U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
HomeSmart.com, Inc.
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(Name of Small Business Issuer in its charter)
Colorado 68-0435257
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2976 Alhambra Drive
Cameron Park, California 95682
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (530) 676-2345
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
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Item 1. Description of Business.
(a) Business Development.
HomeSmart.com, Inc., formerly CPC Office Systems, Inc. (the "Company"), was
organized under the laws of the State of Colorado on July 14, 1995. Immediately
prior to the reverse acquisition by the Company in July 1999 of HomeSmartUSA,
Inc., formerly HomeSmart.com, Inc (sic) ("HomeSmartUSA"), as described in more
detail below, the Company was a public "shell" company, i.e., an inactive,
publicly-quoted company with minimal assets and liabilities, seeking to acquire
one or more then unidentified businesses and/or properties to be chosen by
management after reviewing the opportunities available for profit or growth
potential. On July 19, 1999, the Company issued and sold to a total of
thirty-seven shareholders, pursuant to that certain Stock Purchase and Exchange
Agreement dated July 19, 1999 (the "Stock Exchange Agreement"), an aggregate of
16,117,000 newly-issued, restricted shares, constituting approximately 71.7% of
the 22,465,040 presently issued and outstanding shares, of common stock, no par
value per share (the "HomeSmart.com Common Shares"), of the Company in
consideration of the exchange therefor of 16,117,000 outstanding shares,
constituting 100% of the issued and outstanding shares, of common stock, no par
value per share (the "HomeSmartUSA Common Shares"), of HomeSmartUSA, a Colorado
corporation organized on June 3, 1999. The Stock Exchange Agreement mistakenly
provides that 16,385,000 HomeSmart.com Common Shares were issued in
consideration of the exchange of 16,385,000 HomeSmartUSA Common Shares when, in
fact, 16,117,000 HomeSmart.com Common Shares were issued in consideration of the
exchange of 16,117,000 HomeSmartUSA Common Shares. Further, Mr. Jared C. Brandt
and Ms. Linda Shuls, as trustee for HomeSmart agents, were mistakenly listed as
parties to the Stock Exchange Agreement. The Company is in the process of
circulating for execution an agreement amending the Stock Exchange Agreement to
correct the aforementioned inaccuracies. Immediately following the consummation
of the "reverse acquisition" transaction, HomeSmartUSA became a wholly-owned
subsidiary of the Company. The transaction was consummated as a "tax-free"
reorganization as contemplated by the provisions of Section 368(a)(1)(B) of the
Internal Revenue Code of 1986, as amended.
HomeSmartUSA is the successor to Hamilton and Wilson (the Partnership"), a
de facto California general partnership commenced in February 1997 of which
Messrs. A.L. Hamilton and John J. Wilson, the Secretary/Treasurer/ Chairman of
the Board of Directors and a director, respectively, of the Company were the
general partners. Coincident with the organization on June 3, 1999, of
HomeSmartUSA, Messrs. Hamilton and Wilson each conveyed 100% of their respective
general partnership interests in the Partnership to HomeSmartUSA in
consideration and exchange for the receipt by each individual of 7,000,000
newly-issued, restricted HomeSmartUSA Common Shares. Less than two months later,
on July 19, 1999, the shareholders of HomeSmartUSA, including Messrs. Hamilton
and Wilson among others, exchanged 100% of the outstanding HomeSmartUSA Common
Shares owned collectively by them for HomeSmart.com Common Shares on the basis
of one HomeSmart.com Common Share for each HomeSmartUSA Common Share as
described in more detail above. On July 19, 1999, the Company changed its name
from "CPC Office Systems, Inc." to "HomeSmart.com, Inc." Also, on July 19, 1999,
the name of "HomeSmart.com, Inc (sic) was changed to "HomeSmartUSA, Inc." The
Consolidated Financial Statements of the Company and its 100%-owned subsidiary,
HomeSmartUSA, which commence on page F-1 hereof, are those of the Partnership
insofar as they relate to the period from February 1, 1997, through June 3,
1999. (See the Consolidated Financial Statements of the Company and
HomeSmartUSA.)
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On February 15, 1999, the Partnership entered into an agreement (the
"Agreement") with VLDC Technologies, Inc. ("VLDC," formerly "Virtual Lender.com,
Inc."), a publicly-held mortgage company located in Severna Park, Maryland,
pursuant to which VLDC issued and sold certain shares of its common stock to
Messrs. Hamilton and Wilson, in exchange for the assets of the Partnership, and
certain consultants. The Agreement was terminated on June 3, 1999. During the
period from February 15 through June 3, 1999, the partners remained in control
of the Partnership's assets and, accordingly, management believes that an
economic transfer of the assets failed to occur. As a "break-up fee," in
consideration and exchange for terminating the Agreement, the Company issued an
aggregate of 2,346,000 newly-issued, restricted HomeSmart.com Common Shares in
trust for the benefit of all of the shareholders of VLDC and 1,000,000
newly-issued, restricted HomeSmart.com Common Shares to VLDC (an aggregate of
3,346,000 HomeSmart.com Common Shares). The sole purpose and economic substance
of this transaction was to facilitate the termination of the Agreement.
Litigation in connection with the Agreement, initiated by VLDC, was subsequently
dismissed with prejudice on June 5, 2000.
The Company's and HomeSmartUSA's executive offices are presently located at
2976 Alhambra Drive, Cameron Park, California 95682, and the telephone and
facsimile numbers for both companies are (530) 676-2345 and (530) 676-2351,
respectively.
See (b) "Business of Issuer" immediately below for a description of the
Company's current operations and future proposed activities.
(b) Business of Issuer.
General
The Company, a development-stage enterprise, operates an interactive web
site, or portal, located on the Internet at www.homesmart.com through which it,
together with numerous other companies and individuals engaged in real estate,
mortgage and related businesses, including, among others, real estate companies,
realtors, banks and other mortgage lenders, insurance companies, credit
reporting agencies, appraisers and closing service providers, offer their
products and/or services to the real estate industry and consumers. The Company
provides these companies and individuals, certain of which have a national
reputation, with the vehicle, i.e., the web site on the Internet, via which to
offer their products and/or services. These suppliers of real estate, mortgage
and related products and/or services compensate the Company in a variety of
ways, including advertising fees, revenue sharing and/or referral fees. (See "-
Products and Services Offered by Others.") The real estate, mortgage and related
services offered include, but are not limited to, real estate brokerage,
mortgage lending, credit reporting and real estate appraisal services. Among the
products offered are title and homeowners' insurance and home improvement and
decorative products. These vendors, by marketing their real estate, mortgage and
related products and/or services via the Company's Internet portal, access a
broader market, eliminate multiple telephone and other labor intensive
communications and otherwise improve efficiency and eliminate costs.
The Company can best be described as a business-to-business application
services provider ("ASP"). As an ASP, the Company and its founders have focused
primarily upon the development of software that is useful to real estate brokers
and agents. However, strategic solutions for consumers are also available on the
Company's web site. The Company's goal is to become a comprehensive online
resource center for the real estate services and mortgage industries. This line
of business, known as "online realty services management," or "ORSM," is
believed by management to be the fastest growing segment of the real estate
market. The Company, together with the mortgage, real estate and related
companies that offer products and/or services via the Company's web site,
collectively provide, generally, the products and services necessary for the
purchase of a home, including, among others, the following products and services
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described in detail below: (i) a national database of real property listings,
(ii) virtual home tours; (iii) a home valuation program; (iv) continuous access
(24 hours per day/seven days per week) to a wide range of real estate
transaction-related services; (v) access to information in real-time regarding
the status of any real estate transaction; and (vi) a system for mortgage loan
approval. (See "- Products and Services Offered and to Be Offered by the
Company" and "- Products and Services Offered by Others.")
The Company's web site is divided into six separate sections, as follows:
(i) buying and selling, (ii) financing, (iii) title/escrow, (iv) insurance, (v)
relocation and (vi) home improvement. Management believes that the design of the
site, calculated to attract and maintain the interest of most visitors, is
attractive in a number of ways, including the simplicity of design, the color
scheme and the easy access to information. Visitors to the Company's portal are
presented with information relating, and links connecting, to real estate
companies, realtors, banks and other mortgage lenders, insurance companies,
credit reporting agencies, appraisers, closing service providers and providers
of financial and other services and products. The consumer receives assistance
in locating the desired information regarding available products and services
and quotations enabling him to compare prices. After providing the consumer with
this initial information, the Company then offers its assistance in securing
financing, recommending realtors and title companies and selecting other
products and services necessary in the purchase a home. Finally, consumers are
assisted in purchasing or ordering products and services online.
The Company's portal, developed by Messrs. A.L. Hamilton and John J.
Wilson, executive officers and/or directors of the Company, became initially
available to the public in October 1998. Management limits the content of the
Company's web site by selecting only those vendors of real estate, mortgage and
related products and/or services that provide the desired level of unique
content to contribute to the overall value of the Company's web site and
superior customer service. Management believes that the Company, unlike other
common-themed web sites offering tips and advice, has discovered a unique
marketing niche in researching and making definitive recommendations to
consumers and real estate industry professionals regarding providers of superior
real estate, mortgage and related products and/or services. While the content of
the portal has changed from time-to-time since its origination to feature new
vendors, products, pricing, advertising, information, etc., the site retains the
integrity of its original design, organization, format and functioning.
Additionally, most of the major companies that first offered products and/or
services on the Company's site, including Lycos Inc., RealtyOnline and
Translucent Technologies, continue to do so as of the date hereof. (See "-
Products and Services Offered by Others.")
The Company's web site is hosted on secure high performance silicon
graphics RISC web servers accessing two fiber optic T3 connections on diverse
backbones with multiple back-up T1's using Cisco 7500 series routers and a
60,000-watt back-up generator. The equipment is maintained in a secure facility.
Translucent Technologies, Newport Beach, California, maintains and services the
Company's web site.
The Company is in the development stage and, to date, management has
devoted substantially all of its time and effort to the research and development
of its web site and financing matters. The success of the Company's real estate
portal is dependent upon the Company's ability to attract and retain qualified
suppliers of real estate, mortgage and related products and services and achieve
commercial acceptance for its products and services. Through the date hereof,
the Company's business has generated insignificant product sales and service
revenues and a sizable net loss. There can be no assurance that the Company's
products and services will achieve commercial viability in the future; that
future product sales and/or service revenues will be significant; that any sales
will be profitable; or that the Company will have sufficient funds available for
further research and development of its proposed products and services. The
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Company is largely dependent upon the proceeds anticipated to be received from
future equity and/or debt financing(s) with which to continue its existing
operations and carry out its proposed operations. The Company is not expected to
become a viable business entity unless it achieves profitable operations, which
is not anticipated in the foreseeable future. The Company's independent auditor
has expressed this as a "going concern" qualification in the Report of
Independent Accountants on, and footnotes to, the consolidated financial
statements of the Company and HomeSmart USA, its wholly-owned subsidiary. (See
Item 2. Management's Discussion and Analysis or Plan of Operation" and the
Consolidated Financial Statements of the Company and HomeSmartUSA commencing on
page F-1.)
The Company may expand through the acquisition of other online real estate
and/or mortgage lending companies. While Company management is continuously
monitoring such opportunities, no such companies are acquisition targets as of
the date hereof, nor are there any negotiations for the acquisition of any real
estate and/or mortgage companies ongoing as of the date hereof. (See
"Management's Discussion and Analysis or Plan of Operation - Plan of
Operation.")
Products and Services Offered or to Be Offered by the Company
SmartAgent(TM)
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The SmartAgent(TM) program is the primary program offered by the Company to
all realtors licensed in the United States. The services available to each
realtor enrolled in the program include, but are not limited to, the following:
(i) full personal listing inventory; (ii) virtual home tour listings; (iii)
premium designations for all Lycos co-branded Virtual home tours; and (iv)
premium sales force automation/relationship management software for client
management and monitoring and farming techniques to develop new client
prospects. The realtor enrolls in the program by completing the "Agent Profile"
form and selecting one of the packages, including the SmartAgent(TM) Silver, the
SmartAgent(TM) Gold, the SmartAgent(TM) Platinum and the SmartAgent(TM)
Preferred Provider packages, on the Company's Internet site. The Company charges
a monthly fee for the SmartAgent(TM) Silver, SmartAgent(TM) Gold, SmartAgent(TM)
Platinum and SmartAgent(TM) Preferred Provider programs and, in addition, a
one-time initiation fee for the SmartAgent(TM) Preferred Provider program. The
advantages to the realtor enrolling in the Company's SmartAgent(TM) program are,
among other things, increased visibility to the home-buying public, cost
reductions in marketing listings via the Internet and reductions in the
ever-increasing costs of marketing, promoting and closing real estate
transactions. Management believes, without assurance, that the Company will be
able to capitalize upon the historic receptivity of realtors, as a group, to
innovations in communications techniques to enhance the marketability of the
Company's SmartAgent(TM) program. The Company expects, without assurance, to be
able to generate prospects for its SmartAgent(TM) program from, among others,
individual realtors/agents, broker groups to be offered group rates, franchise
network sales and strategic alliance partner sales referrals. (See "-
Marketing.")
SmartStatus(TM)
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SmartStatus(TM) is a software product designed to enable a realtor to
determine the status of the real estate transaction involving his customer at
every stage of the transaction from inception to closing. It functions by
permitting all services performed at each stage of the transaction, such as the
obtaining of a real estate appraisal, the approval of a mortgage loan, the
issuance of a title insurance policy, the obtaining of homeowners' insurance,
etc., to be reported to the Company's centralized database on the Internet. The
information is accessible at any time to all parties to the transaction, e.g.,
the customer, the realtors (selling and purchasing), the mortgage banker, the
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insurance company, etc., from the desktop of a personal computer or a
customized, hand-held device. The SmartStatus(TM) product will be available to
all realtors enrolled in the SmartAgent program at no extra charge. Management
believes, without assurance, that the Company's SmartStatus(TM) centralized
reporting system will be the foundation for the development of additional
business software applications in the future.
SmartAd(TM)
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The SmartAd(TM) service provides the realtor with print advertising,
customized to display the custom-branded insertion of the realtor, in a number
of real estate publications. The advertisement itself directs the reader of the
real estate publication to the Company's Internet portal, ideally advertised
elsewhere in the publication as well. The SmartAd(TM) system is calculated to
maximize the exposure of realtors to their prospective customers through the
strategy of advertising the Company's portal on the Internet and in
advertisements in print media.
Products and Services Offered by Others
General
-------
Management limits the content of the Company's web site by selecting only
those vendors of real estate, mortgage and related products and services that
provide the desired level of unique content to contribute to the overall value
of the Company's web site and superior customer service. Management believes
that the Company, unlike other common-themed web sites offering tips and advice,
has discovered a unique marketing niche in researching and making definitive
recommendations to consumers and real estate industry professionals of real
estate, mortgage and related companies, including, among others, real estate
companies, realtors, banks and other mortgage lenders, insurance companies,
credit reporting agencies, appraisers and closing service providers, providing
superior products and/or services. These companies and individuals that offer
their products and services to the real estate industry and consumers via the
Company's web site compensate the Company in a variety of ways, including
advertising fees, revenue sharing and/or referral fees. The advertising program
permits a company to place a button or a banner on the Company's web site. The
banner may be placed on each of the main pages, on one specific page targeting a
specific business or rotated throughout the web site. The advertising fee is
based on the "cost per thousand impressions" model and is adjusted for overall
performance. The Company's revenue sharing program permits the participant to
have a button, text link and/or banner on the Company's web site linking the
Company to the participant's web site. The link to the participating company is
assigned a specific uniform resource locator or "URL." Once the visitor to the
Company's web site links to the participant's web site and consummates a
transaction, the Company receives a percentage of the revenue generated by that
transaction. Under the referral fee program, the participant receives referrals
from visitors to the Company's web site who have completed and submitted a form
requesting real estate, mortgage or related information, products and/or
services. The Company receives a fee for the referral.
