation of its public reference rooms. In addition, copies of this material
also should be available through the Internet by using the SEC's Electronic Data
Gathering, Analysis and Retrieval System, which is located http://www.sec.gov.
You may also obtain information about us on the Over the Counter Bulletin
Board's web site which is located at http://www.otcbb.com.
Summary Historical Financial Data
You should read the summary historical financial and operating data set
forth below in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Independent Auditor's
Review Report and notes included elsewhere in this filing.
6
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<TABLE>
<CAPTION>
Price Net U.S.A., Inc.
Consolidated Statement of Operations
for the comparative Three Months and Six Months ended June 30, 2000 and 1999
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Mall, Service and Product Sales $ 466,279 $ 1,078,268 $ 2,893,716 $ 1,775,806
Telephone Service Revenue 235,300 -- 457,334 --
Other Income -- -- --
------------ ------------ ------------ ------------
Total Revenue 701,579 1,078,268 3,351,050 1,775,806
------------ ------------ ------------ ------------
Costs of Sales
Costs of Goods Sold 116,349 69,968 322,552 108,840
Commissions 409,664 977,506 2,517,409 2,736,055
------------ ------------ ------------ ------------
Total Costs of Sales 526,013 1,047,474 2,839,961 2,844,895
------------ ------------ ------------ ------------
Gross Profit (Loss) 175,566 30,794 511,089 (1,069,089)
------------ ------------ ------------ ------------
Expenses
Payroll 498,473 290,693 1,069,011 536,682
Professional Fees 79,590 62,024 1,299,360 393,408
Rent 178,427 53,117 423,089 223,204
Advertising and Promotion 11,609 41,090 97,708 96,484
Amortization 308,898 -- 576,130 --
Depreciation 52,116 14,364 104,232 21,760
Interest Expense 3,586 22,877 5,258 29,447
Bad Debt 33,601 -- 33,601 --
Inventory Writedown 438,825 -- 438,825 --
Other Administrative Expenses 345,240 221,282 728,781 353,979
------------ ------------ ------------ ------------
Total Expenses 1,950,365 705,447 4,775,995 1,654,964
------------ ------------ ------------ ------------
Income Before Income Taxes (1,774,799) (674,653) (4,264,906) (2,724,053)
Provision for Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ (1,774,799) $ (674,653) $ (4,264,906) $ (2,724,053)
============ ============ ============ ============
Basic Earnings per Share $ (0.12) $ (0.10) $ (0.30) $ (0.44)
------------ ------------ ------------ ------------
Basic Weighted Average Number of Shares 14,257,366 6,717,795 14,208,366 6,191,983
Diluted Earnings per Share $ (0.12) $ (0.10) $ (0.26) $ (0.44)
------------ ------------ ------------ ------------
Diluted Weighted Average Number of Shares 14,683,966 6,742,145 16,183,966 6,226,333
</TABLE>
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Balance Sheet Data
At June 30, 2000 At December 31, 1999
-------------------- ---------------------
Cash and cash equivalents.......... $ -- $ 938,272
Working capital (deficit).......... (1,892,365) 586,612
Total assets....................... 4,646,050 5,871,569
Long-term debt and capital lease
obligations....................... -- --
Stockholders' equity (deficit)..... 2,299,664 4,612,486
Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with
our financial statements and accompanying notes appearing elsewhere herein.
Results of Operations
Business Overview
Price Net U.S.A., Inc., (the Company) was founded in order to market and operate
an Internet based infrastructure that supports a home-based business. We market
an extensive line of products and services on the Internet. Customers have the
service, convenience and advantage of using the Internet from their home or
office to make purchases. We market our products and services to retail
consumers as well as business to business. We utilize an alliance-marketing
program of independent representatives and mall operators to sell our products
and services. The mall operators typically pay an initial set-up and training
charge, and a monthly mall maintenance fee. Our program affords the Company the
advantage of a rapidly expanding sales force without the normal upfront and
ongoing costs of maintaining a sales organization of this size. Each mall
operator is compensated on the retail purchases of products and services from
their Internet shopping mall.
The Company has experienced substantial growth in retail sales in the past
couple of years. From 1998 to 1999, the Company's retail sales grew from $124
thousand to $8.3 million, representing a tremendous annual growth rate for the
first full year of operation. The Company's sales revenue totaled $3.3 million
for the six months ended June 30, 2000, which out paced the $1.7 million revenue
generated for the comparative six months ended June 30, 1999.
The Company's products are marketed exclusively through an alliance marketing
system. This system enables the Company's independent mall operators to earn
profits by selling products from the Company's branded super store and outlet
stores to retail consumers and other representatives. Independent
Representatives may also develop their own down-line organizations by sponsoring
other independent mall operators to join the organization and provide e-commerce
business in any market where the Company operates, entitling the sponsors to
receive commission overrides on product sales within their down-line
organizations.
We believe that the Company's alliance marketing system is ideally suited for
Internet e-commerce, because sales of such products and services are
strengthened by ongoing personal contact between the retail consumers and the
independent mall operators. Many of the customers are close friends or relatives
of the mall operators and are willing to purchase products based on the notion
that they are helping the mall operator receive a commission while receiving a
very reasonable or discounted price for the products. The Company's alliance
marketing system appeals to a broad cross-section of people throughout the
world, particularly those seeking to supplement family income, start a home
business or pursue employment opportunities other than conventional, full-time
employment.
Statements included in this "Management's Discussion and Analysis or Plan of
Operation" Section, and in other sections of the Report and in prior and future
filings by the Company with the Securities and Exchange Commission, in the
Company's prior and future press releases and in historical or current facts are
"forward-looking statements" made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. There are numerous risk factors that in
some cases have affected and in the future could affect the Company's actual
results and could cause the Company's actual financial and operating performance
to differ materially from that expressed in any forward-looking statement. The
following discussion and the analysis should be read in conjunction with the
Financial Statements and notes to Financial Statements which appear elsewhere in
this report.
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Results of Operations for the Three Months Ended June 30, 2000 Compared to Three
Months Ended June 30, 1999
Revenue
Revenue decreased to $701,579 for the three months ended June 30, 2000 from
$1,078,268 for the comparable period in 1999 as a result of the significant
reorganization and restructuring of our operation and customer base stemming
from the termination of our Company President. The three months ended June 30
1999 included a very aggressive mall site sales campaign. Of the $701,579
revenue for the three months ended June 30, 2000, $466,279 represents
independent mall site and merchandise sales and the remainder represents
long-distance phone service revenue of $235,300.
Cost of Sales
Cost of sales consists primarily of the costs of commissions paid to our network
of independent sales representatives. Cost of sales decreased to $526,013 for
the three months ended June 30, 2000 from $1,047,474 for the comparable period
in 1999. This $521 thousand decrease was primarily attributable to our decrease
in sales volume. Cost of sales for the three months ended June 30, 2000
represented 75% of the sales revenue as compared to 97% of the sales revenue for
the three months ended June 30, 1999 which generated an overall better gross
profit margin for the later period even though there was a decline in sales. We
expect the overall dollar cost of sales to increase in future periods to the
extent that our sales volume increases but not as a percentage of revenue.
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses consist of advertising and promotional expenditures, payroll and
related expenses for executive and administrative personnel, facilities
expenses, professional and consulting services expenses, travel and other
general corporate expenses. Selling, general and administrative expenses
increased to $1.9 million for the three months ended June 30, 2000 from $705
thousand for the comparable period in 1999. Two significant non-cash
transactions totaling $747 thousand occurred during the three months ended June
30, 2000 as compared to the similar period, which contributed to the increased
costs. They include the amortization of the goodwill associated with the NCN
Communication acquisition for $308 thousand and the write down of inventory
items that totaled $439 thousand. Overall operating expenses are expected to
decrease as a percentage of revenue during future periods because our sales of
mall sites and merchandise are based on e-commerce, which allows increases in
the volume of purchases without having to incrementally add overhead. We expect
selling, general and administrative expenses to increase in absolute dollars as
we continue to pursue advertising and marketing efforts, expand our locations
worldwide, expand our staff and incur additional costs related to the growth of
our business and being a public company.
Net Loss
We incurred a net loss of $(1,774,799) for the three months ended June 30, 2000
as compared to $(675) thousand for the comparable period in 1999. Net loss for
the three months ended June 30, 2000 was primarily affected by the non-cash
transactions mentioned above.
Recent Developments
In May 2000 we negotiated a strategic arrangement with Cyrsh Technologies
Corporation, a high-tech developer of Internet user services and search
protocols, which will allow us to be the primary marketer and co-distributor of
this cutting edge technology. This strategic partner will also provide certain
Internet connectivity and infrastructure support to our existing Internet
networks.
In June 2000 we negotiated a strategic arrangement with 2HQ.com, Inc., for mall
product sales applications including the back-end processing, order fulfillment,
distribution, and customer service. The arrangement also provides for web site
mega-search engine technology and private labeling of the Company's web page.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private sales
of equity and debt and cash generated from operations. As of June 30, 2000, we
had approximately $333,421 of cash and cash equivalents. As of that date, our
principal commitments consisted of obligations outstanding under operating
leases for facilities, vehicles and equipment, obligations to vendors stemming
from costs associated with the daily on-going operations, and obligations for
certain costs associated with the phone company acquisition in October 1999.
Net cash used in operating activities was $929 thousand for the six months ended
June 30, 2000 compared to $3.2 million for the six months ended June 30 1999.
Net cash used in operating activities for the six months ended June 30, 2000
primarily consisted of net operating losses adjusted for expenses paid by stock
issuances, increases in accounts receivable, accounts payable and amortization
and the adjustment for the write down of inventory. Net cash used in operating
activities for the six months ended June 30, 1999 primarily consisted of net
operating losses adjusted for items such as the increase in inventory, an
increase in accounts payable and decreases in prepaids and deposits.
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Net cash used in investing activities for the six months ended June 30, 2000
consisted the purchase of MNS Eagle Equity Group II and additions to fixed
assets, including facility leasehold improvements, equipment purchases,
including computer equipment. Net cash used for investing activities for the six
months ended June 30, 1999 included fixed asset purchases. Net cash used in
investing activities was $220,622 for the six months ended June 30, 2000
compared to $341,862 for the comparative six-month period in 1999.
Net cash provided by financing activities was $211,586 for the six months ended
June 30, 2000 compared to $1.2 million for the six months ended June 30, 1999.
Net cash provided by financing activities for 1999 was affected by the large
sales of private placement common stock.
The Company had a working capital deficit position as of June 30, 2000 of
approximately $187,000 as compared to a working capital position of
approximately $938,000 as of December 31,1999.
The Company had a Stockholders' Equity of $2,299,664 as of June 30, 2000 as
compared to a Stockholders' Equity $4,612,486 as of December 31,1999. The
Company had an accumulated Retained Earnings deficit of $14,959,489 at June 30,
2000, in comparison to an accumulated Retained Earnings deficit of $10,694,583
as of December 31, 1999. The increase in the accumulated deficit is due to the
net loss of $4,264,906 for the six months ended June 30, 2000.
The Company does not currently possess a financial institution source of
financing and the Company cannot be certain that it's existing sources of cash
will be adequate to meet its liquidity requirements. Therefore, the Company is
considering the following options to meet its liquidity requirements:
Attempting to raise additional funds through the sale of equity securities to
persons or entities who are not presently stockholders of the Company;
Attempting to franchise or license its technology and proprietary rights to
foreign countries;
Reducing the Company's present rate of expenditures, which might materially
adversely affect the ability of the Company to market its products and services
effectively.
The Company's future capital requirements will depend on factors, including (i)
the progress and effectiveness of its sales activities and marketing approach,
and (ii) the ability of the Company to maintain its existing customer base and
establishing and expanding its customer base into new domestic and foreign
markets. However, if operating expenses are higher than expected or if cash flow
from operations is lower than anticipated, there can be no assurance that the
Company will have sufficient capital resources to be able to continue as a going
concern.
We may need to raise additional capital funds if, for example, we pursue
business or technology acquisitions or experience operating losses that exceed
our current expectations. If we raise additional funds through the issuance of
equity, equity-related or debt securities, such securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.
Unless the Company is able to continue to generate revenues or obtain additional
financing in the future, the continuing losses incurred by the Company might
raise substantial doubt about the Company's ability to continue as a going
concern. Therefore, the Company's ability to continue in business as a going
concern depends upon its continuing ability to sell its products, to generate
franchise and licensing fees from the potential sales of its technology and
products, to conserve liquidity by setting sales and marketing goals and other
priorities, reducing expenditures, and to obtain financing through equity
offerings or conventional banking sources. In any event, there is no assurance
that any expenditure reductions, financings or other measures that the Company
may enact will enable it to meet its working capital requirements.
Description of Property
The Company's principal executive facility is located at 2575 McCabe Way
Irvine, California 92614. The Company leases approximately 26,000 square feet of
space pursuant to a sixty (60) month lease that terminates on November 1, 2004.
In 1999, the rental cost for this space was $40,164 per month, of which the
Company paid 100%.
10
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of PRICENET's common stock as of the date hereof. The information in
this table provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5% of
our common stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
Beneficial ownership has been determined in accordance with the rules and
regulations of the Securities and Exchange Commission and includes voting or
investment power with respect to the shares and may exceed 100%. Unless
otherwise indicated, the persons named in the table have sole voting and
investment power with respect to the number of shares indicated as beneficially
owned by them. The number of shares of common stock outstanding used in
computing beneficial ownership of each person listed below includes shares of
common stock held by that person as of June 30, 2000. The percentage of
beneficial ownership is based on 14,757,366 shares of common stock outstanding
as of June 30, 2000.
Directors, Executive Officers, Promoters and Control Persons
TABLE I
Name and Title Number of Shares
Of Beneficial Owner Beneficially Owned Percentage
------------------- ------------------ ----------
Donald J. Rakemann, President, 1,560,000 10.6%
Chairman of the Board, Chief
Executive Officer (1)
All Executive Officers and 1,560,000 10.6%
Directors as a group (1 person)
(1) The stock is restricted shares under Rule 144 of the Securities and Exchange
Act of 1933, as amended.
MANAGEMENT
Directors and Executive Officers
The names and ages of the Company's directors and executive officers are set
below. Biographical information for each of these persons is also presented
below.
