U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
X Annual report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 31, 1998.
____ Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to
_________.
Commission File No: 0-25818
WORLDWIDE INTERNET MARKETING, INC.
(Name of small business as specified in its charter)
Colorado 84-1293163
__________________________________________________________
(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
14 East Main Street, P. O. Box 309
__________________________________________________________
Address of Principal Executive Office (street and number)
Los Gatos, California 95301
__________________________________________________________
City, State and Zip Code
Issuer's telephone number: (408) 354-6081
Securities to be registered under Section 12(b) of the Act:
Title of each class: N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Class A Warrants to Purchase Common Stock
(Title of Class)
Class B Warrants to Purchase Common Stock
(Title of class)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. ___
State issuer's revenue for its most recent fiscal year: $220,869
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked priced of such stock, as of a
specified date within the past 60 days (See definition of affiliate in
Rule 12b-2): -0-
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate
market value of the common equity held by non-affiliates on the basis
of reasonable assumptions, if the assumptions are stated.
(Issuers involved in bankruptcy proceedings during the past five years)
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes ____
No ____
(Applicable only to corporate registrants)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,287,500 shares
as of April 30, 1998.
(Documents incorporated by reference)
List hereunder the following documents if incorporated by reference
and the part of this Form 10-KSB (e.g. Part I, Part II, etc.) into which
the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933
("Securities Act"). None.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
Certain statements under the captions "Management's Discussion and
Analysis or Plan of Operations," "Description of Business" and
elsewhere in this document constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology
such as "anticipates," "believes," "expects," "may," "will," or "should"
or other variations thereon, or by discussions of strategies that involve
risks and uncertainties. The actual results of the Company or industry
results may be materially different from any future results expressed or
implied by such forward-looking statements. Factors that could cause
actual results to differ materially include general economic and
business conditions; the ability of the Company to implement its
business and acquisition strategies; changes in the network marketing
industry and changes in consumer preferences; competition; availability
of key personnel; increasing operating costs; unsuccessful advertising
and promotional efforts; changes in brand awareness; acceptance of
new product offerings; and changes in, or the failure to comply with,
government regulations; the ability of the Company to obtain financing
for future acquisitions; and other factors.
<TABLE>
<CAPTION>
Table of Contents
<C> <S>
Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to
a Vote of Security Holders 22
Item 5. Market for the Company's
Common Equity and 22
Related Stockholder Matters
Item 6. Management's Discussion and 23
Analysis or Plan of Operation
Item 7. Financial Statements and
Supplementary Data 39
Item 8. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 65
Item 9. Directors and Executive Officers 65
Item 10. Executive Compensation 67
Item 11. Security Ownership of Certain
Beneficial Owners and
Management 68
Item 12. Certain Relationships and
Related Transactions 69
Item 13. Exhibits, Financial Statement
Schedules and Reports on
Form 8-KSB 72
</TABLE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Company History
Worldwide Internet Marketing, Inc. ("Company") was incorporated
under the laws of the State of Colorado on January 19, 1995, as a
"blind pool" or "blank check" company for the purpose of serving as a
capital market access vehicle for a private company desiring to become
publicly held. The Company voluntarily registered under Section
12(g) of the Securities Exchange Act of 1934 by filing a registration
statement on Form 10-SB. The registration statement became effective
on or about June 6, 1995.
On or about January 16, 1998, the Company acquired 80% of the
issued and outstanding stock of Futurenet Online International, Inc., a
Colorado corporation ("FOII"), which was established in September
1997 to engage in the network marketing business, selling a variety of
third-party manufactured products in countries outside the United
States. The products include high-tech Internet access and video tele-
conferencing devices, nutritional and personal care items, and other
consumer products. Sales are made through a network of independent
sales representatives, called "Distributors," who resell products which
they purchase from the Company. Distributors pay a fee in order to
acquire the right to purchase products and services from the Company,
and they earn income from profits on product sales, commissions on
products sold personally, override commissions on downline
production and training bonuses. The Company's operations
commenced in Canada in November of 1997, and are carried out
through a wholly owned Canadian subsidiary of FOII. Operations
commenced in the Philippines in March of 1998, and are carried out
through a joint venture agreement between FOII and an unaffiliated
foreign sponsor.
Until January of 1998, the Company was in the early developmental
and promotional stages. Its only activities were organizational in
nature, directed at raising capital and preliminary efforts to seek one or
more properties or businesses for acquisition. The Company did not
commence any commercial operations, had no full-time employees and
owned no assets. The Company experienced changes of control during
1996 and 1997, and ultimately acquired control of FOII in January of
1998, at which time the Company commenced operations.
Change of Control in 1996.
On November 6, 1996, a change in control of the Company occurred
when Capital Twain, Inc., a Nevada corporation ("Capital Twain"),
purchased 1,189,500 shares of the Company's common stock. As a
precondition to the purchase, persons who were previously the
principal shareholders of the Company surrendered for cancellation a
total of 347,500 shares of stock. Following these transactions, the
1,189,500 shares of stock purchased by Capital Twain, Inc. constituted
approximately 86.86% of the Company's issued and outstanding stock.
Change of Control in 1997.
On October 27, 1997, Alan J. Setlin acquired control of the Company
by purchasing all of the 1,189,500 common shares previously owned
by Capital Twain, representing approximately 86.86% of the issued
and outstanding stock. Mr. Setlin subsequently transferred 269,500
shares on a gratuitous basis to certain family members and business
associates. Mr. Setlin retained direct ownership of 920,000 shares, and
may have been deemed to be the beneficial owner of an additional
60,000 shares owned by his spouse. Thus, Mr. Setlin had direct or
indirect beneficial ownership of 980,000 shares, representing
approximately 71.56% of the issued and outstanding stock of the
Company. The transaction also involved the transfer of 2,695,000
Class A Warrants and 1,347,500 Class B Warrants previously owned
by Capital Twain, representing approximately 98.39% of each class of
warrants.
The purchase price for the shares was $75,000 and was paid by
execution of two promissory notes in the amount of $37,500 each.
One of such notes was payable to Capital Twain, and the other was
payable to Brownstone Holdings, LLC, a California limited liability
company, in consideration of its release and waiver of any claim it
may otherwise have had against Capital Twain, for an interest in the
shares. The notes were due and payable upon the first to occur of (i)
completion of a contemplated stock acquisition transaction between the
Company and Futurenet Online, Inc. ("Futurenet Online"), pursuant to
which the Company acquired not less than eighty percent (80%) of the
issued and outstanding capital stock of FOII, or (ii) December 31,
1997.
Acquisition of FOII.
On January 16, 1998, the Company formally completed the acquisition
of a controlling interest in FOII by purchasing 80% (800,000 shares)
of its issued and outstanding common stock from Futurenet Online,
Inc. ("Futurenet Online"). The transaction was completed in
accordance with the terms of an Agreement for Purchase and Sale of
Stock dated January 16, 1998, executed to memorialize an oral
agreement made between the parties on December 5, 1997.
Futurenet Online is a wholly-owned subsidiary of Futurenet, Inc., a
Nevada corporation ("Futurenet"), formed to serve as an operating
entity to engage in the network marketing business using the name and
the business system developed by Futurenet. On September 30, 1997,
Futurenet Online formed FOII as a wholly-owned subsidiary for the
purpose of assigning to FOII all rights to engage in the network
marketing business in countries outside the United States. At the time
of the acquisition, FOII had already commenced operations in Canada
and entered into a joint venture agreement to begin operations in the
Philippines.
In addition to the acquisition of shares of FOII, as part of the same
transaction, the Company acquired 1,000,000 warrants to purchase
shares of Futurenet. Each warrant entitles the holder thereof to
purchase one share of common stock of Futurenet at a price of $1.00
per share at any time during a period of three years commencing on
January 16, 1998.
The purchase price for the 800,000 shares of FOII was $3,000,000
which was paid $1,000,000 in cash and $2,000,000 through execution
of a promissory note in favor of Futurenet Online. The note bears
interest at the rate of 6% per annum, requires quarterly payments
commencing April 15, 1998, and is due and payable in full no later
than January 15, 2000. The quarterly payments due under the note are
equal to $15.00 multiplied by the number of television set-top Internet
access devices sold by FOII during the immediately preceding quarter.
The purchase price for the 1,000,000 warrants of Futurenet was
$1,000,000 which was paid in cash. The funds used by the registrant
for payment of the $2,000,000 cash portion of the purchase price of
the shares and warrants were funds received by the registrant from the
private placement sale of its shares to accredited investors.
The purchase price and terms of payment for the FOII shares were
determined by negotiations between the Company and Futurenet
Online. However, the negotiations were not completed on an arm's
length basis because Alan J. Setlin, who is Chairman of the Board and
CEO of Futurenet Online, is also the direct or indirect owner of a total
of 4,589,000 shares of common stock of the Company, representing
approximately 49.41% of its issued and outstanding stock.
The purchase price for the Futurenet warrants was based upon the
closing bid price for the common stock of Futurenet as of December 5,
1997, the date of the oral agreement memorialized by the written
agreement dated January 16, 1998. The agreement by Futurenet to sell
the Warrants to the registrant was intended to provide an inducement
and incentive to the registrant to proceed with the purchase of the
Shares.
Business of the Company.
The Company markets high-tech Internet access and video
teleconferencing devices, personal care items, and home and garden
products through network marketing organizations in which
independent distributors purchase products for resale as well as for
their own personal use. The Company's Canadian operations are
carried out by Futurenet Online Canada, Inc., a wholly owned
Canadian subsidiary of FOII. Futurenet Online of Canada, Inc. is
headquartered in Vancouver, British Columbia. The Company's
Philippine operations are carried out by F.O.M. Philippines, Inc., a
Philippine corporation owned 75% by FOII and 25% by Cybernet
USA-Philippines Inc., a Nevada corporation, under the terms of a joint
venture agreement dated December 1, 1997. F.O.M. Philippines, Inc.
is headquartered in the Manila central business district of Makati.
Industry Overview.
Worldwide, over $100 billion in goods and services are sold annually
by over 25 million independent distributors through direct selling and
network marketing. The industry has grown dramatically over the last
ten years. Initially, this was due to advances in computer capabilities
that reduced operating costs significantly. Most recently, sustained
high growth is attributed to instability in job markets, and the
increased desire amongst individuals to have flexibility and control of
their economic futures. Network marketing has penetrated new
demographics to include the educated professional looking to achieve
additional earnings, residual income and quality of life. Successful
network marketing companies both privately-held and public, are
characterized by industry experts as having good potential for long-
term domestic and international market opportunities, high growth,
relatively high profitability, and high return on equity. Industry
experts also indicate that some products and services are more
successfully sold by direct selling methods than by any other
alternative.
Principal Products.
The Company's products include high-tech Internet access and video
tele-conferencing devices, personal care items, and home and garden
products, all of which are designed principally for individual use and
are produced by third party manufacturers. Each of these products is
produced by unrelated manufacturers. The Company also sells
brochures and sales aids to its distributors. In the event that any of the
manufacturers terminate their relationships with the Company for any
reason, the Company will be forced to seek out alternative suppliers
which the Company believes will be available.
Internet Access Terminal.
The flagship products currently offered by the Company are its
Internet access devices. In Canada, the Company offers the RCA NC-
100; in the Philippines, the NetStation NS-1, two of the premier set-
top Internet access appliances today. Both products allow users to
access the Internet with a standard television set and telephone line.
The suggested retail price of the units is U.S. $499, including delivery,
set up, and in-home Internet training.
In March of 1998, RCA recalled the television set-top access devices
sold by the Company in Canada. The Company's intention is to
exchange one recalled unit for one comparable unit to be determined at
the time of the exchange. Management is unable to determine the
effect of the recall on operations for the year ended January 31, 1998,
because the number of units that need to be exchanged is unknown at
this time. However, if the exchanges were recorded for the year ended
January 31, 1998, the recall would have a positive effect on the
operations because the comparable units have a lower cost.
ViaTV Phone.
Another successful product in Canada which is being launched in the
Philippines is the ViaTV phone from industry leader 8x8 Inc. The
camera is the first affordable generation of a pioneering new
technology allowing consumers to more fully communicate with
distant family, friends and business associates. Like the Internet access
device, this compact unit combines with a regular telephone line and
TV set to form a complete video phone solution using the H.234 video
phone standard which assures compatibility with other more expensive
video conferencing systems. The suggested retail price is U.S. $599.
Personal Care Products.
The Company offers personal care products under the de Chine label.
The de Chine products comprise 8 skin care creams and serums
offered in approximately 23 product combinations.