Mortgages, Lines of Credit, Automobile Loans and Other Financial Services
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Among those companies offering mortgage loans via the Company's portal are
ELOAN, Inc., Wells Fargo Bank, and iQualify. Management believes, without
assurance, that the Internet will change the manner in which consumers shop for
mortgages, lines of credit, automobile loans and other financial services.
According to the Mortgage Bankers Association of America (the "MBAA"), mortgage
loans funded in the United States increased from $834 billion in 1997 to $1.5
trillion and $1.1 trillion in 1998 and 1999, respectively. The MBAA predicts a
further increase in the number of mortgage loans funded in 2000 because of the
increase in the number of such transactions conducted online. By the year 2003,
Forrester Research predicts that $91 billion in mortgage loans (10% of the
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market) will be conducted via the Internet. According to Deutsche Bank
Securities, online mortgages will surge from less than one per cent in 1998 to
23% by 2003.
Customers
Revenue from the sale of the Company's products and/or services, each of
which is described in detail below under the separate caption therefor, is
expected to be realized by the Company from the following sources (in order of
priority):
(i) SmartAgent(TM)subscription fees:
(a) Brokerage office service agreements.
(b) Realtor service agreements.
(ii) Advertising revenue:
(a) Term contracts.
(b) Impression advertising.
(c) "Click-through" advertising.
(iii) Fees for sales of pre-screened mortgage leads.
(iv) Fees for referrals of pre-screened buyer leads.
(v) Revenue from sales to vertical industries of information from the
Company's database of customers.
(vi) Revenue from transaction partners, i.e., the vertical market segment
of individual partners sharing revenue from services and advertising relating to
sales of title, escrow, appraisal, insurance, warranty and credit products. From
many such partners, it is possible for the Company to receive revenue from both
unique impressions and a click-through agreement, the success of any of which
arrangements is dependent upon the volume of traffic on the Company's web site,
which, in turn, depends upon the success of the Company's print advertising
campaign.
Agreements under Negotiation
Lycos, Inc.
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The Company is presently conducting negotiations with Lycos, Inc.
("Lycos"), Waltham, Massachusetts, a powerful Internet search engine, for the
purpose of entering into an advertising agreement providing for the Company's
virtual home tour content to be advertised on Lycos and related web sites and a
"co-branding" agreement providing for online and print advertising to promote
Company virtual tours and real estate services. While the terms and conditions
of the proposed agreements have not yet been agreed upon, management anticipates
that Lycos will be required to guarantee an agreed upon level of traffic to the
Company's web site and that Lycos' compensation may include the issuance of
HomeSmart.com Common Shares in addition to cash. Management anticipates, but
cannot assure, that the anticipated agreements with Lycos will provide over
500,000 visitors to the Company's web site on a monthly basis. The Company has
paid Lycos a total of $173,146 for advertising through the date hereof.
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According to Media Metrix, over 40 million persons used Lycos as of September
30, 1999, that number being the second largest number of Internet users reached
by an Internet company on that date. (See "- Marketing - Advertising.")
Translucent Technologies
------------------------
Management anticipates, without assurance, that it will be successful in
negotiating a software license agreement with Translucent Technologies, Newport
Beach, California. Management further expects, but cannot assure, that the
Company will be obligated, under the terms and conditions of the proposed
software license agreement, to pay Translucent Technologies a software license
fee for each monthly subscriber and that it will receive an equity ownership
interest in Translucent Technologies.
Realty Online
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Management is presently engaged in negotiating a revenue sharing agreement
with Realty Online ("Realty Online"), Agoura, California, for the delivery of
approximately two million national real estate listings, including, but not
limited to, residential, vacation, commercial and rental listings. The listings
will be co-branded and available in real-time via links. Management hopes, upon
the consummation of this proposed agreement, to become competitive in listing
content with Realtor.com, RealEstate.com and Homeseekers.com. The Company also
expects to benefit from the sale of SmartAgent(TM) subscriptions to realtors who
visit Realty Online's web site.
Intellectual Property and Proprietary Rights
The Company regards all or portions of the designs and technologies
incorporated into its online products and services as proprietary and attempts
to protect them with a combination of trademark and trade secret laws. It has
generally been the Company's policy to proceed without patent protection. It may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain and use to the
Company's detriment information that the Company regards as proprietary.
Moreover, the laws of some foreign countries do not afford the same protection
to the Company's proprietary rights as do United States laws. There can be no
assurance that any of the Company's efforts to protect its proprietary
technology will be adequate or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies.
Security
Management believes that the Company provides a high level of security to
the consumer/customer. However, there are many risks associated with the conduct
of business on the Internet, including, among others, security, viruses and
fraud. While hacking is a serious threat to firms such as the Company that
connect to the Internet, the greatest threat to the security of the Company's
business transactions on the Internet is expected to arise from its own
employees. The Company, like most other companies conducting business on the
Internet, intends to continuously implement a wide range of hardware security
measures to offer network protection and business continuity. Nevertheless, it
is generally known that few companies have implemented the security measures
available utilizing current technology, including, among others, file encryption
for stored information, public key cryptography, telecommunication encryption
and digital signatures/sender authentication. Many development-stage companies,
like the Company, lack the capital and/or customer demand to warrant the
investment in electronic security protective applications and technologies.
Further, while many companies have a formal security policy, nearly all are
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believed to be far from adequate and very few companies educate all members of
staff, conduct risk analysis on a regular basis and regularly assess their
software for security flaws. With the wide range of security flaws inherent in
the Internet, the Company can be expected to be at a serious disadvantage, as
compared to its competitors, especially with regard to electronic commercial
transactions, if management fails to protect or minimize the risks to the
Company from security threats. While the Internet represents a new and highly
lucrative market, management expects to be challenged by the necessity to become
fully aware of new technologies so that it can manage the risks associated with
conducting transactions over the net.
Other disadvantages to the Company's conducting business on the Internet
are the lack of physical representation enabling customers to evaluate the
Company's products and services in advance of placing an order and/or obtaining
customer services from personnel with whom they are unable to interact in
person. It is likely that the Company will be unable to generate business from
the type of customer unable to develop a comfort level in the absence of
physical representation and will likely be required to deal with dissatisfied
customers believing that the Company's products and services were not the
equivalent of that of a traditional real estate or mortgage company. Despite the
above-described and other risks to the Company of conducting business via the
Internet, the Company intends to emphasize this method of marketing real estate,
mortgage and related services and products over the other marketing methods
because of the significantly reduced cost to the Company and because of the
elimination of the need for a large physical facility and a sizeable marketing
staff.
Marketing
Market
------
The target market for the Company's products and services is, primarily,
the approximately 760,000 realtors in the United States earning, on average,
approximately $43,000 per annum each, as reported in June 1999 by the National
Association of Realtors. Market research indicates that approximately 17% to 18%
of all such realtors effect 80% of all real estate listings and transactions in
the United States. In order to appeal to the greatest number of realtors, the
Company offers various packages, including the SmartAgent(TM) Silver,
SmartAgent(TM) Gold, SmartAgent(TM) Platinum and SmartAgent(TM) Preferred
Provider packages, each of which includes a differing number of products and/or
services designed to satisfy the specific user requirements of each realtor.
Among consumers, the Company targets the twenty-eight to fifty-seven-year-old
age group because of its activity in the real estate market together with its
increased willingness to use the Internet in the home buying process,
particularly with regard to unique content and function, such as the virtual
listings available on the Company's web site.
Management believes that the real estate industry, like the financial
services industry, will be revolutionized by the use of the Internet. The ready
availability of information to consumers via the Internet is expected to force
realtors, mortgage lenders and others in the real estate business to satisfy
consumer demand for interactive and real-time portals. Mr. Brad Inman, publisher
of the Inman News, a leading real estate publication, recently predicted a
substantial decline in the number of realtors in the United States from 760,000
to as few as 100,000 over five years as a result of the Internet. A recent
report by Jefferies and Company, an investment banking firm, indicates that over
60% of U.S. real estate brokers and agents anticipate change, because of the
Internet, in the manner in which homes are listed, purchased and sold. The
Jefferies report also predicts that the Internet will have the effect of
enabling real estate agents to reach more consumers and lower the marketing
costs per home sale. Based upon these and similar such predictions, management
believes that, in the future, a smaller number of realtors will each handle a
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larger share of the real estate business at a lower cost to the consumer by
employing the Internet and related technologies.
According to January 1999 figures from Media Metrix, over 49% of the United
States adult population (approximately 90 million Americans) now has access to
the Internet. Mr. Mark Snowden, a senior analyst for Inteco, reports that these
90 million adult users access the web from 114 million different locations,
i.e., 48 million from home, 38 million from work, 19 million from a friend or
relative's house, 14 million from school and the remainder from locations such
as libraries and community centers. Forrester Research predicts the Internet
user base to increase by approximately 40% annually over the next three years.
In June 1998, the majority, or 62%, of all Internet users in the world
resided in the United States. E-stats estimated that the number of adult
Americans (over the age of eighteen) online would grow from 28 million as of
December 31, 1997, to 37 million (18.5% of all U.S. adults over the age of
eighteen) in June 1998 to 47 million as of December 31, 1998. Based on 1999
year-end figures, the number of Americans using the Internet is expected to
increase to a total of 85 million by 2002. In December 1998, there were 24.4
million U.S. households (24.2% of total U.S. households) connected to the
Internet, as compared to 18 million U.S. households in June 1998 and 14.5
million households in December 1997.
Marketing
---------
The Company's target market has been divided into four main categories,
including real estate/mortgage lending referrals, automobile loans, credit cards
and commercial loans. The Company's marketing strategy is to attract consumers
of real estate, mortgage and related products and services through innovative,
online marketing programs. Internet traffic-generating, branding opportunities
and marketing campaigns are currently under negotiation with Lycos. Management
will also employ traditional methods of marketing in order to promote the
Company. It is presently intended that these activities will include advertising
in local newspapers, trade journals and periodicals and mailings of brochures.
The advantages to the realtor enrolling in the Company's SmartAgent(TM) program
are, among other things, increased visibility to the home-buying public, cost
reductions in marketing listings via the Internet and reductions in the
ever-increasing costs of marketing, promoting and closing real estate
transactions. Management believes, without assurance, that the Company will be
able to capitalize upon the historic receptivity of realtors, as a group, to
innovations in communications techniques to enhance the marketability of the
Company's SmartAgent(TM) program. The Company expects, without assurance, to be
able to generate prospects for its SmartAgent(TM) program from, among others,
individual realtors/agents, broker groups offered group rates, franchise network
sales and strategic alliance partner sales referrals. (See Item 1. "Description
of Business," (b) Business of Issuer - Products and Services Offered by the
Company - SmartAgent(TM).")
Advertising
-----------
The Company's proposed advertising program is expected to be critical to
the Company's success. Management's goal is to use advertising to create
national awareness of the Company. However, achievement of this goal is
dependent, in the opinion of management, upon the expenditure by the Company of
significant additional funds for advertising; which funding is anticipated,
without assurance to be received in the future from equity and/or debt financing
or otherwise. The Company's proposed advertising campaign is expected to
include, but not be limited to, television infomercials, national newspapers,
television and radio, direct mail, billboard and Internet. The three main
strategies that are expected to be used are visualization, association and brand
awareness.
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SmartAd(TM). The Company's SmartAd(TM) service provides the realtor with
print advertising, customized to display the custom-branded insertion of the
realtor, in a number of real estate publications. The advertisement itself
directs the reader of the real estate publication to the Company's Internet
portal, ideally advertised elsewhere in the publication as well. The SmartAd(TM)
system is calculated to maximize the exposure of realtors to their prospective
customers through the strategy of advertising the Company's portal on the
Internet in advertisements in print media. (See Item 1. "Description of
Business," (b) Business of Issuer - Products and Services Offered by the Company
- SmartAd(TM).")
Proposed Agreement with Lycos. The Company is presently conducting
negotiations with Lycos, Inc., Waltham, Massachusetts, a powerful Internet
search engine, for the purpose of entering into an advertising agreement
providing for the Company's virtual home tour content to be advertised on Lycos
and related web sites and a "co-branding" agreement providing for online and
print advertising to promote Company virtual tours and real estate services.
While the terms and conditions of the proposed agreements have not yet been
agreed upon, management anticipates that Lycos will be required to guarantee an
agreed upon level of traffic to the Company's web site and that Lycos'
compensation may include the issuance of HomeSmart.com Common Shares in addition
to cash. Management anticipates, but cannot assure, that the anticipated
agreements with Lycos will provide over 500,000 visitors to the Company's web
site on a monthly basis. The Company has paid Lycos a total of $173,146 for
advertising through the date hereof. According to Media Metrix, over 40 million
persons used Lycos as of September 30, 1999, that number being the second
largest number of Internet users reached by an Internet company on that date.
(See "- Agreements under Negotiation - Lycos, Inc.")
Competition
Prior to organizing the Company, Messrs. Hamilton and Wilson, the founders
of the Company, performed significant market research of the products and
services offered by other online mortgage and lending companies. They discovered
that the Company's customer-centric business model contrasts sharply with the
business models of most of the competition emphasizing their particular special
interests. Additionally, many of these companies focus upon the provision of
information and tips, while the Company's focus is the connection of the
consumer or industry professional with the site of the provider of the
information, product(s) and/or service(s) sought by the visitor to the Company's
portal. Unlike its competitors, the Company's web site is designed so as to
facilitate the consummation of a business transaction.
The market for real estate, mortgage and related products and services is
intensely competitive. The Company anticipates that it, and the companies that
market their products and/or services via the Company's portal, will be in
competition with traditional and online companies engaged in the real estate,
mortgage and/or related businesses of all sizes located both inside and outside
the United States. Further, while management seeks to minimize the number of
vendors on its site, such as banks, insurance companies, credit reporting
agencies, appraisal services and other financial service companies, offering
similar products and/or services, certain of these companies will inevitably be
in competition with each other. Management believes that most of the Company's
own products and services, including the existing SmartAgent(TM),
SmartStatus(TM) and SmartAd(TM) products and services and the proposed
SmartSign(TM) and CASPER products and services and the SmartDesk custom software
product are sufficiently unique and innovative so as to appeal to a market niche
not serviced by many of the Company's competitors. Nevertheless, although
management knows of no such instance as of the date hereof, the Company may
discover itself to be in competition with one or more of its customers offering
real estate, mortgage and/or related products and services via the Company's web
site identical or similar to those offered by the Company.
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Management is aware of an increasing number of companies offering real
estate, mortgage and related products and services on the Internet. Company
management believes that it is likely that certain of these companies will seek
to provide real estate products and services via the Internet identical or
substantially similar to the Company's products and services. On July 14, 1998,
Microsoft launched "HomeAdvisor," a fully-integrated Internet guide for real
estate buying and selling. Industry observers, including Company management,
believe that the announcement by Microsoft of this new software product is
indicative of the solidity of the market. Killen & Associates, a Palo Alto,
California, research firm, predicted that HomeAdvisor would increase consumer
interest in the emerging Internet real estate market and boost market growth.
HomeAdvisor had approximately 650,000 multi-state ("MLS") listings as of August
1999. HomeAdvisor realtor subscription fees include a personal site for each
realtor's listings and the capability of interacting with HomeAdvisor business
partners. More recently, HomeAdvisor has emphasized strategic alliances with
mortgage providers, such as Quicken Mortgage.
HomeStore.com, a publicly-traded company, is the largest real estate
destination on the Internet, with almost 1.3 million listings, the majority of
which are MLS compilations with a link to the agent's personal web site, as of
September 1999. To management's knowledge, only minimal additional tools and
services are offered to the real estate agent currently. HomeStore.com has
contracts as the exclusive MLS provider with the majority of Internet portals.
HomeStore.com currently leads all real estate sites in the number of unique
visitors and MLS listings, although most experts believe that HomeStore.com's
MLS advantage will diminish as the Internet matures. HomeStore.com's current
market capitalization is approximately $2.218 billion, with its common stock
trading in the past twelve months in a range of $14 to $138 per share.