The following table sets forth the name, age as of April 30, 2000, and position
of all of our directors and officers:
Directors and Officers Age Position
---------------------- --- --------
Donald Rackemann 69 Chairman of the Board and
Chief Executive Officer
Henry Camacho 70 Director, Secretary, Treasurer
Donald Borba 55 Director, Chief Operating Officer
Allen Kimble 38 Chief Financial Officer
Pursuant to PRICENET's bylaws, directors are to be elected at each annual
meeting and serve until their successors have been elected. We have not held an
annual meeting since the reverse merger. Officers are appointed by the board of
directors and serve for one-year terms.
Donald Rackemann has been the Chairman of the Board and the Chief Executive
Officer since 1998. Prior to heading up Price Net USA.com, Mr. Rackemann was
semi-retired but very involved in the manufacturing of golf equipment. From 1988
to 1994, he served as Chairman and CEO of National Telephone & Communications,
Inc. a long-distance telephone service provider, which he co-founded and was
responsible for its early growth and success. Incomnet, Inc. acquired the
company during 1994.
Henry Camacho has served as Secretary, Treasurer, and Director for Price Net
since 1998. From 1993 to 1996 Mr. Camacho served as Manager, Information Systems
of National Telephone and Communications, Inc. Mr. Camacho retired from Rockwell
International in 1992 after 20 years of service in various management positions
in the area of research and development.
11
<PAGE>
Donald Borba has been a member of Price Net's board of directors since 1999. Mr.
Borba has served as President of NCN Communications since 1991. Price Net
acquired NCN Communications in October 1999. Prior to NCN Communications, Mr.
Borba served as President of Entourage International, a publicly traded
multi-product manufacturer. From 1981 to 1989, Mr. Borba served as Executive
Vice President of Scientia Corporation, a petroleum products manufacturer and
the developer of the "Slick 50" automotive product.
Allen Kimble, CPA has served as Chief Financial Officer of Price Net USA.com
since April 2000. From 1999 to April 2000, Mr. Kimble served as Chief Financial
Officer of Trans Mobile Solutions, Inc. a privately held transportation company.
During this timeframe he also served as financial consultant to Xtranet Systems,
Inc. a publicly traded e-commerce company. From 1996 to 1999, Mr. Kimble served
as West Area Controller for Laidlaw Transit Services, Inc. From 1994 to 1996 Mr.
Kimble served as Senior Financial Consultant for Watkins, Consulting, Inc, a CPA
firm.
Board of Directors
Our Board of Directors currently has four members and our by-laws establish a
maximum of seven members. Directors are elected annually to serve until the next
annual meeting of stockholders and until their successors are elected and
qualified. Our Bylaws also provide that vacancies, including those caused by an
increase in the level of directors, may be filled by a majority of the remaining
directors though less than a quorum. When one or more directors shall give
notice of his or her resignation to the board, effective at a future date, the
board shall have the power to fill such vacancies to take effect when such
resignations shall become effective. These interim appointments shall remain in
office until the next annual shareholder meeting.
Board of Directors Compensation
We intend to pay our directors $1,000 each month or for each meeting attended.
If a special committee is selected for certain directors, each director shall
receive an additional fee of $1,000 for each committee meeting attended, unless
the committee meeting is held on the day of a meeting of the Board of Directors,
in which case they will receive no additional compensation for attending the
committee meeting. Non-employee directors will also be reimbursed for reasonable
costs and expenses incurred for attending any director or committee meetings.
Executive Compensation
The following table sets forth information concerning the annual and long-term
compensation earned by our Chief Executive Officer and each executive officer
anticipated for year 2000. We refer to these individuals collectively as the
Named Executive Officers.
Long Term
Compensation
Annual Compensation Awards
------------------------- ------------
Securities
Other annual Underlying
Name and principal position Salary($) compensation ($) Options
--------------------------- --------- --------------- ------------
Donald J. Rackemann, Chairman of the Board
and Chief Executive Officer........... $120,000 $-- $--
Henry Camacho, Secretary, Treasurer
and member of the board of directors.. $120,000 $-- $--
Donald Borba, President, NCN Communications
and member of the board of directors.. $240,000 $-- $--
Allen N. Kimble, CPA,
Chief Financial Officer ........... $ 84,000 $-- $--
Officers and Directors Compensation
-----------------------------------
Stock Salary Other
Name Options Title Payouts Year Compensation Compensation
---- ------- ----- ------- ---- ------------ ------------
Compensation of Directors and Officers
--------------------------------------
At present, PRICENET has no employment agreements with our other officers
or directors, although we intend to enter into such agreements with our full
time management executives.
12
<PAGE>
Certain Relationships and Related Transaction
---------------------------------------------
CERTAIN TRANSACTIONS
Options
As an incentive to a select group of key Independent Representatives the Company
issued options to buy Company stock.
The stock options are available to a significant number of Independent
Representatives (IRs). The Company hosted a promotional campaign during April
1999 to November 1999 where IRs had the potential to receive restricted company
stock in the form of options. The amount of shares that potentially could be
exercised at December 31, 1999 totaled 98,600. However, in order to qualify for
the granting of such options several performance goals must be met, including
remaining active within the Company's organization. If the IR leaves the Company
either by free will or is terminated for cause, all options available to that
individual are forfeited.
The option stock is not included within the shareholder section of the balance
sheet. The stock options are however figured into the diluted earnings per share
on the Statement of Operations.
Warrants
During 1999 the Company entered into an agreement with a product merchandise
distributor, "The Big Store" (see note 15). The Big Store provides an outlet
where Internet mall operators can send their customers to buy products on-line.
As part of the agreement with The Big Store, the Company has granted warrants to
purchase 1,000,000 shares of the Company's restricted common stock at 110% of
the per share market price at the date of the grant.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2000 by:(1) each of our directors;
(2) each of our executive officers; (3) each person known to us to be beneficial
owner of more than 5% of the common stock; and (4) all of our directors and
executive officers as a group.
Percentage of shares owned
-------------------------------
Name and address of Shares beneficially
beneficial owner owned
------------------- ------------------- ------------- -------------
DR & LR Trust .......... 1,230,000 (Donald Rackemann)
PO Box 7171
Newport Beach, CA 92660
Connective, LTD ........ 675,000 (Victor Barron)
C/O Sea Island Drive
Newport Beach, CA 92660
Donald Rackemann ....... 330,000
1 Lime Orchard
Laguna Niguel, CA 92677
Donald Borba ........... 294,327
Henry Camacho .......... 288,000
(Camco.com)
Redondo Beach, CA
Jerry Ballah ........... 266,000 (FWB, Inc)
32 Canyon Fairway
Newport Beach, CA 92660
All directors and
executive officers
as a group (3 persons). 2,142,327 --------
13
<PAGE>
Description of Securities
-------------------------
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50 million shares of common stock and
25 million of preferred stock. The following description of our capital stock
does not purport to be complete and is subject to and qualified in its entirety
by our Certificate of Incorporation and Bylaws, which are included as exhibits
to the registration statement of which this prospectus forms a part, and by the
provisions of applicable Nevada law.
Common Stock
Holders of common stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of common stock are entitled to receive ratable dividends when, as and if
declared by the Board of Directors out of funds legally available therefore.
Upon our liquidation, dissolution or winding up, holders of common stock share
ratably in our assets available for distribution to our stockholders, subject to
the preferential rights of any then-outstanding shares of preferred stock. No
shares of preferred stock will be outstanding immediately following the
consummation of this offering. Holders of common stock have no preemptive,
subscription, redemption, conversion rights or any right of first refusal. All
shares of common stock outstanding upon the effective date of this prospectus,
and the shares offered hereby will, upon issuance and sale, be fully paid and
non assessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 25 million shares of preferred stock in one or more
series, and to fix the designations, rights, preferences, privileges,
qualifications and restrictions thereof including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be superior to the rights of the
common stock. The Board of Directors, without stockholder approval, can issue
preferred stock with voting, conversion and other rights, which could adversely
affect the voting power and, other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms calculated to delay or
prevent a change in control or to make removal of management more difficult. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the common stock. The issuance of preferred stock may have the
effect of delaying, deterring or preventing a change in control without any
further action by the stockholders including, but not limited to, a tender offer
to purchase common stock at a premium over then current market prices. We have
no present plan to issue any additional shares of preferred stock.
Warrants and Options
At March 31, 2000, we had outstanding warrants and options to purchase up to
1,098,600 shares of common stock at an average weighted exercise price of $3.50
per share. All of such warrants and options expire by 2004.
SHARES ELIGIBLE FOR FUTURE SALE
Shares Subject to Rule 144
Of the 13,978,366 shares of common stock that are outstanding as of March 31,
2000, approximately 3,308,691 shares are freely trading with the remaining
balance being "restricted securities" as that term is defined in Rule 144. These
restricted securities will be eligible for sale under Rule 144 upon completion
of this offering, subject to the lock-up described below. As described below,
Rule 144 permits resale of restricted securities subject to certain
restrictions.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year,
including any person who may be deemed an "affiliate," would be entitled to sell
within any three-month period a number of such shares that does not exceed the
greater of 1% of the shares of our common stock then outstanding (149,784 shares
immediately after this offering) or the average weekly trading volume in our
common stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. A person who is not deemed to have
been an "affiliate" at any time during the three months immediately preceding a
sale and who has beneficially owned shares for at least two years would be
entitled to sell such shares under Rule 144 without regard to the volume
limitation described above.
14
<PAGE>
Resale of Shares Underlying Stock Options and Warrants In general, under Rule
701 under the Securities Act, any of our employees, directors, consultants or
advisors who purchase shares from us in connection with a compensatory stock or
option plan or other written compensatory agreement is entitled to resell such
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144, and are eligible to resell
such shares 90 days after the effective date of this offering in reliance on
Rule 144, subject to the provisions of the one year lock-up arrangements
discussed above.
Effect of Substantial Sales on Market Price of Common Stock
We are unable to estimate the number of shares that may be sold in the future by
existing security holders, or the effect, if any, that such sales will have on
the market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock, or the prospect of such sales, could
adversely affect the market price of our common stock.
Transfer Agent
--------------
Holladay Stock Transfer, Inc. of Scottsdale, Arizona is the transfer agent
and registrar for PRICENET's share of common stock. Phone No. (480) 481-3940.
Address: Holladay Business Plaza, 2939 North 67th Place, Scottsdale, Arizona
85251.
PART II
Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
The principal market where the Company trades its common stock shares is
NQB "Pink Sheets"; there are approximately four market makers. The trading
symbol is PUSA. The Company has approximately 14,137,506 shares outstanding, of
which 3,850,000 are in the public float. The Company went public on May 10,
1999.
The highs and lows on bid are prices for sales of the Company's common
stock shares during the past year ended December 31, as follows:
Bid Prices Ask Prices
1999 High Low High Low
---- ---- --- ---- ---
First quarter $-0- -0- $-0- -0-
Second Quarter 7.00 3.00
Third Quarter 3.50 1.50
Fourth Quarter .375 1.50
High and low bid information for PRICENET's common stock reflects
inter-dealer quotes, without retail markup, markdown or commission and may not
represent actual transactions. Prior to the third quarter of 1999 bid prices
were not researched and is believed that high and low bid prices were trading
less than $5.00 per share.
PRICENET is filing this Form 8-K with Form 10-SB disclosures included for
the purpose of enabling its shares to continue to trade on the OTC Bulletin
Board.
Approximate Number of Holders
-----------------------------
As of June 19, 2000, PRICENET had approximately 865 registered holders of
record of PRICENET common stock. Some of those registered holders are brokers
who are holding shares for multiple clients in street name. Accordingly,
PRICENET believes the number of actual shareholders of its common stock exceeds
the number of registered holders of record.
Dividends
---------
PRICENET has never paid any cash or stock dividends. PRICENET presently
intends to reinvest earnings, if any, to fund the development and expansion of
its business and therefore, does not anticipate paying dividends on our common
stock in the foreseeable future. The declaration of dividends will be at the
discretion of our board of directors and will depend upon our earnings, capital
requirements, financial position, general economic conditions and other
pertinent factors.
15
<PAGE>
Legal Proceedings
-----------------
Breakaway Solutions
Breakaway Solutions, formerly known as the Counsel Group, filed an action in the
Orange County Superior Court for a contract executed in 1998 by former PriceNet
President Melanie McCarthy for the merging and modification of existing systems
relative to the mall site and sales in the sum of $132,000. The matter was
settled on July 24, 2000 and PriceNet agreed to pay Breakaway Solutions a total
of $50,000, with $25,000 payable on August 1, 2000 and the remaining $25,000 to
be paid in monthly installments of $5,000 beginning September 1, 2000 until
paid.
Tate
Arbitration has been filed by Larry Tate, a former employee of the Company for
claimed breach of his consulting agreement. Tate contends that despite leaving
the Company and executing a release of claims and payment of 100,000 shares of
stock, the shares do not apply to the settlement and was a part of his initial
payment, thereby claiming that 100,000 additional shares are due him. The
Company contends the settlement and release signed by Tate, along with payment
of 100,000 shares represents payment in full to Tate. Tender of 50,000 shares of
stock to Tate has settled this matter.
Sweeney
The Company against the former Co-Chairman/Chief Operations Officer James A.
Sweeney has commenced litigation for International Interference with Economic
Relationship, Breach of Fiduciary Duty, Fraud, Breach of Contract, and Trade
Libel. The Company has obtained a preliminary injunction against Sweeney. Mr.
Sweeney has filed a cross-complaint for breach of contract, constructive
termination, fraud, conversion and interference with contract/perspective
business advantage and defamation. The Company is vigorously pursuing the matter
toward a favorable outcome. The discovery process is ongoing and the matter is
set for trial in late November 2000.
Ballah, The Big Store, The Big Hub, The Big Biz.com, OhGolly.com, IPowerBiz,
PriceNet Marketing, and MGI WorldNet.com (the Ballah group)
The Company against the former Director/President Jerry Ballah, Bruce Ballah,
The Big Store.com, The Big Hub.com, The Big Biz.com, OhGolly.com, IPowerBiz,
PriceNet Marketing, and MGI WorldNet.com (the Ballah group) has commenced
litigation in the amount of not less than $25,000,000 for Breach of Fiduciary
Duty, Fraud, Breach of Contract, International Interference with Contractual
Relationships, Misappropriation of Trade Secrets, Unfair Competition,
Accounting, and Injunctive Release. The discovery process is ongoing and the
Company is vigorously pursuing the matter toward a favorable outcome.
