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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to _______________
Commission file number 0-28407
NETMAXIMIZER.COM, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0907899
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
4400 North Federal Highway, Suite 307, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 447-9330
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange on which registered:
Common Stock, par value None.
$.001 per share
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 in response to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference to Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of April 9 2001, was $59,040,388 (assuming solely for the purpose
of this calculation that the directors and officers of the registrant are
"affiliates").
The number of shares outstanding of the registrant's common stock, par value
$.001 per share, as of April 9, 2001, was 39,957,149.
Documents Incorporated By Reference: None.
NETMAXIMIZER.COM, INC.
FORM 10-K
INDEX
PART I........................................................................................................ 1
ITEM 1. BUSINESS.................................................................................... 1
ITEM 2. PROPERTIES.................................................................................. 25
ITEM 3. LEGAL PROCEEDINGS........................................................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 26
PART II....................................................................................................... 26
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................... 26
ITEM 6. SELECTED FINANCIAL DATA..................................................................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................................... 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................................... 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................................................ 34
PART III...................................................................................................... 34
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 34
ITEM 11. EXECUTIVE COMPENSATION...................................................................... 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................. 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 40
PART IV....................................................................................................... 40
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................. 40
SIGNATURES.................................................................................................... 35
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Annual Report contains various forward-looking statements and information,
including (but not limited to) under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," that are based on
management's beliefs as well as assumptions made by and information currently
available to management, including statements regarding future economic
performance and financial condition, liquidity and capital resources and
management's plans and objectives. When used in this document, the words
"expect," "anticipate," "estimate," "believe," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
various risks and uncertainties which could cause actual results to vary
materially from those stated. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect actual results may
vary materially from those anticipated, estimated, expected or projected. Some
important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include, but
are not limited to the following: our limited operating history; history of
losses; competition; our ability to manage growth and integration; risks of
technological change; competition for customers; pricing and transportation of
products; our dependence on key personnel; marketing relationships with third
party suppliers; our ability to protect our intellectual property rights;
government regulation of Internet commerce; economic and political factors;
dependence on continued growth in use of the Internet; risk of technological
change; capacity and systems disruptions; liability for Internet content;
uncertainty regarding infringing intellectual property rights of others;
security risks and the other risks and uncertainties described under "Certain
Factors That May Affect Future Operations" in this Annual Report. All such
factors are difficult to predict, contain uncertainties which may materially
affect actual results, and are beyond our control.
PART I
ITEM 1. BUSINESS
Introduction
History of Our Company - Netmaximizer.com, Inc.
We were incorporated in the State of Florida on June 29, 1995 under the name
"RLN Realty Associates, Inc." with an authorized share capital of 7,500 shares
of common stock with a $1.00 par value per share. The founder of RLN Realty
Associates is no longer affiliated in any way with the Company, and we have no
idea why he selected that name or what, if any, business he conducted under that
name. To the best of our knowledge:
o RLN Realty Associates was an inactive company until March, 1999,
o never conducted any business other than annual meetings of the Board of
Directors, and
o no shares of common stock were transferred after March 31, 1996 until
March, 1999.
On June 9, 1998, RLN Realty Associates filed Articles of Amendment to amend its
Articles of Incorporation to increase authorized share capital to 50,000,000
shares of common stock with a $.001 par value per share. In addition to
increasing the authorized capital, RLN Realty Associates authorized a split of
its 5,000 outstanding shares of common stock on a 200-for-one basis effective on
June 9, 1998. On June 12, 1998, RLN Realty Associates filed an application on
Form 211 for its common stock to be quoted on the OTC Bulletin Board, which was
approved on June 18, 1998. We can find no evidence that the stock was actually
quoted until March, 1999.
On February 26, 1999, David Saltrelli replaced the sole board member and became
our President. On March 1, 1999, we amended our Articles of Incorporation to
change our name to "Netmaximizer.com, Inc." to reflect our new e-commerce focus,
and Peter Schuster joined the board and became our Secretary and Treasurer.
March 1, 1999 also marks the beginning of the development of our new business
plan. On March 8, 1999, David Saltrelli and Peter Schuster each purchased
2,430,000 shares of our common stock for cash at a purchase price of $.001 per
share (a total of $2,430 each) as part of the private placement of 12,000,000
shares of our common stock. The remainder of the 12,000,000 shares offered
during this placement were sold for cash at the same purchase price of $.001 per
share to accredited investors not affiliated with Netmaximizer.com, Inc. (see
"Recent Sales of Unregistered Securities").
On October 19, 1999, we authorized a split of our 13,049,170 then-outstanding
shares of common stock on a 3-for-1 basis effective as of November 1, 1999. To
avoid confusion, unless otherwise indicated, we have referred throughout this
Annual Report to numbers of shares giving effect to the split, whether or not
the transaction occurred prior to the split. In other words, unless otherwise
indicated, the effect of the split is given retroactively.