HomeSeekers.com, a publicly-traded company, may be considered a direct
competitor because of its emphasis on business-to-business technology solutions.
HomeSeekers.com had increased its real estate agent subscription base to almost
17,000 as of September 30, 1999. Like the Company's compensation structure,
subscription fees increase in relation to the technological complexity obtained
by the user. HomeSeekers.com's browser product, with embedded real estate tools,
has been very successful at penetrating an industry considered by some to be
technophobic. Like HomeStore.com, HomeSeeker.com's web site features links
permitting consumers to view 80% of all MLS listings at any given time.
HomeSeekers.com has had a market valuation of approximately $66.9 million over
the past year, with a trading range for its common stock of $2 to $25 per share
during the year.
Management hopes, to the extent practicable, to minimize the Company's
weaknesses, including, among others, its undercapitalization, cash shortage,
limitations with respect to personnel, technological, financial and other
resources and lack of a customer base and market recognition, through its focus
on the Internet; which eliminates the need for a large physical facility and a
sizeable marketing staff. However, the Company's opportunity to develop a large
customer base may, nevertheless, be limited by its financial resources and other
assets. In this regard, many of the companies and other organizations with which
HSI will be in competition, including, but not limited to, HomeAdvisor,
HomeStore.com and Home Seekers.com, are established and have far greater
financial resources, substantially greater experience and larger staffs than the
Company. Additionally, many of such organizations have proven operating
histories, which the Company lacks. The Company expects to face strong
competition from both such well-established companies and small independent
companies like itself. In addition, the Company's business may be subject to
decline because of generally increasing costs and expenses of doing business,
thus further increasing anticipated competition. Specifically, any increase in
mortgage interest rates could be expected to have a substantial negative impact
upon the Company's ability to generate revenues. Additionally, it is anticipated
that there may be significant technological advances in the future and the
Company may not have adequate creative management and resources to enable it to
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take advantage of such advances. The effects of any such technological advances
on the Company, therefore, cannot be presently determined.
Management will continue to focus the Company's marketing strategy on the
employment of the Internet to attain economies of scale, lower home acquisition
costs and achieve a simpler, less stressful real estate transaction process.
Additionally, management will continue to employ partnering, joint venture and
similar such arrangements whereby the Company joins with others having greater
financial and other resources than those of the Company in the provision of
information, products and/or services and as sources of financing for the
Company. Management will continue to evaluate each of these prospective projects
or proposals, which may become available for participation by the Company, on a
case-by-case basis. Company management anticipates, without assurance, that,
even with the very limited level of funding that may be available to it, the
Company will be successful in negotiating or extending the relationships,
partnerships, joint ventures and other cooperative efforts with leading real
estate and/or mortgage service providers so as to be capable of continuing the
delivery of cost-effective, Internet-enabled solutions for the real estate and
mortgage industries.
Employees and Consultants
As of the date hereof, the Company has two full-time employees, including
Messrs. John F. Riley, the President/Chief Executive Officer and a director of
the Company, and the Company's administrative manager, who receive salaries of
$144,000 and $35,000 per annum, respectively, and one part-time employee, Mr.
A.L. Hamilton, Secretary/Treasurer/Chairman of the Board of Directors. No cash
compensation has been awarded to, earned by or paid to Mr. Hamilton for all
services rendered in all capacities to the Company since he was first elected as
an executive officer and a director of the Company on July 21, 1999. Mr. John J.
Wilson, a Company director, who served as the Company's President and Chief
Executive Officer on a part-time basis without cash compensation from the
initial date of his election on July 21, 1999, through May 30, 2000, was
succeeded in the office of President by Mr. Riley on May 30, 2000. Mr. Riley's
salary commenced on July 1, 2000, and the Company has reimbursed him for his
expenses incurred on behalf of the Company since June 1, 1999. Additionally, the
Company gifted a cellular telephone, a laptop computer and certain other
equipment to Mr. Riley. Commencing January 2001, the Company proposes to
increase Mr. Riley's salary to $240,000 per annum if it receives additional
funding in an amount deemed acceptable by the Board of Directors. On July 19,
1999, Messrs. Hamilton and Wilson each received 7,000,000 HomeSmart.com Common
Shares in consideration for the sale and transfer by each said individual to the
Company of 7,000,000 HomeSmartUSA Common Shares pursuant to the Stock Purchase
and Exchange Agreement dated July 19, 1999, in accordance with which the Company
acquired HomeSmartUSA by "reverse" acquisition by issuing a total of 16,117,000
HomeSmart.com Common Shares in consideration for all 16,117,000 outstanding
HomeSmartUSA Common Shares, including 14,000,000 HomeSmartUSA Common Shares
owned collectively by Messrs. Hamilton and Wilson. On July 1, 2000, the Company
granted to Mr. Riley options exercisable to purchase 1,000,000 HomeSmart.com
Common Shares at exercise prices of $.50 and $2.00 per share, respectively (a
total of 2,000,000 HomeSmart.com Common Shares), during the three-year period
terminating on June 30, 2003. (See Part I, Item 6. "Executive Compensation,"
Part I, Item 7. "Certain Relationships and Related Transactions" and Part II,
Item 4. "Recent Sales of Unregistered Securities.") None of the Company's
employees are represented by a labor union. The Company has never had a strike
or lockout and considers its employee relations to be good.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
Plan of Operation
-----------------
Since the reverse acquisition by the Company of Homesmart USA on July 19,
1999, the Company has operated an interactive web site, or portal, located on
the Internet at www.homesmart.com through which the Company, together with
numerous other companies and individuals engaged in real estate, mortgage and
related businesses, offer their products and services to the real estate
industry and consumers. (See Item 1. "Description of Business," (b) Business of
Issuer.") The Company is in the development stage and, to date, management has
devoted substantially all of its time and effort to the research and development
of its web site and financing matters. Through the date hereof, the Company's
business has generated insignificant product sales and service revenues and a
sizable net loss. For the years ended December 31, 1999, and 1998, the Company
had gross sales and net revenues aggregating $33,311 and $229,222, respectively,
and a net loss of $(1,468,867), or $(.08) per HomeSmart.com Common Share, and
$(738,950), respectively. For the six months ended June 30, 2000, as compared to
the six months ended June 30, 1999, the Company realized gross sales and net
revenues totaling $3,444 and $30,645, respectively, and a net loss of
$(374,553), or $(.02) per HomeSmart.com Common Share, and $(592,591),
respectively. Sales and marketing expenses, general and administrative expenses
and stock-based consulting compensation increased from $346,432, $498,062 and
$-0-, respectively, for 1998 to $424,541, $780,812 and $150,000, respectively,
for 1999. Costs of sales and revenues decreased from $112,638 to $93,510 for the
year ended December 31, 1998, as compared to the year ended December 31, 1999.
Cost of sales and revenues and stock-based consulting compensation increased
from $48,848 and $-0-, respectively, for the six months ended June 30, 1999, to
$63,112 and $125,000, respectively, for the six months ended June 30, 2000. For
the six months ended June 30, 1999, as compared to the six months ended June 30,
2000, sales and marketing expenses decreased from $245,648 to $43,368 and
general and administrative expenses decreased from $316,832 to $130,417. For the
period from February 1, 1997, through June 30, 2000, the Company realized gross
sales and net revenues of $282,327 and a net loss of $(2,767,082).
The success of the Company's real estate portal is dependent upon the
Company's ability to attract and retain qualified suppliers of real estate,
mortgage and related products and services. The Company has not achieved
commercial acceptance for any of its products and services and there can be no
assurance that the Company will gain such acceptance in the future; that future
product sales and/or service revenues will be significant; that any sales will
be profitable; or that the Company will have sufficient funds available for
further research and development of its proposed products and services. The
likelihood of the Company's success will also depend upon its ability to raise
additional capital from equity and/or debt financing to overcome the problems
and risks described herein; to absorb the expenses and delays frequently
encountered in the operation of a new business; and to succeed in the
competitive environment in which the Company will operate. Although management
intends to explore all available alternatives for equity and/or debt financing,
including, but not limited to, private and public securities offerings, there
can be no assurance that the Company will be able to generate additional
capital. The Company's continuation as a going concern is dependent on its
ability to generate sufficient cash flow to meet its obligations on a timely
basis and ultimately to achieve profitability.
The Company may expand through the acquisition of other online real estate
and/or mortgage lending companies. While Company management is continuously
monitoring such opportunities, no such companies are acquisition targets as of
the date hereof, nor are there any negotiations for the acquisition of any real
estate and/or mortgage companies ongoing as of the date hereof.
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Financial Condition, Capital Resources and Liquidity
----------------------------------------------------
As of June 30, 2000, and December 31, 1999, the Company had total assets of
$319,495 and $439,365, respectively, which included total current assets (cash)
of $2,695 and $110,464, respectively, property and equipment (less accumulated
depreciation) of $301,583 and $310,118, respectively, domaine name (less
accumulated amortization) of $1,990 and $2,250, respectively, and web site (less
accumulated amortization) of $13,227 and $16,533, respectively.
The Company had total current liabilities of $784,406 and $654,723 and a
working capital deficit of $(467,887) and ($218,334) as of June 30, 2000, and
December 31, 1999, respectively. The Company has experienced working capital
shortages from time-to-time and management expects such working capital
shortages to continue for the foreseeable future. As of June 30, 2000, and
December 31, 1999, the Company's total shareholders' equity/partners' capital
was $(464,911), and $(215,358), respectively, including deficits accumulated
during the development stage of $(1,441,602) and $(1,067,049), respectively.
While the Company's independent auditors have presented the Company's financial
statements on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business over a reasonable length of time, they have noted that the Company
has a limited operating history during which it has suffered operating losses,
limited operating capital with which to finance its development, a deficit in
working capital and an unproven business concept that will require additional
resources to perfect. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company's future success will be
dependent upon its ability to provide effective and competitive real estate and
mortgage-related products and services; the continued acceptance of the Internet
for the sale of goods and services and the Company's ability to develop and
provide new services that meet customers' changing requirements. Should the
Company's efforts to raise additional capital through equity and/or debt
financing fail, management and other related parties are expected to provide the
necessary working capital so as to permit the Company to continue as a going
concern.
Item 3. Description of Property.
The Company owns in fee simple the real property located at 2976 Alhambra
Drive, Cameron Park, California, together with the office building comprised of
approximately 4,000 square feet (in which the Company's executive offices are
situated) located on the real property and the 3,000 square foot aircraft hangar
located underneath the building. The property is encumbered by that certain
Promissory Note, secured by a Deed of Trust, dated January 14, 2000, due January
15, 2001, in the principal amount of $230,000 payable by the Company, as the
maker, to Mr. Keith Brunius, as the holder. The Promissory Note is non-interest
bearing until January 25, 2001, after which date interest accrues at the rate of
15% per annum and a penalty in the amount of 10% may be charged by the holder.
In the opinion of management of the Company, the facilities are adequately
covered by insurance. The Company anticipates that these facilities, which are
used exclusively for administrative offices, will be adequate for its
foreseeable future needs. Hamilton, Hamilton & Mah (the "Hamilton Firm"), a law
firm affiliated with the Company, maintains its offices at this location
pursuant to a month-to-month rental arrangement at a rate of $500 per month. Mr.
A.L. Hamilton, a partner of the Hamilton Firm, serves as the Secretary, the
Treasurer and the Chairman of the Board of Directors of the Company and owns of
record and beneficially 3,395,000 HomeSmart.com Common Shares, representing
approximately 15.11% of the issued and outstanding HomeSmart.com Common Shares.
(See Part I, Item 4. "Security Ownership of Certain Beneficial Owners and
Management" and Part I, Item 5. "Directors, Executive Officers, Promoters and
Control Persons.") The Company's telephone and facsimile numbers are (530)
676-2345 and (530) 676-2351, respectively.
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The Company's investment policies with respect to investments in real
estate, interests in real estate, real estate mortgages and securities of or
interests in persons primarily engaged in real estate activities are that the
investment: (i) have a legitimate business purpose and (ii) be income-producing.
Accordingly, the Company's policy is to acquire assets primarily for income, not
primarily for possible capital gain. There are no limitations on the percentage
of assets that may be invested in any one investment or type of investment. The
Company's investment policies are determined by its Board of Directors and may
be changed without a vote of security holders.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of August 14, 2000, by each shareholder known
by the Company to be the beneficial owner of more than 5% of its outstanding
shares of Common Stock, each director and all executive officers and directors
as a group. Under the General Rules and Regulations of the Commission, a person
is deemed to be the beneficial owner of a security if such person has or shares
the power to vote or direct the voting, or dispose or direct the disposition, of
such security. Each of the shareholders named in the table has sole voting and
investment power with respect to the shares of Common Stock beneficially owned.
Shares Percentage
Beneficially of
Beneficial Owner Owned(1) Class(1)
------------------------------------ ----------- ------------
A.L. Hamilton, Trustee for 4,000,000 17.81%
HomeSmart.com, Inc.(2)
2976 Alhambra Drive
Cameron Park, California 95682
A.L. Hamilton(3)(4) 3,395,000 15.11%
2976 Alhambra Drive
Cameron Park, California 95682
John J. Wilson(4) 3,181,250 14.16%
995 Oak Trail Court
Placerville, California 95667
John F. Riley(3)(4) 3,000,000(4) 13.35%
5842 Alleppo Lane
Palmdale, California 93551
Richard E. Dixon 100,000 (5)
6163 Pony Express Trail
Pollock Pines, California 95726
All executive officers and directors 9,676,250(4) 43.07%
as a group (four persons)
------------------------
(1) Represents the number of shares of Common Stock owned of record and
beneficially by each named person or group, expressed as a percentage of
22,465,040 shares of the Company's Common Stock issued and outstanding as of
August 14, 2000.
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(2) Mr. Hamilton holds the shares of Common Stock as trustee for the
benefit of the Company.
(3) Executive officer of the Company.
(4) Member of the Board of Directors of the Company. As a resident of the
State of California, the shareholder is subject to the California community
property laws with regard to his ownership of the shares of Common Stock.
(5) Includes an aggregate of 2,000,000 shares of Common Stock issuable upon
the exercise of options exercisable to purchase 1,000,000 shares of Common Stock
each at exercise prices of $.50 and $2.00 per share, respectively, on or prior
to June 30, 2003.
(6) Less than one per cent.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
Executive Officers and Directors
Set forth below are the names, ages, positions with the Company and
HomeSmartUSA and business experience of the executive officers and directors of
the Company and HomeSmartUSA.
Name Age Position
--------------------- --- ----------------------------------------
John F. Riley* 36 President, Chief Executive Officer and
Director of the Company
A.L. Hamilton* 66 Secretary, Treasurer and Chairman of the
Board of Directors of the Company;
Secretary, Treasurer and a Director of
HomeSmartUSA
John J. Wilson* 52 Director of the Company; President,
Chief Executive Officer and Director of
HomeSmartUSA
Richard E. Dixon 60 Chief Financial Officer of the Company
------------------
*The above-named persons may be deemed to be "promoters" and "parents" of
the Company, as those terms are defined under the General Rules and Regulations
promulgated under the Securities Act of 1933, as amended.
All directors hold office until the next annual meeting of the Company's
shareholders and until their respective successors have been elected and
qualify. Officers serve at the pleasure of the Board of Directors. Messrs.
Riley, Hamilton, Wilson and Dixon are expected to devote approximately 100%, 80%
and 10% and 5%, respectively, of their time to the business of the Company.
Family Relationships
There are no familial relationships among the executive officers and
directors of the Company.
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Business Experience
John F. Riley has served as a director of the Company since April 25, 2000,
as the President of the Company since May 30, 2000, and as the Company's Chief
Executive Officer since July 21, 2000. Mr. Riley has been employed in executive
positions in the mortgage lending or banking businesses for the past
approximately fourteen years since approximately 1986. Since June 1, 2000, he
has served as a consultant to Metrociti Mortgage Corp., Encino, California; for
which privately-held mortgage company he served in the position of Vice
President of Business Development from May 1999 through May 31, 2000. Mr.