In addition to the matters discussed above, the Company is involved in various
legal matters that arise in the normal course of business. The Company believes
that the ultimate resolution of the matters described above and other matters it
is currently aware of will not have an unfavorable material impact on its
financial condition, results of operations or cash flows.
INDEPENDENT AUDITORS
Mark Shelley Intl., CPA, independent auditor, has review our consolidated
financial statements as of June 30, 2000. He has also audited our consolidated
financial statements at December 31, 1999 and December 31, 1998, as set forth in
this report. We have included our financial statements in the prospectus and
elsewhere in the registration statement in reliance on Mark Shelley Intl., CPA's
report, given on his authority as an expert in accounting and auditing.
Recent Sales of Unregistered Securities
---------------------------------------
Common Stock Issuances During 1998
Merger of Gold Star Gaming, Inc. with Price Net, Inc. On March 11, 1998 the
Company, known then as Gold Star Gaming, Inc. merged with Price Net, Inc. in a
reverse merger. The net effect of the merger resulted in an additional 1,100,000
shares issued.
16
<PAGE>
Regulation D, Rule 504 Offering
During the year 1998 the Company had a Regulation D, Rule 504 Offering. The
offering was completed prior to the end of December 31, 1998. The offering sold
shares in four tiers, each one costing more than the last. Share prices ranged
from $0.50 to $2.00. The schedule below summarizes the total number of shares
issued as well as the total amount of the sales proceeds.
Share Price Shares Amount
----------- ------ ------
$0.50 660,000 $330,000
$1.00 325,000 325,000
$1.50 153,017 229,526
$2.00 67,332 115,163
------ -------
Totals for 504 Offering 1,205,349 $999,689
========= ========
Stock for Independent Representative Commission
In December 1998 the Company issued restricted common stock totaling 25,000
shares as a bonus commission to a key Independent Representative.
Common Stock Issuances During 1999
During 1999, the Company issued shares of stock for cash payments, distributor
commissions, employee bonuses, consulting and vendor services, cancellation of
company debt, and inventory acquisition. Each of the recipients of the
securities described below represented that they understood that the securities
acquired might not be sold or otherwise transferred absent registration under
the Securities Act of 1933. Each stock certificate issued bears the Rule 144
restriction endorsement.
Stock Sales, Private Offering
The Company sold to various investors during the year 2,960,229 shares of common
stock for $2 per share. Each of these investors completed an appropriate
subscription agreement detailing his or her qualification for such investments.
Stock Sales, Private Offer
The Company sold to a single individual 5,000 shares of common stock bearing the
R144 restriction for $2,500. The sale price was based on a previous commitment
to this individual during 1998.
Stock for Independent Representative Commissions
During the year the Company adopted special promotional campaigns to encourage
the sales of its Internet Malls. Part of the compensation paid to IRs for these
campaigns included restricted common stock. A total of 753,000 shares were
issuance for IR commissions and the non-cash compensation expense associated
with these issuances totaled $1,506,000. The total non-cash compensation cost
for each recipient was properly reported to the appropriate taxing authorities
during 1999.
Stock for Employee Bonuses
In an effort to maintain a positive working environment and to retain key
individuals, the Company issued to its employees 671,000 shares of restricted
common stock as bonuses. The non-cash compensation cost for the Company totaled
$1,342,000 and was properly included in the employee's income calculations for
1999 and included on the Form W-2 and/or Form 1099 submitted to the appropriate
taxing authorities.
Stock for Consulting/Services
The Company reimbursed attorneys, consultants and other professional fees and
costs with its restricted common stock. The Company issued 960,966 shares of
stock at an agreed upon cost of $2 per share for a total value of $1,921,932 for
these services.
Stock for Advertising
The Company sponsored certain professional golfers. In exchange for portraying
the Pricenet logo on golfing material the golfers and their caddies were given a
total of 11,500 shares of stock valued at $23,000.
Stock for Debt
During July of 1999 the Company converted debt of $150,000 by issuing 300,000
shares of stock priced at $0.50 per share. The debt was a note payable to an
individual, R. Slatkin, who had lent money to the Company. The creditor's price
was based on an option to convert the debt into stock at $0.50 per share.
Stock for Inventory
During the quarter ended March 31, 1999 the Company purchased from DR Trust
6,400 Web PAL units for resale. A Web PAL unit allows a regular television set
to become connected to the Internet. The Company paid $100 each for these units,
giving $246,000 in cash and issuing 500,000 shares of restricted common stock
valued at $394,000.
17
<PAGE>
Stock for NCN Purchase
As part of the NCN purchase the Company issued to the shareholders of NCN
1,090,160 shares of restricted common stock. See Note 12 for more detail on this
purchase.
Stock Subscribed
The Company had stock subscribed totaling 315,020 shares valued at $630,040 as
of the end of the year. As of the report date 130,020 shares have been paid for.
Indemnification of Officers and Directors
-----------------------------------------
Our certificate of incorporation and bylaws contain provisions indemnifying
our directors and executive officers against liabilities. In our certificate of
incorporation, we have to the extent permitted by Nevada law eliminated the
personal liability of our directors and executive officers to PriceNet USA Inc.
and our stockholders for monetary damages for breach of their fiduciary duty,
including acts constituting gross negligence. However, in accordance with Nevada
law, a director will not be indemnified for a breach of his/her duty of loyalty,
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation or any transaction from which the director derived improper
personal benefit. In addition, our bylaws further provide that we may advance to
our directors and officers expenses incurred in connection with proceedings
against them for which they are entitled to indemnification. However, we
currently maintain Directors and Officers Liability Insurance through our
insurance broker, Brakke-Schafnitz Insurance Brokers, Inc.
We have also agreed to indemnify, defend, and hold harmless each of our
officers and directors to the fullest extent permissible by law with regard to
any and all loss, expense or liability, including payment and advancement of
reasonable attorney's fees, arising out of or relating to claims of any kind,
whether actual or threatened, relating in any way to their service to us. We
plan to memorialize these agreements as written contracts.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted for directors, officers and controlling
persons of the Company, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore,
unenforceable.
18
<PAGE>
Continuation of Form 8-K
------------------------
Item 3. Bankruptcy or Receivership
----------------------------------
Not Applicable.
Item 4. Changes in Registrant's Certifying Accountant
-----------------------------------------------------
Not Applicable.
Item 5. Other Events
--------------------
(a) Successor Issuer Election. In accordance with Rule 12g-3(a) of the
General Rules and Regulations of the Securities and Exchange Commission,
PRICENET became the successor issuer to MNS for reporting purposes under the
Securities Exchange Act of 1934 and elects to report under the Act effective
with the filing of this 8-K report.
(b) Important Information about the Registrant. The information reported in
this item is the same information that is reported in a Form 10-SB Registration
Statement under the Securities Exchange Act of 1934, as amended. This
information may be found in Item 2 of this Form 8-K.
Item 6. Resignations of Registrant's Directors
----------------------------------------------
Not Applicable.
Item 7. Financial Statement, Proforma, Financial Information and Exhibits
-------------------------------------------------------------------------
(a) The financial statements of Price Net U.S.A., Inc. and MNS Eagle
Equity Group I, Inc.
(b) Exhibits
Exhibit number
--------------
2.0 Stock Exchange Agreement
3.1 Articles of Merger and Articles of Incorporation
3.3 Bylaws
Item 8. Change in Fiscal Year
-----------------------------
Not Applicable.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PRICE NET U.S.A., INC.
By: /s/ Donald Rackemann
------------------------
Name: Donald Rackemann
Title: Chief Executive Officer
Dated: June 30, 2000
19
<PAGE>
PriceNet USA, Inc.
Index to Consolidated Financial Statements
Contents
Report of Independent Auditor as of December 31, 1999..................... F-1
Consolidated Balance Sheets as of December 31, 1998 and December 31,
1999..................................................................... F-2
Consolidated Statement of Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999......................... F-3
Consolidated Statement of Operations for the years ended December 31,
1999 and 1998 and the period of October 7, 1997 to December 31,1997...... F-4
Consolidated Statement of Cash Flows for the years ended December 31,
1999 and 1998 and the period of October 7, 1997 to December 31,1997...... F-5
Notes to Consolidated Financial Statements......................... F-6 to F-15
Consolidated Balance Sheet as of March 31, 2000 (unaudited)............... F-16
Consolidated Statement of Operations as of March 31, 2000(unaudited)...... F-17
Review Report of Independent Auditor as of June 30, 2000.......... F-18 to F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
M.A. Shelley Intl., CPA
443 E. 10th Ave.
Mesa, AZ 85204
(480) 649-0144
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors
Price Net U.S.A., Inc.
I have audited the accompanying consolidated balance sheets of Price Net
U.S.A., Inc. as of December 31, 1999 and 1998 and the related statements of
stockholders' equity, operations, and cash flows for the period from October 7,
1997 through December 31, 1997 and the years 1998 and 1999. These financial
statements are the responsibility of the Company's Management. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Price Net U.S.A., Inc. as of
and December 31, 1998 and 1999 and the related statements of stockholders'
equity, operations, and cash flows for the period from October 7, 1997 through
December 31, 1997 and the years 1998 and 1999 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As shown in the financial statements
the Company has accumulated a net loss and is in an emerging industry. These
factors raise doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
this uncertainty.
/s/ M.A. Shelley Intl., CPA
---------------------------
M.A. Shelley Intl., CPA
April 25, 2000
F-1
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PriceNet USA, Inc.
Consolidated Balance Sheet
As of December 31, 1999 and December 31, 1998
1999 1998
----------- ----------
Assets
Cash 938,272
Receivables 334,498 5,112
Inventory 572,925 3,972
Prepaids -- --
---------- ----------
Total Current Assets 1,845,695 9,084
---------- ----------
Equipment and Furniture, net of depreciation 991,361 114,457
Investment 13,500
NCN Customer Base 2,954,834
Deposits 66,179 48,321
---------- ----------
Total Assets 5,871,569 171,862
========== ==========
Liabilities
Bank Overdraft 15,369
Accounts Payable 72,972 67,386
Other Current Liabilities 864,072
Notes Payable and Contingent Liabilities 322,039 562,525
---------- ----------
Total Current Liabilities 1,259,083 645,280
---------- ----------
Stockholders' Equity
Preferred Stock, 25,000,000 shares authorized
None outstanding, par value $0.001 -- --
Common Stock, 50,000,000 shares authorized
12,147,234 shares outstanding at 12/31/99
and 4,580,359 shares outstanding 12/31/98
Par value $0.001 12,147 4,580
Paid in Capital 15,924,962 1,044,659
Stock Subscribed (630,040) --
Retained Earnings (Loss) (10,694,583) (1,522,657)
---------- ----------
Total Stockholders' Equity 4,612,486 (473,418)
---------- ----------
Total Liabilities and Stockholders' Equity 5,871,569 171,862
========== ==========
The accompanying notes are an integral part of these statements
F-2
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<TABLE>
<CAPTION>
PriceNet USA, Inc.
Statement of Stockholder's
Equity For the period from October 7, 1997 through December 31, 1999
Common Stock Paid in Stock Retained Total
Shares Amount Capital Subscribed Earnings Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capitalization 2,250,010 $ 2,250 $ 22,750 $ 25,000
Retained Earnings (Loss) $ (201,737) $ (201,737)
----------------------------------------------------------------------------------------
Balance, December 31, 1997 2,250,010 $ 2,250 $ 22,750 $ -- $ (201,737) $ (176,737)
Common Stock Issuances for 1998
Merger Price Net and Gold Star 1,100,000 $ 1,100 $ (6,550) $ (5,450)
Stock Sales 504 Offering 1,205,349 $ 1,205 $ 998,484 $ 999,689
Stock for Independent Rep Commissions 25,000 $ 25 $ 29,975 $ 30,000
Retained Earnings (Loss) $ (1,320,920) $ (1,320,920)
----------------------------------------------------------------------------------------
Balance,December 31, 1998 4,580,359 $ 4,580 $ 1,044,659 $ -- $ (1,522,657) $ (473,418)
Common Stock Issuances for 1999
Stock Sale, Private Offering $2/share 2,960,229 $ 2,960 $ 5,917,498 $ 5,920,458
Stock Sale, Private Offering 5,000 $ 5 $ 2,495 $ 2,500
Stock for Independent Rep Commissions 753,000 $ 753 $ 1,505,247 $ 1,506,000
Stock for Employee Bonuses 671,000 $ 671 $ 1,341,329 $ 1,342,000
Stock for Consulting/Services 960,966 $ 961 $ 1,920,971 $ 1,921,932
Stock for Advertising 11,500 $ 12 $ 22,988 $ 23,000
Stock for Debt 300,000 $ 300 $ 149,700 $ 150,000
Stock for Inventory 500,000 $ 500 $ 393,500 $ 394,000
Stock for NCN Purchase 1,090,160 $ 1,090 $ 2,996,850 $ 2,997,940
Stock Subscribed 315,020 $ 315 $ 629,725 $ (630,040) $ --
$ --
Retained Earnings (Loss) $(9,171,926) $ (9,171,926)
----------------------------------------------------------------------------------------
Balance, December 31, 1999 12,147,234 $ 12,147 $ 15,924,962 $ (630,040) $(10,694,583) $ 4,612,486
========================================================================================
The accompanying notes are an integral part of these statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PriceNet USA, Inc.