On April 10, 2000 we filed an amendment to our Articles of Incorporation
increasing the total number of shares that we may issue to 77,000,000,
consisting of 75,000,000 shares of common stock, par value $.001 per share and
2,000,000 shares of "blank check" preferred stock, par value $.001 per share.
We have not been subject to any bankruptcy, receivership or other similar
proceeding.
Netmaximizer.com Overview
We are an Internet development, marketing and merchandising company that
provides (i) turnkey, individually branded, e-commerce department stores to
affinity groups such as churches, schools and unions and (ii) redemption centers
for recipients of premiums from various merchants.
0 The affinity groups, in turn, offer their membership the ability to
shop at their own affinity store (each an "Affinity Store") and
purchase an array of products and services for which the affinity group
receives a portion of the proceeds of every member purchase.
0 Merchants "reward" their customers for various activities with premium
incentives. We will establish a branded site for each participating
merchant (each a "Redemption Center") and their customers may redeem
incentive vouchers for premiums through that site.
0 When we launch our full-scale operation, we will provide an e-commerce
department store (the "Store") that will serve as the fulfillment
vehicle for the Affinity Stores and the Redemption Centers.
2
Affinity Group Operations
Our initial, public operation began in September 1999, when we started
soliciting and enrolling affinity groups. An "affinity group" is a group of
people who are members of an entity or organization based upon a common interest
or goal. Churches, schools, fraternities, and unions are examples of affinity
groups. When we launch our full-scale operations, we will establish a portal for
each affinity group to the Store through which the group's members may purchase
merchandise in the Store. Not only does the portal have a look and feel unique
to the affinity group, but the entire store appears to the visitor to be unique
to that affinity group.
Affinity groups will not pay any fee to us to establish their custom portal to
the Store (or to establish their unique store). Each affinity group will receive
a fifteen percent (15%) commission on every product which is purchased by its
members or by people referred to the Store by its members. Because the agreement
from the affinity group was obtained by one of our outside, independent sales
people, we will pay a six and one-half per cent commission to that salesperson
(or sales organization) based on purchases made by members of the affinity
group.
Currently, the affinity group Store has sixteen departments which mirror the
departments found in a traditional brick and mortar department store. Additional
departments will be added over time. The departments will remain consistent
across all of the unique, affinity stores. The Store offers the following
services and benefits to its customers:
o free incentives with each purchase;
o a reminder service which electronically reminds customers of important
dates; and
o a newsletter which updates members on new department grand openings,
new product lines, special promotions and discounts.
Prices for items on sale in the Store will be discounted off a "manufacturer's
suggested retail price." Additionally, members of the Affinity Groups will be
able to obtain a personal, preferred status by paying an annual fee to us (of
which the Affinity Group will receive a share). Members who opt for such
preferred status will obtain an even greater discount off the suggested retail
price than is generally available. In addition, members will be offered their
own fully personalized ISP service (Internet connection), at a discounted
monthly service fee (of which the Affinity Group will also receive a share).
Preliminary market testing of these new fee based member services including
"preferred membership status" and "personalized ISP service" have been very
positive, but we can offer no assurance whether these programs will be effective
and profitable.
As of November 4, 1999, when the Store nominally opened, we had enrolled 171,490
families who were members of fifteen affinity groups to be our potential
shoppers. As of April 1, 2001, we have enrolled more than 1,500 affinity groups.
Those affinity groups inform us that they have a total of more than 5,000,000
families who are members. To accommodate that population in full scale
operations will require continued execution of our planned preparation.
3
Incentive Premium Redemption Operations
We have developed, but have not yet begun public operation of an incentive
premium redemption service. Pursuant to agreements to-be-negotiated with various
merchants, we will enable such merchants to generate pre-paid certificates to be
delivered to the customers of those merchants as incentives (e.g., test drive a
car at our dealership and receive a certificate good for $50 worth of
merchandise at our redemption center). We have designed portals to have a unique
look and feel for each such merchant, enabling the customer who is redeeming the
incentive certificate to make "purchases" at the merchant redemption center
using the certificate.
Pre-launch testing indicates favorable pricing for this model and high interest
among the merchant community in several markets across the country that were
informally surveyed. We can offer no assurance, however, that we will be
successful in launching this new application of our technology or, if initially
successful, that we will be able to operate such incentive premium redemption
centers profitably.
The "Store"
In each of the Affinity Stores and Redemption Centers, notwithstanding the
apparently unique look and feel for the various "portals," each application
ultimately leads to the Store. When fully operational, this Store will be
comprised of order reception and processing, warehousing and fulfillment, and
customer service. The order reception and processing aspects of our Store
technically opened to public view beginning on November 4, 1999, however after
initial testing we curtailed operations awaiting funding for expanded
operations. We had interim warehousing and fulfillment operations on line to
accommodate casual shoppers, although our plan was (and is) to initiate no
marketing efforts to encourage purchasing at our Store until we are fully funded
and prepared. During April, 2000, we began our own warehousing and fulfillment
operations and, as we consummate planned financing (if such financing is
available on terms acceptable to us), we will establish minimal inventory stock
levels and hire warehousing and fulfillment personnel, although most of our
sales items will be shipped to us "just in time" or be shipped direct to
customers. We have developed a catalogue we plan to begin to send to affinity
groups within thirty days of receiving the anticipated funding to commence
active marketing for the Store, which we expect to open to full operation within
45 days following the receipt of such funding. All of these dates and plans are
subject to change in the event funding is delayed, arrives in amounts too small
to achieve desired milestones or the other risks and uncertainties described
under "Certain Factors That May Affect Future Operations" materialize.