Riley's responsibilities in this position included the successful development of
three new production divisions, including "Direct Lending," "Builder Partners"
and "Internet Lending." From May 1998 to May 1999, Mr. Riley served in the
position of Senior Executive Vice President for Capital Funding Group, Costa
Mesa, California, a privately-held, full-service mortgage banker. During his
tenure, Mr. Riley was responsible for the successful conversion of Capital
Funding Group from the status of a mortgage broker to that of a licensed
mortgage banker. Mr. Riley served, from May 1995 through April 1998, as a Vice
President of Guild Mortgage Company, Palmdale, California, a private, once
national mortgage bank for which he developed the first "Net Branch," a
significant factor in the company's growth during that period. He served as a
Vice President for National Pacific Mortgage-Old Kent, Palmdale, California, a
publicly-held company, from March 1990 through May 1995. Mr. Riley was employed
by Fireside Thrift & Loan, a private Lancaster, California, company, as a branch
manager from September 1986 to March 1990. He received a Bachelor of Science
degree in business from George Mason University, Fairfax, Virginia, in 1986. Mr.
Riley attended Fordham University Law School, New York, New York, from September
1992 to February 1993 and Albany State University, Albany, New York, from
September 1981 to June 1982.
A.L. Hamilton has served as the Secretary, the Treasurer and a director of
the Company since July 21, 1999. Mr. Hamilton has served as the Chairman of the
Board of Directors of the Company since July 21, 2000. Since July 12, 1999, he
has served in the positions of Secretary, Treasurer and a director of
HomeSmartUSA. Mr. Hamilton has been an attorney in private practice in the State
of California for the past approximately thirty-two years since January 6, 1968.
He has been a partner in the law firm of Hamilton, Hamilton & Mah, which
operates from the Company's facilities in Cameron Park, California, since
January 1998. In addition to providing legal representation to buyers and
sellers in residential and commercial investments, Mr. Hamilton has assisted
several mortgage companies in developing sales and marketing strategies. He has
also been involved in developing his own mortgage business. Mr. Hamilton
received a J.D. degree from Southwestern University, Los Angeles, California, in
June 1967.
John J. Wilson has served as a director of the Company since July 21, 1999.
He served in the positions of President and Chief Executive Officer of the
Company from July 21, 1999, through May 29, 2000. Mr. Wilson has served as the
President and the Chief Executive Officer of HomeSmartUSA since July 12, 1999.
He was the President and co-founder of Phoenix Real Estate Group, Inc., a
private company engaged in mortgage finance and real estate sales, from January
1997 through the date of its voluntary dissolution in 1998. Mr. Wilson received
an A.A. degree from Los Angeles Valley College, Los Angeles, California, in
1975. He attended the University of Northern California College of Law,
Sacramento, California, from 1991 through 1992.
Richard E. Dixon has served as the Chief Financial Officer of the Company
since July 21, 2000. Since July 1999, he has co-owned, with his daughter, and
operated a private accounting practice under the name of Dixon & Dixon in
Pollock Pines, California. For at least approximately twenty-four years prior to
that time, from approximately 1975 through June 1999, Mr. Dixon was
self-employed in private accounting practice in Pollock Pines, California. He
has been licensed as a certified public accountant in the State of California
for the past approximately thirty-three years since December 1966. Mr. Dixon
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received a B.A. degree in business administration from Woodbury University, Los
Angeles, California, in February 1962.
Item 6. Executive Compensation
No cash compensation has been awarded to, earned by or paid to Mr. A.L.
Hamilton for all services rendered in all capacities to the Company since he was
first elected as an executive officer and a director of the Company on July 21,
1999. Mr. Hamilton, Secretary/Treasurer/director and Chairman of the Board of
Directors of the Company, has served in those positions on a part-time basis
without cash compensation since July 21, 1999, and 2000, respectively. Mr. John
J. Wilson served as the President and Chief Executive Officer of the Company on
a part-time basis without cash compensation from July 21, 1999, through May 30,
2000. In June 2000, the Company paid him the sum of $25,000 in cash as
severance. Since July 21, 2000, Mr. Wilson has served as a director of the
Company without cash compensation. Mr. John F. Riley succeeded Mr. Wilson in the
office of Company President on May 30, 2000, and was elected to the office of
Chief Executive Officer of the Company on July 21, 2000. The Company compensates
Mr. Riley, commencing June 1, 2000, by payment of his expenses incurred on
behalf of the Company and, commencing July 1, 2000, with a salary of $144,000
per annum. Additionally, the Company gifted a cellular telephone, a laptop
computer and certain other equipment to Mr. Riley. Commencing January 2001, the
Company proposes to increase Mr. Riley's salary to $240,000 per annum if it
receives additional funding in an amount deemed acceptable by the Board of
Directors. Mr. Richard E. Dixon, who was elected to the office of Chief
Financial Officer of the Company on July 21, 2000, is expected to serve without
cash compensation for the foreseeable future. (See Part I, Item 1. "Description
of Business," (b) "Business of Issuer - Employees.")
On July 19, 1999, Messrs. Hamilton and Wilson each received 7,000,000
HomeSmart.com Common Shares in consideration for the sale and transfer by each
said individual to the Company of 7,000,000 HomeSmartUSA Common Shares pursuant
to the Stock Purchase and Exchange Agreement dated July 19, 1999, in accordance
with which the Company acquired HomeSmartUSA by "reverse" acquisition by issuing
a total of 16,117,000 HomeSmart.com Common Shares in consideration for all
16,117,000 outstanding HomeSmartUSA Common Shares, including 14,000,000
HomeSmartUSA Common Shares owned collectively by Messrs. Hamilton and Wilson. On
November 11, 1999, the Company issued and sold 100,000 HomeSmart.com Common
Shares to Mr. Dixon in consideration for his performance of certain accounting
services on behalf of the Company valued at $150,000. On July 1, 2000, the
Company granted to Mr. Riley options exercisable to purchase 1,000,000
HomeSmart.com Common Shares at exercise prices of $.50 and $2.00 per share,
respectively (a total of 2,000,000 HomeSmart.com Common Shares), during the
three-year period terminating on May 29, 2003. (See Part I, Item 7. "Certain
Relationships and Related Transactions" and Part II, Item 4. "Recent Sales of
Unregistered Securities.")
Except for Mr. John F. Riley, none of the Company's executive officers
and/or directors holds any option to purchase any of the Company's securities.
Messrs. Riley, Hamilton, Wilson and Dixon are expected to devote approximately
100%, 80%, 10% and 5%, respectively, of their time to the business of the
Company. The Company does not provide its officers or employees with pension,
stock appreciation rights, long-term incentive or other plans and has no
intention of implementing any such plans for the foreseeable future. In the
future, the Company may offer stock options to prospective employees and/or
consultants; however, no such options have been granted as of the date hereof.
It is possible that in the future the Company may establish various executive
incentive programs and other benefits, including reimbursement for expenses
incurred in connection with the Company's operations, Company automobiles and
life and health insurance, for its executive officers and directors, but none
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has yet been granted. The provisions of such plans and benefits will be at the
discretion of the Company's Board of Directors.
To date, no cash or non-cash compensation has been awarded to, earned by or
paid to any executive officer or director of HomeSmartUSA, a wholly-owned
subsidiary of the Company, for services performed in all capacities for
HomeSmartUSA. (See Item 1. "Description of Business," (a) "Business
Development.")
Compensation of Directors
The Company has no standard arrangements for compensating the directors of
the Company. The Company proposes, if it is successful in raising additional
capital in excess of $2 million, to pay all members of the Board of Directors
the sum of $5,000 per month, in addition to any other compensation received as
an executive officer(s) or otherwise, for their services to the Company as
directors. Further, the Company proposes in the future to establish an advisory
board whose members are expected to receive, commencing with the Company's
receipt of in excess of $2 million in additional funding, the sum of $2,000 per
month for their services. There can be no assurance that the Company will
receive the financing in excess of $2 million required in order to compensate
its directors and proposed advisory board members as aforementioned.
Item 7. Certain Relationships and Related Transactions.
On July 19, 1999, the Company issued and sold 7,000,000 newly-issued,
restricted HomeSmart.com Common Shares to each of Messrs. A.L. Hamilton and John
J. Wilson, the Secretary/Treasurer/Chairman of the Board of Directors and a
director of the Company, respectively (a total of 14,000,000 HomeSmart.com
Common Shares), in consideration for the sale and transfer by each said
individual to the Company of 7,000,000 HomeSmartUSA Common Shares (a total of
14,000,000 HomeSmartUSA Common Shares) pursuant to the Stock Purchase and
Exchange Agreement dated July 19, 1999, in accordance with which the Company
acquired HomeSmartUSA by "reverse" acquisition by issuing a total of 16,117,000
newly-issued, restricted HomeSmart.com Common Shares in consideration for all
16,117,000 issued and outstanding HomeSmartUSA Common Shares, including
14,000,000 HomeSmart.com Common Shares owned collectively by Messrs. Hamilton
and Wilson. (See Part I, Item 6. "Executive Compensation" and Part II, Item 4.
"Recent Sales of Unregistered Securities.")
On November 11, 1999, the Company issued and sold 100,000 newly-issued,
restricted HomeSmart.com Common Shares to Mr. Richard E. Dixon, the Chief
Financial Officer of the Company, in consideration for certain accounting
services performed on behalf of the Company valued at $150,000. (See Part I,
Item 6. "Executive Compensation" and Part II, Item 4. "Recent Sales of
Unregistered Securities.")
On May 30, 2000, Messrs. Hamilton and Wilson each transferred 2,000,000
HomeSmart.com Common Shares owned of record and beneficially by each individual
(a total of 4,000,000 HomeSmart.com Common Shares) to Mr. Hamilton, as Trustee
for the benefit of the Company. Also, on July 1, 2000, the Company granted to
Mr. Riley options exercisable to purchase 1,000,000 HomeSmart.com Common Shares
at exercise prices of $.50 and $2.00 per share, respectively (a total of
2,000,000 HomeSmart.com Common Shares), during the three-year period terminating
on June 30, 2003. (See Part I, Item 6. "Executive Compensation" and Part II,
Item 4. "Recent Sales of Unregistered Securities.")
Hamilton, Hamilton & Mah (the "Hamilton Firm"), a law firm of which Mr.
Hamilton, the Secretary/Treasurer/Chairman of the Board of Directors and a
controlling shareholder of the Company, is a partner, maintains its offices at
the Company's facilities located in Cameron Park, California, pursuant to a
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month-to-month rental arrangement at a rate of $500 per month. (See Part I, Item
3. "Description of Property.") For the period from June 3 through December 31,
1999, and the six months ended June 30, 2000, the Company received the sums of
$2,000 and $3,500, respectively, in rental income from the Hamilton Firm
pursuant to this arrangement. Also, during the period from June 3 through
December 31, 1999, and the six months ended June 30, 2000, the Company paid
legal expenses in the amounts of $2,000 and $3,500, respectively, to the
Hamilton Firm. Mr. Hamilton, as a controlling shareholder of the Company and a
partner of the Hamilton Firm, has benefited, and stands to benefit in the
future, directly or indirectly, from these related party transactions between
the Company and the Hamilton Firm.
During the six months ended June 30, 2000, Mr. Hamilton advanced a total of
$30,000 to the Company for operating capital. While there is no formalized
repayment plan or interest rate for the advances, they are expected to be
short-term loans payable at such time as the Company raises sufficient
additional capital.
Because of their present management positions, organizational efforts and
percentage share ownership of the Company, Messrs. Hamilton, Wilson and Riley
may be deemed to be "parents" and "promoters" of the Company, as those terms are
defined in the Securities Act of 1933, as amended, and the applicable General
Rules and Regulations thereunder. Because of the above-described relationships,
transactions between and among the Company, Messrs. Hamilton, Wilson and Riley
and the Hamilton Firm, such as the sale of the Company's Common Stock to Messrs.
Hamilton and Wilson and the grant of stock options to Mr. Riley as described
hereinabove, should not be considered to have occurred at arm's-length.
Item 8. Description of Securities.
Description of Capital Stock
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, no par value per share, and 5,000,000 shares of non-voting
preferred stock, no par value per share (the "Preferred Stock").
Description of Common Stock
All shares of Common Stock have equal voting rights and, when validly
issued and outstanding, are entitled to one vote per share in all matters to be
voted upon by shareholders. The shares of Common Stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as
fully-paid and nonassessable shares. Cumulative voting in the election of
directors is not permitted; which means that the holders of a majority of the
issued and outstanding shares of Common Stock represented at any meeting at
which a quorum is present will be able to elect the entire Board of Directors if
they so choose and, in such event, the holders of the remaining shares of Common
Stock will not be able to elect any directors. In the event of liquidation of
the Company, each shareholder is entitled to receive a proportionate share of
the Company's assets available for distribution to shareholders after the
payment of liabilities and after distribution in full of preferential amounts,
if any, to be distributed to holders of the Preferred Stock. All shares of the
Company's Common Stock issued and outstanding are fully-paid and nonassessable.
Dividend Policy. Holders of shares of Common Stock are entitled to share
pro rata in dividends and distributions with respect to the Common Stock when,
as and if declared by the Board of Directors out of funds legally available
therefor, after requirements with respect to preferential dividends on, and
other matters relating to, the Preferred Stock, if any, have been met. The
Company has not paid any dividends on its Common Stock and intends to retain
21
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earnings, if any, to finance the development and expansion of its business.
Future dividend policy is subject to the discretion of the Board of Directors
and will depend upon a number of factors, including future earnings, capital
requirements and the financial condition of the Company.
Transfer Agent and Registrar. The Transfer Agent and Registrar for the
Company's Common Stock is Corporate Stock Transfer, Inc., 3200 Cherry Creek
Drive South, Suite #430, Denver, Colorado 80209.
Description of Preferred Stock
------------------------------
Shares of Preferred Stock may be issued from time to time in one or more
series as may be determined by the Board of Directors. The preferences, the
relative rights of each such series and the qualifications, limitations and
restrictions thereof shall be established by the Board of Directors, except that
no holder of Preferred Stock shall have voting or preemptive rights. The Company
has no shares of Preferred Stock outstanding, and the Board of Directors has no
plan to issue any shares of Preferred Stock for the foreseeable future unless
the issuance thereof shall be in the best interests of the Company.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
(a) Market Information.
The Company's Common Stock is traded over-the-counter in the "Pink Sheets"
under the symbol "HMXT." Set forth below are the high and low closing bid
quotations in the over-the-counter market for the Common Stock as reported by
the relevant market makers for the quarters ended September 30 and December 31,
1999, and March 31 and June 30, 2000. The high and low closing bid quotation for
the Common Stock in the over-the-counter market reported by the relevant market
makers on August 14, 2000, was $.38. Quotations represent inter-dealer
quotations, without adjustment for retail mark-ups, mark-downs or commissions,
and may not necessarily represent actual transactions.
2000 1999
------------------- -------------------
Quarter Ended High Bid Low Bid High Bid Low Bid
---------------- -------- ------- -------- -------
Common Stock:
March 31 $3.00 $2.00
June 30 $.50 $.14
September 30 $6.00 $4.00
December 31 $4.00 $3.00
(b) Holders.
As of August 14, 2000, the Company had approximately 1,722 shareholders of
record of its 22,465,040 issued and outstanding shares of Common Stock, no par
value per share.
(c) Dividends.
The Company has never paid or declared any dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future.
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Item 2. Legal Proceedings.