Consolidated Statement of Operations
For the period from October 7, 1997 through
December 31, 1997, and the years 1998 and 1999
Year Ended Year Ended 10/7/97 to
12/31/99 12/31/98 12/31/97
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Mall, Service and Product Sales 8,086,630 123,890
Telephone Service Revenue 205,785
Other Income 14,344 1,051 2,889
---------- ---------- ----------
Total Revenue 8,306,759 124,941 2,889
---------- ---------- ----------
Costs of Sales
Costs of Goods Sold 485,784 45,198
Commissions 8,224,137 --
---------- ---------- ----------
Total Costs of Sales 8,709,921 45,198
---------- ---------- ----------
Gross Profit (Loss) (403,162) 79,743 2,889
---------- ---------- ----------
Expenses
Payroll, Professional Fees 5,610,134 740,865 131,038
Rent 532,033 170,479 16,726
Advertising and Promotion 289,639 81,017 2,094
Training, Relocation 43,424 2,894
Amortization 251,941
Depreciation 61,930 12,188
Interest Expense 43,828 8,631 493
Bad Debt 7,153 2,199
Other General and Administrative Expenses 1,972,106 341,860 51,381
---------- ---------- ----------
Total Expenses 8,768,764 1,400,663 204,626
---------- ---------- ----------
Income Before Income Taxes (9,171,926) (1,320,920) (201,737)
Provision for Income Taxes -- -- --
---------- ---------- ----------
Net Income (Loss) (9,171,926) (1,320,920) (201,737)
========== ========== ==========
Basic Earnings per Share (1.21) (0.39) (0.09)
---------- ---------- ----------
Basic Weighted Average Number of Shares 7,562,520 3,370,748 2,250,010
---------- ---------- ----------
Diluted Earnings per Share (1.00) (0.39) (0.09)
---------- ---------- ----------
Diluted Weighted Average Number of Shares 9,146,120 3,370,748 2,250,010
---------- ---------- ----------
The accompanying notes are an integral part of these statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PriceNet USA, Inc.
Statement of Cash Flows
For the period from October 7, 1997 through
December 31, 1997, the years 1998 and 1999
Year Ended Year Ended 10/7/97 to
12/31/99 12/31/98 12/31/97
-------- -------- --------
<S> <C> <C> <C>
Cash from Operations
Net Loss (9,171,926) (1,320,920) (201,737)
Yearly expenses paid for with stock 4,792,932
Net Change in Receivables (329,386) 31,038 (36,150)
Net Change in Inventory (174,953) (3,972)
Depreciation 61,930 12,188
Amortization 251,941
Payables and Bank Overdraft 765,454 3,041 85,164
Prepaids 5,000 (5,000)
Deposits (23,708) (34,521) (13,800)
---------- ---------- ---------
Total Cash from Operations (3,827,716) (1,308,146) (171,523)
---------- ---------- ---------
Cash Used in Investments
Cash Used in Merger (5,450)
Purchase of Stock as Investment (33,000)
Purchase of Fixed Assets (938,834) (68,168) (58,477)
---------- ---------- ---------
Total Cash Used for Investments (971,834) (73,618) (58,477)
---------- ---------- ---------
Cash from Financing
Pay Down of Notes Payable (185,136) 357,525 205,000
Sales of Stock 5,922,958 1,024,239 25,000
---------- ---------- ---------
Total Cash from Financing 5,737,822 1,381,764 230,000
---------- ---------- ---------
Net Change in Cash 938,272 -- --
Beginning Balance -- -- --
Ending Balance 938,272 -- --
========== ========== ==========
See Notes to Financial Statements for a
detailed explanation of the non cash
transactions
The accompanying notes are an integral part of these statements
F-5
</TABLE>
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1. GENERAL BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and General Business
Price Net U.S.A., Inc., (the Company) was originally organized in Nevada as Gold
Star Gaming, Inc. on May 31, 1994. The Company was founded in order to market
and operate an Internet based infrastructure that supports a home-based
business. Please refer to Note 2 below regarding the reverse acquisition, which
took place on March 11, 1998.
Internet Shopping Mall Concept
The Company markets an extensive line of products and services on the Internet.
Customers have the service, convenience and advantage of using the Internet from
their home or office to make purchases.
Marketing through Networking
The Company markets their products and services to retail consumers as well as
business to business. Price Net uses a network-marketing program of independent
representatives and mall operators to sell their products and services. The mall
operators typically pay an initial set-up and training charge, and a monthly
mall maintenance fee. This program offers the Company the advantage of a rapidly
expanding sales force without the normal upfront and ongoing costs of
maintaining a sales organization of this size. Each mall operator is compensated
on the retail purchases of products and services from their Internet shopping
mall.
Accounting Basis
The basis is generally accepted accounting principles.
Revenue
The Company receives revenue from retail product sales, services, the sale of
online shopping mall sites, and monthly mall site fees. The Company has over one
million retail products available on its shopping sites. Services available
include long distance telephone service, Internet service provider (ISP)
service, prepaid legal service, income tax audit protection service and Internet
site maintenance and upgrading. Online shopping mall sites are sold by the
company's network of Independent Representatives (IR). Each site is considered
an Independent Mall Operator (IMO).
When initially established, each Independent Mall Operator (IMO) receives a
unique reference number for their site. This number is used to track all
Internet retail activity for their site. Each IMO provides access codes to
customers so the customers will purchase items on their shopping site. PriceNet
has associations with various merchandise distributors that actually capture,
process and provide customer support for all Internet retail sales. One a
monthly basis the distributors provide data and submit sales commissions to the
Company, who then distributes commissions to the IMOs and IRs. On December 31,
1998 the malls sites began processing retail product sales orders. During 1999
product sales increased but were still not yet a significant source of revenue.
To maintain active online, each IMO must pay a nominal monthly service fee.
Independent Representative (IR) Commissions
An IR is considered an independent contractor working their own businesses
similar to other network marketing companies in the industry. Each IR receives
commissions from the following potential sources. Commissions are paid on
independent Internet Mall Operator site sales, retail product sales, service
sales and Mall merchandise sales. These are the same sources for which the
Company receives revenue. Each IR receives a greater commission for sales that
he or she directly makes and a lesser commission on sales his or her
organization makes. These commissions vary depending on how large of an
organization an IR has and the particular products and services being sold
Payroll and Professional Fees
The Company incurred a total of $5,610,143 in payroll and professional fees
during 1999. Included in the total amount, the Company issued restricted common
stock as part of the compensation to IRs, employee bonuses, and consulting
services. As such, the total non-cash portion of compensation cost associated
with the issuances totaled $5,183,210.
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F-6
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Advertising and Promotions
Advertising and promotional expenses are expensed when incurred. The majority of
these costs relate to a monthly sales promotion meeting which the Company
sponsors.
Sales Taxes
Currently the Company follows the normal industry practice of only collecting
sales tax on shipments of products to consumers within its home state of
California. Currently, sales are considered to be sold from the Company
headquarters. The Internet sales industry is new and changing constantly. Local,
state and federal agencies have not fully addressed this new sales medium.
Management cannot predict what if any taxes a particular government or agency
may impose on future or even past sales. A successful assertion by one or more
states or any foreign country could have a material adverse effect on the
Company's business and financial statements if the taxes are applied
retroactively.
Income Taxes
The provision for income taxes is the total of the current taxes payable and the
net of the change in the deferred income taxes. Provision is made for the
deferred income taxes where differences exist between the period in which
transactions affect current taxable income and the period in which they enter
into the determination of net income in the financial statements.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in the primary financial statements
and has provided supplemental disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (see
Note 7).
Earnings per Share
The basic earnings (loss) per share is calculated by dividing the Company's net
income (adjusted for certain dividends when paid) by the weighted average number
of common shares during the year. The diluted earnings (loss) per share is
calculated by dividing the Company's net income (loss) (adjusted for certain
dividends and certain interest when expensed) by the diluted weighted average
number of shares outstanding during the year. The diluted weighted average
number of shares outstanding is the basic weighted average number of shares
adjusted as of the first of the year for any potentially dilutive debt or
equity.
12/31/99 12/31/98
-------- --------
Basic weighted average number of shares 7,562,520 3,370,748
Options and Warrants 1,583,600 0
Diluted weighted average number of shares 9,146,120 3,370,748
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2. REVERSE ACQUISITON
On March 11, 1998 the Company, known then as Gold Star Gaming, Inc.
purchased/merged with Price Net U.S.A., Inc. The surviving entity was Gold Star
Gaming, Inc., which changed its name to Price Net U.S.A., Inc. Price Net was
organized October 7, 1997. For this purchase Gold Star issued 2,250,010 shares
of common stock and exchanged these shares with Price Net shares. The Gold Star
shareholders then gave back to the Company all of their shares except 1,100,000.
The final result left the Company with 3,350,010 shares of common stock issued
and outstanding. This purchase was properly accounted for as a reverse merger
because Gold Star was considered the nominal acquirer. A reverse merger means
that for accounting purposes the nominal acquirer is viewed as having been
acquired by the legally acquired company. Reverse merger also means that the
historical data shown on the financial statements will be that of the acquired
company. In others words, for accounting, the merger is as if Price Net
purchased Gold Star.
--------------------------------------------------------------------------------
F-7
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As shown in the financial statements
the Company has accumulated a net loss. This factor raises doubt about the
Company's ability to continue as a going concern. The Company is also in a new
emerging industry (internet) which to date has not proven itself profitable. The
financial statements do not include any adjustments that might result from these
uncertainties.
NOTE 4. EQUIPMENT, FURNITURE, FIXTURES AND IMPROVEMENTS
The Company capitalized the purchase of equipment, furniture, fixtures and
improvements for major purchases in excess of $1,000 per item. Capitalized
amounts are depreciated over the useful life of the assets using the
straight-line method of depreciation.
Scheduled below are the assets, lives, costs and accumulated depreciation at
December 31, 1999 and 1998.
12/31/99 12/31/98
-------- --------
Computer Hardware and Office Equipment 5 years $ 290,913 $ 78,544
Computer Software 5 years 56,620 32,950
Leasehold Improvements 10 years 560,538
Office Furniture and Fixtures 7 years 157,408 15,151
---------- ----------
Total Equipment and Furniture $1,065,479 $ 126,645
---------- ----------
Accumulated Depreciation $ 74,118 $ 12,188
---------- ----------
Net Equipment and Furniture $ 991,361 $ 114,457
---------- ----------
NOTE 5. INCOME TAXES
The provision for income taxes is the total of the current taxes payable and the
net of the change in the deferred income taxes. Provision is made for the
deferred income taxes where differences exist between the period in which
transactions affect current taxable income and the period in which they enter
into the determination of net income in the financial statements. A valuation
account is established for any tax benefit, which may not be realized. The
Company has a net operating loss of approximately $10,694,583.
Deferred income tax benefit netted with valuation account 0
Current income taxes payable 0
----
Provision for Income Taxes 0
----
NOTE 6. RELIANCE ON OFFICER
Mr. Donald Rackeman serves as the Chairman of the Company's Board of Directors
and also holds the position of Chief Executive Officer. His business experience
is vital to the Company. If Mr. Rackeman were unable to continue in his present
role the Company might be adversely affected. The Company carries no key-man
insurance on Mr. Rackeman. Aside from the business skills and business contacts,
which Mr.Rackeman brings to the Company, he has also guaranteed personally the
leased vehicles, the phone system and the building lease.
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F-8
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 7. STOCKHOLDER'S EQUITY
The Company has one class of preferred stock. There are 25,000,000 shares of
authorized stock. No preferred stock has been issued or is outstanding at the
end of December 31, 1999 and 1998.
The Company has one class of common stock. There are 50,000,000 shares
authorized. The rights of this class of stock are all the same. The common stock
has all of the rights afforded Nevada shareholders. As of December 31, 1998 the
Company had 4,580,359 shares outstanding. As of December 31, 1999 the Company
had 12,147,234 shares outstanding. Common stock issuances for fiscal 1998 and
fiscal 1999 are detailed below.
Common Stock Issuances During 1998
Merger of Gold Star Gaming, Inc. with Price Net, Inc.
On March 11, 1998 the Company, known then as Gold Star Gaming, Inc. merged with
Price Net, Inc. in a reverse merger. The net effect of the merger resulted in an
additional 1,100,000 shares issued.
Regulation D, Rule 504 Offering
During the year 1998 the Company had a Regulation D, Rule 504 Offering. The
offering was completed prior to the end of December 31, 1998. The offering sold
shares in four tiers, each one costing more than the last. Share prices ranged
from $0.50 to $2.00. The schedule below summarizes the total number of shares
issued as well as the total amount of the sales proceeds.
Share Price Shares Amount
----------- ------ ------
$ 0.50 660,000 $ 330,000
$ 1.00 325,000 325,000
$ 1.50 153,017 229,526
$ 2.00 67,332 115,163
--------- ---------
Totals for 504 Offering 1,205,349 $ 999,689
========= =========
Stock for Independent Representative Commission
In December 1998 the Company issued restricted common stock totaling 25,000
shares as a bonus commission to a key Independent Representative.
Common Stock Issuances During 1999
During 1999, the Company issued shares of stock for cash payments, distributor
commissions, employee bonuses, consulting and vendor services, cancellation of
company debt, and inventory acquisition. Each of the recipients of the
securities described below represented that they understood that the securities
acquired might not be sold or otherwise transferred absent registration under
the Securities Act of 1933. Each stock certificate issued bears the Rule 144
restriction endorsement.
Stock Sales, Private Offering
The Company sold to various investors during the year 2,960,229 shares of common
stock for $2 per share. Each of these investors completed an appropriate
subscription agreement detailing his or her qualification for such investments.
Stock Sales, Private Offer
The Company sold to a single individual 5,000 shares of common stock bearing the
R144 restriction for $2,500. The sale price was based on a previous commitment
to this individual during 1998.
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F-9
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Stock for Independent Representative Commissions
During the year the Company adopted special promotional campaigns to encourage
the sales of its Internet Malls. Part of the compensation paid to IRs for these
campaigns included restricted common stock. A total of 753,000 shares were
issuance for IR commissions and the non-cash compensation expense associated
with these issuances totaled $1,506,000. The total non-cash compensation cost
for each recipient was properly reported to the appropriate taxing authorities
during 1999.
Stock for Employee Bonuses
In an effort to maintain a positive working environment and to retain key
individuals, the Company issued to its employees 671,000 shares of restricted
common stock as bonuses. The non-cash compensation cost for the Company totaled
$1,342,000 and was properly included in the employee's income calculations for
1999 and included on the Form W-2 and/or Form 1099 submitted to the appropriate
taxing authorities.
Stock for Consulting/Services
The Company reimbursed attorneys, consultants and other professional fees and
costs with its restricted common stock. The Company issued 960,966 shares of
stock at an agreed upon cost of $2 per share for a total value of $1,921,932 for
these services.
