<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999; or
| | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________________ to
_____________________.
Commission file Number: 0-25136
SUITE101.COM INC.
-----------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 33-0464753
----------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation of organization) identification no.)
SUITE 390 - 1122 MAINLAND STREET, VANCOUVER, BC, CANADA V6B 5L1
---------------------------------------------------------------
(Address of principal executive offices, zip code)
604-682-1400
------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at August 4, 1999
- ----------------------------------- -----------------------------------------
COMMON STOCK, PAR VALUE 12,061,288
$.001 PER SHARE
Transitional Small Business Disclosure Format
YES / / NO /X/
<PAGE>
SUITE 101.COM,INC.
QUARTERLY REPORT ON FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements 3
Accountants' Compilation Report 3
Consolidated Balance Sheets -- June 30, 1999 and 4-5
June 30, 1998
Consolidated Statements of Operations -- Six Months 6
Ended June 30, 1999 and June 30, 1998
Consolidated Statements of Cash Flows -- Six Months 7
Ended June 30, 1999 and June 30, 1998
Notes to Consolidated Financial Statements -- Six Months 8-9
Ended June 30, 1999 and June 30, 1998
Item 2. Management's Discussion and Analysis or Plan of Operation 10-28
PART II OTHER INFORMATION 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 30
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
ACCOUNTANTS' COMPILATION REPORT
We have compiled the accompanying consolidated balance sheets of Suite101.com
Inc. as of June 30, 1999 and June 30, 1998 and the related consolidated
statements of operations and cash flows for the six-month and three-month
periods then ended in accordance with Statements on Standards for Accounting and
Review services issued by the American Institute of Certified Public
Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and accordingly, do not express
an opinion or any form of assurance on them.
N.I. Cameron Inc. (signed)
VANCOUVER, B.C. CHARTERED ACCOUNTANTS
July 16, 1999
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SUITE101.COM INC.
(FORMERLY KNOWN AS KINETIC VENTURES LTD.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED - SEE ACCOUNTANTS' COMPILATION REPORT)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 4,057,447 $ 2,320
Accounts receivable 9,135 2,024
Prepaid expenses and deposits 71,500 -
-----------------------------------
4,138,082 4,344
-----------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer equipment 65,250 44,850
Furniture and fixtures 10,621 721
Leasehold improvements 11,350 17,260
-----------------------------------
87,221 62,831
Less: accumulated amortization 28,768 23,464
-----------------------------------
58,453 39,367
-----------------------------------
TOTAL ASSETS $ 4,196,535 $ 43,711
-----------------------------------
-----------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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SUITE101.COM INC.
(FORMERLY KNOWN AS KINETIC VENTURES LTD.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED - SEE ACCOUNTANTS' COMPILATION REPORT)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 174,404 $ 21,963
DUE TO STOCKHOLDERS - 445,736
DUE TO AFFILIATED COMPANIES - 72,550
-----------------------------------
TOTAL LIABILITIES 174,404 540,249
-----------------------------------
CAPITAL STOCK (Note 4)
Authorized:
40,000,000 common shares with a par value
of $0.001 each
Issued:
12,061,288 common shares 12,062 73
ADDITIONAL PAID-IN CAPITAL 5,220,510 -
DEFICIT (1,245,566) (522,141)
EQUITY ADJUSTMENT FROM FOREIGN
CURRENCY TRANSLATION 35,125 25,530
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 4,022,131 (496,538)
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 4,196,535 $ 43,711
-----------------------------------
-----------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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SUITE101.COM INC.
(FORMERLY KNOWN AS KINETIC VENTURES LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH AND THREE-MONTH PERIODS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED - SEE ACCOUNTANTS' COMPILATION REPORT)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SIX-MONTHS ENDED
- --------------------------------------------------------------------------------------------------------------
JUNE 30 JUNE 30
1999 1998 1999 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
SALES $ 426 $ - $ 842 $ 9,673
---------------------------- ---------------------------
OPERATING EXPENSES
General and administrative 270,721 80,553 482,772 150,737
Marketing 41,490 - 41,490 -
---------------------------- ---------------------------
312,211 80,553 524,262 150,737
---------------------------- ---------------------------
LOSS FROM OPERATIONS (311,785) (80,553) (523,420) (141,064)
---------------------------- ---------------------------
OTHER INCOME (EXPENSE)
Loss on disposal of leasehold improvements (8,130) - (8,130) -
Other income, net 42,987 2,154 43,313 2,486
---------------------------- ---------------------------
34,857 2,154 35,183 2,486
---------------------------- ---------------------------
NET LOSS $ (276,928) $ (78,399) $ (488,237) $ (138,578)
---------------------------- ---------------------------
---------------------------- ---------------------------
INCOME (LOSS) PER SHARE
Basic and Diluted (Note 5) $ (0.02) $ (0.02) $ (0.04) $ (0.04)
----------------------------- ----------------------------
----------------------------- ----------------------------
Weighted average common shares outstanding 11,797,551 3,405,622 10,934,216 3,405,622
----------------------------- ----------------------------
----------------------------- ----------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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SUITE101.COM INC.
(FORMERLY KNOWN AS KINETIC VENTURES LTD.)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED - SEE ACCOUNTANTS' COMPILATION REPORT)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $ (488,237) $ (138,578)
Adjustments to reconcile net loss to
net cash used in operating activities
Loss on disposal of leasehold improvements 8,130 -
Amortization 7,119 6,558
---------------------------------------
(472,988) (132,020)
Changes in operating assets and liabilities
Accounts receivable (3,772) 5,093
Income taxes 1,020 -
Prepaid expenses and deposits (71,500) -
Accounts payable and accrued expenses 44,870 7,953
---------------------------------------
Net cash used in operating activities (502,370) (118,974)
---------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of capital assets (36,745) (3,409)
---------------------------------------
Net cash used in operating activities (36,745) (3,409)
---------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Advances from (to) stockholders (198,664) 121,588
Advances from (to) affiliated companies (43,091) 4,866
Shares issued 4,836,250 -
---------------------------------------
Net cash provided by financing activities 4,594,495 126,454
---------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (8,477) (173)
---------------------------------------
NET INCREASE IN CASH 4,046,903 3,898
CASH (DEFICIENCY) AT BEGINNING OF PERIOD 10,544 (1,578)
---------------------------------------
CASH AT END OF PERIOD $ 4,057,447 $ 2,320
---------------------------------------
---------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
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SUITE101.COM INC.
(FORMERLY KNOWN AS KINETIC VENTURES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED - SEE ACCOUNTANTS' COMPILATION REPORT)
1. THE COMPANY
Suite101.com Inc. (formerly known as Kinetic Ventures Ltd. (the
"Company")) was incorporated in the State of California, United States on
May 20, 1991, and reincorporated in the State of Delaware, United States
on December 31, 1993. By way of a reverse purchase acquisition on December
8, 1998 the Company acquired a wholly-owned subsidiary, i5ive
communications inc. ("i5ive"). i5ive is engaged in the creation, operation
and maintenance of a World Wide Web based community. Because of this
reverse purchase acquisition, the financial statements for June 30, 1998
and the six-month period then ended are those of i5ive and not those
originally reported for Kinetic Ventures Ltd.
GOING CONCERN
The accompanying consolidated financial statements have been presented
assuming the Company will continue as a going concern. As at June 30,
1999, the Company had accumulated $1,245,566 in losses and had no material
revenue producing operations.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Endovascular, Inc., a California
corporation and i5ive communications inc. a Canadian company. All
intercompany accounts and transactions have been eliminated in
consolidation. As at June 30, 1999, there were no operations in the
Company or Endovascular, Inc.