The Company and HomeSmartUSA are defendants in that certain civil action,
No. PC20000276, styled GO2 Net Inc., Plaintiff, v. HomeSmart USA a/k/a HomeSmart
USA, Inc.; HomeSmart.com a/k/a HomeSmart. com, Inc.; John Wilson d/b/a HomeSmart
USA; et. al., Defendants, filed in the Superior Court of the State of
California, County of El Dorado. The Complaint seeks damages for indebtedness
allegedly incurred within the last four years for goods sold and/or services
rendered in the amount of $61,364.44, together with interest thereon at the rate
of 10% per annum from September 15, 1999, and for certain costs. Management
believes that the Company has a number of meritorious defenses to the action and
intends to vigorously defend it on behalf of the Company. Except for the
foregoing, the Company knows of no legal proceedings to which it or HomeSmartUSA
is a party or to which any of its or HomeSmartUSA's property is the subject,
which are pending, threatened or contemplated or any unsatisfied judgments
against the Company or HomeSmartUSA.
Item 3. Changes in and Disagreements with Accountants.
Cordovano and Harvey, P.C., 201 Steele Street, Suite #300, Denver, Colorado
80206, has reported upon the Consolidated Balance Sheet of the Company and its
wholly-owned subsidiary, HomeSmartUSA, as of December 31, 1999, and the related
Consolidated Statements of Operations, Shareholders' Equity/Partners' Capital
and Cash Flows for the years ended December 31, 1999, and 1998, and for the
period from inception (February 1, 1997) through December 31, 1999, and has been
appointed as the Company's independent accountant for the year ending December
31, 2000. There has been no change in the Company's independent accountant
during the period commencing with the Company's retention of Cordovano & Harvey,
P.C., through the date hereof.
Item 4. Recent Sales of Unregistered Securities.
On February 15, 1999, the Hamilton and Wilson partnership, the predecessor
of HomeSmartUSA, entered into an agreement with VLDC Technologies, Inc. ("VLDC,"
formerly Virtual Lender.com, Inc.), Severna Park, Maryland, a publicly-held
mortgage company, pursuant to which VLDC issued and sold certain shares of its
common stock to Messrs. Hamilton and Wilson, the partners of the Partnership, in
exchange for the assets of the Partnership, and certain consultants. On June 3,
1999, the Agreement was terminated. During the period from February 15 through
June 3, 1999, the partners remained in control of the Partnership's assets and,
accordingly, management believes that an economic transfer of the assets failed
to occur. As a "break-up fee," in consideration and exchange for terminating the
Agreement, the Company issued an aggregate of 2,346,000 restricted HomeSmart.com
Common Shares in trust for the benefit of all of the shareholders of VLDC and
1,000,000 restricted HomeSmart.com Common Shares to VLDC (an aggregate of
3,346,000 restricted HomeSmart.com Common Shares). The sole purpose and economic
substance of this transaction was to facilitate the termination of the
Agreement. Litigation in connection with the Agreement, initiated by VLDC, was
subsequently dismissed with prejudice on June 5, 2000. The Company relied upon
the exemption from registration under Section 4(2) of the Securities Act in
connection with the sale of the shares. To make the exemption available, the
Company relied upon the fact the issuance and sale of the shares by the Company
did not constitute a public securities offering. (See Part I, Item 1., (a)
"Development of Business.")
On June 3, 1999, the Company issued and sold 10,000 restricted
HomeSmart.com Common Shares to each of Messrs. Douglas Spring and Warren Wilson
(a total of 20,000 HomeSmart.com Common Shares) in consideration and exchange
for loans and related accrued interest totaling $6,100 and $5,717, respectively
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(a total of $11,817); which funds were used by the Partnership for working
capital and equipment purchases in 1997. The Company relied upon the exemption
from registration provided by Section 4(2) of the Securities Act in connection
with the sales of the shares. The Company relied upon the fact that the issuance
and sale of the shares of Common Stock by the Company did not constitute a
public securities offering, to make the exemption available.
On July 19, 1999, the Company issued and sold to a total of thirty-nine
shareholders, pursuant to that certain Stock Purchase and Exchange Agreement
dated July 19, 1999 (the "Stock Exchange Agreement"), an aggregate of 16,117,000
restricted HomeSmart.com Common Shares, constituting approximately 71.7% of the
22,465,040 presently issued and outstanding HomeSmart.com Common Shares, in
consideration of the exchange therefor of 16,117,000 outstanding HomeSmartUSA
Common Shares, constituting 100% of the issued and outstanding HomeSmartUSA
Common Shares, of HomeSmartUSA, Inc., formerly HomeSmart.com, Inc (sic), owned
of record, collectively, by said thirty-seven shareholders. The Stock Exchange
Agreement mistakenly provides that 16,385,000 HomeSmart.com Common Shares were
issued in consideration of the exchange of 16,385,000 HomeSmartUSA Common Shares
when, in fact, 16,117,000 HomeSmart.com Common Shares were issued in
consideration of the exchange of 16,117,000 HomeSmartUSA Common Shares. Further,
Mr. Jared C. Brandt and Ms. Linda Shuls, as trustee for HomeSmart agents, were
mistakenly listed as parties to the Stock Exchange Agreement. The Company is in
the process of circulating for execution an agreement amending the Stock
Exchange Agreement to correct the aforementioned inaccuracies. Immediately
following the consummation of the "reverse acquisition" transaction,
HomeSmartUSA became a wholly-owned subsidiary of the Company. The transaction
was consummated as a "tax-free" reorganization as contemplated by the provisions
of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. The
Company claimed, in connection with each said transaction whereby the Company
exchanged restricted HomeSmart.com Common Shares for all of the outstanding
HomeSmartUSA Common Shares on the basis of one HomeSmart.com Common Share for
each HomeSmartUSA Common Share, upon the exemption from registration provided
under Section 4(2) of the Act. The facts relied upon by the Company to make the
exemption available include the following: (i) each said transaction, involving
the exchange of HomeSmart.com Common Shares for HomeSmartUSA Common Shares, did
not constitute a public securities offering by the Company; (ii) Messrs. John J.
Wilson and A.L. Hamilton were executive officers, directors and controlling
shareholders of the Company at the time of the "reverse acquisition"
transaction; and (iii) certain of the balance of the thirty-five shareholders
were "accredited investors," as that term is defined under Rule 215 of the
General Rules and Regulations promulgated under the Securities Act of 1933, as
amended, at the time of the consummation of the transaction. (See Part I, Item
1., (a) "Development of Business," Item 6. "Executive Compensation," and Item 7.
"Certain Relationships and Related Transactions.")
On June 3, 1999, the Company issued and sold 250,000 restricted
HomeSmart.com Common Shares to Mr. Jared C. Brandt, 100,000 of which shares were
issued in consideration for the sale by Mr. Brandt to the Company of the real
property located at 2976 Alhambra Drive, Cameron Park California, together with
the 4,000 square foot office building (in which the Company's executive offices
are situated) and certain telecommunications equipment located on the real
property and the 3,000 square foot aircraft hangar located beneath the building,
valued, altogether, at Mr. Brandt's historical cost basis of $277,173, and
150,000 of which shares were issued in consideration for the use of the building
and certain building maintenance and other services by Hamilton and Wilson, the
de facto California general partnership commenced in February 1997 by Messrs.
Hamilton and Wilson as the general partners, valued at $147,534 prior to the
Company's acquisition of the real property. The Company relied upon the
exemption from registration afforded by Section 4(2) of the Securities Act in
connection with the sale of the shares. To make the exemption available, the
Company relied upon the fact that the issuance and sale of the shares by the
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Company did not constitute a public securities offering together with the fact
that Mr. Brandt is an accredited investor. (See Part I, Item 3. "Description of
Property.")
On November 11, 1999, the Company issued and sold 100,000 restricted
HomeSmart.com Common Shares to Mr. Richard Dixon in consideration for certain
accounting services performed on behalf of the Company valued at $150,000. The
Company relied upon the exemption from registration under Section 4(2) of the
Securities Act in connection with the sale of the shares. To make the exemption
available, the Company relied upon the fact that the issuance and sale of the
shares by the Company did not constitute a public securities offering together
with the fact that Mr. Dixon is an accredited investor and was, on November 11,
1999, the co-owner of an accounting firm then performing certain accounting
services for the Company.
On January 10, 2000, the Company issued and sold 100,000 restricted
HomeSmart.com Common Shares to National Capital Asset Group, Inc., Oklahoma
City, Oklahoma, in consideration for the performance by National Capital of
certain consulting services on behalf of the Company valued at $125,000. The
Company relied, in connection with the sale of the HomeSmart.com Common Shares,
upon the exemption from registration afforded by Section 4(2) of the Securities
Act. The Company relied upon the fact that the issuance and sale of the shares
by the Company did not constitute a public securities offering together with the
fact that National Capital Asset Group, Inc., is an accredited investor, to make
the exemption available.
On July 1, 2000, the Company granted to Mr. Riley options exercisable to
purchase 1,000,000 HomeSmart.com Common Shares at exercise prices of $.50 and
$2.00 per share, respectively (a total of 2,000,000 HomeSmart.com Common
Shares), during the three-year period terminating on June 30, 2003. (See Part I,
Item 6. "Executive Compensation" and Item 7. "Certain Relationships and Related
Transactions.") The Company relied upon the exemption from registration provided
by Section 4(2) of the Securities Act in connection with the issuance of the
options. The Company relied upon the fact that the issuance of the options by
the Company did not constitute a public securities offering together with the
fact that Mr. Riley was serving as the President and a director of the Company
on July 1, 2000, to make the exemption available.
Item 5. Indemnification of Directors and Officers.
Article XIII of the Company's Articles of Incorporation, as amended,
contains provisions providing for the indemnification of directors and officers
of the Company as follows:
The Board of Directors of the Corporation shall have the power to:
A. Indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation), by reason of the fact that he is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Corporation and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in the best interests of the Corporation and, with respect to any criminal
action or proceeding, had reasonable cause to believe the action was unlawful.
B. Indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
25
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he is or was a director, officer, employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of the Corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
the best interests of the Corporation; but no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the Corporation unless and only to the extent that the court in which
such action or suit was brought determines upon application that, despite the
adjudication of liability, but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnification for such expenses
which such court deems proper.
C. Indemnify a Director, officer, employee or agent of the Corporation to
the extent that such person has been successful on the merits in defense of any
action, suit or proceeding referred to in Subparagraph A or B of this Article or
in defense of any claim, issue, or matter therein, against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
therewith.
D. Authorize indemnification under Subparagraph A or B of this Article
(unless ordered by a court) in the specific case upon a determination that
indemnification of the Director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
said Subparagraph A or B. Such determination shall be made by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or, if such a quorum is not
obtainable or even if obtainable a quorum of disinterested directors so directs,
by independent legal counsel in a written opinion, or by the shareholders.
E. Authorize payment of expenses (including attorney's fees) incurred in
defending a civil or criminal action, suit or proceeding in advance of the final
disposition of such action, suit or proceeding as authorized in Subparagraph D
of this Article upon receipt of an undertaking by or on behalf of the Director,
officer, employee or agent to repay such amount unless it is ultimately be
determined that he is entitled to be indemnified by the Corporation as
authorized in this Article.
F. Purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation or who is or was serving
at the request of the Corporation as a Director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the provision
of this Article.
The indemnification provided by this Article shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under these
Articles of Incorporation, and the Bylaws, agreements, vote of the shareholders
or disinterested directors or otherwise, and any procedure provided for by any
of the foregoing, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of heirs, executors and administrators of such a person.
Article X of HomeSmartUSA's Articles of Incorporation contains provisions
providing for the indemnification of directors and officers of the Company as
follows:
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The Corporation shall indemnify, to the fullest extent permitted by
applicable law in effect from time to time, any person, and the estate and
personal representative of any such person, against all liability and expense
(including attorneys' fees) incurred by reason of the fact that he is or was a
director or officer of the Corporation or, while serving as a director or
officer of the Corporation, he is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee, fiduciary, or
agent of, or in any similar managerial or fiduciary position of, another
domestic or foreign corporation or other individual or entity or of an employee
benefit plan. The Corporation shall also indemnify any person who is serving or
has served the Corporation as director, officer, employee, fiduciary, or agent,
and that person's estate and personal representative, to the extent and in the
manner provided in any bylaw, resolution of the shareholders or directors,
contract, or otherwise, so long as such provision is legally permissible.
Neither the Company nor HomeSmartUSA has any agreements with any of its
directors or executive officers providing for indemnification of any such
persons with respect to liability arising out of his capacity or status as an
officer and/or director.
At present, there is no pending litigation or proceeding involving a
director or executive officer of the Company or HomeSmartUSA as to which
indemnification is being sought.
PART F/S
The Consolidated Financial Statements of HomeSmart.com, Inc., and its
wholly-owned subsidiary, HomeSmartUSA, Inc., required by Regulation SB commence
on page F-1 hereof in response to Part F/S of this Registration Statement on
Form 10-SB and are incorporated herein by this reference.
PART III
Item 1. Index to Exhibits.
Item
Number Description
------ -----------
3.1* Articles of Incorporation of CPC Office Systems, Inc., filed July 14,
1995.
3.2* Articles of Amendment to the Articles of Incorporation of CPC Office
Systems, Inc., filed July 19, 1999.
3.3* Bylaws of CPC Office Systems, Inc.
3.4* Articles of Incorporation of HomeSmart.com, Inc, filed June 3, 1999.
3.5* Articles of Amendment to the Articles of Incorporation of HomeSmart.
com, Inc, filed July 19, 1999.
3.6* Bylaws of HomeSmart.com, Inc
10.0* Stock Purchase and Exchange Agreement dated July 19, 1999, among
HomeSmart.com, Inc., on the one hand, and HomeSmartUSA, Inc., and Rico
Adamo, Tim Bolin, Gordon and Joan Bourne, John Bowen, Jared Brandt,
William Brody, Rob Burriesci, John Coombs, Ray Daddario, Susan Evans,
Jamie Farrell, Paul Gienger, Lou Getman, Dina Guillen, A.L. Hamilton,
27
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Rosalie Hamilton, John Hertle, Jim Howeson, Elise Jackson, Bill Karr,
John Kuntz, Dave Leonhard, Alma Lynch, Jim Murphy, Tony Nanci, Marion
Pollard, Brent Powell, Patrick Shannahan, Linda Shuls, Linda Shuls, as
trustee for HomeSmart agents, Doug Spring, Mike Stafford, Bev Waters,
Bruce Waters, Mike Wilcox, Brandon Wilson, John Wilson, Warren Wilson
and Sharon Yofan, on the other hand.
------------------------
*Filed herewith.
Item 2. Description of Exhibits.
The documents required to be filed as Exhibit Number 2 in Part III of Form
1-A filed as part of this Registration Statement on Form 10-SB are listed in
Item 1 of this Part III above. No documents are required to be filed as Exhibit
Numbers 3, 5, 6 or 7 in Part III of Form 1-A, and the reference to such Exhibit
Numbers is therefore omitted. No additional exhibits are filed hereto.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
HOMESMART.COM, INC.
(Registrant)
Date: August 24, 2000 By: /s/ John F. Riley
------------------------------
John F.Riley, President and Chief
Executive Officer
Date: August 24, 2000 By: /s/ A. L. Hamilton
------------------------------
A.L. Hamilton, Secretary,
Treasurer and Chairman of the
Board of Directors
28
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HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
Index to Consolidated Financial Statements
Homesmart.Com, Inc.
-------------------
Report of independent accountants ........................................ F-2
Consolidated balance sheets, December 31, 1999, and
June 30, 2000 (unaudited) ........................................... F-3
Consolidated statements of operations, for the years
ended December 31, 1999 and 1998, for the period
from February 1, 1997 (inception) through December 31,
1999, for the six months ended June 30, 2000 and
1999 (unaudited), and for the period from
February 1, 1997 (inception) through June 30, 2000 (unaudited) ....... F-4
Consolidated statement of shareholders' deficit, from
February 1, 1997 (inception) through June 30, 2000 (unaudited) ....... F-5
Consolidated statements of cash flows, for the years ended
December 31, 1999 and 1998, for the period from
February 1, 1997 (inception) through December 31,
1999, for the six months ended June 30, 2000 and 1999
(unaudited), and for the period from February 1, 1997
(inception) through June 30, 2000 (unaudited) ........................ F-7
Notes to consolidated financial statements ............................... F-9
CPC Office Systems, Inc.