Customers make purchases or redeem certificates at the Store using our own
"housing" services. These services provide a virtual "shopping cart," that
allows us to conduct Internet commerce by enabling site visitors to click on a
product to purchase it from the Store, adding it to the virtual shopping cart.
Our housing services then process the financial transaction involved when a
customer purchases a product from the Store or accounts for the redemption of a
certificate and, (1) if the transaction involves a purchase by an affinity group
member, it delivers the information relating to that transaction to Charter
Pacific Bank (see "Processing a Financial Transaction"), or (2) if the
transaction involves redemption of an incentive premium, it transmits the
details regarding the redemption to our accounting department. In addition, our
housing service enables worldwide access to the web site, while providing
greater affinity branding. By affinity branding, we mean the Store will appear
to visitors to be unique to the affinity group or merchant, with logos and
verbiage present on each page related to the affinity group or merchant.
4
Development of the Business
Since February 1999, we have taken the following steps to implement our business
plan:
o Retained David Saltrelli and Peter Schuster who both possess extensive
business, marketing, sales, and operations backgrounds and will manage
our day-to-day business activities.
o Developed our website (Store) with the support of Network 2001, Inc.
("Network"). Network is a corporation wholly-owned by Mr. Steven
Howell, one of our shareholders.
- Effective March 31, 1999, we entered into an agreement with
Network for the design and development of the first phase. As
payment for the services rendered to us, we agreed to pay to
Network $62,000 in cash and to issue to Network eighteen
thousand, eight hundred and eighty-five (18,885) shares of our
common stock. Following the stock split on November 1, 1999, the
number of shares which they hold as a result of providing these
services is fifty-six thousand, six hundred and fifty-five
(56,655). As of November 4, 1999, the web site was substantially
complete and the Store nominally available for shopping. As of
November 27, 1999, those shares have been issued and the cash
has been paid.
- During January, 2000, we began the development of the second
phase of our web site, which includes our own "housing"
services. These enhancements make it appear to visitors that
they are in a store unique to their affinity group or business,
with the affinity group or business name, picture and tag line
on each page. The enhancements also include our own shopping
cart, improved billing procedures and related improvements. Our
agreement with Network called for total payments of $330,000 to
accomplish all of the enhancements.
- Phase three of our website development was also completed in
Year 2000. These enhancements have provided a seamless
connection among our ordering, warehousing, accounting and
customer service functions. This state-of-the-art management
information system will help to ensure that we fulfill our
promise of 100% customer satisfaction. Our agreement with
Network called for total payments of $155,000 to accomplish
these enhancements, which has been paid in full.
- Phase four of our website development was commenced in January
of 2001 and includes development of new fee based offerings for
affinity members such as personalized ISP service and preferred
member purchase status, that provide value added services,
features, pricing, and benefits for a fee. In addition, phase
four also includes the development of the first B2B offering to
on-line merchants which will provide them with their own
turnkey, individually branded, gift redemption center through
which they can provide customers, clients, and employees with
rewards and incentives for purchases and recognition. Our
agreement with Network called for total payments of $625,000 to
accomplish these enhancements.
5
- We anticipate that future technological advances and system
improvements will prompt further enhancements to our website.
These "phase five" improvements remain under discussion.
o Established a relationship with American Sales Industries, Inc.
- Initially as our interim product fulfillment provider, ASI was
paid $2,000 per month for fulfillment services plus a fee per
item for merchandise that we purchased through ASI (at ASI's
cost) equal to: $0.50 per item costing under $5.00, $0.75 per
item costing $5.00 to $9.99 and $1.00 per item costing $10.00 or
more.
- Starting February 1, 2000, we leased 9,000 square feet of
warehouse space from ASI at a monthly rental of $5,000 and
commenced the set up of our own fulfillment center, while ASI
continued to provide complete warehousing and fulfillment
services as before at the same fixed fee plus fee per item
basis.
- Commencing in mid-April, 2000, we began maintaining our own
warehouse and fulfillment center in the leased space and stopped
using ASI for that purpose.