Although unaudited, the interim consolidated financial statements in this
report reflect all adjustments, consisting of normal recurring accruals,
which are, in the opinion of management, necessary for a fair statement of
financial position, results of operations and cash flows for the interim
periods covered and of the financial condition of the Company at the
interim balance sheet dates. The results of operations for the interim
periods presented are not necessarily indicative of the results expected
for the entire year.
These consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
8
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SUITE101.COM INC.
(FORMERLY KNOWN AS KINETIC VENTURES LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED - SEE ACCOUNTANTS' COMPILATION REPORT)
3. FOREIGN EXCHANGE
Unless otherwise stated, all amounts are in United States dollars. The
functional currency of i5ive is the Canadian dollar. Hence, all asset and
liability accounts have been translated using the exchange rate as at June
30, 1999 and June 30, 1998 and all revenues and expenses have been
translated using the average exchange rate for each period. The rates used
were as follows:
<TABLE>
<CAPTION>
(equivalent Cdn $ per U.S. $) 1999 1998
----------------------
<S> <C> <C>
June 30 rate .6835 .6825
Average rate for the three-month period .6790 .6912
</TABLE>
4. CAPITAL STOCK
In April 1999, the Company completed a private placement of 1,000,000
units for $5,000,000. Each unit was comprised of two common shares and one
warrant entitling the holder to purchase an additional common share for
$4.50 on or before February 29, 2000. To date, none of these warrants have
been exercised. The Company incurred $163,750 in expenses concerning this
share issuance.
5. EARNINGS PER SHARE
The calculation of fully diluted earnings per share has excluded any
potential exercise of warrants or options, as the inclusion of these items
would be anti-dilutive.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The following discussion and analysis of the Company should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information including the Company's Financial Statements and the Notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998. This Annual Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that may cause or contribute to such differences include those discussed below
under "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995" and in "Risk Factors"
contained in the Company's Annual Report, as well as those discussed elsewhere
in this Quarterly Report.
OVERVIEW
The Company is an Internet company engaged through its wholly owned
subsidiary, i5ive communications, Inc. ("i5ive") in the creation, operation and
maintenance of a World Wide Web based community, known as Suite101.com, for
Internet users to express themselves, share ideas, interests and expertise, and
publish content accessible to other users with common interests. The Company's
community includes its visitors and Members who are Internet users and
Contributing Editors who create their own personal Web sites organized topically
into Communities of Interest. The Company believes that user affinity to the Web
occurs when users relate personally to their online experience, and the more
users are active in the creation of that experience, the more personal the
experience becomes. By establishing a free service enabling Internet users to
create their own Web sites in Communities of Interest, the Company further
believes that the users will in turn write about their experiences and offer
their knowledge to other Internet users as a means to find the best content and
information on the Internet - quickly and easily. These Communities of Interest
provide the context and tools for Web users to publish content, to communicate
with other users, and to access a centralized and easy-to-navigate destination
for the Best of the Web content. This process enhances the Member's experience
by allowing them to express themselves, share ideas, interests and expertise and
to publish content accessible to other Members and visitors with common
interests.
Content, organized into 11 categories and over 700 topics, is authored
by Member/Contributing Editors, who have demonstrated competence in their area
of interest. Contributing Editors are paid $28 per month for writing monthly,
bi-monthly or weekly articles, for maintaining a "Best of Web" list (links to
topic related information on the Internet), and for hosting discussions on their
topic. As their number grew from 35 in October 1996 to 694 in June
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1999, Member/Contributing Editors created an estimated 15,000 archived
personalized articles Content, which generated 1.8 million page views in June
1999, is currently growing by over 1000 articles a month.
The Company intends to realize revenue by sharing in the proceeds of
e-commerce transactions. The marketing effort is expected to be a collaborative
effort: the Company, its Members and its eVendors. The Company's marketing plan
is founded on the Members' consent, the Company's role as custodian of the
Members' privacy and the eVendors' commitment to deliver competitive, quality
goods and services on time. The Company currently intends to limit its
involvement to facilitating the introduction of the buyer to the seller, the
seller to the buyer. As custodian of the Members' demographics, psychographics
and the Members' annual "Wish" list, the Company will offer its eVendors a
unique opportunity to market one-to-one to a very loyal and focused community.
Unlike traditional marketing campaigns, which typically use print (newspapers,
magazines and direct mail) or the electronic media (radio and television), the
Company's campaigns will direct marketing material to the Members' "Home Page"
or personal Web site, significantly reducing the cost of reaching the consumer.
The interactive nature of the Web and the ability to display attractive graphics
and to facilitate Members "clicking" through directly to the eVendors' site,
will enable the Company to present such offerings 24 hours a day 7 days a week
in a complete, dynamic and timely manner. The Internet's interactive properties
and the Company's dynamic software are believed by management to be compelling
reasons why consenting Members and eVendors will utilize the Company's marketing
program. Products and services can be marketed and the transaction can be
completed on the Web-site quickly and easily. This capability offers the
Company's Members electronic one-stop-shopping and the Company's eVendors
one-to-one contact with the consumer, the Company's Member.
The Company currently affords visitors with access to what its
Contributing Editors determine is the best of the World Wide Web as well as
member generated content. When fully implemented, Suite101 will afford
destinations through which the content can be accessed through the creation of
free member home pages. The Company is currently seeking to increase membership.
The Company will focus on maintaining the confidentiality of member
information and assuring members that information concerning them and their
activities on the Internet are private. With this assured privacy, the Company
intends to seek the members consent to provide aggregated demographic and
psychographic information as well as aggregated member purchasing preferences to
vendors of services and products. As a consequence, marketing to members will be
limited to services and products in which they have expressed an interest.
Revenues derived from this aggregated information are intended to be shared with
members. The Company believes that this aggregated information will be
attractive to vendors looking for a loyal and targeted market to facilitate
transactions. In addition, the Company intends to derive revenues from
participating in transactions conducted by members with vendors through its
Internet facilities.
11
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As the Company grows, its operating expenses will increase in
connection with its visitor and Member generation, brand marketing and eVendors'
promotional efforts, its increased funding of site development, technology and
operating infrastructure, and the increased general and administrative staff
needed to support the Company's growth. The Company anticipates that it will
incur net losses for the foreseeable future. The extent of these losses will be
contingent, in part, on the amount and rates of growth in the Company's net
revenue from electronic commerce (e-commerce) and advertising. The Company
expects its operating expenses to increase significantly, especially in the
areas of sales and marketing and brand promotion. The Company believes that
period-to-period comparisons of its Member recruitment results are not
meaningful and that the results for any period should not be relied upon as an
indication of future performance. There can be no assurance that the Company's
operating losses will not increase in the future or that the Company will ever
achieve or sustain profitability.
To date, the Company has entered into a limited number of license
arrangements and strategic alliances in order to build its communities, provide
community-specific content, generate additional traffic, and increase
membership.
The Company intends to continue to increase reach and membership and to
seek additional strategic alliances with content and distribution partners,
including alliances that create co-branded sites through which the Company
markets its services.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
During the six months ended June 30, 1999, the Company's sales were
$842 compared with sales of $9,673 during the 1998 period. Sales in both periods
were primarily attributable to software licensing revenues of i5ive.