------------------------
Report of Independent accountants......................................... F-19
Balance sheet, July 18, 1999 and December 31, 1998........................ F-20
Statements of operations, for the period from January 1, 1999
through July 18, 1999, for the years ended
December 31, 1998 and 1997, and from July 14, 1995
(inception) through July 18, 1999................................... F-21
Statement of shareholders' equity, from July 14, 1995 (inception)
through july 18, 1999............................................... F-22
Statements of cash flows, for the period from January 1, 1999
through July 18, 1999, for the years ended
December 31, 1998 and 1997, and from July 14, 1995
(inception) through July 18, 1999................................... F-23
Notes to financial statements............................................. F-24
Pro Forma Financial Information
-------------------------------
Pro Forma Introduction ................................................... F-27
Notes to Pro Forma Condensed, Combined Financial Information ............. F-28
Pro Forma Condensed, Combiend Statement of Operations, for
the year ended December 31, 1999 ................................... F-29
F-1
<PAGE>
To the Board of Directors and Shareholders
HomeSmart.com, Inc. and subsidiary
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheet of HomeSmart.com,
Inc. and subsidiary (the "Company") as of December 31, 1999, and the related
consolidated statements of operations, shareholders' deficit and cash flows for
each of the years in the two year period then ended and from February 1, 1997
(date of inception) through December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HomeSmart.com, Inc.
and subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for each of the years in the two year period then ended and
from February 1, 1997 (date of inception) through December 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note A to the financial
statements, the Company has significant operating losses and a deficit in
working capital at December 31, 1999. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding those matters also are described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Cordovano and Harvey, P.C.
Denver, Colorado
March 31, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 2000
------------ ---------
(unaudited)
ASSETS
<S> <C> <C>
Cash ...................................................................... $ 110,464 $ 2,695
Property and equipment, net of accumulated
depreciation of $10,317 and $18,852
(unaudited), respectively (Note D) ..................................... 310,118 301,583
Intangible assets (Note B):
Domain name, net of accumulated amortization
of $350 and $610 (unaudited), respectively ........................... 2,250 1,990
Web site, net of accumulated amortization of
$3,307 and $6,613 (unaudited), respectively .......................... 16,533 13,227
----------- -----------
Total assets .......................................................... $ 439,365 $ 319,495
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable .......................................................... 259,913 136,680
Due to America Online, Inc. (Note H) ...................................... 354,257 354,257
Network services payable .................................................. --
Related party advances payable (Note C) ................................... -- 30,000
Other accrued expenses .................................................... 40,553 48,469
Short-term debt, less unamortized discount
of $15,000 (unaudited) (Note E) ........................................ -- 215,000
----------- -----------
Total liabilities .................................................... 654,723 784,406
----------- -----------
Shareholders' deficit (Note G):
Preferred stock, no par value; 5,000,000 shares authorized;
-0- and -0- shares issued and outstanding, respectively .............. -- --
Common stock, no par value; 50,000,000 shares authorized;
22,781,000, and 22,881,000 (unaudited) shares issued
and outstanding, respectively ........................................ 851,691 976,691
Deficit accumulated during development stage ........................... (1,067,049) (1,441,602)
----------- -----------
Total shareholders' deficit .......................................... (215,358) (464,911)
----------- -----------
$ 439,365 $ 319,495
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
February 1, 1997 February 1, 1997
(inception) For the Six Months Ended (inception)
For the Years Ended December 31, through June 30, through
-------------------------------- December 31, ------------------------- June 30,
1999 1998 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
Gross sales and net revenues ....... $ 33,311 $ 229,222 $ 278,883 $ 3,444 $ 30,645 $ 282,327
------------ ------------ ------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of sales and revenues ....... 93,510 112,638 228,396 63,112 48,848 291,508
Sales and marketing .............. 424,541 346,432 773,224 43,368 245,648 816,592
General and administrative ....... 780,812 498,062 1,454,519 130,417 316,832 1,584,936
Stock-based compensation -
consulting (Note G) ............. 150,000 -- 150,000 125,000 -- 275,000
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses ......... 1,448,863 957,132 2,606,139 361,897 611,328 2,968,036
------------ ------------ ------------ ------------ ------------ ------------
Loss from operations ............. (1,415,552) (727,910) (2,327,256) (358,453) (580,683) (2,685,709)
Interest expense ................... (5,315) (11,040) (17,273) (19,600) (11,908) (36,873)
Other income (expense):
Rental income, related party
(Note C) ........................ 2,000 -- 2,000 3,500 -- 5,500
Stock-based compensation -
failed merger (Note G) .......... (50,000) -- (50,000) -- -- (50,000)
------------ ------------ ------------ ------------ ------------ ------------
Loss before income taxes ......... (1,468,867) (738,950) (2,392,529) (374,553) (592,591) (2,767,082)
Provision (benefit)
for income taxes:
Current benefit .................. 544,300 -- 544,300 138,794 -- 683,094
Deferred expense ................. (544,300) -- (544,300) (138,794) -- (683,094)
------------ ------------ ------------ ------------ ------------ ------------
Net loss ......................... $ (1,468,867) $ (738,950) $ (2,392,529) $ (374,553) $ (592,591) $ (2,767,082)
============ ============ ============ ============ ============ ============
Earnings per share of common
stock ............................ (0.08) (0.02)
============ ============
Weighted average number of
common shares outstanding ........ 18,868,071 22,381,000 14,158,000
============ ============ ============
Pro forma financial information:
Pro forma officer distributions .. $ (192,889) $ (102,197) $ (192,889)
Pro forma provision for
income taxes -- -- --
------------ ------------ ------------
Pro forma net loss ............... $ (1,661,756) $ (841,147) $ (785,480)
============ ============ ============
Pro forma basic and diluted
earnings per share of
common stock .................... (0.09) (0.06) (0.06)
============ ============ ============
Pro forma weighted average number
of common shares outstanding .... 14,158,000
============
The accompanying notes are in integral part of these financial statements
F-4
<PAGE>
HOMESMART.COM, INC;
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Deficit
Accumulated
Preferred Stock Common Stock During the
Partners' --------------------- ------------------------- Development
Capital Shares Amount Shares Amount Stage Total
------- ------ ------ ------ ------ ----- -----
Balance, February 1, 1997
(inception) .................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss ........................... (184,712) -- -- -- -- -- (184,712)
Contributions ...................... 31,281 -- -- -- -- -- 31,281
Distributions ...................... (11,253) -- -- -- -- -- (11,253)
----------- --------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ...... (164,684) -- -- -- -- -- (164,684)
Net loss ........................... (738,950) -- -- -- -- -- (738,950)
Contributions ...................... 385,288 -- -- -- -- -- 385,288
Distributions ...................... (102,197) -- -- -- -- -- (102,197)
----------- --------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ...... (620,543) -- -- -- -- -- (620,543)
Contributions ...................... 1,105,967 -- -- -- -- -- 1,105,967
Distributions ...................... (192,889) -- -- -- -- -- (192,889)
Net loss prior to reorganization ... (401,818) -- -- -- -- -- (401,818)
Reorganization from a Partnership .. -- --
to a corporation (Note A) ....... $ 109,283 -- -- 14,158,000 (109,283) -- --
===========
Deferred taxes relating to the
reorganization (Note E) ......... -- -- -- -- -- --
Shares issued in exchange for the
partnership's debt
conversion (Note G) ............. -- -- 20,000 11,817 -- 11,817
Common stock issued to related
party in exchange for liabilities
of the Partnership, valued at the
fair value of the liabilities
(Note C) ........................ -- -- 150,000 147,534 -- 147,534
Common stock issued in exchange for
liabilities of the Partnership,
valued at the fair value of the
liabilities (Note G) ............ 1,807,000 315,790 315,790
Common stock issued in exchange for
property (Notes C and G) ........ 100,000 277,173 277,173
The accompanying notes are an integral part of thee consolidated financial statements.
F-5
<PAGE>
HOMESMART.COM, INC;
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Deficit
Accumulated
Preferred Stock Common Stock During the
Partners' --------------------- ------------------------- Development
Capital Shares Amount Shares Amount Stage Total
------- ------ ------ ------ ------ ----- -----
Merger with CPC Office
Systems, Inc. (Note A).................. -- -- 2,600,000 8,660 -- 8,660
Common stock issued to settle
failed merger dispute
(Note G) ............................. -- -- 3,346,000 50,000 -- 50,000
Common stock issued in exchange
for services, valued at the
market price of the
common stock (Note G) ................ -- -- 100,000 150,000 -- 150,000
Net loss ................................ -- -- -- -- (1,067,049) (1,067,049)
-------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ........... -- -- 22,281,000 851,691 (1,067,049) (215,358)
Common stock issued in exchange
for services, valued at the
market price of the common
stock (unaudited) (Note G) ........... -- -- 100,000 125,000 -- 125,000
Net loss (unaudited) .................... -- -- -- -- (374,553) (374,553)
-------- -------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 (unaudited) ... -- $ -- 22,381,000 $ 976,691 $(1,441,602) $ (464,911)
======== ======== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
February 1, For the Six Months Ended February 1,
1997 --------------------------- 1997
For the Years Ended December 31, (inception) June 30, (inception)
------------------------------- December 31, --------------------------- June 30,
1999 1998 1999 2000 1999 2000
---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities:
Net loss .............................. $(1,468,867) $ (738,950) $(2,392,529) $ (374,553) $ (592,591) $(2,767,082)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization ....... 13,241 883 14,611 12,101 4,312 26,712
Common stock exchanged
for services ....................... 150,000 -- 150,000 125,000 107,028 275,000
Common stock issued
in failed merger
(Note G) ............................ 50,000 -- 50,000 -- -- 50,000
----------- ----------- ----------- ----------- ----------- -----------
(1,255,626) (738,067) (2,177,918) (237,452) (481,251) (2,415,370)
Changes in current assets
and liabilities:
Accounts receivable and other
current assets ...................... 2,216 (1,306) -- -- 1,400 --
Accounts payable and accrued
expenses ........................... 465,218 487,801 1,137,887 70,683 173,559 1,208,570
----------- ----------- ----------- ----------- ----------- -----------
Net cash flow (used in)
operating activities ............... (788,192) (251,572) (1,040,031) (166,769) (306,292) (1,206,800)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchase of equipment ................. (18,010) (7,395) (43,262) -- (29,907) (43,262)
Purchase of intangible assets ......... (22,440) -- (22,440) -- -- (22,440)
----------- ----------- ----------- ----------- ----------- -----------
Net cash flow (used in)
investing activities ................. (40,450) (7,395) (65,702) -- (29,907) (65,702)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Partners' contributions ............... 1,105,967 385,288 1,522,536 -- 1,105,967 1,522,536
Partners' distributions ............... (192,889) (102,197) (306,339) -- (192,889) (306,339)
Proceeds from related party
advances (Note C) .................... -- -- -- 30,000 -- 30,000
Proceeds from note payable
(Note E) ............................. -- -- -- 29,000 -- 29,000
----------- ----------- ----------- ----------- ----------- -----------
Net cash flow provided by
financing activities ................. 913,078 283,091 1,216,197 59,000 913,078 1,275,197
----------- ----------- ----------- ----------- ----------- -----------
Net change in cash ....................... 84,436 24,124 110,464 (107,769) 576,879 2,695
Cash at beginning of period .............. 26,028 1,904 -- 110,464 26,028 --
----------- ----------- ----------- ----------- ----------- -----------
Cash at end of period ............... $ 110,464 $ 26,028 $ 110,464 $ 2,695 $ 602,907 $ 2,695
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
February 1, For the Six Months Ended February 1,
For the Years 1997 -------------------------- 1997
Ended December 31, (inception) June 30, (inception)
------------------- December 31, -------------------------- June 30,
1999 1998 1999 2000 1999 2000
---- ---- ---- ---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ....................................... $ -- $ -- $ -- $ 4,600 $ -- $ --
========== ===== ========== ========= ========= =========
Income taxes ................................... $ -- $ -- $ -- $ -- $ -- $ --
========== ===== ========== ========= ========= =========
Non-cash investing and financing
activities:
14,158,000 shares of common stock
issued in reorganization
from partnership
to corporation (Note A) ..................... $ (109,283) $ -- $ (109,283) $ -- $ -- $(109,283)
========== ===== ========== ========= ========= =========
20,000 shares of common stock
issued in exchange for
partnership's debt conversion
(Note G) ...................................... $ 11,817 $ -- $ 11,817 $ -- $ -- $ 11,817
========== ===== ========== ========= ========= =========
100,000 shares of common stock
issued for property (Notes C and G) .......... $ 277,173 $ -- $ 277,173 $ -- $ 277,173 $ 277,173
========== ===== ========== ========= ========= =========
Common stock issued for
liabilities of the partnership
(Notes C,G) .................................. $ 463,324 $ -- $ 463,324 $ -- $ -- $ 463,324
========== ===== ========== ========= ========= =========
Current liabilities satisfied
with issuance of
promissory note (Note E) ..................... $ -- $ -- $ -- $ 171,000 $ -- $ 171,000
========== ===== ========== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-8
</TABLE>
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: NATURE OF ORGANIZATION
Description of Organization, Recent Reorganization and Recapitalization
HomeSmart.com, Inc. and its predecessor, the Partnership of Hamilton and Wilson,
(collectively referred to as the "Company") is a start-up entity planning to
provide real estate and related services via the Internet. The Company's
products under development include a web publication that will serve both
consumers and the real estate industry through a comprehensive real estate
Internet site. The principle business activities of the Company to date have
included rolling out a new service introducing real estate agents to potential
home buyers through the Company's website. The Company provided exclusive
referral territories to real estate agents and referred potential home buyers
those real estate agents. This program was discontinued effective January 1,
2000. The Company's corporate office is located in Cameron Park, California.
The Company was incorporated in Colorado in July 1995 as CPC Office Systems,
Inc. and changed its name to HomeSmart.com, Inc. in July 1999. Its wholly owned
subsidiary, formally known as HomeSmart.com, Inc. and now known as Homesmart
USA, Inc. was incorporated in Colorado in June 1999. Homesmart USA, Inc. is the
successor to Hamilton and Wilson, (the "Partnership"), formed in California in
February 1997.
Effective June 3, 1999, the partners incorporated Homesmart USA, Inc., (USA) and
exchanged 100 percent of their interests in the Partnership for 14,158,000
shares of the common stock of the newly formed corporation. This transaction was
a reorganization of entities under common control, and accordingly, it was
accounted for at historical cost.
On July 19, 1999, USA exchanged 100 percent of its outstanding shares of common
stock for 16,385,000 shares of common stock of CPC Office Systems, Inc. (CPC).
This acquisition has been treated as a recapitalization of USA with CPC the
legal parent company. Simultaneously, CPC changed its name to HomeSmart.com,
Inc. Since CPC had, prior to the recapitalization, no assets or operations, the
recapitalization has been accounted for as the sale of 2,600,000 shares of USA
common stock for the net assets of CPC. Costs of the transaction have been
charged to the period.
Liquidity and going concern
The Company has devoted substantially all of its efforts since inception to the
research and development of its web site address homesmart.com and to financing
matters. The Company is in the development stage embarking on a new venture. To
date, the Company's product sales and service revenues have been insignificant.
The Company has limited capital with which to pursue its business plan. The
Company's technology is unproven and will take additional resources to perfect.
The success of the Company's homesmart.com web site is dependent on attracting
and retaining qualified content providers. The Company has not gained market
acceptance for any of its products and there can be no assurance that the
Company will be able to gain such acceptance in the future, that future sales
and revenues will be significant, that any sales will be profitable, or that the
Company will have sufficient funds available to research and develop its
proposed products and services.