- We have a written agreement with ASI under which they will
function as our purchasing agent on a non-exclusive basis, and
their compensation for those services will be the "fee-per-item
based on product cost" described above.
o Executed a Merchant Bankcard Services and Security Agreement with
Charter Pacific Bank.
o Executed lease agreements for executive, administrative, purchasing and
customer service office space in Boca Raton, Florida.
o On November 4, 1999, nominally opened the web site Store to fifteen
affinity groups which had a total of 171,490 families as members. As of
April 1, 2001, we have enrolled more than 1,500 affinity groups that
tell us they have more than 5,000,000 families that are members of
those groups.
o On February 8, 2000, we obtained more than $1.3 Million in a financing
transaction with Monavia, Limited. Monavia received our non-negotiable,
9% promissory note due February 7, 2003 plus a three-year warrant to
purchase 681,987 shares of our common stock at an exercise price of
$15.00 per share (the market price on the date of the warrant). On July
21, 2000, we obtained an additional $645,000 in another transaction
with Monavia. Monavia received our non-negotiable, 9% promissory note
due July 20, 2003 plus a three-year warrant to purchase 321,932 shares
of our common stock at an exercise price of $16.50 per share (the
market price on the date of the warrant).
o On September 13, 2000, we entered into an agreement with Carousel
Finance Limited to issue up to 1,000,000 units, each comprised of one
share of our common stock and one warrant to purchase an additional
share of our common stock, for a purchase price of $5.00 per unit. The
warrant entitles the holder to purchase the common stock at an exercise
price of $10 for a term of five years. In a series of five transactions
between the date of the agreement and December 29, 2000 we obtained
more than $435,000. Carousel received 87,477 shares of our common stock
plus warrants to purchase the same number of additional shares.
6
o On February 14, 2001, we received $1,000,000 from Consensus Investments
Limited, which was a first tranche under a negotiated financing program
under which the financier may invest up to $5.0 million over the next
six months, based on a twenty percent discount to market price, with a
warrant attached at the market price.
o Designed and proofed a four-color, sixteen page catalogue, which is
ready for printing and distribution as soon as our store is
functionally ready to be fully operational.
o Designed, completed and tested a 1,000 page electronic catalogue which
is ready to be distributed via the Internet to on-line affinity group
members.
o Executed agreements with independent representatives who explain our
business concept to affinity groups and enroll their participation in
the program.
o Designed a core staff for our customer service, purchasing, warehousing
and fulfillment operations.
We intend to take the following steps to continue to implement our business
plan:
o Obtain requisite financing and create an inventory of merchandise for
our Store;
o Complete the staffing of our warehousing and fulfillment operation;
o Distribute our catalogue and commence aggressive marketing on a
phase-in basis to our present pool of more than 1,500 affinity groups
with established (but yet-to-be-opened) custom portals or stores;
o Increase our marketing activities to new affinity groups by expanding
the number of independent representatives and by allowing every
affinity group that is already on-line to open a store and distribute
their branded 1,000+ page catalogue directly to their membership base
via the Internet at no cost;
o Commence our marketing activities to every on-line merchant with regard
to our incentive redemption program;
o Expand our core Customer Service Department and outsource future
expansion to support full operations;
o Hire necessary key consultants and personnel with Internet e-commerce
experience to further implement our business strategy.
7
Marketing Strategy to Affinity Groups
The lynchpin of our marketing strategy to affinity groups is to utilize and
potentially enhance the affinity groups' internal methods of communication to
their members to grow our market share. We have enrolled and continue to enroll
affinity groups through the use of commission-only, outside sales
representatives. The representatives use our on-line description of our Store
and the affinity group program to demonstrate to affinity groups how their
members will be able to use the Store, the accuracy of our transaction tracking
system and the potential profitability for the affinity group as its members
make the purchases from the Store that they would otherwise make elsewhere. The
affinity group completes an on-line application. Since the affinity group
receives a fifteen percent (15%) commission on every purchase its members make,
the leaders of that affinity group are incentivized to use the group's internal
communications methods (such as the pulpit, a newsletter, a payroll insert, or a
flier brought home from school) to market our Store.
Both the sales representative that recruits an affinity group and the affinity
group itself are paid commissions only if and when product sales to members of
that affinity group are completed, thereby substantially eliminating the up
front marketing and advertising costs typically found in the retail sales
industry. The sales representative (or the group of which the sales
representative is a part) receives a total commission of 6.5% of sales to
members of affinity groups which such sales representative enrolled and the
affinity group is paid a 15% commission on such sales made to its members. As we
continue to develop this model prior to opening our Store for sales (and thus
for commissions), we have advanced certain sums to our representatives as
advances on commissions to be earned. We can offer no assurance whether such
advances on commissions will ever be offset by actually earned commissions.
We have developed and proofed a four-color, sixteen-page catalogue that we will
make available to affinity groups for distribution to their members either via
print or electronically via the Internet. We expect to begin distributing the
catalogue to the affinity groups during June, 2001. During July, following the
distribution of that catalogue, we will commence full scale operations.