General and administrative expenses were $482,772 in the six months
ended June 30, 1999 compared with $150,737 during the six months ended June 30,
1998. The increase was primarily the result of the increase in the number of the
Company's Contributing Editors and the increased scale of the Company's
operations in 1999. Marketing expenses were $41,490 during the six months ended
June 30, 1999 compared with $-0- during 1998. This was the consequence of the
initiation of these activities during the 1999 period.
The Company's Loss From Operations was $523,420 in 1999 compared with
$141,064 in 1998. Other income was $43,313 in 1999 compared with $2,486 in 1998.
The increase was the result of interest earned on bank balances. Loss on
disposal of leasehold improvements in 1999 of $8,130 was the result of
relocating the Company's offices.
The increase in the Company's Net Loss in 1999 compared with 1998 was the
result of the increase in operating expenses.
12
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LIQUIDITY AND CAPITAL RESOURCES
The report of the Company's independent auditors on their audit of the
Company's financial statements as of December 31, 1998 contains an explanatory
paragraph that describes an uncertainty as to the ability of the Company to
continue as a going concern due to the Company's recurring losses and, as of the
date of their report, the lack of liquid resources. During the six months ended
June 30, 1999, the Company realized gross proceeds of $5,000,000 from a private
placement of its equity securities. In the transaction, the Company sold
1,000,000 units of securities, each unit consisting of two shares of Common
Stock and one Common Stock Purchase Warrant. The warrants are exercisable
through February 29, 2000 at a price of $4.50 per share. These proceeds are
believed by management to be sufficient to meet the Company's anticipated needs
for working capital and capital expenditures for at least the next 12 months. Of
the proceeds, approximately $300,000 was used to meet expenses of the offering
and approximately $341,000 was used to repay indebtedness to stockholders and
affiliated companies, including accrued interest.
In June, 1999, the Company entered into an agreement with Doublespace
to provide creative and technical advise regarding advertising, brand awareness,
site scalability, e-commerce architecture and a media plan. Implementation of
this marketing program is scheduled to commence in September 1999.
The Company's existing funds are believed by management to be adequate
to meet the Company's requirements through December 31, 2000, based on the
Company's current estimates of expenditures. The Company may seek to raise
additional funds in order to fund more aggressive promotions and more rapid
expansion, to develop newer or enhanced services, to respond to competitive
pressures or to acquire complementary businesses, technologies or services.
There can be no assurance that any additional financing will be available on
terms favorable to the Company, or at all. If adequate funds are not available
or not available on acceptable terms, the Company may not be able to fund its
expansion, promote its e-commerce as the Company desires, or, develop or enhance
services or respond to competitive pressures. Any such inability could have a
material adverse effect on the Company's business, results of operations and
financial condition. Additional funds raised through the issuance of equity or
convertible debt securities, will result in reducing the percentage ownership of
the stockholders of the Company and, stockholders may experience additional
dilution and such securities may have rights, preferences or privileges senior
to those of the rights of the Company's Common Stock.
As a result of the Company's limited operating history, the Company has
limited meaningful historical financial data upon which to base planned
operating expenses. Accordingly, the Company's anticipated expense levels in the
future are based in part on its expectations as to future revenue from proposed
e-commerce revenue-sharing arrangements, and anticipated growth in visitor
traffic and membership and will become, to a large extent, fixed. Revenues and
operating results generally will depend on the volume of, timing of and ability
to complete transactions, which are difficult to forecast. In addition, there
can be no assurance that the Company will be able to accurately predict its
revenues, particularly in light of the intense
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competition for the sale of products and services on the Web, revenue-sharing
opportunities, the Company's limited operating history and the uncertainty as
to the broad acceptance of the Web as an e-commerce medium. The Company may
be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall or other unanticipated changes in the e-commerce
industry. Any failure by the Company to accurately make such predictions
would have a material adverse effect on the Company's business, results of
operations and financial condition.
YEAR 2000 COMPUTER ISSUES
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The "Year 2000
Problem" is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail. the Company is
in the process of working with its software vendors to ensure that the software
that the Company has licensed from third parties will operate properly in the
year 2000 and beyond. In addition, the Company is working with its external
suppliers and service providers to ensure that they and their systems will be
able to support the Company's needs and, where necessary, inter-operate with the
Company's server and networking hardware and software infrastructure in
preparation for the year 2000. Management does not anticipate that the Company
will incur significant operating expenses or be required to invest heavily in
computer systems improvements to be year 2000 compliant. However, significant
uncertainty exists concerning the potential costs and effects associated with
any year 2000 compliance. Any year 2000 compliance problems of either the
Company, its customers or vendors would have a material adverse effect on the
Company's business, results of operations and financial condition.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed above
and elsewhere in this Quarterly Report are "forward-looking statements" as
defined under the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties. The forward-looking statements discussed in this
Quarterly Report appear in various places including: "Item 2 - Management's
Discussion and Analysis or Plan of Operation - Overview", "-Liquidity and
Capital Resources", and "-Year 2000 Computer Issues". The Company cautions
readers that the risk factors described in its Annual Report on Form 10-KSB, as
well as those described elsewhere in this Quarterly Report, or in its other
filings with the Commission, in some cases have affected, and in the future
could affect its actual results, could cause its actual results during 1999 and
beyond, to differ materially from those expressed in any forward-looking
statements, and could cause the development of the Company and its business
plans to be different than expressed in those statements. Important factors that
may be encountered, that could cause actual results to
14
<PAGE>
differ materially from the forward-looking statements in this Quarterly
Report include, among others, the Company's early stage of development and
absence of material revenues, the possibility that the Company will be unable
to increase membership in its Communities of Interest sufficiently to attract
e-commerce, the usual unforeseeable risks encountered by any new enterprise,
the inability of the Company to attract readership to its Communities, the
Company's potential need for additional capital and the possible inability of
the Company to attract such capital on acceptable terms or at all, the
uncertainties of the levels of the Company's future operating expenses,
fluctuations in its quarterly revenues and membership growth, the level of
consumer acceptance of e-commerce, the inability of the Company to enter into
marketing and other relationships to develop its e-commerce, intense
competition among Internet portals and e-commerce participants, the inability
of the Company to manage its growth, the impact of possible future government
regulation, the inability of the Company to afford a sufficient level of
privacy to its members, the possible volatility of the market price for the
Company's Common Stock, and the impact of additional shares possibly coming
onto the market for sale.
RISK FACTORS
An investment in the Company's common stock involves a high degree of
risk. The following factors, in addition to the other information contained
herein, should be carefully considered in evaluating the Company and its
business before purchasing shares of the Company's common stock. See "Cautionary
Statement for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995" regarding risks and uncertainties relating to
forward looking statements in this Quarterly Report.
EARLY DEVELOPMENT STAGE; NO MATERIAL REVENUES. The Company is in the
early stage of developing its business plan and operations. The Company has
realized no material revenues to date from its Internet operations activities.
From in April 1996 through June 30, 1999, total revenues from these Internet
operations activities were negligible. During that period, it has accumulated
losses of $1,245,566. The Company has not achieved profitability on a quarterly
or annual basis to date, and the Company anticipates that it will continue to
incur net losses for the foreseeable future. The extent of these losses will be
dependent, in part, on the amount and rates of its expenditures and growth in
the Company's net revenue from e-commerce transactions. The Company expects its
operating expenses to increase significantly, especially in the areas of visitor
and Member generation, brand marketing and e-commerce promotion. As a result, it
will need to generate materially increased amounts of quarterly net revenue if
profitability is to be achieved. The Company believes that period-to-period
comparisons of its operating results will not be meaningful and that the results
for any period should not be relied upon as an indication of future performance.