Other Consumer Products.
The Company also offers approximately 29 home and garden products
including door guards, laundry and fabric conditioner, laundry pre-
spot, household insecticide, garden and plant insecticide, carpet
shampoo, spot remover, odor eliminator, hand dishwashing liquid, tile
and soap scum cleaner, surface sanitizer, weed killer, fertilizer,
furniture polish and paint remover.
Promotional Materials.
The Company also derives revenues from the sale of various
educational and promotional materials designed to aid its distributors
in maintaining and building their businesses. Such materials include
various sales aids, informational videotapes and cassette recordings,
and product displays and brochures.
Product Procurement.
The Company has not generally entered into long-term supply
agreements with the manufacturers and suppliers of its product line.
However, the Company customarily enters into contracts with its
manufacturers and suppliers to establish the terms and conditions of
purchases. The Company's arrangements with its suppliers may be
terminated by either party upon the completion of any outstanding
purchase orders. Therefore, there can be no assurance that suppliers
will continue to manufacture products for the Company. In the event
the Company's relationship with any of its manufacturers becomes
impaired, the Company would be required to obtain alternative sources
for its products. Although the Company has not previously
experienced product unavailability or supply interruptions, the
Company believes that it would be able to obtain alternative sources of
its various products. A significant delay or reduction in availability of
products, however, could have a material adverse effect on the
Company's business, operating results and financial condition.
Product Liability and Insurance.
The Company, like other marketers of products that are intended to be
ingested, faces an inherent risk of exposure to product liability claims
in the event that the use of its products results in injury. The
Company generally does not obtain contractual indemnification from
parties manufacturing or supplying its products, nor does it maintain
any product liability insurance coverage. Therefore, product liability
claims against the Company could result in material losses to the
Company.
Warranties, Guarantees and Return Policies.
All of the items in the Company's product line include a customer
satisfaction guarantee. Within 30 days of purchase, any retail
customer or distributor who is not satisfied with a Company product
for any reason may return it or any unused portion to the distributor
from whom it was purchased or to the Company for a full refund or
credit toward the purchase of another Company product. Distributors
may obtain replacements from the Company for products returned to
them by retail customers if they return such products to the Company
on a timely basis.
Operations.
Since organization, the Company's philosophy has been to pursue
increased revenues through new product lines and market expansion.
In order to reduce the costs associated with product line expansion, the
Company purchases all of its products from unaffiliated manufacturing
organizations. The Company has adopted a similar approach with
regard to market expansion and support through its joint venture
program. The joint venture program enhances the Company's ability to
expand into additional markets more quickly and efficiently and to
transfer from the Company to a third party foreign sponsor the costs
and other burdens associated with creating the corporate infrastructure
required to open and support new markets.
The Company intends to continue to enter into joint venture
agreements pursuant to which the Company grants to foreign sponsors
the exclusive right to purchase and resell the Company's products in
particular countries using the business systems developed by the
Company. The joint venture companies will be charged license fees
which are designed to cover the cost of initial inventories, management
consulting services by the Company, and other costs during the start-
up period.
Since the development of the joint venture program, the Company has
entered into a joint venture agreement with an unrelated third party for
the distribution of the Company's products in the Philippines.
Although the Company has undertaken the development of network
marketing operations in Canada without a foreign sponsor, the
Company may enter into such a joint venture agreement in the future.
Marketing
The Company markets its product line through independent distributors
in network marketing organizations consisting of approximately 2,513
distributors as of April 30, 1998. At January 31, 1998 the Company
had 801 distributors. Distributors are independent contractors who
purchase products directly from the Company for resale to retail
consumers and for personal use. The Company's marketing efforts are
typically focused on middle-income families and individuals.
Distributors may elect to work on a full-time or part-time basis. The
Company believes that its network marketing system appeals to a
broad cross-section of people, particularly those seeking to supplement
family income, start a home business or pursue employment
opportunities other than conventional, full-time employment, and that a
majority of its distributors therefore work on a part-time basis.
Management believes that its network marketing system is ideally
suited to marketing its product line because sales of such products are
strengthened by ongoing personal contact between retail consumers and
distributors, many of whom use the Company's products themselves.
Sales are made through direct personal sales presentations as well as
presentations made to groups in a format known as "opportunity
meetings." These presentations are designed to encourage individuals
to purchase the Company's products by informing potential customers
and distributors of the Company's product line and results of personal
use, and the potential financial benefits of becoming a distributor. The
objective of the marketing program is to develop a broad based
network marketing organization of distributors within a relatively short
period.
The Company's network marketing program encourages individuals to
develop their own downline network marketing organizations. Each
new distributor is linked to an existing distributor that personally
enrolled the new distributor into the Company's network marketing
organization or is linked to an existing distributor in the enrolling
distributor's downline as specified by the enrolling distributor at the
time of enrollment. Growth of a distributor's downline organization is
dependent on the recruiting and enrollment of additional distributors
by the distributor or the distributors within such distributor's downline
organization.
Distributors are required to assume responsibility for training and
motivation of other distributors within their downline organization and
to conduct opportunity meetings as soon as they are appropriately
trained. The Company strives to maintain a high level of motivation,
morale, enthusiasm and integrity among the members of its network
marketing organization. The Company believes this result is achieved
through a combination of products, sales incentives, personal
recognition of outstanding achievement, and quality promotional
materials. Under the Company's network marketing program,
distributors purchase sales aids and brochures from the Company and
assume the costs of advertising and marketing the Company's product
line to their customers as well as the direct cost of recruiting new
distributors. The Company believes that this form of sales
organization is cost efficient for the Company because direct sales
expenses are primarily limited to the payment of bonuses, which are
only incurred when products are sold.
The Company continually strives to improve its marketing strategies,
including the compensation structure within its network marketing
organization and the variety and mix of products in its line, to attract
and motivate distributors. These efforts are designed to increase
distributors' monthly product sales and the recruiting of new
distributors.
Pursuant to the Company's existing multi-level marketing plan, the
Company's foreign subsidiary and sponsor distribute the Company's
products to consumers through a network of distributors. Distributors
in a multi-level marketing system are independent contractors, not
employees of the direct selling subsidiary. Distributors sell products
directly to consumers primarily through individual in-home
demonstrations and trial use. Generally, an individual becomes a
distributor by the execution of an application and the payment of a
small processing fee. As a distributor, the individual is authorized to
retail the products purchased from the Company. An individual
becomes a distributor by attaining a set level of sales activity over a
specific time period. Distributors may purchase products, at
wholesale, directly from the direct selling subsidiary for resale to
dealers or directly to consumers. The direct selling subsidiary and
certain local distributors hold training and orientation seminars in the
respective countries. The direct selling subsidiaries depend on their
existing distributors to identify, sponsor and train new distributors.
Specifically, new dealers are brought into the multi-level distribution
networks by existing distributors. In turn, these new distributors are
encouraged to identify other new distributors. The existing distributors
benefit from the sponsorship of new distributors in that the sponsoring
distributor receives a percentage commission on the products purchased
for resale by those individuals sponsored directly by the distributor, as
well as commissions on the products purchased by those distributors
sponsored by such individuals. The commissions vary depending upon
the level of customer sales attained by a distributor and the number of
individuals such distributor has sponsored.
The Company maintains a computerized system for processing
distributor orders and calculating bonus payments which enables it to
remit such payments promptly to distributors. The Company believes
that prompt and accurate remittance of bonuses is vital to recruiting
and maintaining distributors, as well as increasing their motivation and
loyalty to the Company. The Company makes bonus payments to its
distributors weekly and monthly based upon previous product
purchases. This compares attractively to most network marketing
companies that make only monthly bonus payments.
The Company is committed to providing the best possible support to
its distributors. Distributors in the Company's network marketing
organization are provided training guides and are given the opportunity
to participate in Company training programs. The Company sponsors
regularly scheduled conference calls for its distributors which include
testimonials from successful distributors and satisfied customers as
well as current product and promotional information. The Company
maintains a Web site which provides information on the Company, its
products and network marketing system. The Company's "E-mail
Blast" is designed to help recruit new distributors by answering
commonly asked questions and includes product information and
business building information. The "E-mail Blast" also provides a
forum for the Company to give additional recognition to its
distributors for outstanding performance. In addition, the Company
regularly sponsors training sessions for its distributors, at which
distributors are provided the opportunity to learn more about the
Company's product line and selling techniques so that they can build
their businesses more rapidly. The Company produces comprehensive
and attractive catalogues and brochures that display and describe the
Company's product line. Products are also displayed on the
Company's Internet mall.
Furthermore, in order to facilitate its continued growth and support
distributor activities, the Company continually upgrades its
management information and telecommunications systems. These
systems are designed to provide, among other things, financial and
operating data for management, timely and accurate product ordering,
bonus payment processing, inventory management and detailed
distributor records.
Key Operating Strengths.
The Company believes the source of its success is its support of, and
compensation program for, its distributors. The Company provides its
distributors with high-quality products and a highly attractive bonus
program, along with extensive Company-sponsored training and
motivational events and services. The Company believes that it has
established a strong operating platform to support distributors and
facilitate future growth. The key components of this platform include
the following:
Quality products with strong brand recognition;
Credibility by offering superior products associated with leaders in the
industry;
The Company's status as one of few network marketing companies
providing a low-cost solution to accessing the Internet;
The distributor's consultive approach to selling high-tech products
which includes training and personalized support;
A compensation program that permits distributors to earn income from
profits on resale of products and residual income from reorder bonuses
on product purchases within a distributor's downline organization;
A superior communications program that seeks to effectively and
efficiently communicate with distributors by utilizing new technologies
and marketing techniques, as well as motivational events and training
seminars;
A continual expansion and improvement of the Company's product
line and marketing plan;
Employment of computer technology to provide timely and accurate
product order processing, weekly bonus payment processing, detailed
distributor earnings statements and inventory management; and
A seasoned management team with proven track record in the network
marketing industry.
Growth Strategy
The Company's growth strategy is to expand its product line and
network of independent distributors to increase sales. An increase in
the number of distributors generally results in increased sales volume,
and new products create enthusiasm among distributors, serve as a
promotional tool in selling other products, and attract new distributors.
Once a part of the Company's network marketing organization,
distributors and consumers will continue to be targeted for recurring
sales of the Company's Internet shopping mall products.
The Company will also seek to increase sales through support activities
designed to enhance sales in its existing markets. Such activities will
include increasing the number of Company-sponsored training and
motivational events and teleconferences, and hiring additional
distributor support personnel.
In addition, the Company will seek to grow by establishing operations
in additional markets through joint venture agreements with foreign
sponsors. The principal objective of the Company's joint venture
strategy is to quickly establish additional network marketing, resulting
in increased sales volume with minimal additional start-up and
administrative costs. The Company will not consummate a joint
venture unless, at the time, it is anticipated that such arrangement will
contribute to profitability and provide positive cash flows from
operations. The Company believes there are numerous international
markets in which its network marketing organization and products
could prove successful. However, there is no assurance that the
Company will be able to locate suitable joint venture partners, or that
such agreements, if consummated, will result in increased profitability
and cash flows.
Competition.
The markets for Internet access and video teleconferencing devices
such as those sold by the Company are relatively new and only mildly
competitive. The products offered by competitors in the markets
served by the Company are generally of an inferior quality, and no
competitor offers such products through a network marketing program.
Due to the high quality of its products and the ability to offer
exceptional personal service and training through its network of
independent distributors, the Company believes it has a competitive
advantage in the markets it serves at this time. There is no assurance,
however, that competitors with greater financial and other resources
will not eventually enter such markets with comparable or better
products. Such competition could have a material adverse affect on
the business of the Company.
In contrast, the personal care and home and garden products
distributed by the Company are sold in highly competitive markets in
which competitive products are sold by both retail sellers and other
multi-level and direct selling organizations. In addition to competition
relating to the products, the Company's direct selling subsidiary and
foreign sponsor, as well as certain of the distributors, are subject to
intense competition in the identification, sponsorship, and training of
distributors from other multi-level direct selling organization, whose
specific product lines may or may not compete with the products
distributed by the Company.
The Company is subject to significant competition in recruiting
distributors from other network marketing organizations, including
those that market products in the weight management, dietary
supplement and personal care categories, as well as other types of
products. There are over 300 companies worldwide that utilize
network marketing techniques, many of which are substantially larger,
offer a greater variety of products, and have available considerably
greater financial resources than the Company. The Company's ability
to remain competitive depends, in significant part, on the Company's
success in recruiting and retaining distributors through an attractive
bonus plan and other incentives. The Company believes that its bonus
plan and incentive programs provide its distributors with significant
income potential. However, there can be no assurance that the
Company's programs for recruitment and retention of distributors will
continue to be successful.