Stock for Advertising
The Company sponsored certain professional golfers. In exchange for portraying
the Pricenet logo on golfing material the golfers and their caddies were given a
total of 11,500 shares of stock valued at $23,000.
Stock for Debt
During July of 1999 the Company converted debt of $150,000 by issuing 300,000
shares of stock priced at $0.50 per share. The debt was a note payable to an
individual, R. Slatkin, who had lent money to the Company. The creditor's price
was based on an option to convert the debt into stock at $0.50 per share.
Stock for Inventory
During the quarter ended March 31, 1999 the Company purchased from DR Trust
6,400 Web PAL units for resale. A Web PAL unit allows a regular television set
to become connected to the Internet. The Company paid $100 each for these units,
giving $246,000 in cash and issuing 500,000 shares of restricted common stock
valued at $394,000.
Stock for NCN Purchase
As part of the NCN purchase the Company issued to the shareholders of NCN
1,090,160 shares of restricted common stock. See Note 12 for more detail on this
purchase.
Stock Subscribed
The Company had stock subscribed totaling 315,020 shares valued at $630,040 as
of the end of the year. As of the report date 130,020 shares have been paid for.
Options
As an incentive to a select group of key Independent Representatives the Company
issued options to buy Company stock. The list below depicts the option recipient
and number of shares available.
Miscellaneous shares for 9 Key Representatives 31,000
Robert Gibson 10,000
DKY Enterprises 59,000
Keith Yarborough 50,000
Gil Kim 60,000
Douglas Forsberg 75,000
Jeff Schlegle 100,000
Ron Touchard 100,000
-------
TOTAL 485,000
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F-10
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
In addition to the options indicated above, stock options are available to a
significant number of Independent Representatives (IRs). The Company hosted a
promotional campaign during April 1999 to November 1999 where IRs had the
potential to receive restricted company stock in the form of options. The amount
of shares that potentially could be exercised at December 31, 1999 totaled
98,600. However, in order to qualify for the granting of such options several
performance goals must be met, including remaining active within the Company's
organization. If the IR leaves the Company either by free will or is terminated
for cause, all options available to that individual are forfeited.
The option stock is not included within the shareholder section of the balance
sheet. The stock options are however figured into the diluted earnings per share
on the Statement of Operations.
Warrants
During 1999 the Company entered into an agreement with a product merchandise
distributor, "The Big Store" (see note 15). The Big Store provides an outlet
where Internet mall operators can send their customers to buy products on-line.
As part of the agreement with The Big Store, the Company has granted warrants to
purchase 1,000,000 shares of the Company's restricted common stock at 110% of
the per share market price at the date of the grant.
SFAS No. 123
As permitted under SFAS No. 123, the Company has not recognized compensation
expense for the theoretical value of its options and warrants at the grant date
(in excess of the recognition of the intrinsic value). Had compensation expense
for the Options and Warrants been based on the fair value of the options at the
grant date amortized over any potential vesting period, the Company's pro forma
net loss and net loss per share would have been as follows:
December 31,1999 December 31, 1998
---------------- -----------------
Net Loss:
As Reported $(9,171,926) $(1,320,920)
Pro forma $(9,571,076) $(1,320,920)
Net Loss Per Share:
As Reported - Basic and Diluted $(1.00) $(0.09)
Pro forma - Basic and Diluted $(1.05) $(0.09)
In determining the fair value of options and warrants granted for purposes of
the preceding pro forma disclosures, the Company used the minimum value
option-pricing model with the following weighted-average assumptions for 1999
and 1998, respectively: risk-free interest rate of 5%, dividend yield of zero,
and expected life of 1 year for the options and 5 years for the warrants. The
options granted during 1999 had a weighted average fair value of $1.57 per share
and the warrants had a weighted average fair value of $0.35 per share.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Office Leases
On November 1, 1999 the Company entered into an agreement to lease a 24,342
square feet facility located at 2575 McCabe Way, Irvine California. The lease
term is 60 months and the initial monthly rent is $40,164.
The Company has an existing facility located at 2424 S.E. Bristol, Newport
Beach, California which incurs a lease payment of $18,323 per month. The lease
term for this facility expires on December 31, 2003. The Company is actively
marketing the property for another entity to assume the lease. The lease tables
below do not factor the lease cancellation or assumption possibility.
The Company leases a storage facility located at Brook hollow Office Park, Santa
Ana, California for $3,500 per month. The term for this lease expires on April
5, 2000.
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F-11
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Vehicle Leases
The Company provides leased vehicles to a select group of independent
representatives and corporate senior management. At the end of December 1999
there were a total of twenty-one vehicles leased with a total monthly payment of
$21,734.
Office Equipment
The Company leases photocopying and other computer equipment from vendors. The
monthly payments for this leased equipment totals approximately $300 per month.
Below is a listing of the operating lease commitments for the next five years as
of December 31, 1998.
Year 1 Years 2 Year 3 Year 4 Year 5
------ ------- ------ ------ ------
Office Lease $374,074 $513,999 $532,356 $548,419 $564,482
Vehicles $1,690/mth 20,184 20,184 20,184 4,752 4,752
Office Equipment $900/qtr 3,600 3,600 3,600 3,600 3,600
------- ------- ------- ------- -------
Total $397,858 $537,783 $556,140 $556,771 $572,834
------- ------- ------- ------- -------
Below is a listing of the operating lease commitments for the next five years as
of December 31, 1999.
Year 1 Years 2 Year 3 Year 4 Year 5
------ ------- ------ ------ ------
Offices Lease $781,593 $849,856 $875,077 $805,593 $540,392
Vehicles $21,734/mth 260,812 197,782 24,663 14,498 14,498
Office Equipment $900/qtr 3,600 3,600 3,600 3,600 3,600
------- ------- ------- ------- -------
Total $1,046,005 $1,051,238 $903,340 $823,691 $558,490
--------- --------- ------- ------- -------
NOTES 9. NOTES PAYABLE
During 1998, the Company held several notes for individuals who had lent the
company money. Most of the notes payable had been paid off during 1999 by either
cash or common stock payments. Below is a summary of the notes payable as of
December 31, 1999 and 1998 respectively.
Description Terms 12/31/99 12/31/98
DR. Trust 7.5% and 6% $ 77,039 $360,900
Evans 10% 0 20,000
Langston 10% 0 15,000
Stevenson 10% 0 7,500
Slatkin short term no intrest 0 150,000
NCN Note 125,000 0
--------
Total Notes Payable $202,039 $553,400
-------- --------
Accrued Interest 0 9,125
-------- --------
Total Notes Payable $202,039 $562,525
-------- --------
--------------------------------------------------------------------------------
F-12
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 10. YEAR 2000 COMPLIANCE
The Company reviewed its product line and supportive in-house software to ensure
all applications within the software, firmware and hardware utilizing "clocks"
were able to identify and process date data, including leap year. All software
using dates for calculation or to take any action is year 2000 compliant.
The manufacturer must address compliance of any additional third party software
including operating systems used with any Company equipment.
The Company is dependent upon the smooth functioning of the Internet systems and
the line providers for its uninterrupted operations. It is also dependent upon
the smooth operation of the banking, and credit card industry. These outside
industries have, as far as the Company can tell, responded adequately to the
year 2000 compliance problem. However, no assurance can be given that service of
these or other necessary industries will not be interrupted in the near future,
thus materially affecting the operations of the Company. As time passes, the
2000 compliance problem becomes less significant.
NOTE 11. RELATED PARTIES
The Chairman of the Board of Directors is the father of the administrator of the
DR & LR Trust, which has a note payable with the Company.
During 1999 the Company purchased from the DR & LR Trust inventory items that
consisted of the 6,400 Web PAL units. The price per unit was reduced from an
estimated wholesale value of $249 per unit to $100 per unit.
NOTE 12. PURCHASE OF NCN COMMUNICATIONS
On October 11, 1999 the Company purchased 100% of shareholder interest in NCN
Investments, Inc. NCN Investments is a holding company, which wholly owns NCN
Communications, Inc. NCN Communications, Inc. is a long distance telephone
service provider company. NCN Investments has no assets or debt except for owing
the communications company. NCN has gross telephone service sales revenue of
approximately $800,000 per month that contributes to a net revenue stream of
$75,000 per month.
The acquisition was consummated because management felt that a long distance
telephone service would complement their growing list of products offered by the
IMOs. Equally important, management feels strongly that the large, seasoned
customer base that NCN owns has tremendous value in and of itself. However,
there was no reflection of this significant intangible asset on the balance
sheet of NCN at the time of the acquisition. Below is a summary of NCN
Communications balance sheet as of the purchase date.
Cash and Cash Equivalents $7,622
Receivables 297,547
Fixed Assets 7,000
Deposits 2,180
Current Payables 252,834
Note Payable and Contingent Liability 245,000
Common Stock 1,313,250
Retained Earnings (Loss) (1,496,735)
-----------
Net Tangible Equity $(183,485)
---------
--------------------------------------------------------------------------------
F-13
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
The Company paid the following for 100% interest in NCN
Shares of common stock 1,090,160 valued at $2.75 per share $2,997,940
Cash paid to shareholders 25,350
-----------
Total Price of NCN $3,023,290
The purchase price on NCN is being recorded in the following manner.
Negative assets vs. liabilities as listed above $ (183,485)
Goodwill recorded as an asset to cover the negative equity $ 183,485
Total Goodwill recognized from purchase $3,206,775
Amortization Expense at December 31, 1999 $ (251,941)
The Goodwill is being amortized over 36 months on a straight-line basis.
NOTE 13. INVESTMENTS
The Company purchased 1,000 shares of stock in Pacific Mercantile Bank for
$13,500 ($13.50 per share cost) as a long-term investment. The market value of
the stock as of December 31, 1999 was $21.50 per share. This creates an
unrealized and unrecorded gain of $8,000.
NOTE 14. REFUNDS
The Company had adopted a policy during 1999 of refunding an IMO site of up to a
year from the date of purchase. The refunds are netted against future
commissions that an IR might receive because of the original commissions paid.
Beginning January 15, 2000 the Company has changed its refund policy. They will
refund a distributor the amount of a mall purchase minus any associated
commissions if the request is received within 72 hours of the purchase date.
This change conforms to federal law.
When an IMO site is sold not only the IR receives a commission, but their
related organization, or up line, also receives a commission. If an IMO requests
and receives a refund, the Company also charges the IRs that are affected by the
refund. This charge is netted against any current or future commissions and
bonuses of the IRs and up lines. A holding list (receivable list) is created for
future offset of commissions for those IRs that do not qualify for current
commissions. This holding list is automatically referred to whenever commissions
and bonuses are calculated. As of December 31, 1999 the amount of the holding
(receivable) list totaled $257,406. Because of the nature of network marketing
and the uncertainty of collection, this amount has not been recognized in the
financial statements as a receivable. If collected, the receivables will be
netted against current period commissions as they occur, as indicated above,
reducing current commission costs.
NOTE 15. AGREEMENTS WITH "THE BIG STORE.COM" and "THE BIG HUB.COM"
In the fall of 1999, the Company signed agreements with "The Big Store.com" and
"The Big Hub.com" to facilitate web site product searches, merchandise sales,
order fulfillment, distribution, and provide full customer service for IMO
customer retail sales. These agreements are as follows:
--------------------------------------------------------------------------------
F-14
<PAGE>
PRICENET USA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
The Big Store
The agreement with "The Big Store" is for the back-end processing or order
fulfillment, distribution, and customer service phase of mall product sales
applications. The agreement requires the Company to pay a one-time private label
development fee of $150,000 to connect all of the Companies current IMO sites.
In addition, the Company must pay "The Big Store" a store fee commission on
monthly gross sales ranging from 2% to 6% and transaction fees ranging from a
flat $32,000 per month to a percentage charge for each transacted item. As part
of this agreement the Company granted "The Big Store.com" warrants for 1,000,000
shares of restricted common stock. The warrants have a five-year exercise
period.
The Big Hub
The agreement with "The Big Hub" is for the licensing of web site mega-search
engine technology and also for licensing of a private label web page to access
"The Big Store" products. The agreement requires the Company to pay $25 for each
IMO set up with back-end processing by "The Big Store", a monthly maintenance
fee of $5 for each IMO currently using "The Big Store" private label mall, and
an annual renewal fee of $7.50 for each active IMO.
NOTE 16. PLEDGED ASSETS
The Company has pledged assets in the form of a Certificate of Deposit to secure
the vehicle leases. The Certificate of Deposit is with First Security Bank in
the amount of $50,000.
NOTE 17. SUBSEQUENT EVENTS
On March 28, 2000 the Company resolved a long-standing dispute with Victor
Barron, a former Officer and Director of the Company, regarding the ownership of
international sales rights. The settlement allows Price Net to retain the
international sales rights but requires the Company to provide certain nominal
payments for IMO site sales as well as providing foreign ownership interest as
follows:
o $2.00 for each new IMO site sold worldwide for duration of 36 months.
o $4.50 for each new IMO sold outside of the United States for duration
of 60 months or until the foreign country is officially opened for
business.
o 5% ownership stake of each foreign operation, plus 2% of the proceeds
received from stock offerings of those foreign locations. This
includes a $10,000 cash advance each month for a 6-month period to be
credited against the foreign capital raised.
o Beginning in July, 2000, each month the Company must buy back as much
as $15,000 worth of the Company's common stock that Mr. Barron holds,
at Mr. Barron's discretion, until the Company has fulfilled its
registration requirements with the Securities and Exchange Commission.
--------------------------------------------------------------------------------
F-15
<PAGE>
PriceNet USA, Inc.
Consolidated Balance Sheet
Quarter Ended March 31, 2000
UNAUDITED
March 31, 2000
--------------
Assets
Cash --
Receivables $ 279,721
Inventory 572,925
Prepaids --
Total Current Assets $ 852,646
------------
Equipment and Furniture, net of depreciation 1,074,099
Other Assets
Investment Misc 13,500
Deposits 67,917
NCN Customer Base 3,206,775
Accumulated Amortization (519,172)
------------
Total Other Assets $ 2,769,020
Total Assets $ 4,695,766
============
Liabilities
Accounts Payable 77,593
Other Current and Accrued Liabilities 838,018
Notes Payable and Contingent Liabilities 252,039
------------
Total Liabilities $ 1,167,650
Stockholders' Equity
Preferred Stock, 25,000,000 shares authorized
None outstanding, par value $0.001 --
Common Stock, 50,000,000 shares authorized
13,978,366 shares outstanding at 03/31/00
Par value $0.001 13,978
Paid in Capital 17,445,903
Stock Subscribed (630,040)
Retained Earnings (Loss) (13,301,725)
------------
Total Stockholders' Equity 3,528,116
------------
Total Liabilities and Stockholders' Equity 4,695,766
============
F-16
<PAGE>
PriceNet USA, Inc.