F-9
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, and the
limited history of the sale of goods and services via the Internet. The
Company's future success will be dependent upon its ability to provide effective
and competitive real estate services, the continued acceptance of the Internet
for e-commerce, and the Company's ability to develop and provide new services
that meet customers changing requirements, including the effective use of
leading technologies and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
The likelihood of the success of the Company will also depend upon its ability
to raise sufficient capital to overcome the problems and risks described in the
first paragraph, to absorb the expenses and delays frequently encountered in the
operation of a new business, and to succeed in the competitive environment in
which it will be operating.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As previously discussed, the
Company is a development stage company with insignificant revenue through
December 31, 1999, and has incurred losses of $1,468,867 and $738,950 for the
years ended December 31, 1999 and 1998, respectively. For the period from
February 1, 1997 (inception) through December 31, 1999 and for the period from
February 1, 1997 (inception) through June 30, 2000, the Company has had losses
of $2,392,529 and $2,767,082 (unaudited), respectively. This factor among others
may indicate that the Company will be unable to continue as a going concern.
Management believes that the Company is not a viable candidate for commercial
bank debt financing due to its lack of operating history and the small amount of
its tangible assets. The Company will rely on additional private funding and the
sale of its common stock subsequent to the filing of its registration statement
on Form 10-SB to finance operations through completion of the development stage.
There is no assurance that the Company's proposed financing plan will be
successful, that it will meet the objectives of its business plan, or that it
will be successful in obtaining additional financing.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis and ultimately to
attain profitability.
NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All intercompany accounts have been
eliminated. The consolidated financial statements, insofar as they relate to
periods from February 1, 1997 through June 3, 1999, are those of the
Partnership. The Company's financial statements are prepared in accordance with
Financial Accounting Standards Board Statements of Financial Accounting
Standards (SFAS) No. 7 "Accounting for Development Stage Enterprises".
F-10
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities;
disclosure of contingent assets and liabilities at the date of the financial
statements; and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company had no cash equivalents
at December 31, 1999 or June 30, 2000 (unaudited).
Fair Value of Financial Instruments
The Company believes that the carrying value of financial instruments on the
balance sheet approximates their fair value.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed, for
financial reporting purposes, over the estimated useful life of the assets using
the straight-line method:
Building and improvements ..................................... 30 years
Furniture and equipment ....................................... 5 years
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
Intangible Assets
Software Development Costs
The cost of developing and implementing its website database and related
software is expensed until the Company has determined that the web site and
related software will result in probable future economic benefits and management
has committed to funding the project. Thereafter, all direct external
implementation costs and purchased software costs are capitalized and amortized
using the straight-line method over the remaining estimated useful lives, not
exceeding five years. The Company capitalized website database costs of $19,840
and $-0-, respectively in the accompanying financial statements for the years
ended December 31, 1999 and 1998. A total of $19,840 was capitalized as website
database costs during the period from February 1, 1997 through December 31,
1999. No software development costs were capitalized prior to January 1, 1999 as
the Company had not yet adopted SOP 98-1. The Company also did not capitalize
any software development costs during the six months ended June 30, 2000
(unaudited). Amortization on the website database for the year ended December
31, 1999 and for the six months ended June 30, 2000 was $3,307 and $3,306
(unaudited), respectively.
F-11
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Domain Name
Remaining intangible assets consist of the cost to acquire the domain name
Homesmart.com and is being amortized over sixty months. Amortization expense for
the year ended December 31, 1999 and 1998 and for the six months ended June 30,
2000 was $350, $150, and $260 (unaudited), respectively.
Impairment of Long-lived Assets and Certain Identifiable Intangibles
The Company evaluates the carrying value of its long-lived assets under the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. Statement No. 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
value or fair value, less costs to sell.
Revenue Recognition Policy
Revenues, consisting principally of fees paid by real estate agents for web
pages and exclusive referral territories, are recognized when earned. Other
revenues consisting of referral fees from real estate agents for home sales, are
recognized at closing.
Sales and Marketing Costs
Sales and marketing expense includes the costs to acquire and retain customers,
advertising and other general sales and marketing costs. The Company expenses
the cost of advertising its services as incurred.
Start-up Costs
Costs related to the organization of the Company have been expensed as incurred.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities arise from the difference between
the tax basis of an asset or liability and its reported amount on the financial
statements. Deferred tax amounts are determined by using the tax rates expected
to be in effect when the taxes will actually be paid or refunds received, as
provided under currently enacted law. Valuation allowances are established when
necessary to reduce the deferred tax assets to the amounts expected to be
realized. Income tax expense or benefit is the tax payable or refundable,
respectively, for the period plus or minus the change during the period in the
deferred tax assets and liabilities.
F-12
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In tax years prior to June 3, 1999, the Company operated as a partnership, and
therefore was exempt from taxation in accordance with the partnership provisions
of the Internal Revenue Code (the "Code"). Under the partnership provisions of
the Code, the partners of Homesmart USA include their share of the partnership's
income on their personal tax returns. Accordingly, Homesmart USA was not subject
to Federal and state income taxes during the period from February 1, 1997
through December 31, 1997, the year ended December 31, 1998, and the period from
January 1 through June 2, 1999.
For periods prior to the revocation of its partnership status, the pro forma
income tax information included in statements of operations is presented in
accordance with SFAS No. 109 as if the Company had been subjected to Federal and
state income taxes for the period from February 1, 1997 through December 31,
1997, the year ended December 31, 1998, and the period from January 1 through
June 2, 1999.
Pro Forma Loss per Common Share
The Company reports pro forma loss per share using a dual presentation of basic
and diluted loss per share. Basic loss per share excludes the impact of common
stock equivalents and preferred stock dividends. Diluted loss per share uses the
average market price per share when applying the treasury stock method in
determining common stock equivalents. Pro froma loss per common share is
calculated by dividing the pro forma net loss by the weighted average number of
share outstanding for the period. As of December 31, 1999 and June 30, 2000
(unaudited) there were no warrants, options, or common stock equivalents
outstanding.
Pro Forma Weighted Average Number of Shares Outstanding
Pro forma weighted average common shares outstanding for the year ended December
31, 1998 represent the weighted average number of common shares issued in the
Reorganization.
Stock-based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) which permits the use of either a fair
value based method or permits the continued use of the intrinsic value method as
defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Companies that elect to continue to apply the
method provided in APB 25 are required to disclose the pro forma net income and
earnings per share that would have resulted from the use of the fair value based
method. The Company has elected to continue to determine the value of the
stock-based compensation arrangements under the provisions of APB 25. However,
there was no effect on net loss or loss per share. Accordingly, the pro forma
disclosures required under SFAS 123 are not provided.
Recent Accounting Pronouncements
The Company has adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income". SFAS No. 130 requires the Company to report in its financial
statements, in addition to its net income (loss), comprehensive income (loss),
which includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities. There were no differences between the Company's comprehensive income
(loss) and net income (loss) as reported.
F-13
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers. The Company has
determined that it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits," which requires additional
disclosures about pension and other post-retirement benefit plans, but does not
change the measurement or recognition of those plans. The Company has determined
that there is no impact, of adopting SFAS No. 132.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of costs incurred for computer software
developed or obtained for internal use. The Company adopted the provisions of
SOP 98-1 on January 1, 1999.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities was issued. SFAS No. 133 establishes accounting and reporting for
derivative instruments, including derivative instruments imbedded in other
contracts, and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either an asset or liability and measure those
instruments at fair value, as well as identify the conditions for which a
derivative may be specifically designed as a hedge. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. This
statement is not expected to materially affect the Company. The Company
currently has no derivative instruments and does not engage in hedging
activities.
In June 1999, SFAS No. 137 was issued to amend the implementation date for SFAS
No. 133 to be effective for all quarters of all fiscal years beginning after
June 15, 2000. This statement is not expected to materially affect the Company.
Unaudited Financial Information
The financial statements as of June 30, 2000, the six months ended June 30, 2000
and 1999, and for the period of February 1, 1997 (inception) through June 30,
2000 are unaudited, and certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring items, necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements have been included. The results of
operations for the interim period are not necessarily indicative of the results
for an entire fiscal year.
F-14
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk
For the years ended December 31, 1999 and 1998 and from February 1, 1997
(inception) through December 31, 1999, three vendors collectively represented
approximately 27 percent, 26 percent, and 24 percent, respectively, of the
Company's purchases. For the three months ended June 30, 2000 and 1999, and for
the period from February 1, 1997 (inception) through June 30, 2000, those same
three vendors collectively represented approximately 15 percent, 21 percent, and
32 percent, respectively of the Company's purchases (unaudited).
NOTE C: RELATED PARTY TRANSACTIONS
The Partnership was funded through private capital contributions. The principle
source of that capital was loans to the Partners from their friends and
relatives. No formal terms were documented. The Partners generally settled these
loans with shares of their own common stock of the Company, acquired in the
recapitalization described in Note A.
An individual provided the use of a building (subsequently acquired by the
Company) and building maintenance and other services, with a fair value of
$147,534, to the Partnership. Upon incorporation, the liability was converted to
150,000 shares of the Company's common stock.
On June 3, 1999, the Company purchased the building and certain
telecommunications equipment from the individual for 100,000 shares of its own
common stock. The transaction was treated as an asset purchased from a
shareholder. The transaction was valued at the shareholder's historical cost
basis, or $277,173.
The Company rents office space to a law firm affiliated with an officer of the
Company. The Company also purchased legal services from the law firm. During the
six months ended June 30, 2000 and for the period from June 3, 1999 through
December 31, 1999, the Company received rental income totaling $3,500
(unaudited) and $2,000, respectively. During the six months ended June 30, 2000
and for the period from June 3, 1999 through December 31, 1999, the Company
incurred legal fees totaling $3,500 (unaudited) and $2,000, respectively.
During the six months ended June 30, 2000 an officer of the Company advanced the
Company a total of $30,000 (unaudited) for operating capital. The advances are
accounted for as short-term loans with no formalized repayment plan or interest
rate. Repayment will occur when the Company raises sufficient capital.
F-15
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, June 30,
1999 2000
----------- -----------
(unaudited)
Building and improvements .................... $236,824 $236,824
Furniture and equipment ...................... 31,639 31,639
-------- --------
268,463 268,463
Less accumulated depreciation ................ 10,317 18,852
-------- --------
258,146 249,611
Land ......................................... 51,972 51,972
-------- --------
$310,118 $301,583
======== ========
Depreciation expense for the years ended December 31, 1999 and 1998, and for the
period from February 1, 1997 (inception) through December 31, 1999, was $9,584,
$733, and $10,317, respectively. Depreciation expense for the six months ended
June 30, 2000 and 1999, and for the period from February 1, 1997 (inception)
through June 30, 2000, was $8,535 (unaudited), $3,430, and $18,852 (unaudited),
respectively.
NOTE E: SHORT-TERM DEBT
On January 14, 2000, the Company issued a promissory note with a face value of
$230,000 which is collateralized by the Company's building. The face value of
the note is due on January 15, 2001. The note was issued with a $30,000
discount, or an annual imputed interest rate of 15%. During the six months ended
June 30, 2000 amortization on the discount was $15,000 (unaudited). Of the
$200,000 proceeds from the note, $29,000 was received as cash and $171,000 was
used to pay current liabilities.
NOTE F: INCOME TAXES
A reconciliation of the U.S. statutory federal federal income tax rate the
effective tax rate follows for the seven months subsequent to the reorganization
of June 3, 1999.
U.S. statutory federal rate, graduated ......................... 34.00%
State income tax rate, net of federal benefit .................. 5.83%
Net operating loss for which no tax benefit
is currently available ...................................... -39.83%
-----
0.00%
As stated in Note B, the Company was not subject to Federal and State income
taxes for the years ended December 31, 1998 and 1997 and for the period from
January 1, 1999 to the date of reorganization.
F-16
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance offsets the net deferred tax asset for which there is no
assurance of recovery. The change in the valuation allowance for the seven
months ended December 31, 1999 was $556,415. The change in the valuation
allowance for the seven months ended December 31, 1999 was $556,415. NOL
carryforwards at December 31, 1999 will begin to expire in 2019. The valuation
allowance will be evaluated at the end of each year, considering positive and
negative evidence about whether the asset will be realized. At that time, the
allowance will either be increased or reduced; reduction could result in the
complete elimination of the allowance if positive evidence indicates that the
value of the deferred tax asset is no longer impaired and the allowance is no
longer required.
Should the Company undergo an ownership change, as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation
which could reduce or defer the utilization of those losses.
NOTE G: SHAREHOLDERS' DEFICIT
Preferred Stock
The preferred stock may be issued in series as determined by the Board of
Directors. As required by law, each series must designate the number of shares
in the series and each share of a series must have identical rights of (1)
dividend, (2) redemption, (3) rights in liquidation, (4) sinking fund provisions
for the redemption of the shares, (5) terms of conversion and (6) voting rights.
Common stock issued for Liabilities of the Partnership
On June 3, 1999, the Company issued 1,807,0000 shares of its common stock to
nonemployees in exchange for $315,790 in consulting services performed for the
Partnership during the period from February 1, 1997 through June 3, 1999.
Liabilities to the consultants were accrued by the Partnership in each
accounting period in which the services were performed. The Company recorded the
common stock issuance at the fair value of the liabilities as the board of
directors determined that the liabilities arising from the services were more
reliably measurable than the fair value of the common stock issued.
Common Stock Issued in Exchange for Debt of the Partnership
On June 3, 1999, the Company issued 20,000 shares of its common stock to
individuals in exchange for loans to the Partnership and related accrued
interest totaling $11,817. The loans were provided for working capital and
equipment during 1997. The Company recorded the common stock issuance based on
the amount of the loans and related interest, since the amount of debt and
interest was more reliably measurable than the fair value of the common stock
issued.
Common Stock Issued for Property
See paragraph three of Note C
F-17
<PAGE>
HOMESMART.COM, INC.
(Formerly Homesmart USA, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common stock issued for Services Provided to the Company
On November 11, 1999, the Company issued 100,000 shares of its common stock to
an individual in exchange for accounting services. Effective May 18, 2000 the
individual became the Company's Chief Financial Officer. The Company recorded
the transaction at $150,000, or $1.50 per share, which was the closing market
price of the Company's stock on the date of issuance.
On January 10, 2000 the Company issued 100,000 shares of its common stock to a
consulting firm in exchange for general business consulting services relating to
the Company (unaudited). The Company recorded the transaction at $125,000, or
$1.25 per share, which was the closing market price of the Company's common
stock on the day of issuance.
Failed Merger
On February 15, 1999, the Partnership entered into a merger agreement with
Virtual Lender.com, Inc. (VL). Under the terms of the merger agreement, VL
issued shares of its common stock to the partners in exchange for the assets of
the Partnership. On June 3, 1999, the merger agreement with VL was terminated.
During the period from February 15 through June 3, 1999, the Partners remained
in control of the Partnership assets. Management believes that an economic
transfer of the assets had not occurred.
A break-up fee, consisting of 3,346,000 shares of the Company's common stock,
was paid to VL. The sole purpose and economic substance of this transaction was
to facilitate the termination of the merger agreement.
NOTE H. COMMITMENTS AND CONTINGENCIES
Due to liquidity problems, the Company has been unable to make timely payments
to certain creditors. At December 31, 1999 and June 30, 2000, $354,257 and
$354,257 (unaudited) was due to America Online, Inc.
In addition, the Company and its subsidiary are defendants in a civil lawsuit
filed in the Superior Court of the State of California, County of El Dorado. The
Complaint seeks damages for indebtedness allegedly incurred within the last four
years for goods sold and/or services rendered in the amount of $61,364 plus
interest and certain costs. This amount is included in accounts payable at
December 31, 1999 and June 30, 2000.
NOTE I. SUBSEQUENT EVENTS
On July 1, 2000 the Company granted its president options to purchase one
million shares of its no par common stock at $.50 and an additional one million
shares at $2.00 per share. On July 1, 2000 the market price of the stock was
$.35. The options were fully vested from July 1, 2000 and will expire on June
30, 2003.
F-18
<PAGE>
To the Board of Directors and Shareholders
HomeSmart.com, Inc. (formerly CPC Office Systems, Inc.)