Although the Company's competition in the Internet access and video
tele-conferencing markets is currently limited, the business of
marketing products in the personal care and home and garden product
categories offered by the Company is highly competitive. These
market segments include numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers,
retailers and physicians that actively compete in the sale of such
products. The Company also competes with other providers of such
products, especially retail outlets, based upon convenience of purchase
and immediate availability of the purchased product. The market is
highly sensitive to the introduction of new products that may rapidly
capture a significant share of the market. As a result, the Company's
ability to remain competitive may depend in part upon the successful
introduction and addition of new products to its line.
The Company's network marketing competitors that market products in
the personal care and home and garden product categories offered by
the Company include small, privately held companies, as well as
larger, publicly held companies with greater financial resources and
greater product and market diversification and distribution.
The Company could also encounter competition in its efforts to locate
attractive joint venture partners in various foreign countries, possibly
from other network marketing companies. Many of these entities will
have significantly greater experience, resources and managerial
capabilities than the Company and will therefore be in a better position
than the Company to establish attractive business opportunities.
Patent and Trademarks.
The Company owns no domestic or foreign patents which relate to the
production of the products it sells; all of such products are produced,
and sold to the Company by third party manufacturers. The Company
owns no domestic or foreign trademark registrations, and currently has
no applications pending domestically or in foreign jurisdictions. The
Company relies on common law trademark rights to protect its
unregistered trademarks. Common law trademark rights do not
provide the Company with the same level of protection as afforded by
a registration of a trademark. Moreover, common law trademark
rights are limited to the geographic area in which the trademark is
actually used. Therefore, there can be no assurance that another
company will not replicate one or more of the Company's products.
Government Approvals.
Prior to commencing operations, and prior to making or permitting
sales of its products, the Company may be required to obtain an
approval, license or certification from the country's ministry of health
or comparable agency. Prior to entering a new market in which a
formal approval, license or certificate is required, the Company will be
required to work extensively with local authorities to obtain the
requisite approvals. The approval process generally requires the
Company to present each product and product ingredient to appropriate
regulators and, in some instances, arrange for testing of products by
local technicians for ingredient analysis. Such approvals may be
conditioned on reformulation of the Company's products or may be
unavailable with respect to certain products or ingredients.
Government Regulation.
All advertising, promotional and solicitation materials used by
distributors must be approved by the Company prior to use. Some
dietary supplement companies have been the subjects of enforcement
actions instituted by government agencies to prevent false and
misleading advertising of products. In addition, such agencies have
increased their scrutiny of the use of testimonials, such as those which
may be utilized by the Company. While the Company has not been
the target of such enforcement action, there can be no assurance that
such agencies will not question the Company's advertising or other
operations in the future. In addition, there can be no assurance that a
government agency will not interpret product claims which are
preemptively valid under applicable laws, as illegal under that agency's
regulations, or that future regulations or decisions will not restrict the
permissible scope of such claims. The Company also is subject to the
risk of claims by distributors and customers who may file actions on
their own behalf, as a class or otherwise, and may file complaints with
the consumer affairs offices of such agencies. These agencies may
take action on their own initiative against the Company for alleged
advertising or product claim violations or on a referral from
distributors, consumers or others. Remedies sought in such actions
may include consent decrees and the refund of amounts paid by the
complaining distributor or consumer, refunds to an entire class of
distributors or customers, or other damages, as well as changes in the
Company's method of doing business. Proceedings resulting from
these complaints may result in significant defense costs, settlement
payments or judgments and could have a material adverse effect on the
Company.
Although Company management believes that its products, sales
materials, and sales plans are in substantial compliance with applicable
laws and regulations, these laws and regulations are subject to change
and interpretation which could adversely affect the Company's foreign
operations or its distributors, which in turn could adversely affect the
Company.
Employees.
Until the acquisition of FOII on January 16, 1998, the Company was a
development stage company with no employees. Management used
consultants, attorneys and accountants as necessary, while seeking and
evaluating business opportunities. At April 30, 1998, the Company
had approximately 29 employees, including 10 part time employees in
its U.S. corporate operations and 9 full time employees in its Canadian
operations and 10 full time employees in its Philippine operations.
None of the Company's employees is represented by a labor union or
collective bargaining unit. The Company considers relations with its
employees to be satisfactory.
Distributors participating in the marketing plans of the Company's
foreign operations are independent contractors and are not employees
of the Company, its foreign subsidiary or joint venture operations. No
remuneration will be paid to the Company's officers except as set forth
under "Executive Compensation" and under "Certain Relationships and
Related Transactions."
ITEM 2. PROPERTIES
The Company maintains its corporate offices at the offices of
its affiliate, Futurenet Online, at 28460 Avenue Stanford, Valencia,
California 91355. The Company's telephone number there is (805)
295-8200. The Company maintains an office and mailing address at
14 East Main Street, P. O. Box 309, Los Gatos, California 95301.
The Company's telephone number there is (408) 354-6081. The
Company pays no rent for the use of these facilities.
The Company also maintains its Canadian executive office,
warehouse and distribution center in an 8,000 square foot facility in
Vancouver, British Columbia. The premises are occupied pursuant to
a non-cancelable, long-term lease which expires in July 2000, and
which requires monthly rental payments of approximately $5,000,
subject to certain annual increases.
The Company's joint venture operation in the Philippines, F. O.
M. Philippines, Inc., maintains its executive office, warehouse and
distribution center in a 7,300 square foot facility in Makati City, Metro
Manila. The premises are occupied pursuant to a one year lease which
expires on June 30, 1999, and which requires monthly rental payments
of approximately $5,500.
Neither the Company nor any of its subsidiaries own any real
estate. The Company believes these facilities, or other facilities
available to the Company, will be adequate for its needs for the next
twelve months.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings, and no
such proceedings are known to be contemplated. Except as disclosed
herein no director, officer or affiliate of the Company, and no owner
of record or beneficial owner of more than 5.0% of the securities of
the Company, or any associate of any such director, officer or security
holder is a party adverse to the Company or has a material interest
adverse to the Company in reference to pending litigation.
Involvement in Certain Legal Proceeding by Control Person.
Federal Trade Commission vs. Futurenet, Inc., et al., Civil No. 98-
1113 GHK (ALJx). On February 17, 1998, the Federal Trade
Commission (the "Commission") filed a Complaint and Application
for Temporary Restraining Order and other equitable relief against
Futurenet, Futurenet Online and several individuals, including Alan J.
Setlin. Mr. Setlin is a controlling shareholder of Futurenet and the
Company. The complaint charged the defendants with violations of
Section 5 of the Federal Trade Commission Act ("FTC Act"), 15
U.S.C. Section 45, alleging that the defendants had engaged in an
illegal multi-level marketing scheme. The Court granted the
Commission's Application on February 23, 1998, and the Temporary
Restraining Order was modified on March 6, 1998. Certain of the
defendants, including Futurenet, Futurenet Online and Mr. Setlin
agreed to enter a Stipulated Final Judgment and Order for Permanent
Injunction ("Order") to resolve all matters in dispute without admission
of liability.
The Order was entered by the Court on April 20, 1998, and
permanently enjoined the defendants from directly or indirectly
participating in any marketing scheme in which a person participates
under the condition that he or she makes a payment to receive the
right to derive income primarily from the recruitment of additional
recruits or from non-retail sales made to or by such recruits. The
Order also provides information concerning multi-level marketing
programs which are acceptable to the Commission, including
guidelines for commissions, product return policies and representations
in connection with recruiting and advertising. Under the terms of the
Order, the defendants are required to provide periodic reports
containing financial and other information about the defendants, and
their distributors and customers. Some of the periodic reports will be
subject to independent audit. The Order also prescribes the use of
certain disclosure and verification forms in connection with the
business of the defendants. For three years from the date of the Order,
the defendants are also restrained from holding a five percent or
greater interest in, or serving as a director or officer of any business
engaged in multi-level marketing unless they first obtain a performance
bond in amounts prescribed by the Order. Finally, judgment was
entered jointly and severally against certain of the defendants,
including Futurenet, Futurenet Online, and Mr. Setlin in the amount of
$1 million in settlement of the Commission's claim for consumer
redress. The defendants have complied with the performance bond
requirements of the Order, as well as the prescribed payment schedule
in connection with the judgment. The Court retains jurisdiction to
assure compliance with the Order.
Management anticipates that the defendants will be able to comply
with the terms of the Order and that the matter should have no
material adverse effect on the Company. However, there is no
assurance that due to factors beyond the control of management, the
Order will not be reopened for purposes of modification. The
Company is still in a developmental stage and relies substantially upon
the personnel and other resources of Futurenet Online. Until the
Company is no longer so reliant, if the matter were reopened and
modified in any way materially adverse to the business of Futurenet
Online, such a development could have a material adverse effect on
the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
In conjunction with a change in control of the Company in October of
1997, a special meeting of stockholders of the Company was held on
November 4, 1997 for the purpose of approving a proposal to amend
the Company's articles of incorporation changing the name of the
Company to "Worldwide Internet Marketing, Inc." At the same time,
the Company's Board of Directors approved a proposal to split the
Company's outstanding common stock at a ratio of 9:1, increasing the
number of outstanding shares from 1,369,500 to 12,415,500, and a
proposal to cancel the Company's 2,739,000 Class A and 1,369,500
Class B stock purchase warrants, and authorize 3,000,000 new Class A
and 3,000,000 new Class B stock purchase warrants to be issued at the
discretion of the board of directors. The proposal was approved by a
majority of the stockholders.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is currently no public trading market for the Company's
securities. The securities are held of record by a total of
approximately 60 persons. No dividends have been declared or paid
on the Company's securities, and it is not anticipated that any
dividends will be declared or paid in the foreseeable future.
Recent Sales of Unregistered Securities.
On November 4, 1997, the Company issued 50,000 shares of common
stock to fifteen of its former minority shareholders pursuant to an
October 27, 1997 stock purchase agreement in which the Company
agreed to issue the shares to the former shareholders as partial
consideration for their agreement to sell 180,000 shares of the
Company's common stock to several non-affiliated parties. The net
aggregate purchase price for the shares was $50.
On November 4, 1997, the Company issued 170,000 shares of
common stock pursuant to subscription agreements as follows: 100,000
shares to a non-affiliated individual, 50,000 shares to Brownstone
Holdings, LLC, 10,000 shares to Blue Light Investors Inc. Pension
Plan, and 10,000 shares to Sunset Management, Inc. The net aggregate
purchase price for the shares was $850.
On November 17, 1997, the Company issued 1,500,000 shares of
common stock pursuant to subscription agreement to Lancer Offshore,
Inc. The net aggregate purchase price for the shares was $2,000,000.
On November 17, 1997, the Company issued a Class A warrant for the
purchase of up to 750,000 shares of the Company's common stock to
Lancer Offshore, Inc. The warrant is exercisable at any time between
November 17, 1997 and December 31, 1999 at an exercise price of
$2.00 per share.
On November 17, 1997, the Company issued a Class B warrant for the
purchase of up to 750,000 shares of the Company's common stock to
Lancer Offshore, Inc. The warrant is exercisable at any time between
November 17, 1997 and December 31, 1999 at an exercise price of
$4.00 per share.
Each of the above transactions was made in reliance on Section 4 (2)
of the Securities Act of 1933, as amended. No underwriter or
placement agent was involved in any of the issuances.
No Public Market for Company's Securities and Penny Stock Trading
Rules.
The Company's securities are not currently traded on any securities
exchange or quotation system. A request for clearance of quotations
for the Company's common stock on the National Quotation Bureau
"Pink Sheets," pursuant to SEC rule 15c2-11 was filed with NASD
Regulation, Inc. by a prospective market maker for the Company on
December 30, 1997. The request is under consideration and if
approved, the Company's common stock will then be traded in the
over-the-counter market. A holder of such securities will find it more
difficult to dispose of the securities or to obtain accurate quotations as
to the price of the securities. In addition, the common stock would
become subject to the "penny stock" trading rules under the Securities
Act of 1934, as amended, which impose additional restrictions on
broker-dealers who trade in such stock and could severely limit the
market liquidity of the Company's securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS.
Until January of 1998, the Company was in the early developmental
and promotional stages. Its only activities were organizational in
nature, directed at raising capital, and preliminary efforts to seek one
or more properties or businesses for acquisition. The Company's
operations commenced in January of 1998, when it acquired a
controlling interest in FOII. The acquisition was accounted for by the
Purchase Method of accounting. Therefore, the Company has reported
FOII's operations from the effective date, January 1, 1998, of the
purchase.