8
Marketing Strategy to Merchants
We are assembling a unique sales force to market to merchants. Because of the
extensive experience possessed by members of our senior management, this
marketing formula is well-tested. Decision makers in various enterprises that
sell to the public will be approached with regard to the premium incentive
vouchers. If a merchant elects to enroll, he will deposit a sum of money with us
to be drawn against by the merchant using the Internet to print and deliver
vouchers. The actual purchase price of the voucher will be less than the face
amount of the voucher, so the merchant will benefit from the perceived increased
good will. The consumer who receives the voucher will visit the Redemption
Center, where that consumer will again be exposed to the merchant's marketing
messages. Upon selecting the desired premium, the consumer will acquire a
desired item of merchandise (rather than one arbitrarily selected by the
merchant). We plan to deliver a fully functional, individually branded, on-line
redemption center to every merchant that has an Internet presence. We will be
able to deliver the on-line redemption center to any merchant within 24 hours at
a nominal branding cost of under $50 per store. The beta version of our on-line
redemption center is functional as of April 1, 2001.
Processing Financial Transactions
Our enhanced software now processes the financial transaction involved when a
customer purchases a product from the Store and then delivers the information
relating to that transaction to Charter Pacific Bank. We have entered into an
agreement with Charter to complete the processing of the financial transactions.
Charter has significant experience in processing credit card transactions and
offers a real-time payment processing system. Charter has been in the business
of processing and administering financial transactions for several years and we
believe Charter will offer the benefits of reliable, secure payment processing
functionality. We hope to benefit from Charter's low incidence of customer
charge-backs and credit card fraud. A further benefit to us is that we will not
have to bear the cost of developing and maintaining complex systems,
infrastructure, and overhead to process credit card transactions.
We believe the benefits of Charter's service are:
o secure communication lines between us and Charter;
o the customer payment information is encrypted to prevent alteration or
tampering; and
o the messages are authenticated to verify the identity of the parties
sending and receiving the payment processing request.
Access to Charter's servers is secure, monitored and controlled 24 hours a day,
seven days a week.
Domain Name
We have registered our domain name "Netmaximizer.com" with Network Solutions,
Inc. ("NSI"). NSI acts as a clearinghouse for web site domain names under
license from the United States government.
9
Intellectual Property
We intend to rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. As of the date of this annual report, we do not own or otherwise control
any registered patents, copyrights or trademarks, nor have we submitted any
applications for trademark registration.
Our current logo consists of a gorilla and a tag line including the words
"Netmaximizer.com", colored blue and red. Although we have a license to use it,
we were advised that the present design of our mark may not be sufficiently
unique to be protected as a trademark. We are currently having our logo and
other related scripts and images custom designed so that there will be no
conflict with existing caricatures and type styles. We intend to file to have
that intellectual property trademark protected. If we determine that our
business plan or any individual aspect of the way we are doing business is an
asset whose value can be protected as intellectual property, we will attempt to
protect that proprietary asset by applying for a patent, copyright or trademark.
We cannot assure you that our patents, once applied for, will be issued, that
our trademark registrations will be approved or that our patents or trademarks
will not be successfully challenged by others or invalidated. If our trademark
registrations are not approved because third parties own these trademarks, our
use of these trademarks would be restricted unless we entered into arrangements
with the third-party owners, which might not be possible on reasonable terms.
Despite any efforts we may make in the future to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
technology or business model. Monitoring unauthorized use of our technology and
business model is difficult and we cannot be certain that the steps we will take
will prevent unauthorized use of our technology and business model.
In addition, our business activities may infringe upon the proprietary rights of
others, and, from time to time, we may receive, claims of infringement against
us. Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Any litigation could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time consuming and
expensive to resolve and would divert management's time and attention away from
our business. Any potential intellectual property litigation could also force us
to do one or more of the following:
o make significant changes to the structure and operation of our
business;
o attempt to design around a third party's patent; or
o license alternative technology from another party.
Implementation of any of these alternatives could be costly and time consuming,
and may not be possible. Accordingly, an adverse determination in any litigation
that we are a party to would have a material adverse effect on our business,
results of operations and financial condition.
In addition, we will endeavor to rely on trade secret laws and non-disclosure
and confidentiality agreements with our employees and consultants who have
access to our proprietary technology. We strictly control access to and
distribution of our technologies, documentation and other proprietary
10
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our solutions or technologies.
We cannot assure you that the steps we have taken will prevent misappropriation
of our solutions or technologies, particularly in foreign countries where laws
or law enforcement practices may not protect our proprietary rights as fully as
in the United States.
Industry Overview - The Internet
The Internet is an increasingly significant global interactive medium for
communications, content and commerce. Growth in Internet usage has been fueled
by a number of factors, including:
o the large and growing base of personal computers in the workplace and
home;
o advances in the performance of personal computers and modems;
o improvements in network systems and infrastructure;
o readily available and lower cost access to the Internet;
o increased awareness of the Internet among businesses and consumers;
o increased volume of information and services offered on the Web; and
o reduced security risks in conducting transactions online.
International Data Corporation estimates that the number of Internet users
worldwide exceeded 97 million in 1998 and will grow to approximately 320 million
by the end of 2002. International Data Corporation also estimates that worldwide
commerce over the Internet will reach approximately $426 billion by the end of
2002, up from approximately $32 billion in 1998.