To the extent that net revenues do not grow at anticipated rates or that
increases in its operating expenses precede or are not subsequently followed by
commensurate increases in net revenue, or that the Company is unable to adjust
operating expense levels accordingly, the Company's business, results of
operations and financial condition will be materially and adversely affected.
There can be no assurance that the Company's operating
15
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losses will not increase in the future or that the Company will ever achieve or
sustain profitability.
The Company is currently developing its business through efforts to
attract visitors, Members and Contributing Editors to its Web-based community.
At June 30, 1999, it had grown from 35 Contributing Editors in October 1996 to
694 in June 1999. During the month of June 1999, the site received approximately
1.8 million page views. The Company cannot assure that such growth rates are
sustainable. The Company's business plan is to continue to expand its numbers of
visitors, Members and Contributing Editors in an effort to reach a sufficient
level of critical mass as well as to continue to improve and enhance its site
infrastructure through the introduction of improved technology. No significant
efforts have been expended to date to realize revenues. Accordingly, there can
be no assurance that the Company's business plan can be successfully developed
or that it will realize any material revenues.
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; NO ASSURANCE OF
PROFITABILITY. i5ive was founded in April 1996 and has had no material revenues
to date. Accordingly, the Company and i5ive have no operating history upon which
an evaluation of the Company's current business plans and its prospects can be
based, each of which must be considered in light of the risks, expenses and
problems frequently encountered by companies in the early stages of development,
and particularly by such companies entering new and rapidly developing markets
like the Internet. Such risks include, without limitation, the lack of broad
acceptance of the community concept on the Internet, the possibility that the
Internet will fail to achieve broad acceptance as a commercial medium, the lack
of acceptance by consumers of e-commerce, the inability of the Company to
attract visitors, or retain Members and Contributing Editors, the inability of
the Company to generate significant e-commerce-based revenues from its visitors
and Members, risks associated with a new and unproven business concept, the
Company's ability to anticipate and adapt to a developing market, the failure of
the Company's network infrastructure (including its server, hardware and
software) to efficiently handle its Internet traffic, changes in laws and taxes
that adversely affect the Company's business, the possibility that the Company
will be unable to manage effectively any rapid expansion of its operations,
including the amount and timing of capital expenditures and other costs relating
to any expansion of the Company's operations, the introduction and development
of different or more extensive communities by direct and indirect competitors of
the Company, including those with greater financial, technical and marketing
resources, the inability of the Company to maintain and increase levels of
traffic on its Website, the inability of the Company to attract, retain and
motivate qualified personnel, technical difficulties, system downtime or
Internet brownouts, the amount and timing of operating costs and capital
expenditures relating to development of the Company's business, operations and
infrastructure, and general economic conditions. To address these risks, the
Company must, among other things, attract visitors and retain Members and
Contributing Editors, attract and retain a significant number of eVendors,
respond to competitive developments, form and maintain relationships with
strategic partners, attract and respond to competitive developments, retain and
motivate qualified personnel, develop and upgrade its technologies and
commercialize its services incorporating such technologies and be successful in
attracting additional substantial capital at the times, in the amounts and on
the terms required. There can be no assurance that the Company will be
successful in addressing such risks, and any
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failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition. Due to the foregoing
factors, the Company's quarterly net revenue and operating results are
difficult to forecast. Consequently, the Company believes that period to
period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. It is likely that in some future quarter or quarters the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially and adversely affected.
UNPROVEN BUSINESS; DEPENDENCE ON MEMBERS. The success of the Company's
business depends upon its ability to expand upon and develop its community-based
platform of Internet access and to generate multiple revenue streams. Currently,
the Company has no source of material revenues. The potential success of this
business concept is unproven, and, to be successful, the Company must, among
other things, develop and market concepts that achieve broad market acceptance
by its Members and Internet users. The Company is and will be substantially
dependent upon its Member-generated content, the promotional efforts of its
Members, the acceptance by its visitors and Members of marketing and other
promotional programs of third parties and the Company, and its ability and the
ability of its Contributing Editors to attract Web users to its site and to
reduce the demands on Company personnel. This business concept has existed for
only a limited period of time, and, as a result, is relatively unproven. There
can be no assurance that the Company's Member-generated content or the
promotional efforts of its Members will continue to attract users to the
Company's Website. There can also be no assurance that the Company's Members and
Contributing Editors will continue to devote time voluntarily to improving the
community, or, given the fact that the Company provides free disk space to its
Members and the Company supports the involvement of its Contributing Editors,
that third parties will not attempt to hold the Company and the Company
responsible for such content and/or any actions or omissions of such
Contributing Editors. There also can be no assurance that the Company's
business, results of operations and financial condition would not be materially
and adversely affected if a substantial number of Members or Contributing
Editors became dissatisfied with the Company's services or its intention to
commercialize those services or that the Contributing Editors become
dissatisfied with the amounts of compensation paid by the Company to them.
Moreover, considering the modest level of compensation paid to Contributing
Editors, there can be no assurance that consistent levels of high quality Member
generated content will be maintained. These levels of compensation may hinder
the Company's efforts in the future to attract Contributing Editors. Further,
there can be no assurance that the community on the Internet or the Company's
services will achieve broad market acceptance. Accordingly, no assurance can be
given that the Company's business will be successful or that it can sustain
revenue growth or generate significant profits.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The
report of the Company's independent auditors on their audit of the Company's
financial statements as of December 31, 1998 contains an explanatory paragraph
that describes an uncertainty as to the ability of the Company to continue as a
going concern due to the Company's recurring losses and, as of the date of their
report, the lacks of liquid resources. At December 31, 1998, the
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Company did not have available to it the funds necessary to meet its
anticipated capital needs. However, through June 30, 1999, the Company
realized gross proceeds of $5.0 million from a private placement of its
securities. These funds are believed by management to be sufficient to meet
the Company's anticipated needs for working capital and capital expenditures
for at least the next 12 months. The Company may seek to raise additional
funds in order to fund more aggressive promotions and more rapid expansion,
to develop newer or enhanced services, to respond to competitive pressures or
to acquire complementary businesses, technologies or services. There can be
no assurance that any additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or
not available on acceptable terms, the Company may not be able to fund its
expansion, promote its e-commerce as the Company desires, or, develop or
enhance services or respond to competitive pressures. Any such inability
could have a material adverse effect on the Company's business, results of
operations and financial condition. Additional funds raised through the
issuance of equity or convertible debt securities, will result in reducing
the percentage ownership of the stockholders of the Company and, stockholders
may experience additional dilution and such securities may have rights,
preferences or privileges senior to those of the rights of the Company's
Common Stock.
As a result of the Company's limited Internet operating history, the
Company has limited meaningful historical financial data upon which to base
planned operating expenses. Accordingly, the Company's anticipated expense
levels in the future are based in part on its expectations as to future revenue
from proposed e-commerce revenue-sharing arrangements, and anticipated growth in
visitor traffic and in membership and will become, to a large extent, fixed.