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with
the Company's financial statements and the related notes thereto
appearing elsewhere herein. The Company is not providing any
comparisons of its results of operations because the Company was in
the early stage of development and conducted operations for only one
month during the year ending January 31, 1998, and such comparisons
would not be meaningful.
FORWARD LOOKING STATEMENTS.
The statements contained in this Management's Discussion and
Analysis or Plan of Operations include "forward looking" information
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of
1934, as amended, and are subject to the safe harbor created by those
sections. The actual future results of the Company could differ
materially from those projected in the forward-looking information.
For a discussion of certain factors that could cause actual results to
differ materially from those projected in the forward-looking
information, see "Factors That May Affect Future Performance" herein.
RESULTS OF OPERATIONS.
Revenues.
Although the Company was incorporated in January of 1995, it did not
commence operations until January of 1998, when it acquired a
controlling interest in FOII. Until then, the Company was in the early
developmental and promotional stages. For the twelve months ending
January 31, 1998, the Company generated $220,869 of revenue, 85.8%
percent of which was generated from distributor fees paid to the
Company. During the developmental stages of network marketing
organizations, heavy emphasis is often placed upon building distributor
networks. As a result, it is not uncommon for revenue from
distributor fees to exceed revenue from retail sales of products.
However, as its distributor networks become more established, the
Company expects retail sales to increase as a percentage of total sales.
Sales generated from distributor fees are recorded at the time the fees
are paid. Retail product sales are recorded at the time the products are
shipped to customers, and includes the retail sales price of each
product and any shipping and handling charges billed to the customers.
Cost of Sales.
For the twelve months ending January 31, 1998, costs of sales
amounted to $199,981, or approximately 90.5% of revenues. Of this
amount, cost of sales in connection with distributors fees represent
78.7% and primarily consist of the cost of television set-top Internet
access devices and sales materials used by distributors in their sales
activities. The Company's gross profit margin was approximately
9.5% for the twelve months ending January 31, 1998. The failure to
generate sales with sufficient margins to cover its operating expenses
will result in losses and could have a material adverse effect on the
Company's business, prospects, financial condition and results of
operations.
Operating Expenses.
Operating expenses, primarily consisting of management and
office salaries, service costs, rent and other overhead expenses, were
$252,745, or approximately 114.4% of revenues for the twelve months
ending January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's principal sources of liquidity were cash and cash
equivalents derived from private sales of the Company's equity and
debt securities, and operating advances from an affiliate. The
Company's only other source of funds from the date of inception
through January 31, 1998, has been revenues from the sale of products
and services in the amount of $220,869.
Capital expenditures for the twelve months ending January 31, 1998
were $20,000. The Company has no material commitments for capital
expenditures, and does not anticipate a substantial increase in capital
expenditures in 1998.
The Company generated revenues of $220,869 and experienced net
losses of $203,757 for the year ended January 31, 1998. The
Company's ability to survive and grow in the immediate future will
depend upon the Company's ability to raise additional capital from
public or private equity or debt sources. In addition, the Company
believes that it will need to raise additional funds in order to avail
itself of any unanticipated opportunities (such as more rapid expansion,
acquisitions of complementary businesses, or the development of new
products or services), to react to unforeseen difficulties (such as the
loss of key personnel or the rejection by Internet users of the
Company's Web site content) or to otherwise respond to unanticipated
competitive pressures. The Company has used rather than provided
cash from its operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. In view of the
matters described above, recoverability of a major portion of the
Company's recorded asset amounts is dependent upon the Company's
ability to raise sufficient capital to fund its working capital
requirements until the Company can generate sufficient sales volume
to cover its operating expenses.
In addition to the capital raised in 1997 through private equity and
debt offerings, the Company will continue to rely upon advances from
its affiliate, Futurenet Online, and is currently negotiating with several
investors about raising additional capital through private placement
offerings. The Company also anticipates the collection of license fees
from its joint venture partners. Management believes that the
Company's current cash on hand, plus the additional capital that is
expected to be raised in the future, will be sufficient to cover its
working capital needs until the Company's sales volume reaches a
sufficient level to cover operating expenses. However there can be no
assurance that such capital resources will be available to the Company
or that if available, such funds will be on terms acceptable to the
Company.
Acquisition of Controlling Interest of FOII.
On January 16, 1998, the Company completed the acquisition of a
controlling interest in FOII by purchasing 80% (800,000 shares) of its
issued and outstanding common stock. In addition to the acquisition
of the shares of FOII, as part of the same transaction, the Company
acquired 1,000,000 warrants to purchase shares of Futurenet. The
Company used net cash of $953,084 and $1,000,000 to acquire the
common stock and warrants, respectively. The funds used for these
transactions were received by the Company from the private placement
sale of its equity securities. The Company has no plans to make other
acquisitions at this time.
Subsequent Event - Convertible Debenture and Letter of Credit.
On April 15, 1998, the Company entered into an agreement with an
investor to provide $550,000 in debt financing in the form of a
convertible debenture. For a two-year period, the debenture is
convertible at the option of the holder into the Company's common
stock at a conversion price of (i) $2.00 per share if converted during
the first twelve months, or (ii) $2.50 per share if converted during the
second twelve months. The debenture bears interest at the rate of 10%
per annum, payable quarterly, until the earlier of the date of
conversion or the end of the 24 months, at which time the entire
principal amount and all accrued interest are due and payable. The
Company agreed to pay the investor a fee equal to 9% of the principal
amount. The investor also agreed to provide a letter of credit of up to
$1 million to be used to finance 60 days of projected inventory for the
Company's Internet mall. Any purchases of inventory are required to
be mutually agreed upon by the Company and the investor. All fees
and interest expense incurred in connection with the letter of credit are
to be paid by the investor from an override to be received by the
investor on sales.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE.
The Company's business, financial condition and results of operations
may be affected by a number of factors including, without limitation,
the factors discussed below:
The Need For Additional Capital.
The Company must seek additional financing in order to sustain
operations or achieve planned expansion. While the Company believes
that it will be able to find the additional capital resources necessary to
sustain operations, there can be no assurance that such additional funds
will be available or that if available, such additional funds will be on
terms acceptable to the Company.
Limited Operating History; Accumulated Deficit; Anticipated Losses.
The Company was incorporated in January 1995, and commenced
operations in January 1998, when it acquired a controlling interest in
FOII. Accordingly, the Company has a limited operating history on
which to base an evaluation of its business and prospects. The
Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly
expanding markets such as Internet access, video teleconferencing and
online commerce. Such risks for the Company include, but are not
limited to, an evolving and unpredictable business model and the
management of growth. To address these risks, the Company must,
among other things, obtain a customer base, implement and execute its
business and marketing strategy, continue to develop and upgrade its
technology and transaction processing systems, improve its Internet
mall, provide superior customer service and order fulfillment, respond
to competitive developments, and attract, retain and motivate qualified
partners and personnel. There can be no assurance that the Company
will be successful in addressing such risks, and the failure to do so
could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Since inception, the Company has incurred losses, and as of January
31, 1998 has an accumulated deficit of approximately $218,819. The
Company believes its success will depend in large part on its ability to
(i) expand its network of independent distributors; (ii) enter into
additional joint venture agreements in other foreign markets; (iii)
improve and expand it product lines and services; (iv) provide
customers with an outstanding value and a superior shopping
experience; (v) successfully coordinate the timely fulfillment of
customer orders; and (vi) achieve sufficient sales volume to realize
economies of scale. Accordingly, the Company intends to invest
heavily in marketing and promotion, and operating infrastructure
development. As a result, the Company believes that it will incur
substantial operating losses for the foreseeable future, and that the rate
at which such losses will be incurred will increase significantly from
current levels.
For the year ended January 31, 1997, the Company incurred a net loss
of $6,668 and had negative cash flows from operations of $673, and
had a shareholders deficit of $2,988 as of January 31, 1997. For the
year ended January 31, 1998, the Company had a net loss of $203,757,
negative cash lows from operations of $648,085, and had shareholders
equity of $1,783,051 as of January 31, 1998.
Management raised capital during 1997 through private placement
offerings of equity, which provided funding to complete the
Company's investing activities. The Company used all of the net
proceeds of the private placement offering to purchase controlling
interest in FOII and to purchase stock purchase warrants of Futurenet.
Insufficient cash is generated by operations to fund the Company's
operating losses. In order to continue to fund operating losses while it
seeks to implement its business plan, and until it can generate
sufficient funds from operations, the Company must raise additional
funds. There can be no assurance that such financing will be
available, if at all, in amounts or on terms acceptable to the Company.
In addition, the fact that there is not currently a public market for the
Company's securities may make it difficult for the Company to raise
additional capital to continue its development.
Unpredictability of Future Revenues; Potential Fluctuations in
Quarterly Operating Results; Seasonality.
As a result of the Company's limited operating history and the
emerging nature of significant markets in which it competes, the
Company is unable to accurately forecast its revenues. The
Company's current and future expense levels are based largely on its
investment plans and estimates of future revenues. Sales and operating
results generally depend upon the Company's ability to expand its
network of independent distributors and to establish joint venture
operations in additional foreign markets. The Company will not be
able to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall until revenues grow substantially.
Accordingly, any significant shortfall in revenues in relation to the
Company's planned expenditures could have an immediate adverse
effect on the Company's business, prospects, financial condition and
results of operations. Further, as a strategic response to changes in the
competitive environment, the Company may from time to time make
certain pricing, service or marketing decisions that could have a
material effect on its business, prospects, financial conditions and
results of operations.
The Company may experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which
are outside the Company's control. Factors which may adversely
affect the Company's quarterly operating results include: (i) the
Company's ability to expand its network of independent distributors;
(ii) the Company's ability to establish joint venture operations in
additional foreign markets; (iii) the Company's ability to manage
fulfillment operations and to establish competitive gross margins; (iv)
the announcement or introduction of competitive services or products
by the Company and its competitors; (v) price competition or higher
vendor prices; (vi) the level of use and consumer acceptance of the
Internet and other online services for the purchase of consumer
products such as those offered by the Company through distributors
and its Internet mall; (vii) the Company's ability to upgrade and
develop its systems and infrastructure and attract new personnel in a
timely and effective manner; (viii) the level of traffic on the
Company's Internet mall; (ix) technical difficulties, system downtime
or Internet brownouts; (x) the amount and timing of operating costs
and capital expenditures relating to the expansion of the Company's
business, operations and infrastructure; (xi) delays in revenue
recognition at the end of a fiscal year as a result of shipping or
logistical problems; (xii) the level of merchandise returns expected by
the Company; (xiii) governmental regulation and taxation; (xiv)
economic conditions specific to the markets for the products and
services offered by the Company; (xv) economic conditions specific to
network marketing, the Internet and on-line commerce; and (xvi)
general economic conditions.
The Company expects that it may experience seasonality in its
business, reflecting traditional retail seasonality patterns. Sales in the
traditional retail industry are significantly higher in the quarter of each
year ending January 31 than in the preceding three quarters.
Due to the foregoing factors, in one or more future quarters, the
Company's operating results may fall below the expectations of
securities analysts and investors. In such event, the trading price of
the common stock would likely be materially adversely affected.
Risk of Capacity Constraints; Reliance on Internally Developed
Systems; System Development Risks.
A key element of the Company's strategy is to generate a high volume
of traffic on, and use of, its Web site which includes the Company's
Internet mall. Accordingly, the satisfactory performance, reliability
and availability of the Company's Web site, transaction processing
systems and network infrastructure are critical to the Company's
reputation and its ability to attract and retain distributors and
customers, as well as maintain adequate distributor and customer
services levels. The Company's revenues depend, in part, on the
number of visitors who shop on its Internet mall and the volume of
orders it fulfills. Any system interruptions that result in the
unavailability of the Company's Web site or reduced order fulfillment
processing would reduce the volume of goods sold and the
attractiveness of the Company's product and service offerings. The
Company may experience periodic systems interruptions from time to
time. Any substantial increase in the volume of traffic on the
Company's Web site or the number of orders placed by customers will
require the Company to expand and further upgrade its technology,
transaction-processing systems and network infrastructure. There can
be no assurance that the Company will be able to accurately project
the rate or timing of increases, if any, in the use of its Web site or
timely expand and upgrade its systems and infrastructure to
accommodate such increases.