The availability of a broad range of content and the acceptance of electronic
commerce has driven rapid Internet adoption by businesses and consumers alike,
which has in turn stimulated the proliferation of additional content and
electronic commerce.
We believe that the growing adoption of the Internet represents an enormous
opportunity for businesses to conduct commerce electronically without borders
over the Internet.
E-commerce
The term "e-commerce" encompasses business to consumer transactions conducted
over the Internet and the World Wide Web. As interest in the Web exploded during
the mid-1990's and, as the number of consumers with access to the Internet at
work or at home grew, companies that originally had established Web sites for
marketing purposes (to promote their corporate or brand identity or to provide
information about their products) soon became interested in using those sites
for sales purposes. Businesses identified the Internet as a means to shorten the
sales cycle.
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The information that is presented on a Web site is delivered in a focused manner
to targets who are intentionally looking for that specific information. The
Internet can reduce costs and level the playing field for small and large
businesses, allowing them to extend their reach globally. The availability of
sophisticated Internet and Web technology, stronger security mechanisms, and the
increasing acceptance of the new communications medium are also fueling the use
of e-commerce by businesses and consumers.
We believe that consumers' trust will increase with the number of successfully
completed transactions. Studies are demonstrating that the consumers' attitudes
are rapidly changing and that they are rapidly gaining confidence with
transacting business over the Internet.
We believe that the way in which products and services will be directly or
indirectly sold in the future will increasingly shift toward the Internet.
Leading businesses throughout the world are developing their Web strategies to
take advantage of this shift in the way consumers will receive product and
service related information, and purchase goods and services.
Competition
The online commerce market, particularly over the Web, is new, rapidly evolving
and intensely competitive. Our current or potential competitors include:
o online vendors of the types of products we currently offer in the Store
or intend to offer in the future;
o a number of indirect competitors, including Web portals and Web search
engines such as Yahoo! and America OnLine, that are involved in online
commerce either directly or in collaboration with other retailers;
o traditional brick and mortar distributors and retail vendors of the
products we currently offer in the Store or intend to offer in the
future, many of which possess significant brand awareness, sales volume
and customer bases;
o catalogue vendors; and
o conventional retail outlets who currently sell, or who may sell,
products or services through the Internet.
We believe that the principal competitive factors in the online, affinity-group
centered, retailing market are:
o breadth and depth of product selection and services;
o number of affinity group members and the quality and frequency of the
groups' contacts with their members;
o size of groups' membership base;
o accessibility to, and ease of use of, site;
o quality of editorial and other site content;
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o quality of search tools and transaction speed and security;
o quality of service and personalized service;
o technical expertise;
o convenience and price; and
o reliability and speed of fulfillment.
We expect competition to increase due to the lack of significant barriers to
entry for online business generally, and for online direct marketing programs.
Some of our current and potential competitors, such as Amazon.com, Outpost.com,
and Buy.com, have longer operating histories, greater brand recognition, larger
client and member bases, and significantly greater financial, technical and
marketing resources than we do.
These advantages may enable them to respond more quickly to new or emerging
technologies and changes in customer preferences. These advantages may also
allow them to engage in more extensive research and development, undertake
extensive and far-reaching marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, strategic
partners and advertisers. As a result, it is possible that our existing
competitors or new competitors may rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margin and
loss of market share. We may not be able to compete successfully, and
competitive pressures may affect our business, results of operations and
financial condition.
Governmental Regulation
We are subject to general business regulations and laws regarding taxation and
access to online commerce. In addition, the Internet is subject to government
obscenity and decency standards. Like all companies, we are subject to consumer
protection laws and we are subject to compliance with Federal Trade Commission
restrictions.
Because we permit our affinity groups and merchants to place their content on
the Affinity Stores and the Redemption Centers, we may not have absolute control
regarding all of the content that appears on those portals. Accordingly, there
is a risk that we may have inappropriate content that could be viewed before we
could remove it. Each of our Affinity Groups and merchant participants has
signed an agreement in which they covenant not to put inappropriate material on
the site.
Employees
While we completed development of our web site and raised needed capital, we
reduced our full time staff to two. We anticipate that number to expand rapidly
during the next two months as we re-commence our warehouse and fulfillment
operations, expand our customer service operations and begin our aggressive
marketing campaign. From time to time, we may also retain consultants and
consulting firms to provide us with special expertise in developing marketing,
software and telecommunications technologies. The sales people who recruit
affinity groups and the sales force that markets to merchants are not employees
of the Company, but are independent contractors.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
We Have Only a Limited Operating History that Investors May
Use to Assess Our Future Prospects
We have only a limited operating history. We have not and may never generate
sufficient revenues to achieve profitability. We have limited experience
addressing challenges frequently encountered by early-stage companies in the
electronic commerce and direct marketing industries. You should evaluate our
business in light of the risks and difficulties frequently encountered by early
stage companies engaged in Internet commerce. For us, these risks include:
o our significant dependence on selling products through the Internet,
which thus far has only limited market acceptance;
o our ability to develop and upgrade our infrastructure, including
internal controls, transaction processing capacity, data storage and
retrieval systems and Web site;
o our need to manage changing operations as the number of our products
and purchasers increase;
o our reliance upon strategic relationships, such as:
a. American Sales Industry Lease and Purchasing Agreements: If
American Sales Industries were to discontinue providing purchasing
services we might not be able to buy our goods as cheaply. If we
were to lose our lease, then we would have to move our warehousing
and fulfillment functions to another location or find a qualified
provider of these services.