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the balance sheet of HomeSmart.com, Inc. (formerly CPC Office
Systems, Inc.) (A development stage Company) as of July 18, 1999 and December
31, 1998, and the related statements of operations, shareholders' equity and
cash flows for the period from January 1 through July 18, 1999, the years ended
December 31, 1998 and 1997, and the period from July 14, 1995 (inception)
through July 18, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HomeSmart.com, Inc. (formerly
CPC Office Systems, Inc.) as of July 18, 1999 and December 31, 1998, and the
related statements of operations, shareholders' equity and cash flows for the
period from January 1 through July 18, 1999, the years ended December 31, 1998
and 1997, and the period from July 14, 1995 (inception) through July 18, 1999 in
conformity with generally accepted accounting principles.
On July 19, 1999, the Company was acquired by HomeSmartUSA, Inc., in a reverse
acquisition.
Cordovano and Harvey, P.C.
Denver, Colorado
November 5, 1999
F-19
<PAGE>
<TABLE>
<CAPTION>
HOMESMART.COM, INC.
(Formerly CPC Office Systems, Inc.)
(A Development Stage Company)
July 18, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Cash ........................................................................... $ -- $ --
======= =======
SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY (Note D):
Preferred stock, no par value, 5,000,000 shares
authorized, -0- and -0- shares issued
and outstanding .............................................................. -- --
Common stock, no par value, 50,000,000 shares
authorized, 2,600,000 and 2,600,000 issued
and outstanding, respectively ................................................ 260 260
Additional paid-in capital ..................................................... 8,400 4,100
Deficit accumulated during the development stage ............................... (8,660) (4,360)
------- -------
TOTAL SHAREHOLDERS' DEFICIT .......................... $ -- $ --
======= =======
See accompanying notes to financial statements
F-20
<PAGE>
HOMESMART.COM, INC.
(Formerly CPC Office Systems, Inc.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
July 14,
January 1, 1995
1999 For the Years Ended (inception)
through December 31, through
July 18, ----------------- July 18,
1999 1998 1997 1999
------- ------- ------- -------
COSTS AND EXPENSES
Related party costs (Note B) .................................. $ 4,300 $ 600 $ 600 $ 8,400
Organization expenses ......................................... -- -- -- 260
------- ------- ------- -------
4,300 600 600 8,660
------- ------- ------- -------
LOSS BEFORE INCOME TAXES ...................... (4,300) (600) (600) (8,660)
Provision (benefit) for income taxes (Note C)................. -- -- -- --
======= ======= ======= =======
NET LOSS ...................................... $(4,300) $ (600) $ (600) $(8,660)
======= ======= ======= =======
See accompanying notes to financial statements
F-21
<PAGE>
HOMESMART.COM, INC.
(Formerly CPC Office Systems, Inc.)
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY
July 14, 1995 (inception) through July 18, 1999 Deficit
Accumulated
Preferred Stock Common Stock Additional During
-------------------- --------------------- Paid In Development
Shares Amount Shares Amount Capital Stage Total
------ ------ ------ ------ ------- ----- -----
Balance, July 14, 1995
(inception) ........................... -- $ -- -- $ -- -- $ -- --
Sale of common stock ......................... -- -- 2,600,000 260 -- -- 260
Contributed rent and services,
related party (Note B) ..................... -- -- -- -- 2,300 -- 2,300
Net income for the period .................. -- -- -- -- -- (2,560) (2,560)
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 1995 .............. -- -- 2,600,000 260 2,300 (2,560) --
Contributed rent and services,
related party (Note B) .................... -- -- -- -- 600 -- 600
Net loss for year ......................... -- -- -- -- -- (600) (600)
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 1996 .............. -- -- 2,600,000 260 2,900 (3,160) --
Mar31, 1991, shares issued for
Contributed rent and services,
related party (Note B) .................... -- -- -- -- 600 -- 600
Net loss for year ......................... -- -- -- -- -- (600) (600)
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 1997 .............. -- -- 2,600,000 260 3,500 (3,760) --
Contributed rent and services,
related party (Note B) .................... -- -- -- -- 600 -- 600
Net loss for year ......................... -- -- -- -- -- (600) (600)
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 1998 .............. -- -- 2,600,000 260 4,100 (4,360) --
Contributed rent and services,
related party (Note B) .................... -- -- -- -- 4,300 -- 4,300
Net loss for year ......................... -- -- -- -- -- (4,300) (4,300)
--------- --------- --------- --------- --------- --------- ---------
Balance July 18, 1999 .................. -- $ -- 2,600,000 $ 260 $ 8,400 $ (8,660) $ --
========= ========= ========= ========= ========= ========= =========
See accompanying notes to financial statements
F-22
<PAGE>
HOMESMART.COM, INC.
(Formerly CPC Office Systems, Inc.)
(A Development Stage Company)
STATEMENT OF CASH FLOWS
July 14, 1995
January 1, 1999 For the Years Ended (inception)
through December 31, through
July 18, ----------------------- July 18,
1999 1998 1997 1999
---- ---- ---- ----
OPERATING ACTIVITIES
Net income (loss) ...................................... $(4,300) $ (600) $ (600) $(8,660)
Adjustments to reconcile net loss to net cash
used in operating activities:
Contributed occupancy costs (Note B) ............... 300 600 600 2,400
Contributed services costs (Note B) ................ 4,000 -- -- 6,000
------- ------- ------- -------
NET CASH (USED IN)
OPERATING ACTIVITIES ................................ -- -- -- (260)
------- ------- ------- -------
FINANCING ACTIVITIES
Proceeds from the sale of common stock ............. -- -- -- 260
------- ------- ------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ................................ -- -- -- 260
------- ------- ------- -------
Net change in cash .......................................... -- -- -- --
Cash at beginning of period ................................. -- -- -- --
------- ------- ------- -------
CASH AT END OF PERIOD ................................ $ -- $ -- $ -- $ --
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ........................................... $ -- $ -- $ -- $ --
======= ======= ======= =======
Income taxes ....................................... $ -- $ -- $ -- $ 123
======= ======= ======= =======
See accompanying notes to financial statements
F-23
</TABLE>
<PAGE>
HOMESMART.COM, INC.
(FORMERLY CPC OFFICE SYSTEMS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Organization
HomeSmart.com, Inc. was incorporated on July 14, 1995 as CPC Office Systems,
Inc. ("CPC"). From inception through its reorganization on July 18, 1999, CPC's
principal activities consisted of incorporating in the state of Colorado and
issuing 2.6 million shares of common stock.
July 19, 1999 Reverse Acquisition
CPC exchanged 16,385,000 shares of its no par value voting common stock for 100
percent (16,385,000) of the outstanding shares of common stock of HomeSmartUSA,
Inc. ("USA") and also changed its name to HomeSmart.com, Inc. (the "Company"),
on July 19, 1999. This acquisition has been treated as a reverse acquisition
whereby USA is considered the surviving entity. Costs of this transaction have
been charged to the period.
Basis of Presentation
The Company prepared the accompanying financial statements in accordance with
Statement of Financial Accounting Standards No. 7 "Accounting for Development
Stage Enterprises".
Start-up Costs
Costs related to the organization of the Company have been expensed as incurred.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities;
disclosure of contingent assets and liabilities at the date of the financial
statements; and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates.
Income Taxes
The Company reports income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes", which requires the liability method in accounting for income
taxes. Deferred tax assets and liabilities arise from the difference between the
tax basis of an asset or liability and its reported amount on the financial
statements. Deferred tax amounts are determined by using the tax rates expected
to be in effect when the taxes will actually be paid or refunds received, as
provided under currently enacted law. Valuation allowances are established when
necessary to reduce the deferred tax assets to the amounts expected to be
realized. Income tax expense or benefit is the tax payable or refundable,
respectively, for the period plus or minus the change during the period in the
deferred tax assets and liabilities.
Loss per Common Share
The Company reports loss per share using a dual presentation of basic and
diluted loss per share. Basic loss per share excludes the impact of common stock
equivalents and preferred stock dividends. Diluted loss per share uses the
average market price per share when applying the treasury stock method in
determining common stock equivalents.
F-24
<PAGE>
HOMESMART.COM, INC.
(FORMERLY CPC OFFICE SYSTEMS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Accounting Year
The Company's accounting and tax year end is December 31st.
Non-monetary Transactions
The accompanying financial statements reflect an expense and a corresponding
credit to paid-in capital for transactions where the principal shareholder paid
an expense on behalf of the Company, provided office space to the Company, and
contributed services in the form of time and effort on behalf of the Company.
Recently Issued Accounting Pronouncements
The Company has adopted the following new accounting pronouncements for the year
ended December 31, 1998. There was no effect on the financial statements
presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting
Comprehensive Income," requires the reporting and display of total comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
NOTE B. RELATED PARTY TRANSACTIONS
The corporate office was located in the personal residence of the sole officer
and director of the Company for all periods presented. The space was provided at
no charge to the Company. In addition, the sole officer and director provided
certain services, at no charge to the Company, from time to time for all periods
presented. The Board of Directors of the Company has estimated the fair value of
the use of such space in relationship to the cost of similar space. In addition,
the Board of Directors has estimated the value of such services provided by the
sole officer and director of the Company based on the time and effort involved
as well as prevailing wage rates. For the period from January 1, 1999 through
July 18, 1999, the years ended December 31, 1998, 1997 and 1996, and the period
from July 14, 1995 (inception) through December 31, 1995, respectively, those
costs totaled $4,300, $600, $600, $600, and $2,560. These costs are reflected in
the accompanying financial statements as related party expenses with a
corresponding credit to contributed capital.
NOTE C. INCOME TAXES
The benefit for income taxes from operations consisted of the following
components at July 18, 1999: current tax benefit of $1,649 resulting from a net
loss before income taxes, and deferred tax expense of $1,649 resulting from the
valuation allowance recorded against the deferred tax asset resulting from net
operating losses. The change in the valuation allowance for the period from
January 1 through July 18, 1999 was $819. Net operating loss carryforwards at
July 18, 1999 will begin expire in 2006. The valuation allowance will be
evaluated at the end of each year, considering positive and negative evidence
about whether the asset will be realized. At that time, the allowance will
either be increased or reduced; reduction could result in the complete
elimination of the allowance if positive evidence indicates that the value of
the deferred tax asset is no longer impaired and the allowance is no longer
required.
F-25
<PAGE>
HOMESMART.COM, INC.
(FORMERLY CPC OFFICE SYSTEMS, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE C. INCOME TAXES, CONCLUDED
A reconciliation of U.S. statutory federal income tax rate to the effective rate
follows for the period from January 1, 1999 through July 18, 1999, the years
ended December 31, 1998 and 1997, and from July 14, 1995 (inception) through
July 18, 1999 follows:
January 1, July 14,
1999 For the Years Ended 1995
through December 31, (inception)
July 18 ------------------ through
1999 1998 1997 1999
---- ---- ---- ----
U.S. statutory federal rate 15.00% 15.00% 15.00% 15.00%
State income tax rate 4.75% 4.75% 4.75% 4.75%
Net operating loss for which
no tax benefit is currently
available -19.75% -19.75% -19.75% -19.75%
----- ----- ----- -----
0.00% 0.00% 0.00% 0.00%
===== ===== ===== =====
Should the Company undergo a change in control, as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the change in control will be subject to an annual limitation
which could reduce or defer the utilization of those losses.
NOTE D. PREFERRED STOCK
The preferred stock may be issued in series as determined by the Board of
Directors. As required by law, each series must designate the number of shares
in the series and each share of a series must have identical rights of (1)
dividend, (2) redemption, (3) rights in liquidation, (4) sinking fund provisions
for the redemption of the shares, (5) terms of conversion and (6) voting rights.
NOTE E. THE YEAR 2000 ISSUE
The Y2K issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's computer
and telecommunications programs that have date sensitive software may recognize
a date using "00" as the year 1900 instead of 2000. This could result in system
failure or miscalculations causing disruptions or operations, including, among
other things an inability to process transactions, send invoices, or engage in
similar normal business activities. The Company maintained no equipment as of
July 18, 1999. The Company cannot determine the extent to which the Company is
vulnerable to third parties' failure to remediate their own Y2K problems. As a
result, there can be no guarantee that the systems of other companies on which
the Company's business relies will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would have a material adverse effect on the Company. In view
of the foregoing, there can be no assurance that the Y2K issue will not have a
material adverse effect on the Company's business.
F-26
<PAGE>
HOMESMART.COM, INC.
A Development Stage Company
Unaudited Pro Forma Condensed, Combined Statement of Operations
For the Year ended December 31, 1999
The following unaudited pro forma condensed, combined statement of operations
for the year ended December 31, 1999 gives effect to the merger between
Homesmart USA, Inc. and CPC Office Systems, Inc. Subsequent to the merger, the
Company's name was changed to Homesmart.com, Inc.
The pro forma condensed, combined statement of operations was prepared assuming
that the acquisition described above was consummated as of the beginning of the
period presented.
The unaudited pro forma condensed, combined financial statements are based upon
historical financial statements of the Homesmart.com, Inc. and CPC Office
Systems, Inc.
The pro forma adjustments and the resulting pro forma combined financial
statements have been prepared based upon available information and certain
assumptions and estimates deemed appropriate by the Registrant.
The pro forma condensed, combined statements of operations are not necessarily
indicative of the results of operations that actually would have been achieved
had the acquisition been consummated as of the dates indicated, or that may be
achieved in the future. Furthermore, the pro forma combined financial statements
do not reflect changes that may occur as the result of post-combination
activities and other matters.
The pro forma condensed, combined financial statements and notes thereto should
be read in conjunction with the accompanying historical financial statements and
notes thereto of Homesmart.com, Inc. and CPC Office Systems, Inc.
F-27
<PAGE>
HOMESMART.COM, INC.
A Development Stage Company
Notes to Pro Forma Condensed, Combined Financial Information
For the Year Ended December 31, 1999
(Unaudited)
The following unaudited pro forma condensed, combined statement of operations
gives effect to the acquisition by CPC Office Systems, Inc. of all of the
outstanding common stock of HomesmartUSA, Inc.
This unaudited pro forma condensed, combined statement of operations is not
necessarily indicative of results of operations had the acquisitions occurred at
January 1, 1999, nor the results to be expected in the future.
F-28
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED, COMBINED
STATEMENT OF OPERATIONS
For the Year Ended December 3, 1999
CPC Office
Homesmart Systems, Pro Forma
.com, Inc. Inc. Combined
---------- ---- --------
<S> <C> <C> <C>
Gross sales and net revenues ................................. $ 33,311 $ -- $ 33,311
------------ ------------ ------------
Operating costs and expenses:
Cost of sales and revenues ............................... 93,510 -- 93,510
Sales and marketing ...................................... 424,541 -- 424,541
General and administrative ............................... 780,812 4,300 785,112
Stock-based compensation -
consulting ............................................. 150,000 -- 150,000
------------ ------------ ------------
Total costs and expenses .... 1,448,863 4,300 1,453,163
------------ ------------ ------------
Loss from operations .... (1,415,552) (4,300) (1,419,852)
Interest expense ............................................. (5,315) (4,300) (5,315)
Other income (expense):
Rental income, related party ............................. 2,000 4,300 6,300
Stock-based compensation -
failed merger .......................................... (50,000) -- (50,000)
------------ ------------ ------------
Loss before income taxes .... (1,468,867) (4,300) (1,473,167)
Provision (benefit) for income taxes:
Current benefit .......................................... 544,300 -- 544,300
Deferred expense ......................................... (544,300) -- (544,300)
------------ ------------ ------------
Net loss .... $ (1,468,867) $ (4,300) $ (1,473,167)
============ ============ ============
Earnings per share of common stock ........................... (0.09) * (0.08)
============ ============ ============
Weighted average number of
common shares outstanding ................................ 16,268,071 2,600,000 18,868,071
============ ============ ============
See notes to pro forma condensed combined financial statements
F-29
</TABLE>