The Company uses an internally developed system for its Web site,
search engine, and substantially all aspects of transaction processing,
including order management, cash and credit card processing, shipping,
accounting and financial systems. Any substantial disruptions or
delays in any of its systems would have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
Risk of System Failure; Single Site and Order Interface.
The Company's success, in particular its ability to successfully receive
and fulfill orders and provide high-quality customer service, largely
depends on the efficient and uninterrupted operation of its computer
and communications hardware systems. All of the Company's
computer and communications hardware in connection with its foreign
operations is located at single locations in Vancouver, British
Columbia and Manila in the Philippines. All of the Company's
computer and communications hardware in connection with its
corporate operations is located at a single facility in Valencia,
California. Although the Company has redundant and back-up systems
onsite and offsite, the Company's systems and operations may be
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events.
Despite the implementation of network security measures by the
Company, its servers may be vulnerable to computer viruses, physical
or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. The occurrence of any of the foregoing risks could
have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Management of Potential Growth; New Management Team; Limited
Senior Management Resources.
The Company anticipates significant expansion of its operations to
address potential growth in the number of foreign markets it will
serve, the size of its network marketing organizations, its customer
base and market opportunities. This expansion is expected to place a
significant strain on the Company's management, operations and
financial resources. The majority of the Company's senior
management joined the Company within the last year, some of which
have no prior senior management experience at public companies. The
Company's new employees include a number of managerial, technical
and operational personnel who have not yet been fully integrated into
the Company's operations. To manage the increase in personnel and
the expected growth of its operations, the Company will be required to
improve existing, and implement new, transaction processing,
operational and financial systems, procedures and controls, and to train
and manage an expanding employee base. Although the Company
does not believe that there will be a significant increase in the number
of employees over the next twelve months, the Company may be
required to increase its finance, administrative and operations staff.
Further, the Company's management will be required to maintain and
expand its relationships with various manufacturers, distributors,
freight companies, Internet service providers and other third parties
necessary to the Company's operations. There can be no assurance
that the Company's current and planned personnel, systems, procedures
and controls will be adequate to support the Company's future
operations, that management will be able to hire, train, retain, motivate
and manage required personnel or that the Company's management
will be able to successfully identify, manage and exploit existing and
potential market opportunities. If the Company is unable to manage
growth effectively, its business, prospects, financial condition and
results of operations would be materially adversely affected.
Dependence on Continued Growth of Online Commerce.
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and
other online services as an effective medium of commerce for its
distributors and consumers. Rapid growth in the use of and interest in
the Web, the Internet and other online services is a recent
phenomenon, and there can be no assurance that acceptance and use
will continue to develop or that a sufficiently broad base of consumers
will adopt and continue to use the Internet and other online services as
a medium of commerce. Demand and market acceptance for recently
introduced products and services over the Internet are subject to a high
level of uncertainty and there exist few proven services and products.
The Company relies, and will continue to rely, on the traditional direct
selling activities of its network marketing organizations. The
Company relies, and will continue to rely, on consumers who have
historically used traditional means of commerce to purchase
merchandise. For the Company to be successful, these distributors and
consumers must accept and utilize novel ways of conducting business
and exchanging information.
In addition, the Internet and other online services may not be accepted
as a viable commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and
performance improvements. To the extent that the Internet and other
online services continue to experience significant growth in the number
of users, their frequency of use or an increase in their bandwidth
requirements, there can be no assurance that the infrastructure for the
Internet and other online services will be able to support the demands
placed upon them. In addition, the Internet and other online services
could lose their viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of
Internet or other online service activity, due to increased governmental
regulation. Changes in or insufficient availability of
telecommunications services to support the Internet or other online
services could also result in slower response times and adversely affect
the usage of the Internet and other online services generally and the
Company's Internet mall in particular. If use of the Internet and other
online services does not continue to grow or grows more slowly than
expected, if the infrastructure for the Internet and other online services
does not effectively support growth that may occur, or if the Internet
and other online services do not become a viable commercial
marketplace, the Company's business, prospects, financial condition
and results of operations would be materially adversely affected.
Rapid Technological Change.
To remain competitive, the Company must continue to enhance and
improve the responsiveness, functionality and features of its Internet
mall. The online commerce industry is characterized by rapid
technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying
new technologies and the emergence of new industry standards and
practices that could render the Company's existing Web site and
proprietary technology and systems obsolete. The Company's future
success will depend, in part, on its ability to implement such
technologies in its various foreign operations, enhance its existing
services, develop new services and technologies that address the
increasingly sophisticated and varied needs of its distributors and
prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and
timely basis. The development of a Web site and other proprietary
technology entails significant technical and business risks. There can
be no assurance that the Company will successfully use new
technologies effectively or adapt its Web site, proprietary technology
and transaction-processing systems to customer requirements or
emerging industry standards. If the Company is unable, for technical,
legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, its
business, prospects, financial condition and results of operations would
be materially adversely affected.
Year 2000.
The Company may be interacting with certain programs in connection
with credit card transactions and programs used by the Company's
vendors and suppliers. These programs may refer to annual dates only
by the last two digits, e.g., "97" for "1997." Problems are anticipated
to arise for many of these programs in the year 2000 ("Year 2000
Problems"). The Company has taken this problem into account with
respect to its own internal programs and believes that its own internal
programs are not susceptible to Year 2000 Problems. However, the
Company has not made a formal assessment of programs used by
service providers or other third parties, including the financial
institutions processing credit card transactions, with which the
Company may have to interact, nor the Company's vulnerability which
may result from any such party's failure to remediate their own year
2000 issues. There can be no guarantee that the systems of other
companies on which the Company relies will be timely converted and
will not have an adverse effect on the Company's business, prospects,
financial condition and results of operations.
Dependence on Key Personnel; Need for Additional Personnel.
The Company's performance is substantially dependent on the
continued services and on the performance of its senior management
and other key personnel. The Company's performance also depends
on the Company's ability to retain and motivate its other officers and
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 Company's business, prospects, financial condition and results
of operations. The Company currently has no written employment
agreements with any officer or key employee. The Company's future
success depends on its ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, editorial,
merchandising, marketing and customer service personnel.
Competition for such personnel is intense. There can be no assurance
that the Company will be able to successfully attract, assimilate and
retain sufficiently qualified personnel, and the failure to do so could
have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Online Commerce Security Risks.
A significant barrier to online commerce and communications is the
need for secure transmission of confidential information over public
networks. The Company relies 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 credit card numbers. There can be no assurance
that advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a
compromise or breach of the algorithm used by the Company to
protect distributor and consumer transaction data. A party who is able
to circumvent the Company's security measures could misappropriate
confidential information or cause interruptions in the Company's
operations. The Company may be required to expend significant
capital and other resources to protect against such security breaches or
to alleviate problems caused by such breaches. If any compromise of
the Company's security were to occur, it could have a material adverse
effect on the Company's business, prospects, financial condition and
results of operations.
Concerns over the security of transactions conducted on the Internet
and other online services as well as users' desires for privacy may also
inhibit the growth of the Internet and other online services generally,
and the Web in particular, especially as a means of conducting
commercial transactions. The activities of the Company and third
party contractors involve the storage and transmission of proprietary
information, such as credit card numbers and other confidential
information. Any such breach of security could damage the
Company's reputation and expose the Company to a risk of loss,
litigation and/or possible liability. There can be no assurance that the
Company's security measures will prevent a security breach or that the
failure to prevent such security breach will not have a material adverse
effect on the Company's business, prospects, financial condition and
results of operations.
Merchants on the Internet are subject to the risks of credit card fraud
and other types of theft and fraud perpetrated by hackers and online
thieves. Credit card companies may hold merchants fully responsible
for any fraudulent purchase made when the signature cannot be
verified. Although credit card companies and others are in the process
of developing anti-theft and anti-fraud protections, and while the
Company itself is continuously developing internal controls, at the
present time, risk from such activities could have a material adverse
effect on the Company's business, prospects, financial condition and
results of operations.
Risks of International Expansion.
The Company currently has operations in Canada and the Philippines,
and is contemplating the expansion of operations to other foreign
markets. To date, the Company has limited experience in sourcing,
marketing and distributing products in international markets and in
developing localized versions of its Web site and other systems. The
Company believes that it will incur significant costs in establishing
international facilities and operations, in promoting its name
internationally, in developing localized versions of its Web site and
other systems and in sourcing, marketing and distributing products in
foreign markets. There can be no assurance that the Company's
international efforts will be successful. If the revenues resulting from
international activities are inadequate to offset the expense of
establishing and maintaining foreign operations, such inadequacy
would have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. In addition,
there are certain risks inherent in doing business on an international
level, such as unexpected changes in regulatory requirements, export
and import restrictions, tariffs and other trade barriers, difficulties in
staffing and managing foreign operations, longer payment cycles,
political instability, fluctuations in currency exchange rates, seasonal
reductions in business activity in other parts of the world and
potentially adverse tax consequences, all of which could adversely
affect the Company's international operations. There can be no
assurance that one or more of such factors would not have a material
adverse effect on the Company's business, prospects, financial
condition and results of operations.
Competition in the Online Commerce Industry.
The online commerce industry, particularly on the Internet, is new,
rapidly evolving and intensely competitive. The Company expects
such competition to intensify in the future. Barriers to entry are
minimal, allowing current and new competitors to launch new Web
sites at relatively low cost. The Company currently or potentially
competes with a variety of other companies. These competitors
include other network marketing companies, online vendors, mail order
catalogue operators and retail and warehouse/discount store operators.
The Company believes that the principal competitive factors in its
market are price, speed of fulfillment, name recognition, wide
selection, personalized services, ease of use, 24-hour accessibility,
customer service convenience, reliability, quality of search engine
tools, and quality of editorial and other site content. Many of the
Company's current and potential competitors have longer operating
histories, larger customer bases, greater brand name recognition, and
significantly greater financial, marketing and other resources than the
Company. In addition, online retailers may be acquired by, receive
investments from, or enter into other commercial relationships with
larger, well-established and well-financed companies as use of the
Internet and other online services increases. Certain of the Company's
competitors may be able to secure merchandise from vendors on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web site and
systems development than the Company. Increased competition may
result in reduced operating margins, loss of market share and a
diminished franchise value. There can be no assurance that the
Company will be able to compete successfully against current and
future competitors, and competitive pressures faced by the Company
may have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. Further, as a
strategic response to make changes in the competitive environment, the
Company may, from time to time, make certain pricing, service or
marketing decisions or acquisitions that could have a material adverse
effect on its business, prospects, financial condition and results of
operations. New technologies and the expansion of existing
technologies may increase the competitive pressures on the Company.
In addition, companies that control access to transactions through
network access or Web browsers could promote the Company's
competitors or charge the Company a substantial fee for inclusion.
Reliance on Certain Suppliers and Shippers.
To date, the Company has carried sufficient inventory in it warehouse
facilities to assure rapid fulfillment of distributor and customer orders.
The Company has no long term contracts or arrangements with any of
its vendors or shippers that guarantee the availability of merchandise,
the continuation of particular payment terms, the extension of credit or
shipping schedules. There can be no assurance that the Company's
current vendors will continue to sell merchandise to, or that shippers
will be able to provide delivery service for, the Company on current
terms or that the Company will be able to establish new, or extend
current vendor and shipper relationships to assure acquisition and
delivery of merchandise in a timely and efficient manner and on
acceptable commercial terms. If the Company were unable to develop
and maintain relationships with vendors and shippers that would allow
it to obtain sufficient quantities of merchandise on acceptable
commercial terms, or in the event of labor disputes or natural
catastrophes, its business, prospects, financial condition and results of
operations would be materially adversely affected.
Availability of Merchandise; Vendor Credit for the Company.
Although the Company maintains relationships with vendors which it
believes will offer competitive sources of supply, and believes that
other sources are available for most of the merchandise it will sell or
may sell in the future, there can be no assurance that the Company
will be able to obtain the quantity and brand quality of items that
management believes are optimum. The unavailability of certain
product lines could adversely affect the Company's operating results.
Given its lack of operating history, certain vendors of products sold by
the Company may not be prepared to advance normal levels of credit
to the Company. An unwillingness to extend credit may increase the
amounts of capital required to finance the Company's operations and
reduce returns, if any on invested capital.
Risks Associated with Entry Into New Business Areas.
The Company may chose to expand its operations by developing new
Web sites, promoting new or complementary products or sales formats,
expanding the breadth and depth of products and services offered or
expanding its market presence through relationships with third parties.