Consolidated Statement of Operations
For the Quarter Ended March 31, 2000
UNAUDITED
Quarter Ended
03/31/00
-------------
Revenue
Mall, Service and Product Sales $ 2,428,100
Telephone Service Revenue 222,034
Other Income
------------
Total Revenue $ 2,650,134
------------
Costs of Sales
Costs of Goods Sold 213,035
Commissions 2,122,140
------------
Total Costs of Sales $ 2,335,175
------------
Gross Profit (Loss) $ 314,959
------------
Expenses
Payroll, Professional Fees $ 1,846,884
Rent 244,662
Advertising and Promotion 71,326
Training, Relocation 0
Amortization 257,031
Depreciation 10,200
Interest Expense 1,672
Bad Debt 0
Other General and Administrative Expenses 490,326
------------
Total Expenses $ 2,922,101
------------
Income (Loss) Before Income Taxes $ (2,607,142)
Provision for Income Taxes --
------------
Net Income (Loss) $ (2,607,142)
============
Diluted Earnings per Share $ (0.169)
Diluted Weighted Average Number of Shares 15,404,966
------------
F-17
<PAGE>
M.A. Shelley Intl., CPA
443 E. 10th Ave.
Mesa, AZ 85204
(480) 461-8301
To the Audit Committee and
Board of Directors
I have reviewed the accompanying balance sheet of PriceNet U.S.A., Inc. and its
wholly owned subsidiary as of June 30, 2000 and the related statements of
operations for the three months and six months then ended, the statement of
stockholders' equity and cash flow for the six months then ended, in accordance
with Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the company's management.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly I do not express such an opinion.
Based on my review, I am not aware of any material modifications that should be
made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The financial statements for the quarters, six months and years ended December
31, 1999 were audited by me and I expressed an unqualified opinion on them in my
reports, but I have not performed any auditing procedures since that date.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As shown in the financial statements
the Company has accumulated a net loss and is in an emerging industry. These
factors raise doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
this uncertainty.
M.A. Shelley Intl., CPA
August 9, 2000
F-18
<PAGE>
Price Net U.S.A., Inc.
Consolidated Balance Sheet
as of June 30, 2000 and December 31, 1999
6/30/00 12/31/99
----------- -----------
Assets
Cash -- 938,272
Receivables 319,921 334,498
Inventory 134,100 572,925
----------- -----------
Total Current Assets 454,021 1,845,695
----------- -----------
Equipment and Furniture, net of depreciation 1,007,751 991,361
Investment 13,500 13,500
NCN Customer Base 2,420,371 2,954,834
International Rights 459,333
MNS Eagle Purchase 225,000
Deposits 66,074 66,179
----------- -----------
Total Assets 4,646,050 5,871,569
=========== ===========
Liabilities
Bank Overdraft 189,802
Accounts Payable 440,203 72,972
Other Current Liabilities 1,182,756 864,072
Notes Payable and Contingent Liabilities 533,625 322,039
----------- -----------
Total Current Liabilities 2,346,386 1,259,083
----------- -----------
Stockholders' Equity
Preferred Stock, 25,000,000 shares authorized
none outstanding, par value $0.001
Common Stock, 50,000,000 shares authorized
12,147,234 shares outstanding at 6/30/00
and 12,147,234 shares outstanding 12/31/99
par value $0.001 14,757 12,147
Paid in Capital 17,574,396 15,924,962
Stock Subscribed (330,000) (630,040)
Retained Earnings (Loss) (14,959,489) (10,694,583)
----------- -----------
Total Stockholders' Equity 2,299,664 4,612,486
----------- -----------
Total Liabilities and Stockholders' Equity 4,646,050 5,871,569
=========== ===========
The accompanying notes are an integral part of these statements.
See Accountant's Review Report
F-19
<PAGE>
<TABLE>
<CAPTION>
Price Net U.S.A., Inc.
Consolidated Statement of Operations for
the comparative Three Months and Six Months ended June 30, 2000 and 1999
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
------------ ------------ ------------ ------------
Revenue
<S> <C> <C> <C> <C>
Mall, Service and Product Sales $ 466,279 $ 1,078,268 $ 2,893,716 $ 1,775,806
Telephone Service Revenue 235,300 -- 457,334 --
Other Income -- -- --
------------ ------------ ------------ ------------
Total Revenue 701,579 1,078,268 3,351,050 1,775,806
------------ ------------ ------------ ------------
Costs of Sales
Costs of Goods Sold 116,349 69,968 322,552 108,840
Commissions 409,664 977,506 2,517,409 2,736,055
------------ ------------ ------------ ------------
Total Costs of Sales 526,013 1,047,474 2,839,961 2,844,895
------------ ------------ ------------ ------------
Gross Profit (Loss)
175,566 30,794 511,089 (1,069,089)
------------ ------------ ------------ ------------
Expenses
Payroll 498,473 290,693 1,069,011 536,682
Professional Fees 79,590 62,024 1,299,360 393,408
Rent 178,427 53,117 423,089 223,204
Advertising and Promotion 11,609 41,090 97,708 96,484
Amortization 308,898 -- 576,130 --
Depreciation 52,116 14,364 104,232 21,760
Interest Expense 3,586 22,877 5,258 29,447
Bad Debt 33,601 -- 33,601 --
Inventory Writedown 438,825 -- 438,825 --
Other Administrative Expenses 345,240 221,282 728,781 353,979
------------ ------------ ------------ ------------
Total Expenses 1,950,365 705,447 4,775,995 1,654,964
------------ ------------ ------------ ------------
Income Before Income Taxes (1,774,799) (674,653) (4,264,906) (2,724,053)
Provision for Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ (1,774,799) $ (674,653) $ (4,264,906) $ (2,724,053)
============ ============ ============ ============
Basic Earnings per Share $ (0.12) $ (0.10) $ (0.30) $ (0.44)
------------ ------------ ------------ ------------
Basic Weighted Average Number of Shares 14,257,366 6,717,795 14,208,366 6,191,983
Diluted Earnings per Share $ (0.12) $ (0.10) $ (0.26) $ (0.44)
------------ ------------ ------------ ------------
Diluted Weighted Average Number of
Shares 14,683,966 6,742,145 16,183,966 6,226,333
The accompanying notes are an integral part of these statements.
See Accountant's Review Report
F-20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Price Net U.S.A., Inc.
Statement of Stockholder's Equity
for the period from October 7, 1997 through June 30, 2000
Common Stock Paid in Stock Retained Total
Shares Amount Capital Subscribed Earnings Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capitalization 2,250,010 $ 2,250 $ 22,750 $ 25,000
Retained Earnings (Loss) $ (201,737) $ (201,737)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,250,010 $ 2,250 $ 22,750 $ -- $ (201,737) $ (176,737)
Common Stock Issuances for 1998
Merger Price Net and Gold Star 1,100,000 $ 1,100 $ (6,550) $ (5,450)
Stock Sales 504 Offering 1,205,349 $ 1,205 $ 998,484 $ 999,689
Stock for Independent Rep
Commissions 25,000 $ 25 $ 29,975 $ 30,000
Retained Earnings (Loss) $ (1,320,920) $ (1,320,920)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,580,359 $ 4,580 $ 1,044,659 $ -- $ (1,522,657) $ (473,418)
Common Stock Issuances for 1999
Stock Sale, Private Offering
$2/share 2,960,229 $ 2,960 $ 5,917,498 $ 5,920,458
Stock Sale, Private Offering 5,000 $ 5 $ 2,495 $ 2,500
Stock for Independent Rep
Commissions 753,000 $ 753 $ 1,505,247 $ 1,506,000
Stock for Employee Bonuses 671,000 $ 671 $ 1,341,329 $ 1,342,000
Stock for Consulting/Services 960,966 $ 961 $ 1,920,971 $ 1,921,932
Stock for Advertising 11,500 $ 12 $ 22,988 $ 23,000
Stock for Debt 300,000 $ 300 $ 149,700 $ 150,000
Stock for Inventory 500,000 $ 500 $ 393,500 $ 394,000
Stock for NCN Purchase 1,090,160 $ 1,090 $ 2,996,850 $ 2,997,940
Stock Subscribed 315,020 $ 315 $ 629,725 $ (630,040) $ --
$ --
Retained Earnings (Loss) $ (9,171,926) $ (9,171,926)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1999 12,147,234 $ 12,147 $ 15,924,962 $ (630,040) $(10,694,583) $ 4,612,486
===============================================================================================
Common Stock Issuances for 2000
Stock for Purchase of MNS Eagle 500,000 500 124,500 125,000
Stock for International Rights 1,000,000 1,000 499,000 500,000
Stock Options Excersized 282,500 282 231,013 231,295
Stock for Services 827,632 828 794,921 795,749
Stock Subscribed Cancelled 300,040 300,040
Retained Earnings (Loss) (4,264,906) (4,264,906)
-----------------------------------------------------------------------------------------------
Balance, June 30, 2000 14,757,366 $ 14,757 $ 17,574,396 $ (330,000) $(14,959,489) $ 2,299,664
===============================================================================================
The accompanying notes are an integral part of these statements.
See Accountant's Review Report
F-21
</TABLE>
<PAGE>
Price Net U.S.A., Inc.
Statement of Cash Flow
for the Six Months ended June 30, 2000
Six Months Ended Six Months Ended
6/30/00 6/30/99
----------------- ----------------
Cash from Operations
Net Loss $(4,264,906) $(2,724,053)
Expenses paid for with stock 1,327,084
Net Change in Receivables
14,577 (13,479)
Net Change in Inventory 438,825 (639,720)
Depreciation 104,232 21,760
Amortization 575,130
Payables and Bank Overdraft 875,716 243,844
Prepaids -- (40,165)
Deposits
105 (60,409)
----------- -----------
Total Cash from Operations $ (929,237) $(3,212,222)
----------- -----------
Cash Used in Investments
Purchase of MNS Eagle (100,000)
Purchase of Fixed Assets (120,622) (341,862)
----------- -----------
Total Cash Used for Investments (220,622) (341,862)
----------- -----------
Cash from Financing
Notes Payable 211,586 23,132
Sales of Stock -- 4,720,495
----------- -----------
Total Cash from Financing $ 211,586 $ 4,743,627
----------- -----------
Net Change in Cash $ (938,273) $ 1,189,543
Beginning Balance $ 938,273 $ --
----------- -----------
Ending Balance $ -- $ 1,189,543
=========== ===========
See Notes to Financial Statements for a detailed explanation of the non-cash
transactions.
The accompanying notes are an integral part of these statements.
See Accountant's Review Report
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. GENERAL BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Results for the three months and six months
ended June 30,2000 are not necessarily indicative of the results that may be
expected for the fiscal year ended December 31, 2000.
Organization and General Business
Price Net U.S.A., Inc., (the Company) was originally organized in Nevada as Gold
Star Gaming, Inc. on May 31, 1994. The Company was founded in order to market
and operate an Internet based infrastructure that supports a home-based
business. Please refer to Note 2 below regarding the reverse acquisition, which
took place on March 11, 1998.
Internet Shopping Mall Concept
The Company markets an extensive line of products and services on the Internet.
Customers have the service, convenience and advantage of using the Internet from
their home or office to make purchases.
Marketing through Networking
The Company markets their products and services to retail consumers as well as
business to business. Price Net uses a network-marketing program of independent
representatives and mall operators to sell their products and services. The mall
operators typically pay an initial set-up and training charge, and a monthly
mall maintenance fee. This program offers the Company the advantage of a rapidly
expanding sales force without the normal upfront and ongoing costs of
maintaining a sales organization of this size. Each mall operator is compensated
on the retail purchases of products and services from their Internet shopping
mall.
Accounting Basis
The basis is generally accepted accounting principles.
Revenue
The Company receives revenue from retail product sales, services, the sale of
online shopping mall sites, and monthly mall site fees. The Company has over one
million retail products available on its shopping sites. Services available
include long distance telephone service, Internet service provider (ISP)
service, prepaid legal service, income tax audit protection service and Internet
site maintenance and upgrading. Online shopping mall sites are sold by the
company's network of Independent Representatives (IR). Each site is considered
an Independent Mall Operator (IMO).
When initially established, each Independent Mall Operator (IMO) receives a
unique reference number for their site. This number is used to track all
Internet retail activity for their site. Each IMO provides access codes to
customers so the customers will purchase items on their shopping site. PriceNet
has associations with various merchandise distributors that actually capture,
process and provide customer support for all Internet retail sales. One a
monthly basis the distributors provide data and submit sales commissions to the
Company, who then distributes commissions to the IMOs and IRs. On December 31,
1998 the malls sites began processing retail product sales orders. During 1999
product sales increased but were still not yet a significant source of revenue.
To maintain active online, each IMO must pay a nominal monthly service fee.
Independent Representative (IR) Commissions
An IR is considered an independent contractor working their own businesses
similar to other network marketing companies in the industry. Each IR receives
commissions from the following potential sources. Commissions are paid on
independent Internet Mall Operator site sales, retail product sales, service
sales and Mall merchandise sales. These are the same sources for which the
Company receives revenue. Each IR receives a greater commission for sales that
he or she directly makes and a lesser commission on sales his or her
organization makes. These commissions vary depending on how large of an
organization an IR has and the particular products and services being sold
Payroll and Professional Fees
The Company incurred a total of $1,299,360 in payroll and professional fees for
the six months ended June 30, 2000. Included in the total amount, the Company
issued restricted common stock as part of the compensation to IRs, employee
bonuses, and consulting services. As such, the total non-cash portion of
compensation cost associated with the issuances totaled $702,084.