Revenues and operating results generally will depend on the volume of, timing of
and ability to complete transactions, which are difficult to forecast. In
addition, there can be no assurance that the Company will be able to accurately
predict its net revenue, particularly in light of the unproven manner in which
it intends to derive its Internet revenue, the intense competition for the sale
of products and services on the Web, revenue-sharing opportunities, the
Company's limited operating history and the uncertainty as to the broad
acceptance of the Web as an e-commerce medium. The Company may be unable to
adjust spending in a timely manner to compensate for disappointing results of
its marketing efforts to develop Internet revenue, or any unexpected revenue
shortfall or other unanticipated changes in the e-commerce industry. Any failure
by the Company to accurately make such predictions or adjustments in the
Company's spending would have a material adverse effect on the Company's
business, results of operations and financial condition.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY;
UNPREDICTABILITY OF FUTURE NET REVENUE. The Company expects operating results to
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside of the Company's control. These factors include demand for
the products the Company intends to market through its Web site, Members'
acceptance of e-commerce on the Suite101 Web site, the level of traffic on the
Suite101.com site, the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's operations, the introduction of new
or enhanced services by the Company or its competitors, the timing and number of
new hires, the availability of desirable products and services for sale through
the Company's Web site, the loss of a key strategic or marketing
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relationship by the Company, changes in the Company's marketing policy or
those of its competitors, the mix of products and services marketed by the
Company's eVendors, engineering or development fees that may be paid in
connection with adding new Web site development and publishing tools,
technical difficulties with the Suite101.com site, general economic
conditions, and economic conditions specific to the Internet or all or a
portion of the technology market. As a strategic response to changes in the
competitive environment, the Company may from time to time make certain
pricing, service or marketing decisions or business combinations that could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company expects to experience
seasonality in its business, with user traffic on the Suite101.com site
potentially being lower during the summer and year-end vacation and holiday
periods when overall usage of the Web is lower. Because Web-based e-commerce
is an emerging market, additional seasonal and other patterns may develop in
the future as the market matures. Any seasonality is likely to cause
quarterly fluctuations in the Company's operating results, and there can be
no assurance that such patterns will not have a material adverse effect on
the Company's business, results of operations and financial condition.
MANAGEMENT OF GROWTH AND RELATIONSHIPS; BRIEF TENURE OF MANAGEMENT;
DEPENDENCE ON KEY PERSONNEL. In developing its business plan, the Company
expects to be required to establish and manage multiple relationships with
various strategic and eVendors, distributors, providers of services, technology
licensors, Members, marketers, and other third parties. To date, only a limited
number of such relationships have been established. These requirements to enter
into these relationships will be exacerbated in the event of material growth of
the Company or in the number of third party relationships, and there can be no
assurance that the Company's systems, procedures or controls will be adequate to
enable the Company to establish and enter into these relationships, to support
any substantial growth in the Company's operations or that the Company's
management will be able to implement or manage any growth effectively. To
effectively manage growth, the Company must establish, implement and improve
operational, financial and management information systems and expand, train and
manage its employee base. the Company's development is and will continue to be
substantially dependent on the abilities and performance of its executive
officers and other key employees. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the prospects, business development, and results of operations and financial
condition of the Company. Competition for senior management, experienced sales
and marketing personnel, qualified Web engineers and other employees is and is
expected to continue to be intense, and there can be no assurance that the
Company will be successful in attracting and retaining such personnel. There can
be no assurance that the Company may not experience difficulty from time to time
in hiring and retaining the personnel necessary to support the growth of its
business. The failure of the Company to successfully manage its personnel
requirements would have a material adverse effect on the Company's business,
results of operations and financial condition.
INTENSE COMPETITION. The market for community based e-commerce on the
Internet is new and rapidly evolving and competition for visitors, Members and
Contributing Editors, strategic partners and eVendors is new, rapidly evolving,
and intense and this competition is expected to increase significantly in the
future. Barriers to entry into the Internet business are
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relatively insubstantial. The Company believes that the principal competitive
factors for companies seeking to create community on the Internet are
content, critical mass, functionality, brand recognition, Member affinity and
loyalty, broad demographic focus and open access for visitors. Other
companies who are primarily focused on creating Web-based community on the
Internet are About.com, Yahoo! Inc., iVillage.com, Inc., Tripod, Inc., a
subsidiary of Lycos, Inc., Angelfire Communications, Xoom.com, Inc. and
theglobe.com. Each of these competitors is significantly larger than the
Company and more well-established and well-known in the Internet industry and
with greater capital resources. The Company will likely also face competition
in the future from Web directories, search engines, shareware archives,
content sites, commercial online service provides ("OSPs"), sites maintained
by Internet service providers ("ISPs") and other entities that attempt to or
establish communities on the Internet by developing their own community or
acquiring one of the Company's competitors. In addition, the Company could
face competition in the future from traditional media companies, a number of
which, including Disney, CBS and NBC have recently made significant
acquisitions of or investments in Internet companies. Further, there can be
no assurance that the Company's competitors and potential competitors will
not develop communities that are equal or superior to those of the Company or
that achieve greater market acceptance than the Company's community.
The Company also competes for visitors and Members with many Internet
content providers and ISPs, including Web directories, search engines, shareware
archives, content sites, commercial online services and sites maintained by
Internet service provides, as well as thousands of Internet sites operated by
individuals and government and educational institutions. These competitors
include free information, search and content sites or services, such as American
Online, Inc. ("AOL"), CNET, Inc. ("CNET"), CNN/Time Warner, Inc. ("CNN/Time
Warner"), Excite, Inc. ("Excite"), Infoseek Corporation ("Infoseek"), Lycos,
Inc. ("Lycos"), Netscape Communications Corporation ("Netscape"), Microsoft
Corporation ("Microsoft"), About.com, Inc. and Yahoo! Inc. ("Yahoo!"). The
Company also competes with the foregoing companies, as well as traditional forms
of media, such as newspapers, magazines, radio and television. The Company
believes that the principal competitive factors in attracting strategic partners
and other sources of e-commerce business include the amount of traffic on its
Web site, name recognition, customer service, the demographics of the Company's
Members and viewers, the Company's ability to offer targeted audiences and the
overall cost-effectiveness of the e-commerce opportunities offered by the
Company. The Company believes that the number of Internet companies relying on
Web-based e-commerce and advertising revenue will increase substantially in the
future. Accordingly, the Company will likely face increased competition,
resulting increased pressures on its revenue sharing percentages which could, in
turn, have a material adverse effect on the Company's business, results of
operations and financial condition.
Substantially all of the Company's existing and potential competitors,
including Web directories and search engines and large traditional media
companies, have longer operating histories in the Web market, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than the Company. Such competitors are able to
undertake more extensive marketing campaigns for their brands and services,
adopt more aggressive advertising pricing policies and make more attractive
offers to potential employees, visitors, Members, distribution partners,
eVendors, marketers, and third party content providers.
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There can be no assurance that Internet content providers and ISPs, including
Web directories, search engines, shareware archives, sites that offer
professional editorial content, commercial online services and sites
maintained by ISPs will not be perceived by potential strategic partners,
eVendors and marketers as having more desirable Web sites. In addition, many
persons with whom the Company would seek to enter into a strategic
relationship have already established collaborative relationships with the
Company's competitors or potential competitors, and other high-traffic Web
sites. Accordingly, there can be no assurance that the Company will be able
to grow its visitor and Membership base, traffic levels and customer base or
retain its current Members, traffic levels or customers, or that competitors
will not experience greater growth in traffic than the Company as a result of
such relationships which could have the effect of making their Web sites more
attractive, or that the Company's strategic partners will not sever or will
elect not to renew their agreements with the Company. There can also be no
assurance that the Company will be able to compete successfully in the
Internet or that competition will not have a material adverse effect on the
Company's business, results of operations and financial condition.