b. Network 2001: If Network were to abandon developmental efforts, we
would have to obtain an alternative contractor to develop the
planned enhancements to our site, thereby causing delay in
implementation.
c. Affinity Groups' Participation: If the current Affinity Groups
were to stop promoting their members' purchasing through our
Store, then we would have to find replacement Affinity Groups.
o regulatory risks associated with our business, particularly with regard
to the possibility of our having to determine and collect state taxes
for sales conducted over the Internet; and
o our dependence upon and need to hire key personnel, for example a Chief
Operating Officer, a Director of Customer Service, a Director of
Purchasing, a Director of Shipping & Fulfillment and a Director of
Computer Operations.
We may not be successful in addressing these risks, and our business strategy
may not be successful. Our revenue and income potential is unproven and our
business model is still emerging. We cannot assure you that we will continue to
attract affinity group participants or achieve significant revenues or operating
margins in future periods. In addition, we have never operated during a general
economic downturn in the United States, which typically adversely affects retail
sales. Accordingly, our limited operating history does not provide investors
with a meaningful basis for evaluating our business, our prospects or an
investment in our common stock.
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We Have a History of Losses and these Losses May Continue Until August 31, 2001
We have never operated profitably and, given our planned level of operating
expenses, we expect to continue to incur losses for the foreseeable future.
Although we project revenue growth to begin during June or July, such growth may
not be achieved or if it is achieved, such growth may not be sustainable at a
rate sufficient to achieve and maintain profitability. We plan to increase our
operating expenses as we continue to build infrastructure and inventory to
support the expansion of our business. We anticipate needing $2,100,000 to
sustain our operations for the next year, not including the lines of credit and
other capitalization which we intend to employ to fund our inventory. Our losses
may increase in the future, and even if we achieve our revenue targets, we may
not be able to sustain or increase profitability on a quarterly or annual basis.
If our revenues grow more slowly than we anticipate, or if our operating
expenses exceed our expectations and cannot be adjusted accordingly, our
business, results of operations and financial condition will be materially and
adversely affected.
Our Prospects for Obtaining Additional Financing Are Uncertain and Failure
to Obtain Needed Financing Could Affect Our Ability to Pursue Future Growth
We will need to raise additional funds to develop or enhance our services, to
fund expansion, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. Although we intend to use "just-in-time"
shipping and "drop shipping" for much of our sales, we intend to finance certain
items in inventory using capital. We cannot assure you that additional financing
will be available on terms favorable to us, or at all. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced and these securities
might have rights, preferences or privileges senior to those of our current
stockholders. If adequate funds are not available on acceptable terms, our
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance services or products, or otherwise respond to competitive
pressures would be significantly limited. Our business, results of operations
and financial condition could be materially adversely affected by this
limitation.
Permanent Injunction Against Our President
In June 1993, following the filing of a complaint by the Federal Trade
Commission, David Saltrelli, our President and director, (and other individuals
and entities not affiliated with Netmaximizer.com, Inc.) entered into a
Stipulated Permanent Injunction and Final Judgment with the FTC. The Injunction
was entered by the United States District Court for the Middle District of
Florida, Orlando Division. In the proceedings leading up to the Injunction,
allegations were made that (a) consumers acquired travel-related services and
products (both as incentives and as direct purchases) from telemarketing
entities either controlled by or affiliated with Mr. Saltrelli; (b) that the
descriptions of and disclosures regarding these travel-related products or
services were inadequate; (c) that consumers were at times required to pay
undisclosed fees or increased costs with regard to the travel-related products
to services; and (d) that on occasion the travel-related products or services
were not available at the times or on the terms advertised. Mr. Saltrelli denied
all material allegations contained in the FTC's complaint. He agreed to the
injunction, without trial or adjudication of any issue of law or fact, to
resolve all matters in dispute between him and the FTC. See "Item 5. Directors
and Executive Officers - Other Information - FTC Injunction."
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The Injunction enjoins Mr. Saltrelli, as well those acting with him or
participating in his activities, from supplying travel-related services and
products for use in telemarketing and from assisting in the telemarketing of any
travel-related product or service. The Injunction also states that, in
connection with the advertising, promotion, marketing, distribution, offering
for sale or sale of travel-related products or services (including premiums and
incentives), Mr. Saltrelli and the related parties are permanently enjoined
from, among other things, failing to disclose or misrepresenting in any manner
any restriction, limitation or condition on any consumer's use of a
travel-related product or service, or failing to provide to each consumer who
obtains such travel-related product or service the exact trip, product or
service as was represented to the consumer.