Although the Company has no present understanding, commitments or
agreements with respect to any material acquisitions or investments,
the Company may pursue the acquisition of new or complementary
businesses, products or technologies. There can be no assurance that
the Company would be able to expand it efforts and operations in a
cost-effective or timely manner or that any such efforts would increase
overall market acceptance. Furthermore, any new business or Web site
launched by the Company that is not favorably received by consumers
or distributors could damage the Company's reputation. Expansion of
the Company's operations in this manner would also require significant
additional expenses and development operations and editorial resources
and would strain the Company's management, financial and
operational resources. The lack of market acceptance of such efforts
or the Company's inability to generate sufficient revenues from such
expanded services or products could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
ITEM 7. FINANCIAL STATEMENTS.
<PAGE>
WORLDWIDE INTERNET MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JANUARY 31, 1998 AND 1997
<PAGE>
WORLDWIDE INTERNET MARKETING, INC. AND SUBSIDIARY
CONTENTS
January 31, 1998
<TABLE>
<S> <C>
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS 42
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS 44
FINANCIAL STATEMENTS
Consolidated Balance Sheet 45
Consolidated Statements of Operations 47
Consolidated Statements of Stockholders' Equity 48
Consolidated Statements of Cash Flows 50
Notes to Consolidated Financial Statements 53
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
Board of Directors and Stockholders
Worldwide Internet Marketing, Inc.
Los Gatos, California
We have audited the accompanying consolidated balance sheet of
Worldwide Internet Marketing, Inc. and subsidiary as of January 31,
1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. 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 audit.
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Worldwide Internet Marketing, Inc. and subsidiary as of January 31,
1998, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.
As shown in the consolidated financial statements, the Company has
incurred an operating loss of $ 203,757 and had negative cash flows
from operations of $ 648,085 during the year ended January 31, 1998.
In addition, the Company relies substantially upon the management,
technical, financial and other resources of Futurenet, Inc. who entered
into a stipulated Final Judgment and Order for Permanent Injunction
with the Federal Trade Commission (see Note 6). These factors,
among others, as discussed in Notes 1 and 6 to the financial
statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 5, 1998
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Worldwide Internet Marketing, Inc.
We have audited the balance sheet of Worldwide Internet Marketing,
Inc., fka Chelmsford Capital, Ltd., for the year ended January 31,
1997 (not presented), and the related statements of loss and
accumulated deficit, cash flows, and stockholders' equity for the year
ended January 31, 1997. 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 audit.
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 audits provide 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 Chelmsford
Capital, Ltd. as of January 31, 1997, and the results of its operations
and its cash flows, for the year ended January 31, 1997, in conformity
with generally accepted accounting principles.
/s/
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
Denver, Colorado
April 28, 1997<PAGE>
WORLDWIDE INTERNET MARKETING, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
January 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents 31,465
Inventories 418,875
Prepaid inventories 204,782
Other prepaid assets 44,359
Total current assets 699,481
Investment in affiliate 1,000,000
Furniture and equipment, net 131,717
Excess cost over fair value of
net assets acquired, net of
accumulated amortization of 76,506
2,677,711
Total assets 4,508,909
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 93,179
Net advances from affiliate 226,517
Accrued liabilities 161,316
Total current liabilities 481,012
Note payable - affiliate 2,000,000
Total liabilities 2,481,012
Minority interest 244,846
Commitments and Contingencies
Stockholders' equity
Preferred stock, no par value
10,000,000 shares authorized
0 shares issued and outstanding 0
Common stock, no par value
100,000,000 shares authorized
9,287,500 shares issued and
outstanding 2,009,485
Additional paid-in capital 3,489
Foreign currency translation (10,204)
Stock subscription receivable (900)
Accumulated deficit (218,819)
Total stockholders' equity 1,783,051
Total liabilities and
stockholders' equity 4,508,909
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WORLDWIDE INTERNET MARKETING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended January 31,
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1997
<S> <C> <C>
Revenues
Retail sales 31,263 -
Distributors fees 189,606 -
Total revenues 220,869 -
Cost of sales
Retail sales 42,450
Distributors fees 157,531
Total cost of sales 199,981 -
Gross profit 20,888 -
Operating expenses 252,745 6,688
Loss from operations (231,857) (6,688)
Minority interest 28,100 -
Net loss (203,757) (6,688)
Basic loss per common share (0.06) 0.00
Diluted loss per common share (0.06) 0.00
Weighted-average shares
outstanding 3,225,210 1,369,500
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
WORLDWIDE INTERNET MARKETING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended January 31,
(page 1 of 2)
<TABLE>
<CAPTION>
Common Stock Additional
Shares Paid-In
Issued Amount Capital
<S> <C> <C> <C>
Balance,
January 31, 1996 1,717,000 8,585 625
Expenses paid by related
party 2,414
Rent provided at no charge 450
Canceled shares (347,500)
Net loss
Balance,
January 31, 1997 1,369,500 8,585 3,489
9-for-1 stock split 10,956,000
Cancellation of shares 4,758,000
Sale of common stock 1,720,000 2,000,900
Change in currency
translation adjustment
Net loss
Balance,
January 31, 1998 9,287,500 2,009,485 3,489
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
WORLDWIDE INTERNET MARKETING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended January 31,
(page 2 of 2)
<TABLE>
<CAPTION>
Foreign Stock
Currency Subscription Accumulated
Translation Receivable Deficit Total
<S> <C> <C> <C> <C>
Balance, January 31, 1996 - - (8,374) 836
Expenses paid by related
party 2,414
Rent provided at no charge 450
Canceled shares -
Net loss (6,688)
Balance, January 31, 1997 - - (15,062) (2,988)
9-for-1 stock split -
Cancellation of shares -
Sale of common stock (900) 2,000,000
Change in currency
translation adjustment (10,204) (10,204)
Net loss (203,757) (203,757)
Balance, January 31, 1998 (10,204) (900) (218,819) 1,783,051
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
WORLDWIDE INTERNET MARKETING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 31,
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net loss (203,757) (6,688)
Adjustments to reconcile
net loss to net cash used
in operating activities
Minority interest (28,100) -
Rent - 450
Depreciation and
amortization expense 78,674 75
Expenses paid by related
party - 2,414
Recognition of acquired
deferred revenue (75,601) -
(Increase) decrease in
Inventories (372,731) -
Prepaid inventories (179,782) -
Other prepaid assets 27,286 -
Other assets 321 -
Increase (decrease) in
Accounts payable 40,021 -
Accrued liabilities 65,584 3,076
Net cash (used in)
operating activities (648,085) (673)
Cash flows from investing activities
Acquisition of FutureNet
Online International, Inc.,
net of cash acquired (953,084)
Investment in affiliate (1,000,000) -
Purchase of furniture
and equipment (17,220) -
Net cash used in
investing activities (1,970,304) -
Cash flows from financing activities
Net advances from affiliate 660,058
Proceeds from sale of stock 2,000,900 -
Stock subscription receivable (900) -
Net cash provided by
financing activities 2,660,058
Foreign currency translation (10,204) -
Net increase (decrease) in cash 31,465 (673)
Cash, beginning of period - 673
Cash, end of period 31,465 -
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
WORLDWIDE INTERNET MARKETING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended January 31,
Supplemental disclosures of cash flow information:
For the years ended January 31, 1998 and 1997, no interest or taxes
were paid.
Supplemental schedule of non-cash investing and financing activities:
From January 19, 1995 (inception) through the third quarter of the
year ended January 31, 1997, the Company incurred $1,075 in rent
expense which has been designated as additional paid-in capital.
<PAGE>
WORLDWIDE INTERNET MARKETING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT
ACCOUNTING POLICIES
Organization and Line of Business.
Worldwide Internet Marketing, Inc. ("WIM") was incorporated in
Colorado in January 1995 with the intent to be a holding company.
WIM, through its majority owned subsidiary, FutureNet Online
International, Inc. ("FOII") (collectively the "Company"), is engaged in
the marketing of television set-top computer-access devices and related
peripherals, which access the World Wide Web, and various consumer
products through an Internet mall service and distributors. The
Company distributes its products through a multi-level marketing
system internationally.
In November 1997, the stockholders approved a proposal to amend the
Company's articles of incorporation changing its name from
Chelmsford Capital LTD to Worldwide Internet Marketing, Inc. and
moved the corporate headquarters to Los Gatos, California.
For the year ended January 31, 1998, a controlling interest (980,000 or
71.6%) of the Company's common stock was purchased by an
unrelated party.
Principles of Consolidation.
The consolidated financial statements include the accounts of WIM and
its majority owned subsidiary, FOII. All material intercompany
accounts and transactions have been eliminated.
Basis of Presentation.
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles which
contemplate continuation of the Company as a going concern. As
shown in the accompanying financial statements, during the year ended
January 31, 1998, the Company incurred a net loss of $203,757, and
had negative cash flows from operations of $648,085, and as of
January 31, 1998, the Company had an accumulated deficit of
$218,819. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. In addition, the Company's
attainment of profitable operations is dependent upon achieving a level
of revenues adequate to support the Company's cost structure. In view
of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon the Company's ability
to achieve profitable operations and obtain sufficient capital to fund its
operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue its existence.
Management has taken the following steps to revise its operating and
financial requirements which it believes are sufficient to provide the
Company with the ability to continue in existence:
(a) The Company continues to reduce operating expenses.
(b) The Company will continue to receive advances from its
affiliate.
(c) The Company will attempt to raise capital in the form
of proceeds from license fees charged to new joint venture partners.
(d) Subsequent to the year ending January 31, 1998, the
Company raised investment capital in the amount of $550,000 through
the issuance of corporate debentures convertible into the Company's
common stock. As part of the same transaction, the Company
received a letter of credit which will be used to secure inventory
financing of up to $1,000,000 (see Note 10).
(e) The Company will attempt to raise additional capital
through private placements of its equity or debt securities.
Cash and Cash Equivalents.
For the purposes of the statements of cash flows, the Company
considers highly-liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories.
Inventories principally consist of finished goods and are stated at the
lower of cost or market, cost generally being determined on a first-in,
first-out basis.
Furniture and Equipment.
Office equipment, furniture and fixtures, and leasehold improvements
are stated at cost, less accumulated depreciation and amortization,
which are provided using the straight-line method over the estimated
useful lives of five years.
Excess Cost over Fair Value of Net Assets Acquired.
The Company continually monitors its excess cost over fair value of
net assets acquired (which is amortized over three years) to determine
whether any impairment of this asset has occurred. In making such
determination with respect to excess cost over fair value of net assets
acquired, the Company evaluates the performance, on an undiscounted
cash flow basis, of the underlying assets that gave rise to this amount.
Minority Interest.
Minority interest represents the minority shareholders' proportionate
share (20%) of the equity and accumulated losses of FOII and FOII's
subsidiary's minority shareholders' proportionate share (25%) of
F.O.M Philippines' equity and accumulated losses.
Revenue Recognition.
The Company does not grant credit to its distributors and customers.
Retail sales are recorded when the cash is received and the product is
shipped. The Company records revenue from distributor fees once the
distributor has signed the distributor's contract and paid the full fee.
The distributor fee grants the distributor the right to sell the
Company's products and services and to cover the annual cost of
providing post-contract services such as accounting statements and
sales training. The Company has accrued the related costs associated
with these services. The distributor fee is collected annually by the
Company and is recognized upon receipt because the Company's
continuing involvement with the distributor is deemed to be
immaterial. The recognized revenue is net of expected returns.
Significant Supplier.
The Company purchased all of its television set-top computers from
one supplier. This item represents a majority of the Company's
inventory at January 31, 1998. The Company believes that it could
find another supplier of television set-top computers within a
reasonable period of time if this one supplier were unable to provide
this product to the Company.
Commissions
An independent distributor earns commissions and retail volume
bonuses. Such commissions are based on the number of other
distributors signed up in a year and retail sales volume of certain other
members of the independent sales force who are sponsored by the
distributor.
Income Taxes
The Company accounts for income taxes under the liability and asset
method, which requires the 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 income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period
and the change during the period in deferred tax assets and liabilities.
Basic Loss Per Share
For the year ended January 31, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share. Basic losses per share is computed by dividing losses available
to common stockholders by the weighted-average number of common
shares outstanding. Diluted losses per share is computed similar to
basic losses per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Earnings per share for 1997
has been restated to conform with SFAS No. 128.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, accounts payable,
and accrued liabilities, the carrying amounts approximate fair value
due to their short maturities. The amount shown for the note payable
also approximates fair value because current interest rates and terms
offered to the Company for similar debt are substantially the same.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash. The Company places its
cash with high quality financial institutions and at times may exceed
the FDIC $100,000 insurance limit.