RISK OF RELIANCE ON INTERNALLY DEVELOPED SYSTEMS. The Company uses and
presently intends to use an internally developed system for its Web site. This
system has not been fully developed. The Company's inability to further develop
and modify this system as necessary to accommodate increased levels of traffic
on its Web site may cause unanticipated system disruptions, slower response
times, degradation in Member satisfaction and service, leading to a loss of
Members and Contributing Editors, and delays in reporting accurate financial
information. Any of these events could have a material adverse effect on the
Company's business, results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally, and there are currently few laws
or regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, a number of
legislative and regulatory proposals are under consideration by U.S. and
Canadian federal, state, provincial, local and foreign governmental
organizations, and it is possible that a number of laws or regulations may be
adopted with respect to the Internet relating to such issues as user privacy,
user screening to prevent inappropriate uses of the Internet by, for example,
minors or convicted criminals, taxation, infringement, pricing, content
regulation, quality of products and services and intellectual property ownership
and infringement. The adoption of any such laws or regulations may decrease the
growth in the use of the Internet, which could, in turn, decrease the demand for
i5ive's community, increase i5ive's cost of doing business, or otherwise have a
material adverse effect on the Company's business, results of operations and
financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, copyright, trademark, trade secret,
obscenity, libel and personal privacy is uncertain and developing. Any new
legislation or regulation, or application or interpretation of existing laws,
could have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that any
legislation will not be enacted in the future that could expose the Company to
substantial liability. Legislation could
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also dampen the growth in the use of the Web generally and decrease the
acceptance of the Web as a communications and commercial medium, and could,
thereby, have a material adverse effect on the Company's business, results of
operations and financial condition. It is also possible that the Company's
use of "cookies" to track demographic information and user preferences and to
target advertising may become subject to laws limiting or prohibiting their
use. A "cookie" is a bit of information keyed to a specific server, file
pathway or directory location that is stored on a user's hard drive, possibly
without the user's knowledge. A user is generally able to remove cookies.
Germany, for example, has imposed laws limiting the use of cookies, and a
number of Internet commentators, advocates and governmental bodies in the
United States and other countries have urged the passage of laws limiting or
abolishing the use of cookies. Limitations on or elimination of the Company's
use of cookies could limit the effectiveness of the Company's targeting of
advertisements, which could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, a
number of legislative proposals have been made at the U.S. and Canadian
federal, state, provincial and local level that would impose additional taxes
on the sale of goods and services over the Internet and certain jurisdictions
have taken measures to tax Internet-related activities. Recently, the U.S.
Congress has considered a number of versions of legislation which would place
a moratorium of a number of years on any new taxation of Internet commerce.
There can be no assurance that nay such legislation will be adopted by the
U.S. Congress. Moreover, it is likely that, once such moratorium is lifted,
some type of U.S. federal and/or state taxes will be imposed upon Internet
commerce, and there can be no assurance that such legislation or other
attempts at regulating commerce over the Internet will not substantially
impair the growth of commerce on the Internet and, as a result, adversely
affect the Company's opportunity to derive financial benefit from such
activities. In addition to the foregoing areas of recent legislative
activities, several telecommunications carriers are currently seeking to have
telecommunications over the Web regulated by the U.S. Federal Communications
Commission (the "FCC") in the same manner as other telecommunications
services. For example, America's Carriers Telecommunications Association has
filed a petition with the FCC for this purpose. In addition, because the
growing popularity and use of the Web have burdened the existing
telecommunications infrastructure and many areas with high Web use have begun
to experience interruptions in phone service, local telephone carriers have
petitioned the FCC to regulate ISPs and OSPs in a manner similar to long
distance telephone carriers and to impose access fees on the ISPs and OSPs.
If either of these petitions is granted, or the relief sought therein is
otherwise granted, the costs of communicating on the Web could increase
substantially, potentially slowing growth in use of the Web, which could, in
turn, decrease demand for the Company's services or increase the Company's
cost of doing business. Due to the global nature of the Web, it is possible
that, although transmissions by the Company over the Internet originate
primarily in British Columbia, Canada, the governments of various states in
the United States and foreign countries might attempt to regulate the
Company's transmissions or prosecute the Company for violations of their
laws. There can be no assurance that violations of local laws will not be
alleged or charged by state or foreign governments, that the Company might
not unintentionally violate such laws or that such laws will not be modified,
or new laws enacted, in the future. Any of the foregoing developments could
have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, as the Company's services
are available over the Internet in multiple foreign countries, provinces,
states and other jurisdictions, such jurisdictions
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may claim that the Company is required to qualify to do business as a foreign
corporation in each such jurisdiction. the Company is qualified to do
business only in British Columbia, and failure by the Company to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties and could result in the inability
of the Company to enforce contracts in such jurisdictions. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company's
business, results of operations and financial condition.
LIABILITY FOR INFORMATION RETRIEVED FROM THE WEB; ABSENCE OF LIABILITY
INSURANCE. Because materials may be downloaded by Members and other users of the
Company's Web site and subsequently distributed to others, there is a potential
that claims will be made against the Company for defamation, negligence,
copyright or trademark infringement, personal injury or other theories based on
the nature, content, publication and distribution of such materials. Such claims
have been brought, and sometimes successfully pressed, against OSPs for example,
in the past. the Company has received inquiries from time to time from third
parties regarding such matters, all of which have been resolved to date without
any payments or other material adverse effect on the Company. In addition, the
increased attention focused upon liability issues as a result of these lawsuits
and legislative proposals could impact the overall growth of Internet use. the
Company could also be exposed to liability with respect to the offering of third
party content that may be accessible through the Company's Web site, or through
content and materials that may be posted by Members on their personal Web sites
or chat rooms, or on-line discussions offered by the Company. Such claims might
include, among others, that by directly or indirectly hosting the personal Web
sites of third parties, the Company is liable for copyright or trademark
infringement, or other wrongful actions by such third parties through such Web
sites. It is also possible that if any third party content information provided
on the Company's web site contains errors, third parties could make claims
against the Company for losses incurred in reliance on such information. Even to
the extent that such claims do not result in liability to the Company, the
Company could incur significant costs in investigating and defending against
such claims. The imposition on the Company of potential liability for
information carried on or disseminated through its systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources and limit the
attractiveness of the Company's services to Members and visitors. the Company
also intends to enter into agreements with eVendors and sponsors under which the
Company is intended to be entitled to receive a share of any revenue from the
purchase of goods and services through direct links from the Company's Web site.
Such arrangements may expose the Company to additional legal risks and
uncertainties, including potential liabilities to consumers of such products and
services by virtue of the Company's involvement in providing access to such
products or services, even if the Company does not itself provide such products
or services. While the Company's agreements with these parties are intended to
provide that the Company will be indemnified against such liabilities, there can
be no assurance that such indemnification, if available, will be adequate.
Currently, the Company does not carry general liability insurance intended to
protect the Company from any liability arising out of the foregoing. In any
event, however, insurance may not cover all potential claims to which the
Company is exposed or may
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not be adequate to indemnify the Company for all liability that may be
imposed. Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage would have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, the increased attention focused upon liability issues as a result
of these lawsuits and legislative proposals could impact the overall growth
of Internet use.