F-23
<PAGE>
Advertising and Promotions
Advertising and promotional expenses are expensed when incurred. The majority of
these costs relate to a monthly sales promotion meeting which the Company
sponsors.
Sales Taxes
Currently the Company follows the normal industry practice of only collecting
sales tax on shipments of products to consumers within its home state of
California. Currently, sales are considered to be sold from the Company
headquarters. The Internet sales industry is new and changing constantly. Local,
state and federal agencies have not fully addressed this new sales medium.
Management cannot predict what if any taxes a particular government or agency
may impose on future or even past sales. A successful assertion by one or more
states or any foreign country could have a material adverse effect on the
Company's business and financial statements if the taxes are applied
retroactively.
Income Taxes
The provision for income taxes is the total of the current taxes payable and the
net of the change in the deferred income taxes. Provision is made for the
deferred income taxes where differences exist between the period in which
transactions affect current taxable income and the period in which they enter
into the determination of net income in the financial statements.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in the primary financial statements
and has provided supplemental disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (see
Note 7).
Earnings per Share
The basic earnings (loss) per share is calculated by dividing the Company's net
income (adjusted for certain dividends when paid) by the weighted average number
of common shares during the year. The diluted earnings (loss) per share is
calculated by dividing the Company's net income (loss) (adjusted for certain
dividends and certain interest when expensed) by the diluted weighted average
number of shares outstanding during the year. The diluted weighted average
number of shares outstanding is the basic weighted average number of shares
adjusted as of the first of the year for any potentially dilutive debt or
equity.
06/30/00 12/31/99
-------- --------
Basic weighted average number of shares 14,757,366 7,562,520
Options and Warrants 1,426,600 1,583,600
Diluted weighted average number of shares 16,183,966 9,146,120
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2. REVERSE ACQUISITON
On March 11, 1998 the Company, known then as Gold Star Gaming, Inc. purchased
/merged with Price Net U.S.A., Inc. The surviving entity was Gold Star Gaming,
Inc., which changed its name to Price Net U.S.A., Inc. Price Net was organized
October 7, 1997. For this purchase Gold Star issued 2,250,010 shares of common
stock and exchanged these shares with Price Net shares. The Gold Star
shareholders then gave back to the Company all of their shares except 1,100,000.
The final result left the Company with 3,350,010 shares of common stock issued
and outstanding. This purchase was properly accounted for as a reverse merger
because Gold Star was considered the nominal acquirer. A reverse merger means
that for accounting purposes the nominal acquirer is viewed as having been
acquired by the legally acquired company. Reverse merger also means that the
historical data shown on the financial statements will be that of the acquired
company. In others words, for accounting, the merger is as if Price Net
purchased Gold Star.
NOTE 3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As shown in the financial statements
the Company has accumulated a net loss. This factor raises doubt about the
Company's ability to continue as a going concern. The Company is also in a new
emerging industry (internet) which to date has not proven itself profitable. The
financial statements do not include any adjustments that might result from these
uncertainties.
F-24
<PAGE>
NOTE 4. EQUIPMENT, FURNITURE, FIXTURES AND IMPROVEMENTS
The Company capitalized the purchase of equipment, furniture, fixtures and
improvements for major purchases in excess of $1,000 per item. Capitalized
amounts are depreciated over the useful life of the assets using the
straight-line method of depreciation.
Scheduled below are the assets, lives, costs and accumulated depreciation at
June 30, 2000 and 1998.
06/30/00 06/30/99
-------- --------
Computer Hardware and Office Equipment 5 years $ 248,283 $139,925
Computer Software 5 years 96,169 46,569
Leasehold Improvements 10 years 625,244
Office Furniture and Fixtures 7 years 184,297 68,113
---------- --------
Total Equipment and Furniture $1,153,993 $254,607
---------- --------
Accumulated Depreciation $ 153,350 $ 12,188
---------- --------
Net Equipment and Furniture $1,000,643 $242,419
---------- --------
NOTE 5. INCOME TAXES
The provision for income taxes is the total of the current taxes payable and the
net of the change in the deferred income taxes. Provision is made for the
deferred income taxes where differences exist between the period in which
transactions affect current taxable income and the period in which they enter
into the determination of net income in the financial statements. A valuation
account is established for any tax benefit, which may not be realized. As of
June 30, 2000 the Company has a net operating loss of approximately $14,985,180.
Deferred income tax benefit netted with valuation account 0
Current income taxes payable 0
---
Provision for Income Taxes 0
---
NOTE 6. RELIANCE ON OFFICER
Mr. Donald Rackeman serves as the Chairman of the Company's Board of Directors
and also holds the position of Chief Executive Officer. His business experience
is vital to the Company. If Mr. Rackeman were unable to continue in his present
role the Company might be adversely affected. The Company carries no key-man
insurance on Mr. Rackeman. Aside from the business skills and business contacts,
which Mr.Rackeman brings to the Company, he has also guaranteed personally the
leased vehicles, the phone system and the building leases.
NOTE 7. STOCKHOLDER'S EQUITY
The Company has one class of preferred stock. There are 25,000,000 shares of
authorized stock. No preferred stock has been issued or is outstanding at the
end of June 30, 2000 and 1999.
The Company has one class of common stock. There are 50,000,000 shares
authorized. The rights of this class of stock are all the same. The common stock
has all of the rights afforded Nevada shareholders. As of June 30, 2000 the
Company had 14,757,366 shares outstanding. As of June 30, 1999 the Company had
7,609,609 shares outstanding. Common stock issuances for fiscal 1998, fiscal
1999 and the six months ended June 30, 2000 are detailed below.
Common Stock Issuances During 1998
Merger of Gold Star Gaming, Inc. with Price Net, Inc. On March 11, 1998 the
Company, known then as Gold Star Gaming, Inc. merged with Price Net, Inc. in a
reverse merger. The net effect of the merger resulted in an additional 1,100,000
shares issued.
F-25
<PAGE>
Regulation D, Rule 504 Offering
During the year 1998 the Company had a Regulation D, Rule 504 Offering. The
offering was completed prior to the end of December 31, 1998. The offering sold
shares in four tiers, each one costing more than the last. Share prices ranged
from $0.50 to $2.00. The schedule below summarizes the total number of shares
issued as well as the total amount of the sales proceeds.
Share Price Shares Amount
----------- ------ ------
$0.50 660,000 $330,000
$1.00 325,000 325,000
$1.50 153,017 229,526
$2.00 67,332 115,163
--------- --------
Totals for 504 Offering 1,205,349 $999,689
--------- --------
Stock for Independent Representative Commission
In December 1998 the Company issued restricted common stock totaling 25,000
shares as a bonus commission to a key Independent Representative.
Common Stock Issuances During 1999
During 1999, the Company issued shares of stock for cash payments, distributor
commissions, employee bonuses, consulting and vendor services, cancellation of
company debt, and inventory acquisition. Each of the recipients of the
securities described below represented that they understood that the securities
acquired might not be sold or otherwise transferred absent registration under
the Securities Act of 1933. Each stock certificate issued bears the Rule 144
restriction endorsement.
Stock Sales, Private Offering
The Company sold to various investors during the year 2,960,229 shares of common
stock for $2 per share. Each of these investors completed an appropriate
subscription agreement detailing his or her qualification for such investments.
Stock Sales, Private Offer
The Company sold to a single individual 5,000 shares of common stock bearing the
R144 restriction for $2,500. The sale price was based on a previous commitment
to this individual during 1998.
Stock for Independent Representative Commissions
During the year the Company adopted special promotional campaigns to encourage
the sales of its Internet Malls. Part of the compensation paid to IRs for these
campaigns included restricted common stock. A total of 753,000 shares were
issuance for IR commissions and the non-cash compensation expense associated
with these issuances totaled $1,506,000. The total non-cash compensation cost
for each recipient was properly reported to the appropriate taxing authorities
during 1999.
Stock for Employee Bonuses
In an effort to maintain a positive working environment and to retain key
individuals, the Company issued to its employees 671,000 shares of restricted
common stock as bonuses. The non-cash compensation cost for the Company totaled
$1,342,000 and was properly included in the employee's income calculations for
1999 and included on the Form W-2 and/or Form 1099 submitted to the appropriate
taxing authorities.
Stock for Consulting/Services
The Company reimbursed attorneys, consultants and other professional fees and
costs with its restricted common stock. The Company issued 960,966 shares of
stock at an agreed upon cost of $2 per share for a total value of $1,921,932 for
these services.
Stock for Advertising
The Company sponsored certain professional golfers. In exchange for portraying
the Pricenet logo on golfing material the golfers and their caddies were given a
total of 11,500 shares of stock valued at $23,000.
Stock for Debt
During July of 1999 the Company converted debt of $150,000 by issuing 300,000
shares of stock priced at $0.50 per share. The debt was a note payable to an
individual, R. Slatkin, who had lent money to the Company. The creditor's price
was based on an option to convert the debt into stock at $0.50 per share.
F-26
<PAGE>
Stock for Inventory
During the quarter ended March 31, 1999 the Company purchased from DR Trust
6,400 Web PAL units for resale. A Web PAL unit allows a regular television set
to become connected to the Internet. The Company paid $100 each for these units,
giving $246,000 in cash and issuing 500,000 shares of restricted common stock
valued at $394,000.
Stock for NCN Purchase
As part of the NCN purchase the Company issued to the shareholders of NCN
1,090,160 shares of restricted common stock. See Note 12 for more detail on this
purchase.
Stock Subscribed
The Company had stock subscribed totaling 315,020 shares valued at $630,040 as
of December 31, 1999. As of June 30, 2000, the review report date, 165,000
shares remain subscribed but un-paid.
Options
As an incentive to Independent Representatives the Company issued options to buy
Company stock. The stock options are available to a significant number of
Independent Representatives (IRs). The Company hosted a promotional campaign
during April 1999 to November 1999 where IRs had the potential to receive
restricted company stock in the form of options. The amount of shares that
potentially could be exercised at December 31, 1999 totaled 98,600. However, in
order to qualify for the granting of such options several performance goals must
be met, including remaining active within the Company's organization. If the IR
leaves the Company either by free will or is terminated for cause, all options
available to that individual are forfeited. As of June 30, 2000 none of the
options have been exercised.
The option stock is not included within the shareholder section of the balance
sheet. The stock options are however figured into the diluted earnings per share
on the Statement of Operations.
Warrants
During 1999 the Company entered into an agreement with a product merchandise
distributor, "The Big Store" (see note 15). The Big Store provides an outlet
where Internet mall operators can send their customers to buy products on-line.
As part of the agreement with The Big Store, the Company has granted warrants to
purchase 1,000,000 shares of the Company's restricted common stock at 110% of
the per share market price at the date of the grant.
Common Stock Issuances During the Six Months ended June 30, 2000
During the six months ended June 30, 2000, the Company issued shares of stock
for distributor commissions, employee bonuses, consulting and vendor services,
and the acquisition of a company. Each of the stock certificates issued bears
the Rule 144 restriction endorsement. The following paragraphs identify the
nature of the stock issuances.
Stock for Independent Representative Commissions
During 1999 the Company adopted special promotional campaigns to encourage the
sales of its Internet Malls. Part of the compensation paid to IRs for these
campaigns included restricted common stock. Most of the stock was issued during
1999 but 22,000 shares totaling $12,410 in non-cash consulting expense was
issued during the six months ended June 30, 2000.
Stock for Employee Bonuses
In an effort to maintain a positive working environment and to retain key
individuals, the Company issued to its employees 149,000 shares of restricted
common stock as bonuses. The non-cash compensation cost for the Company totaled
$138,540.
Stock for Consulting/Services
The Company reimbursed attorneys, consultants and other professional fees and
costs with its restricted common stock. The Company issued 945,532 shares for a
total non-cash value of $551,134, which was recorded to professional fees -
consulting expense for the six months ended June 30, 2000.
Stock for Acquisition and Defense of International Sales Rights On March 28,
2000 the Company resolved a long-standing dispute with Victor Barron, a former
Officer and Director of the Company, regarding the ownership of international
sales rights. The settlement allows Price Net to retain the international sales
rights and in return, the Company issued to Mr. Barron 1,000,000 shares of
restricted common stock at a total non-cash value of $500,000. The sales rights
were recorded as a capital asset for the Company (see Note 17 below).
F-27
<PAGE>
Stock for Acquisition of MNS Eagle Equity Group II
On June 19, 2000 the Company acquired 100% of MNS Eagle Equity Group II (MNS), a
fully reporting public OCT Bulletin Board company. The Company issued 50,000
shares of restricted common stock and $100,000 in cash for 682,500 shares of
MNS, which represented 100% of the issued and outstanding stock of MNS. The
company issued an additional 450,000 shares of restricted common stock to agents
for the associated finders fees and consulting fees as part of the acquisition.
The non-cash cost associated with the stock issuance portion was valued at
$125,000. See Note 18 below regarding this acquisition.
SFAS No. 123
As permitted under SFAS No. 123, the Company has not recognized compensation
expense for the theoretical value of its options and warrants at the grant date
(in excess of the recognition of the intrinsic value). Had compensation expense
for the Options and Warrants been based on the fair value of the options at the
grant date amortized over any potential vesting period, the Company's pro forma
net loss and net loss per share would have been as follows:
June 30, 2000 December 31, 1999
------------- -----------------
Net Loss:
As Reported $(4,264,906) $(9,171,926)
Pro forma $(4,455,322) $(9,571,076)
Net Loss Per Share:
As Reported - Basic and Diluted $(0.27) $(1.00)
Pro forma - Basic and Diluted $(0.28) $(1.05)
In determining the fair value of options and warrants granted for purposes of
the preceding pro forma disclosures, the Company used the minimum value
option-pricing model with the following weighted-average assumptions for the six
months ended June 30, 2000 and year ended December 31, 1999, respectively:
risk-free interest rate of 5%, dividend yield of zero, and expected life of 1
year for the options and 5 years for the warrants. The options granted during
1999 had a weighted average fair value of $1.57 per share and the warrants had a
weighted average fair value of $0.35 per share.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Office Leases
On November 1, 1999 the Company entered into an agreement to lease a 24,342
square feet facility located at 2575 McCabe Way, Irvine California. The lease
term is 60 months and the initial monthly rent is $41,381.