NOTE 2 - INVESTMENT IN AFFILIATE
The Company owns a warrant to purchase, at an exercise price of $1
per share, 1,000,000 shares of common stock from Futurenet, Inc., the
parent company of the minority shareholder of FOII. The warrant is
exercisable for the period January 16, 1998 to January 15, 2001. The
carrying amount of the warrant approximates fair value as determined
by the Black-Scholes method of valuation.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at January 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Office equipment 107,149
Furniture and fixtures 10,667
Leasehold improvements 20,576
138,392
Less accumulated
depreciation and
amortization of 6,675
Total 131,717
</TABLE>
Total depreciation and amortization expense for the year ended January
31, 1998 was $2,168.
NOTE 4 - ACCRUED LIABILITIES
Accrued liabilities at January 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Sales taxes payable 33,547
Commissions payable 35,651
Service liability 62,000
Other accrued liabilities 30,118
Total 161,316
</TABLE>
NOTE 5 - RELATED PARTY TRANSACTIONS
At January 31, 1998, the Company had a balance due to an affiliate of
$226,517 for operating advances.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company leases its office space under an operating lease which
expires in July 2000. The Company also leases certain equipment
under non-cancelable operating leases.
Future minimum payments under its operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended
January 31,
<S> <C>
1999 58,158
2000 66,427
2001 34,635
Total 159,220
</TABLE>
Rent expense for the years ended January 31, 1998 and 1997 was
$6,778 and $450, respectively.
Involvement in a Certain Legal Proceeding by a Majority Shareholder
and Affiliate
On February 17, 1998, the Federal Trade Commission (the
"Commission") filed a Complaint and Application for Temporary
Restraining Order and other equitable relief against Futurenet, Inc.,
Futurenet Online, Inc., and several individuals, including Alan J.
Setlin. Mr. Setlin is a controlling shareholder of Futurenet, Inc., and
the Company. The complaint charges the defendants with violations
of Section 5 of the Federal Trade Commission Act, alleging that the
defendants had engaged in an illegal multi-level marketing scheme.
The Court granted the Commission's Application on February 23,
1998, and the Temporary Restraining Order was modified on March 6,
1998. Certain of the defendants, including Futurenet, Inc., Futurenet
Online, Inc., and Mr. Setlin agreed to enter a Stipulated Final
Judgment and Order for Permanent Injunction ("Order") to resolve all
matters in dispute without admission of liability.
The Order was entered by the Court on April 20, 1998, and
permanently enjoined the defendants from directly or indirectly
participating in any marketing scheme in which a person participates
under the condition that he or she makes a payment to receive the
right to derive income primarily from the recruitment of additional
recruits or from non-retail sales made to or by such recruits. For three
years from the date of the Order, the defendants are also restrained
from holding a five percent or greater interest in, or serving as a
director or officer of any business engaged in multi-level marketing
unless they first obtain a performance bond in amounts prescribed by
the Order. Finally, judgment was entered jointly and severally against
certain of the defendants, including Futurenet, Inc., Futurenet Online,
Inc., and Mr. Setlin in the amount of $1 million in settlement of the
Commission's claim for consumer redress. The Court retains
jurisdiction to assure compliance with the Order.
Management anticipates that the defendants will be able to comply
with the terms of Order and that the matter should have no material
adverse effect on the Company. However, there is no assurance that
due to factors beyond the control of management, the Order will not
be reopened for purposes of modification. The Company is still in a
developmental stage and relies substantially upon the management,
technical, financial and other resources of Futurenet Online. Until the
Company is no longer so reliant, if the matter were reopened and
modified in any way materially adverse to the business of Futurenet
Online, such a development could have a material adverse effect on
the business of the Company.
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of its no
par value preferred stock. The preferred stock may be issued in series,
from time to time, with such designations, rights, preferences, and
limitations as the Board of Directors may determine by resolution. At
January 31, 1998, no shares of the Company's no par value preferred
stock were issued or outstanding.
Stock Issuance
During the year ended January 31, 1997, a total of 347,500 shares of
common stock were canceled. All share and per share amounts have
been restated to reflect this cancellation.
During the year ended January 31, 1998, the Company sold 1,720,000
shares of common stock at prices ranging from $0.0006 to $1.33 per
share for a total of $2,000,900.
Stock Split
In November 1997, the stockholders approved a proposal to split the
Company's outstanding common stock at a ratio of 9-to-1, thereby
increasing the number of outstanding shares from 1,369,500 to
12,325,500. Simultaneously, certain stockholders agreed to cancel
4,758,000 shares, leaving 7,567,500 shares outstanding.
Par Value
The Board of Directors determined a stated value for the common
stock of $0.0005 per share ($0.001 post split) with any balance paid
per share designated as additional paid-in capital.
Warrants
In connection with the 9-for-1 stock split, the class A and B warrants
were increased from 2,739,000 and 1,369,500, respectively, to
24,651,000 and 12,325,500, respectively. Simultaneously, certain
warrant holders agreed to cancel Class A and B warrants of 9,516,000
and 4,758,000, respectively. In addition, the Company canceled the
remaining 15,135,000 and 7,567,500 Class A and B warrants leaving
no warrants outstanding.
In 1997, the Board of Directors authorized the Company to issue up to
3,000,000 each of Class A and Class B warrants to purchase at $2.00
and $4.00, respectively, one share of the Company's common stock.
The warrants are exercisable until December 31, 1999 and are
cancelable at the discretion of the Company. In connection with the
sale of 1,500,000 shares of the Company's common stock, the
Company issued 750,000 of each Class A and B warrants. As of
January 31, 1998, the issued warrants are as follows:
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Balance, January 31, 1997 2,739,000 1,369,500
9-for-1 stock split 21,912,000 10,956,000
Cancellation of warrants
associated with
shares cancelled (9,516,000) (4,758,000)
Cancellation of warrants (15,135,000) (7,567,500)
Issuance of warrants 750,000 750,000
Balance, January 31, 1998 750,000 750,000
</TABLE>
The Company also reserves the right to extend the expiration date or
reduce the exercise price of any or all classes of warrants upon giving
five days notice. The warrants can only be exercised when a current
registration statement for the shares underlying the warrants is on file.
If the Company acquires a business opportunity and is unable to have
a registration statement covering the shares underlying these warrants
declared effective, by their terms, no warrants can be exercised. As of
January 31, 1998, the Company does not have a current registration
statement.
NOTE 8 - INCOME TAXES
For the year ended January 31, 1998, the difference between the
federal statutory rate of 34% and the Company's effective tax rate of
0% is due primarily to the fact that the Company has no domestic
taxable income.
As of January 31, 1998, the Company had net federal operating loss
carryforwards of approximately $22,000, which expire in various years
through 2013.
NOTE 9 - ACQUISITIONS - RELATED PARTY TRANSACTION
On January 16, 1998, the Company acquired 80% or 800,000 shares of
the outstanding common stock of FOII in exchange for $3,000,000,
which consisted of $1,000,000 cash and a note payable for $2,000,000.
FOII was a wholly-owned subsidiary of FutureNet, Inc., which is
majority-owned by the majority stockholders of the Company. The
negotiations were not completed on an arm's length basis and
management has not obtained a fairness opinion as to the fair value of
this transaction. The acquisition was accounted for by the purchase
method of accounting. Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on the
estimated fair value at the date of acquisition. The excess of the
purchase price over the estimated fair value of net assets acquired of
$2,718,216 has been recorded as excess cost over fair value of net
assets acquired, which is being amortized over three years.
The note payable pays interest at 6% per year compounded annually
and is unsecured. Payments are due on the fifteenth day after each
calendar quarter end and are based on $15 per set-top Internet access
device sold by the Company during the immediately preceding
calendar quarter. Any outstanding principal and accrued interest
amounts are due on January 15, 2000.
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash 46,916
Due from affiliate 433,541
Inventories 46,144
Prepaid expenses and
other current assets 96,645
Furniture and equipment 116,665
Intangible assets 2,754,217
Accounts payable and
accrued liabilities (145,582)
Deferred revenues (75,600)
Minority interest (211,500)
Net assets 3,061,446
Less minority interest 61,446
Purchase price 3,000,000
</TABLE>
The following table presents the unaudited pro forma condensed
statement of operations for the year ended January 31, 1998 and
reflects the results of operations of the Company as if the acquisition
of FOII had been effective February 1, 1997. The pro forma amounts
are not necessarily indicative of the combined results of operations that
are expected as a result of the acquisition.
<TABLE>
<CAPTION>
January 31, 1998
<S> <C>
Net sales 465,254
Gross profit 214,448
Selling general and
administrative expenses 924,067
Net loss (709,619)
Basic net loss per common share (0.22)
Diluted loss per common share (0.22)
</TABLE>
NOTE 10 - SUBSEQUENT EVENTS
Convertible Debentures
On April 15, 1998, the Company entered into an agreement with an
investor. The agreement provides for the following:
The investor will purchase a convertible debenture for $550,000.
For a two-year period, the debenture shall be convertible at the option
of the holder into the Company's common stock at a conversion price
of i) $2.00 per share if converted during the first twelve months or ii)
$2.50 a share if converted during the second twelve months.
The debenture shall bear interest at the rate of 10% per annum payable
quarterly until the earlier of i) the date of conversion or ii) the end of
the twenty-four months at which time the entire principal amount and
all accrued interest shall be due and payable.
The Company shall pay the investor a 9% fee of the principal amount.
The investor shall provide a letter of credit of up to $1,000,000 to be
used to finance sixty days of projected inventory purchases for the
Company's Internet mall. The purchases shall be mutually agreed by
the Company and the investor.
All fees and interest expense incurred in connection with the letter of
credit shall be paid by the investor from the investor's override.
The investor is to receive a 3 1/2% override for all products and
services sold on the Company's Internet mall.
The Company shall grant the investor an option to purchase up to
250,000 shares of the Company's common stock exercisable at a price
of $1.81 per share. The stock options shall not be exercisable until the
first month that the sales volume of the Internet mall reaches
$5,000,000 and in no event after the end of the twelfth month from the
date of the agreement of the expiration date of the stock option.
Product Recall
In March 1998, the Company's vendor, for television set-top access
devices sold for its Canadian operation, recalled the television set-top
access devices. The Company's intention is to exchange one recalled
unit for one comparable unit to be determined at the time of the
exchange. At the issuance of these financial statements, the Company
has not determined the effect on the operations for the year ended
January 31, 1998 because the number of units that need to be
exchanged is unknown. However, if the exchanges were recorded for
the year ended January 31, 1998, the recall would have a positive
effect on the operations because the comparable units have a lower
cost.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUN-
TANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Following a change in control of the Company, the board of directors
elected to change the Company's principal independent accountants in
April of 1998. At that time, the Company's former independent
accountants, Comiskey & Company, P.C. of Aurora, Colorado, were
replaced by the firm of Singer Lewak Greenbaum & Goldstein LLP,
of Los Angeles, California. The Company has had no disagreements
with it's principal independent accountant since the date of inception.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT.
The directors and executive officers serving the Company as of April
30, 1998 are as follows:
<TABLE>
<CAPTION>
Positions
Name Age Held Tenure
<S> <C> <C> <C>
Frederick Neebling 68 President
Chief Executive 11/97 -
Officer and Present
Chairman
Thomas K. Russell 45 Secretary,
Director 11/97 -
Present
Ed Jarrin 32 President of
Futurenet Online 9/97 -
International, Inc. Present
and Futurenet Online
of Canada, Inc.
</TABLE>
The directors named above will serve until the next annual meeting of
the Company's stockholders. Thereafter, directors will be elected for
one-year terms at the annual stockholders' meeting. Officers will hold
their positions at the pleasure of the board of directors, absent any
employment agreement, of which none currently exists or is
contemplated. There is no arrangement or understanding between any
of the directors or officers of the Company and any other person
pursuant to which any director or officer was or is to be selected as a
director or officer.
Frederick Neebling serves as President and Chairman of the Board of
FOII. Mr. Neebling is President of McMurtry and Bell, a general
insurance agency located in Los Gatos, California. Mr. Neebling
founded the agency in 1965.
Thomas K. Russell serves as Secretary and Director of FOII. Mr.
Russell served as Secretary, Treasurer, Chief Financial Officer,
General Counsel and Director of MTR Gaming Group, Inc.