SECURITY RISKS. There can be no assurance that experienced programmers
or "hackers" may not from time to time attempt to penetrate the Company's
network security. To date, none of this activity has occurred. However, in the
event any such attempts should occur and be successful, such a penetration may
have a material adverse effect on the Company's business, results of operations
or financial condition. A party who is able to penetrate the Company's network
security could misappropriate proprietary information or cause interruptions in
the Company's Web site. In addition, in offering certain payment services, the
Company could become increasingly reliant on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. The Company may be required
to expend significant capital and resources to protect against the threat of
such security, encryption and authentication technology breaches or to alleviate
problems cause by such breaches. Concerns over the security of Internet
transactions and the privacy of users may also inhibit the growth of the
Internet generally, particularly as a means of conducting commercial
transactions. Security breaches or the inadvertent transmission of computer
viruses could expose the Company to a risk of loss or litigation and possible
liability. There can be no assurance that contractual provisions attempting to
limit the Company's liability in such areas will be successful or enforceable,
or that other parties will accept such contractual provisions as part of the
Company's agreements, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
RELIANCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The Company
regards its technology as proprietary and attempts to protect it by relying on
trademark, service mark, copyright and trade secret laws and restrictions on
disclosure and transferring title and other methods. The Company currently has
no patents or patents pending and does not anticipate that patents will become a
significant part of the Company's intellectual property in the foreseeable
future. the Company also generally enters into confidentiality or license
agreements with its employees and consultants, and generally controls access to
and distribution of its documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's proprietary information without authorization or to
develop similar technology independently. the Company pursues the registration
of its trademarks and service marks in the United States and Canada and
internationally, and intends to apply for the registration in the United States
and Canada for a number of its service marks There can be no assurance that such
registration will be granted or, if granted, that the Company will derive any
material commercial benefit from such registration. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which the Company's services are distributed or made available
through the Internet, and policing unauthorized use of the Company's proprietary
information is difficult. Legal standards relating to the validity,
enforceability and scope of protection of certain
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proprietary rights in Internet-related businesses are uncertain and still
evolving, and no assurance can be given as to the future viability or value
of any proprietary rights of the Company or other companies within this
market. There can be no assurance that the steps taken by the Company will
prevent misappropriation or infringement of its proprietary information. Any
such infringement or misappropriation, should it occur, could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation might result in substantial costs and diversion of
resources and management attention and could have a material adverse effect
on the Company's business, results of operations and financial condition and
the Company may not have available the resources necessary to pursue such
litigation. Furthermore, there can be no assurance that the Company's
business activities will not infringe upon the proprietary rights of others,
or that other parties will not assert infringement claims against the
Company. It can be expected that the Company will be subjected to claims in
the ordinary course of its business, including claims of alleged infringement
of the trademarks, service marks and other intellectual property rights of
third parties by the Company and the content generated by its Members.
Although such claims have not occurred to date, such claims and any resultant
litigation, should it occur, might subject the Company to significant
liability for damages and might result in invalidation of the Company's
proprietary rights and even if not meritorious, could be time consuming and
expensive to defend and could result in the diversion of management time and
attention, any of which might have a material adverse effect on the Company's
business, results of operations and financial condition. The Company
currently licenses from third parties certain technologies incorporated into
the Company's Web site. As the Company continues to introduce new services
that incorporate new technologies, it may be required to license additional
technology from others. There can be no assurance that these third party
technology licenses will continue to be available to the Company on
commercially reasonable terms, if at all. The inability of the Company to
obtain any of these technology licenses could result in delays or reductions
in the introduction of new services or could adversely affect the performance
of its existing services until equivalent technology could be identified,
licensed and integrated.
DEPENDENCE ON CONTINUED GROWTH IN THE USE OF THE INTERNET; DEPENDENCE
ON WEB INFRASTRUCTURE. The Company's future success is substantially dependent
upon continued growth in the use of the Internet and the Web in order to support
e-commerce development on the Company's Web site and in the acceptance and
volume of e-commerce transactions on the Internet. There can be no assurance
that the number of Internet users will continue to grow or that e-commerce over
the Internet will become more widespread. As is typical in the case of a new and
rapidly evolving industry, demand and market acceptance for recently introduced
services are subject to a high level of uncertainty. the Company cannot predict
the extent to which consumers will be willing to shift their purchasing habits
from traditional retailers to online retailers. The Internet may not prove to be
a viable commercial marketplace for a number of reasons, including lack of
acceptable security technologies, lack of access and ease of use, congestion of
traffic, inconsistent quality of service and lack of availability of
cost-effective, high-speed service, potentially inadequate development of the
necessary infrastructure, excessive governmental regulation, uncertainty
regarding intellectual property ownership or timely
25
<PAGE>
development and commercialization of performance improvements, including
high-speed modems. The success of the Company's Web site will depend in large
part upon the continued development of a Web infrastructure, such as a
reliable network backbone with the necessary speed, data capacity and
security, and timely development of complementary products, such as
high-speed modems for providing reliable Web access and services. Because
global e-commerce and online exchange of information on the Web and other
similar open wide area networks are new and evolving, it is difficult to
predict with any assurance whether the Web will support increasing use or
will prove to be a viable commercial marketplace. The Web has experienced,
and is expected to continue to experience, significant growth in the number
of users and the amount of content. To the extent that the Web continues to
experience increased numbers of users, frequency of use or increased band
width requirements of users, there can be no assurance that the Web
infrastructure will continue to be able to support the demands placed on it
by this continued growth or that the performance or reliability of the Web
will not be adversely affected by this continued growth. In addition, the Web
could lose its viability or effectiveness due to delays and the development
or adoption of new standards and protocols to handle increased levels of
activities or due to increased government regulation. There can be no
assurance that the infrastructure or complementary products or services
necessary to make the Web a viable commercial marketplace will be developed,
or, if they are developed, that the Web will achieve broad acceptance. If the
necessary infrastructure standards, protocols, or complementary products,
services or facilities are not developed, or if the Web does not become a
viable commercial marketplace, the Company's business, results of operations
and financial condition will be materially and adversely affected. Even if
such infrastructure, standards or protocols or complementary products,
services, or facilities are developed and the Web becomes a viable commercial
marketplace, there can be no assurance that the Company will not be required
to incur substantial expenditures in order to adapt its services to changing
Web technologies, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
SALES TAX COLLECTION. One or more states, provinces or countries may
seek to impose sales tax collection obligations on out-of-state or
out-of-province or foreign companies such as the Company which engage in online
commerce. Any new operation or facilities in the United States or Canada or
elsewhere could subject shipments into such states or provinces to state or
provincial or foreign sales taxes. A successful assertion by one or more states
or provinces or any foreign country that the Company should collect sales or
other similar taxes on the sale of merchandise could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, NORTHFIELD CAPITAL
CORPORATION AND 284085 BC LTD. The Company's three Directors and Northfield
Capital Corporation, and their respective affiliates, in the aggregate,
beneficially own approximately 46.4% of the outstanding Common Stock of the
Company. As a result, these stockholders possess significant influence over the
Company, giving them the ability, among other things, to elect a majority of the
Company's Board of Directors and approve significant corporate transactions.
Such share ownership and control may also have the effect of delaying or
preventing a change in control of the Company, impeding a merger, consolidation,
takeover or other business combination
26
<PAGE>
involving the Company, or discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of the Company which
could have a material adverse effect on the market price of the Company's
Common Stock.