The Company has an existing facility located at 2424 S.E. Bristol, Newport
Beach, California which incurs a lease payment of $18,323 per month. The lease
term for this facility expires on December 31, 2003. The Company is actively
marketing the property for another entity to assume the lease. The lease tables
below do not factor the lease cancellation or assumption possibility.
The Company leases a storage facility located at Brook hollow Office Park, Santa
Ana, California for $3,500 per month. The term for this lease expires on April
5, 2000.
Vehicle Leases
The Company provides leased vehicles to a select group of independent
representatives and corporate senior management. At the end of June 2000 there
were a total of twenty-one vehicles leased with a total monthly payment of
$21,734.
Office Equipment
The Company leases photocopying and other computer equipment from vendors. The
monthly payments for this leased equipment totals approximately $300 per month.
Below is a listing of the operating lease commitments for the next five years as
of December 31, 1998.
Year 1 Years 2 Year 3 Year 4 Year 5
------ ------- ------ ------ ------
Office Lease $374,074 $513,999 $532,356 $548,419 $564,482
Vehicles $1,690/mth 20,184 20,184 20,184 4,752 4,752
Office Equipment $900/qtr 3,600 3,600 3,600 3,600 3,600
-------- -------- -------- -------- --------
Total $397,858 $537,783 $556,140 $556,771 $572,834
-------- -------- -------- -------- --------
F-28
<PAGE>
Below is a listing of the operating lease commitments for the next five years as
of December 31, 1999.
<TABLE>
<CAPTION>
Year 1 Years 2 Year 3 Year 4 Year 5
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Offices Lease $ 781,593 $ 849,856 $ 875,077 $ 805,593 $ 540,392
Vehicles $21,734/mth 260,812 197,782 24,663 14,498 14,498
Office Equipment $900/qtr 3,600 3,600 3,600 3,600 3,600
---------- ---------- ---------- ---------- ----------
Total $1,046,005 $1,051,238 $ 903,340 $ 823,691 $ 558,490
---------- ---------- ---------- ---------- ----------
</TABLE>
NOTES 9. NOTES PAYABLE
During 1998, the Company held several notes for individuals who had lent the
company money. Most of the notes payable had been paid off during 1999 by either
cash or common stock payments. Below is a summary of the notes payable as of
June 30, 2000 and December 31, 1999 respectively.
Description Terms 06/30/00 12/31/99
----------- ----- -------- --------
DR. Trust 7.5% and 6% $ 14,039 $ 77,039
NCN Note no interest 105,000 125,000
McInerney no interest 120,000 0
Go Fast Automotive 10% 125,000 0
Artunian 10% 146,000 0
---------
Total Notes Payable $ 510,039 $ 202,039
--------- ---------
Accrued Interest 3,586 0
---------
Total Notes Payable $ 513,625 $ 202,039
--------- ---------
NOTE 10. YEAR 2000 COMPLIANCE
The Company reviewed its product line and supportive in-house software to ensure
all applications within the software, firmware and hardware utilizing "clocks"
were able to identify and process date data, including leap year. All software
using dates for calculation or to take any action is year 2000 compliant.
The manufacturer must address compliance of any additional third party software
including operating systems used with any Company equipment.
The Company is dependent upon the smooth functioning of the Internet systems and
the line providers for its uninterrupted operations. It is also dependent upon
the smooth operation of the banking, and credit card industry. These outside
industries have, as far as the Company can tell, responded adequately to the
year 2000 compliance problem. However, no assurance can be given that service of
these or other necessary industries will not be interrupted in the near future,
thus materially affecting the operations of the Company. As time passes, the
2000 compliance problem becomes less significant.
NOTE 11. RELATED PARTIES
The Chairman of the Board of Directors and the Company's Chief Executive Officer
is the father of the administrator of the DR & LR Trust. The trust purchased the
office facility at 2575 McCabe Way, Irvine CA from the Company's landlord after
the Company had moved into the facility. The trust has also lent money to the
Company on numerous occasions and currently has an outstanding note receivable
due from the Company. During 1999 the Company purchased from the DR & LR Trust
inventory items that consisted of the 6,400 Web PAL units. The price per unit
was reduced from an estimated wholesale value of $249 per unit to $100 per unit.
F-29
<PAGE>
NOTE 12. PURCHASE OF NCN COMMUNICATIONS
On October 11, 1999 the Company purchased 100% of shareholder interest in NCN
Investments, Inc. NCN Investments is a holding company, which wholly owns NCN
Communications, Inc. NCN Communications, Inc. is a long distance telephone
service provider company. NCN Investments has no assets or debt except for owing
the communications company. NCN has gross telephone service sales revenue of
approximately $800,000 per month that contributes to a net revenue stream of
approximately $75,000 per month.
The acquisition was consummated because management felt that a long distance
telephone service would complement their growing list of products offered by the
super store. Equally important, management feels strongly that the large,
seasoned customer base that NCN owns has tremendous value in and of itself.
However, there was no reflection of this significant intangible asset on the
balance sheet of NCN at the time of the acquisition. Below is a summary of NCN
Communications balance sheet as of the purchase date.
Cash and Cash Equivalents $ 7,622
Receivables 297,547
Fixed Assets 7,000
Deposits 2,180
Current Payables 252,834
Note Payable and Contingent Liability 245,000
Common Stock 1,313,250
Retained Earnings (Loss) (1,496,735)
-----------
Net Tangible Equity $ (183,485)
-----------
The Company paid the following for 100% interest in NCN
Shares of common stock 1,090,160
valued at $2.75 per share $ 2,997,940
Cash paid to shareholders 25,350
-----------
Total Price of NCN $ 3,023,290
The purchase price on NCN is being recorded in the following manner.
Negative assets vs. liabilities as listed above $ (183,485)
Goodwill recorded as an asset
to cover the negative equity $ 183,485
Total Goodwill recognized from purchase $ 3,206,775
Amortization Expense at June 30, 2000 $ (786,404)
The Goodwill is being amortized over 36 months on a straight-line basis.
NOTE 13. INVESTMENTS
The Company purchased 1,000 shares of stock in Pacific Mercantile Bank for
$13,500 ($13.50 per share cost) as a long-term investment. The stock was split 2
for 1 during March 2000. The market value of the stock as of June 30, 2000 was
$7.03 per share. This creates an unrealized and unrecorded gain for the 2,000
shares of $560.
NOTE 14. REFUNDS
The Company had adopted a policy during 1999 of refunding an IMO site of up to a
year from the date of purchase. The refunds are netted against future
commissions that an IR might receive because of the original commissions paid.
Beginning January 15, 2000 the Company has changed its refund policy. They will
refund a distributor the amount of a mall purchase minus any associated
commissions if the request is received within 72 hours of the purchase date.
This change conforms to federal law.
When an IMO site is sold, the IR receives a commission. The IRs related
organization, or up line, also receives a commission on the sale. If an IMO
requests and receives a refund, the Company assesses a charge to the IRs and up
line that are affected by the refund. The charge can also be netted against any
current or future commissions and bonuses of the IRs and up lines if they are
active within the organization.
F-30
<PAGE>
As of June 30, 2000 the amount of refunds payable totaled $519,210 and is
included as a part of the accrued liabilities as reported on the balance sheet.
Since the majority (between 70% to 80%) of the IMO sales are paid out to the IRs
and up line as commissions, the majority of any potential refund payments would
necessitate a receivable due from the IRs. A holding list (receivable list) is
created and updated for such refunds or credit card charge backs. As of June 30,
2000, the holding list totaled $397,406. However, because of the nature of
network marketing and the uncertainty of collection, this receivable amount has
not been recognized in the financial statements as a receivable. If collected,
the proceeds will be netted against any refunds paid, reducing the overall
refund costs.
NOTE 15. TERMINATION OF AGREEMENTS WITH "THE BIG STORE.COM" and "THE BIG
HUB.COM"
In the fall of 1999, the Company signed agreements with "The Big Store.com" and
"The Big Hub.com" to facilitate web site product searches, merchandise sales,
order fulfillment, distribution, and provide full customer service for IMO
customer retail sales. These agreements are outlined as follows:
The Big Store
The agreement with "The Big Store" was for the back-end processing or order
fulfillment, distribution, and customer service phase of mall product sales
applications. The agreement required the Company to pay a one-time private label
development fee of $150,000 to connect all of the Companies current IMO sites.
In addition, the Company was accessed a store fee commission on monthly gross
sales ranging from 2% to 6%. The agreement also granted "The Big Store.com"
warrants for 1,000,000 shares of restricted common stock. The warrants have a
five-year exercise period.
The Big Hub
The agreement with "The Big Hub" was for the licensing of web site mega-search
engine technology and also for licensing of a private label web page to access
"The Big Store" products. The agreement required the Company to pay $25 for each
IMO set up with back-end processing by "The Big Store", a monthly maintenance
fee of $5 for each IMO currently using "The Big Store" private label mall, and
an annual renewal fee of $7.50 for each active IMO.
The two aforementioned agreements were hereby terminated during May 2000 due to
a dispute between the Company and the representatives of the organizations
mentioned above regarding the terms of the agreements. A lawsuit has been filed
against the two entities (see Note 19 - Legal Issues).
NOTE 16. PLEDGED ASSETS
The Company has pledged assets in the form of a Certificate of Deposit to secure
the vehicle leases. The Certificate of Deposit is with First Security Bank in
the amount of $50,000.
NOTE 17. INTERNATIONAL SALES RIGHTS
On March 28, 2000 the Company resolved a long-standing dispute with Victor
Barron, a former Officer and Director of the Company, regarding the ownership of
international sales rights. The settlement allows Price Net to retain the
international sales rights but requires the Company to provide certain nominal
payments for IMO site sales as well as providing foreign ownership interest as
follows:
o $2.00 for each new IMO site sold worldwide for duration of 36 months.
o $4.50 for each new IMO sold outside of the United States for duration
of 60 months or until the foreign country is officially opened for
business.
o 5% ownership stake of each foreign operation, plus 2% of the proceeds
received from stock offerings of those foreign locations. This
includes a $10,000 cash advance each month for a 6-month period to be
credited against the foreign capital raised.
o Beginning in July, 2000, each month the Company must buy back as much
as $15,000 worth of the Company's common stock that Mr. Barron holds,
at Mr. Barron's discretion, until the Company has fulfilled its
registration requirements with the Securities and Exchange Commission.
In addition to the ongoing payments and costs identified above, the Company
issued to Mr. Barron 1,000,000 shares of restricted common stock at a total
non-cash value of $500,000. The sales rights were recorded as a capital asset
for the Company.
F-31
<PAGE>
NOTE 18. ACQUISITION OF MNS EAGLE EQUITY GROUP II
On June 19, 2000 the Company acquired 100% of MNS Eagle Equity Group II (MNS), a
fully reporting public OCT Bulletin Board company. The Company issued 50,000
shares of restricted common stock and $100,000 in cash for 682,500 shares of
MNS, which represented 100% of the issued and outstanding stock of MNS. The
company issued an additional 450,000 shares of restricted common stock to agents
for the associated finders fees and consulting fees as part of the acquisition.
The non-cash cost associated with the stock issuance portion was valued at
$125,000.
The Company effectively became the parent of MNS and will retain MNS's reporting
status with the U.S. Securities and Exchange Commission (SEC). The Company filed
"Form 8K" with the SEC on June 30, 2000, which announced the stock exchange
agreement between the Company and the shareholders of MNS. The Form 8K also gave
detailed information as to the change in control of MNS. The SEC accepted the
Form 8K on June 30, 2000.
NOTE 19. LEGAL ISSUES
Breakaway Solutions
Breakaway Solutions, formerly known as the Counsel Group, filed an action in the
Orange County Superior Court for a contract executed in 1998 by former PriceNet
President Melanie McCarthy for the merging and modification of existing systems
relative to the mall site and sales in the sum of $132,000. The matter was
settled on July 24, 2000 and PriceNet agreed to pay Breakaway Solutions a total
of $50,000, with $25,000 payable on August 1, 2000 and the remaining $25,000 to
be paid in monthly installments of $5,000 beginning September 1, 2000 until
paid.
Tate
Arbitration has been filed by Larry Tate, a former employee of the Company for
claimed breach of his consulting agreement. Tate contends that despite leaving
the Company and executing a release of claims and payment of 100,000 shares of
stock, the shares do not apply to the settlement and was a part of his initial
payment, thereby claiming that 100,000 additional shares are due him. The
Company contends the settlement and release signed by Tate, along with payment
of 100,000 shares represents payment in full to Tate. Tender of 50,000 shares of
stock to Tate has settled this matter.
Sweeney
The Company against the former Co-Chairman/Chief Operations Officer James A.
Sweeney has commenced litigation for International Interference with Economic
Relationship, Breach of Fiduciary Duty, Fraud, Breach of Contract, and Trade
Libel. The Company has obtained a preliminary injunction against Sweeney. Mr.
Sweeney has filed a cross-complaint for breach of contract, constructive
termination, fraud, conversion and interference with contract/perspective
business advantage and defamation. The Company is vigorously pursuing the matter
toward a favorable outcome. The discovery process is ongoing and the matter is
set for trial in late November 2000.
Ballah, The Big Store, The Big Hub, The Big Biz.com, OhGolly.com, IPowerBiz,
PriceNet Marketing, and MGI WorldNet.com (the Ballah group)
The Company against the former Director/President Jerry Ballah, Bruce Ballah,
The Big Store.com, The Big Hub.com, The Big Biz.com, OhGolly.com, IPowerBiz,
PriceNet Marketing, and MGI WorldNet.com (the Ballah group) has commenced
litigation in the amount of not less than $25,000,000 for Breach of Fiduciary
Duty, Fraud, Breach of Contract, International Interference with Contractual
Relationships, Misappropriation of Trade Secrets, Unfair Competition,
Accounting, and Injunctive Release. The discovery process is ongoing and the
Company is vigorously pursuing the matter toward a favorable outcome.
In addition to the matters discussed above, the Company is involved in various
legal matters that arise in the normal course of business. The Company believes
that the ultimate resolution of the matters described above and other matters it
is currently aware of will not have an unfavorable material impact on its
financial condition, results of operations or cash flows.
F-32
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2.0 Stock Exchange Agreement
3.1 Article of Merger and Articles of Incorporation
3.3 Bylaws