(NASDAQ: "MNTG") from December of 1989 until February of 1998,
with responsibility for the management of compliance, financial
reporting and general legal matters of the Company. From 1979 to
1989, he was a practicing attorney in Southern California emphasizing
business litigation, medical malpractice and representation of American
Indian Tribes in tribal and federal courts and legislative and
administrative matters. Since 1975, Mr. Russell has served as an
officer or director of various public and private corporations engaged
in the oil, mining, hotel, equipment leasing, wholesale travel and
motion picture businesses. Mr. Russell received his Bachelor of Arts
in Marketing from California State University at Fullerton in 1975,
and his Juris Doctor from Pepperdine University in 1978. He has been
an active member of the State Bar of California since 1979.
Ed Jarrin, Jr. currently serves as President, Futurenet Online Marketing
Canada, Inc., and has a strong background in network marketing,
having previously served as Director of International Operations
overseeing 10 countries for a large company in Germany. Earlier he
served as controller for a major U.S. network-based marketing firm.
Prior to this, Mr. Jarrin served as CFO for a major home builder in
Southern California responsible for construction financing and funds
management. He has also worked for major banks in several
capacities.
Involvement in Certain Legal Proceeding by Control Person.
Federal Trade Commission vs. Futurenet, Inc., et al., Civil No. 98-
1113 GHK (ALJx). On February 17, 1998, the Federal Trade
Commission (the "Commission") filed a Complaint and Application for
Temporary Restraining Order and other equitable relief against
Futurenet, Futurenet Online and several individuals, including Alan J.
Setlin. Mr. Setlin is a controlling shareholder of Futurenet and the
Company. The complaint charged the defendants with violations of
Section 5 of the Federal Trade Commission Act ("FTC Act"), 15
U.S.C. Section 45, alleging that the defendants had engaged in an
illegal multi-level marketing scheme. The Court granted the
Commission's Application on February 23, 1998, and the Temporary
Restraining Order was modified on March 6, 1998. Certain of the
defendants, including Futurenet, Futurenet Online and Mr. Setlin
agreed to enter a Stipulated Final Judgment and Order for Permanent
Injunction ("Order") to resolve all matters in dispute without admission
of liability. The Order was entered by the Court on April 20, 1998.
For further discussion, see Item 3. Legal Proceedings.
Compliance With Section 16(a) of the Exchange Act.
To the best knowledge and belief of the Company, the directors,
officers or beneficial owners of more than 10% of the Company's
securities have not filed the Initial Statement of Beneficial Ownership
of Securities on Form 3, Statement of Changes in Beneficial
Ownership of Securities on Form 4, or Annual Statement of Changes
in Beneficial Ownership of Securities on Form 5, in a timely manner.
The Company has initiated a plan to have its Secretary assist such
directors, officers or beneficial owners to have all required filings
under Section 16(a) completed within the next ten days. The
Company will thereafter make efforts to assure that such filings are
made in a timely manner in the future.
ITEM 10. EXECUTIVE COMPENSATION.
No officer or director received any remuneration from the Company
during the fiscal year. Until the Company establishes profitable
operations, it is not intended that any officer or director will receive
compensation from the Company other than reimbursement for
out-of-pocket expenses incurred on behalf of the Company. See
"Certain Relationships and Related Transactions." The Company has
no stock option, retirement, pension, or profit-sharing programs for the
benefit of directors, officers or other employees, but the Board of
Directors may recommend adoption of one or more such programs in
the future.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
The following table sets forth, as of the end of the Company's most
recent fiscal year, the number of shares of Common Stock owned of
record and beneficially by executive officers, directors and persons
who hold 5.0% or more of the outstanding Common Stock of the
Company. Also included are the shares held by all executive officers
and directors as a group.
<TABLE>
<CAPTION>
Name and Number of Shares Percent of
Address Owned Beneficially<F1> Class Owned
<S> <C> <C>
Alan J. Setlin<F2> 4,589,000 49.41%
28460 Avenue Stanford
Valencia, CA 91355
Lancer Offshore, Inc.<F3> 2,250,000 22.42%
375 Park Avenue, Suite 2006
New York, NY 10152
Lancer Partners, L.P.<F4> 1,000,000 9.96%
375 Park Avenue, Suite 2006
New York, NY 10152
Don & Bonnie Saunders 1997 Trust 915,000 9.85%
32251 Peppertree Bend
San Juan Capistrano, CA 92675
Frederick Neebling 350,000 3.77%
16 East Main Street
P. O. Box 309
Los Gatos, CA 95031
Thomas K. Russell 100,000 1.08%
30 Sembrado
Rancho Santa Margarita, CA 92688
John Mulder<F5> 0 0.00%
All directors and executive 450,000 4.85%
officers as a group <F6>
<FN>
<F1> This table is based upon information supplied by officers,
directors and principal stockholders. Unless otherwise indicated in the
footnotes to this table, and subject to community property laws where
applicable, each of the shareholders named in this table has sole voting
and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 9,287,500
shares outstanding at April 30, 1998, adjusted as required by rules
promulgated by the Securities and Exchange Commission.
<F2> Includes 300,000 shares held by Mr. Setlin's wife and 50,000
shares held by Mr. Setlin's daughter.
<F3> Includes warrants to purchase 750,000 shares, exercisable
within 60 days of April 30, 1998.
<F4> Includes warrants to purchase 750,000 shares, exercisable
within 60 days of April 30, 1998.
<F5> Mr. Mulder resigned as president in November of 1997.
<F6> Includes Frederick Neebling and Thomas K. Russell, the
directors of the Company at April 30, 1998.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Indemnification of Officers and Directors.
As permitted by Colorado law, the Company's Articles of
Incorporation provide that the Company will indemnify its directors
and officers against expenses and liabilities they incur to defend, settle,
or satisfy any civil or criminal action brought against them on account
of their being or having been Company directors or officers unless, in
any such action, they are adjudged to have acted with gross negligence
or willful misconduct. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy as expressed in that Act and is, therefore, unenforceable.
Exclusion of Liability.
Pursuant to the Colorado Corporation Code, the Company's Articles of
Incorporation exclude personal liability for its directors for monetary
damages based upon any violation of their fiduciary duties as directors,
except as to liability for any breach of the duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, acts in violation of Section 7-5-114 of the
Colorado Corporation Code, or any transaction from which a director
receives an improper personal benefit. This exclusion of liability does
not limit any right which a director may have to be indemnified and
does not affect any director's liability under federal or applicable state
securities laws.
Conflicts of Interest.
None of the officers of the Company will devote more than a portion
of his time to the affairs of the Company. There will be occasions
when the time requirements of the Company's business conflict with
the demands of the officers' other business and investment activities.
Such conflicts may require that the Company attempt to employ
additional personnel. There is no assurance that the services of such
persons will be available or that they can be obtained upon terms
favorable to the Company.
In January, 1995, the Company issued to its officers, directors, and
others a total of 1,717,000 shares of Common Stock, Class A Warrants
to purchase 2,739,000 additional shares of Common Stock at $2.00 per
share, and Class B Warrants to purchase 1,369,500 additional shares of
Common Stock at $4.00 per share for a total of $6,847.50 in cash and
$1,737.50 in services, or an average of approximately $0.005 per share
(without allocating any of the consideration to the Warrants).
On November 6, 1996, Capital Twain purchased 1,189,500 shares of
the Company's common stock, 2,695,000 Class A Warrants and
1,347,500 Class B Warrants for a total purchase price of $70,000. The
sellers were Gary S. Joiner, Scott Olson, Grant Peck, Dean Sessions,
John Stearns and Cumberland Capital Corporation, who were the
principal shareholders of the Company prior to completion of the sales
transaction.
In conjunction with the sales transaction, Gary S. Joiner, Scott Olson,
Grant Peck, Dean Sessions, and John Stearns surrendered for
cancellation a total of 347,500 shares which had been issued to them
for services at the time of formation of the Company. Following the
surrender of such shares, the Company had a total of 1,369,500 shares
issued and outstanding.
Change of Control in 1996.
On November 6, 1996, a change in control of the Company occurred
when Capital Twain, purchased 1,189,500 shares of the Company's
common stock. As a precondition to the purchase, persons who were
previously the principal shareholders of the Company surrendered for
cancellation a total of 347,500 shares of stock. Following these
transactions, the 1,189,500 shares of stock purchased by Capital
Twain, Inc. constituted approximately 86.86% of the Company's
issued and outstanding stock.
Change of Control in 1997.
On October 27, 1997, Alan J. Setlin acquired control of the Company
by purchasing all of the 1,189,500 common shares previously owned
by Capital Twain, representing approximately 86.86% of the issued
and outstanding stock. Mr. Setlin subsequently transferred 269,500
shares on a gratuitous basis to certain family members and business
associates. Mr. Setlin retained direct ownership of 920,000 shares, and
may have been deemed to be the beneficial owner of an additional
60,000 shares owned by his spouse. Thus, Mr. Setlin had direct or
indirect beneficial ownership of 980,000 shares, representing
approximately 71.56% of the issued and outstanding stock of the
Company. The transaction also involved the transfer of 2,695,000
Class A Warrants and 1,347,500 Class B Warrants previously owned
by Capital Twain, representing approximately 98.39% of each class of
warrants.
The purchase price for the shares was $75,000 and was paid by
execution of two promissory notes in the amount of $37,500 each. One
of such notes was payable to Capital Twain, and the other was payable
to Brownstone Holdings, LLC, a California limited liability company,
in consideration of its release and waiver of any claim it may
otherwise have had against Capital Twain, for an interest in the shares.
The notes were due and payable upon the first to occur of (i)
completion of a contemplated stock acquisition transaction between the
Company and FOI, pursuant to which the Company acquired not less
than eighty percent (80%) of the issued and outstanding capital stock
of FOII or (ii) December 31, 1997.
The purchase was completed pursuant to the terms of a Stock Purchase
Agreement dated October 27, 1997, between Donald Saunders and
Alan J. Setlin, as Buyer, and Capital Twain, as Seller. Mr. Saunders
was a named party to the transaction because he agreed to serve as co-
signer of the two promissory notes, but he did not acquire any portion
of the purchased shares. Brownstone Holdings, LLC, was a named
party to the Stock Purchase Agreement for purposes of waiving any
claim it may otherwise have had against Capital Twain for an interest
in the shares.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-KSB.
(a) (2) The Exhibits listed below are filed as part of this Annual
Report.
<TABLE>
<CAPTION>
Exhibit No. Document
<S> <C>
3.1 Articles of Incorporation (incorporated by
reference to Form 10-KSB filed with the Securities and Exchange
Commission on behalf of the Company on May 16, 1997).
3.2 Bylaws (incorporated by reference to Form 10-
KSB filed with the Securities and Exchange Commission on behalf of
the Company on May 16, 1997).
4.1 Warrant Agent Agreement (incorporated by
reference to Form 10-KSB filed with the Securities and Exchange
Commission on behalf of the Company on May 16, 1997)
4.2 Specimen Class A Warrant Certificate
(incorporated by reference to Form 10-KSB filed with the Securities
and Exchange Commission on behalf of the Company on May 16,
1997).
4.3 Specimen Class B Warrant Certificate
(incorporated by reference to Form 10-KSB filed with the Securities
and Exchange Commission on behalf of the Company on May 16,
1997).
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the Company during
the last quarter of its fiscal year ended January 31, 1998, and for the
interim period since:
A report on Form 8-K dated October 27, 1997, was filed by the
Company during the last quarter of it's fiscal year ending January 31,
1997, to report the change in control of the Company.
A report on Form 8-K dated December 5, 1997, to report an
oral agreement pursuant to which the Company agreed to purchase
80% of the outstanding stock of Futurenet Online, International, Inc.
from FOI.
A report on Form 8-K dated January 16, 1998, to report an
agreement pursuant to which the Company agreed to purchase 80% of
the outstanding stock of Futurenet Online, International, Inc. from
FOI.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Worldwide Internet Marketing, Inc.
Dated: May 15, 1998 By:/s/___________________________
Frederick Neebling
Chairman and Chief Executive Officer
Dated: May 15, 1998 By:/s/___________________________
Thomas K. Russell
Director
<PAGE>
EXHIBIT 27- FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 31,465
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 623,657
<CURRENT-ASSETS> 44,359
<PP&E> 138,392
<DEPRECIATION> 6,675
<TOTAL-ASSETS> 4,508,909
<CURRENT-LIABILITIES> 481,012
<BONDS> 0
0
0
<COMMON> 2,009,485
<OTHER-SE> (226,434)
<TOTAL-LIABILITY-AND-EQUITY> 4,508,909
<SALES> 202,869
<TOTAL-REVENUES> 202,869
<CGS> 199,981
<TOTAL-COSTS> 199,981
<OTHER-EXPENSES> 252,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (203,757)
<INCOME-TAX> (203,757)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (203,757)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