YEAR 2000 COMPLIANCE. The Company is aware of the issues associated
with the programming code in existing computer systems as the year 2000
approaches. The "Year 2000 Problem" is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the two-digit
year value to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or fail. the
Company is in the process of working with its software vendors to ensure that
the software that the Company has licensed from third parties will operate
properly in the year 2000 and beyond. In addition, the Company is working with
its external suppliers and service providers to ensure that they and their
systems will be able to support the Company's needs and, where necessary,
inter-operate with the Company's server and networking hardware and software
infrastructure in preparation for the year 2000. Management does not anticipate
that the Company will incur significant operating expenses or be required to
invest heavily in computer systems improvements to be year 2000 compliant.
However, significant uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance. Any year 2000 compliance
problems of either the Company, its customers or vendors would have a material
adverse effect on the Company's business, results of operations and financial
condition.
NO ACTIVE PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF
STOCK PRICE. Prior to the closing of the Company's transaction with i5ive, there
was no active public market for its Common Stock. Since December 30, 1998, the
Company's Common Stock has been quoted on the OTC Bulletin Board. There can be
no assurance that an active trading market for the Common Stock will be
sustained or that the market price of the Common Stock will not decline based
upon market or other conditions. The market price may bear no relationship to
the revenues, earnings, assets or potential of the Company and may not be
indicative of the future business performance of the Company. The trading price
of the Company's Common Stock has been and can be expected to be subject to wide
fluctuations in response to variations in the Company's quarterly results of
operations, the gain or loss of significant strategic relationships,
unanticipated delays in the development of the Company, changes in earnings
estimates by analysts, announcements of technological innovations or new
solutions by the Company or its competitors, general conditions in the
technology and Internet sectors and in Internet-related industries, other
matters discussed elsewhere in this Annual Report and other events or factors,
many of which are beyond the Company's control. In addition, the stock market in
general and the technology and Internet sectors in particular have experienced
extreme price and volume fluctuations which have affected the market price for
many companies in industries similar or related to that of the Company and which
have been unrelated to the operating performance of these companies. These
market fluctuations, as well as general economic, political and market
conditions, may have a material adverse effect on the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against such companies. Such litigation,
27
<PAGE>
if instituted, and irrespective of the outcome of such litigation, could
result in substantial costs and a diversion of management's attention and
resources and have a material adverse effect on the Company's business,
results of operations and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of significant amounts of the
Company's Common Stock in the public market or the perception that such sales
will or could occur could materially and adversely affect the market price of
the Company's Common Stock or the future ability of the Company to raise capital
through an offering of its equity securities. The Company had, as of June 30,
1999, 12,061,288 shares of common stock outstanding. Of such shares, 5,610,340
shares were held by Directors of the Company, 284085 BC Ltd. and Northfield
Capital Corporation. The 3,405,622 shares held by Northfield Capital Corporation
and 284085 BC Ltd. are "restricted securities" as such term is defined in Rule
144 under the Securities Act. In addition, through June 30, 1999, the Company
sold 2,000,000 shares of Common Stock and warrants expiring on February 29, 2000
to purchase an additional 1,000,000 shares of Common Stock which are "restricted
securities". Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act. Approximately 4,450,948
shares of the Company's Common Stock are freely transferable under U.S. Federal
securities laws.
The Company has filed a Form S-8 registration statement under the
Securities Act to register all shares of Common Stock issuable pursuant to
outstanding options and all shares of Common Stock reserved for issuance under
the Company's 1998 Stock Incentive Plan. Such registration statement became
effective immediately upon filing and the shares issuable on exercise of options
granted under the 1998 Stock Incentive Plan are covered by that registration
statement. At such time as the options granted become exercisable, commencing
December 4, 1999, the shares issuable on exercise of the options will thereupon
be eligible for sale in the public markets, subject to Rule 144 limitations
applicable to affiliates. As of June 30, 1999, there were outstanding options to
purchase up to 443,109 shares of Common Stock, of which options to purchase
278,207 shares will become vested and immediately exercisable at a price of
$1.50 per share on December 4, 1999. The remaining options to purchase 164,902
shares vest on various dates commencing February 23, 2000 through April 27,
2002.
In addition, the Company has agreed to file a registration statement
under the Securities Act to register the offer and sale of the 3,000,000 shares
(including 1,000,000 shares issuable on exercise of warrants) sold in April 1999
in the private sale of the Company's securities. At such time as such
registration statement is declared effective by the Commission those shares will
be freely transferrable. The sale of those shares or the perception that such
sales will or could occur could materially and adversely affect the market price
for the Company's Common Stock. The Company intends to file the registration
statement during the third calendar quarter of 1999.
28
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the quarter ended June 30, 1999, the Company completed
an offering of its securities. The Company offered 1,000,000 units, each unit
consisting of two shares of Common Stock and one warrant to purchase one share
of Common Stock. Each warrant is exercisable at a price of $4.50 per share,
subject to anti-dilution adjustment, at any time through February 29, 2000. At
any time after the shares of Common Stock issuable on exercise of the warrants
have been registered under the Securities Act of 1933, as amended (the
"Securities Act") and provided that the average of the high bid and low asked
prices for the Registrant's Common Stock, as quoted in the OTC Bulletin Board,
equals or exceeds (US) $5.00 per share for 20 consecutive trading days ending on
the third business day prior thereto, the Registrant may at its option redeem
the warrants at a price of (US) $0.01 per warrant.
Through March 31, 1999, the Company had received subscriptions to and
accepted purchases of 500,000 units, or gross proceeds of (US) $2,500,000 and
thereafter, on or prior to April 12, 1999, the Company had received
subscriptions to and had accepted purchases of an additional 500,000 units, or
gross proceeds of (US) $2,500,000 or aggregate gross proceeds of (US)
$5,000,000.
The Units and the securities included in the Units were offered and
sold in reliance upon the exemption from the registration requirements of the
Securities Act afforded by Section 4(2) thereof and by Regulation D adopted
under the Securities Act. The Units were sold to persons who represented that
they are "accredited investors" as defined under Regulation D and that they were
purchasing the securities for investment and not for distribution.
The net proceeds are intended to be used for marketing and advertising,
member service enhancements, working capital and general corporate purposes and
to repay loans. At June 30, 1999, the Company had repaid out of the proceeds
loans from stockholders and affiliates in the amount of approximately $341,000.
In addition to cash commissions, the Company issued three-year warrants
exercisable at $5.50 per share to purchase an aggregate of approximately 65,000
shares as compensation in connection with the offering.
The Company has agreed to file a registration statement under the
Securities Act to register the Common Stock included in the Units and issuable
on exercise of the warrants. The Company intends to file this registration
statement during the third calendar quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 11, 1999, the Company held its annual meeting of stockholders.
At the meeting, stockholders were requested to vote on the election of five
persons as Directors of the Company,
29
<PAGE>
to serve until the next annual meeting of stockholders in 2000 and until
their respective successors are elected and qualified, and on a proposal to
approve the adoption of the Company's 1998 Stock Incentive Plan.
At the meeting, the following persons were elected as Directors:
Peter L. Bradshaw
Julie M. Bradshaw
Sunny Hirai
Mitchell Blumberg
Alfred J. Puchala, Jr.
The proposal to approve the adoption of the 1998 Stock Incentive Plan
was approved by the favorable vote of a majority of the shares present and
voting at the meeting with the following vote:
In favor -- 5,061,825
Against -- -0-
Abstain -- 62
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K for
April 12, 1999 in response to Items 5 and 7 thereof.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUITE101.COM,INC.
-----------------
(Registrant)
Date: August 6, 1999 /s/ Peter L. Bradshaw
-----------------------------------
Peter L. Bradshaw
President and Chief Operating Officer
(Principal Executive, Financial and
Accounting Officer)
31
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