Netmaximizer.com, Inc. had beginning on November 4, 1999 and prior to March 1,
2000, provided travel-related premiums and incentives to affinity group members
to promote the sale of products, albeit never in a telemarketing context. As of
March 1, 2000, we eliminated all use of travel-related incentives, as we
determined that our affinity group members relate better to a more tangible,
name-product incentive. Nonetheless, if the FTC were to determine that Mr.
Saltrelli, as our President, or Netmaximizer.com itself had violated the terms
of the Injunction between November 4, 1999 and March 1, 2000, by engaging in
prohibited conduct, it may seek to enforce the Injunction directly against us.
Should this or any other regulatory action lead to civil or criminal charges
against Netmaximizer.com, Inc., we may be subject to negative publicity, the
costs of litigation, the diversion of management time and other negative
effects, even if we ultimately prevail.
Our Quarterly Operating Results May Be Subject to Fluctuations,
which Could Affect Our Stock Price
We hope to grow rapidly and our revenue and operating results may vary
significantly from quarter to quarter due to a number of factors, some of which
are outside of our control. As a result, our operating results may be below the
expectations of public market analysts and investors. In this event, the price
of our common stock may fall.
The factors most likely to produce varied results include:
o changes in marketing and advertising costs that we incur to attract and
retain affinity groups and their members;
o our rate of acquiring affinity groups and the level of activity of new
and existing members of groups;
o changes in the prices we pay for the goods we sell or the availability
of such goods in the quantity and variety we require to retain our
members;
o the exercise of a substantial number of options or warrants to acquire
shares of our common stock at prices below the prevailing market;
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o the introduction of new products and services by us or by our
competitors;
o changes in the costs of warehousing or delivering our goods;
o changes in our pricing policies, the pricing policies of our
competitors or the pricing policies for Internet retail sales
generally;
o unexpected costs and delays relating to the expansion of our
operations; and
o the occurrence of technical difficulties or unscheduled system
downtime.
Due to these factors, revenues and operating results are difficult to forecast
and investors should not rely on period to period comparisons of results of
operations as an indication of our future performance. Any significant shortfall
in revenues in relation to our expenses would have a material adverse effect on
our business, results of operations and financial condition.
Our Operating Results May Be Subject to Seasonal Fluctuations that
Could Impact Our Growth and Affect Our Stock Price
We believe that our revenues will be subject to seasonal fluctuations as a
result of general patterns of retail buying, which are typically higher during
the fourth calendar quarter. In addition, expenditures by consumers tend to be
cyclical, reflecting general economic conditions, holidays, vacation periods and
the beginning and end of school. The extent of these seasonal fluctuations in
any period may be difficult to predict and, if the fluctuations are higher than
our expectations, they could have a material adverse effect on our business,
results of operations and financial condition. A downturn in the general economy
or a shift in consumer buying patterns could harm our results of operations.
We Hope to Grow Rapidly, and the Failure to Manage Our Growth
Could Adversely Affect Our Business
As we continue to increase the scope of our operations, we may not have an
effective planning and management process in place to implement our business
plan successfully. We plan to expand our warehousing and fulfillment and our
customer service operations very rapidly. We plan to continue the expansion of
our sales, marketing and administrative functions. We received our first
application from an affinity group in September 1999. As of April 6, 2001, we
had accepted a total of more than 1,500 applications. We have accepted them in
increments over time and intend to continue to do so. This growth may strain our
management systems and resources. We anticipate the need to continue to improve
our financial and managerial controls and our reporting systems. In addition, we
will need to expand, train and manage our growing work force. Our business,
results of operations and financial condition will be materially and adversely
affected if we are unable to manage our expanding operations effectively.
Our Success Depends In Part On Our Ability to Maintain
and Expand an Active Membership Base
Our success largely depends on our ability to maintain and expand an active
membership base. Although we initially accepted applications for participation
by 15 affinity groups representing approximately 171,490 members and have
subsequently expanded our membership base to more than 1,500 affinity groups
with more than 5,000,000 families that are members, this industry typically has
17
generated the majority of its revenues from a small percentage of its members,
and we cannot assure you that the percentage of active members will increase in
our case. In addition, we cannot be certain that our membership growth will
continue at current rates or increase in the future.
Our Success Also Depends In Part On Our Ability to Recruit
and Maintain an Active Merchant Base
We believe the preliminary testing of our Redemption Store concept has proven
the viability of that plan. Nonetheless, if we are unable to recruit a
sufficient number of merchant participants or, having recruited them, if the
merchants do not use the premium incentive vouchers, that aspect of our
operations will not be successful.
Our Business Will Suffer If the Acceptance of Online
Purchasing Does Not Continue
Our future success will depend substantially upon continued growth in the use of
the Internet and in the acceptance and volume of commerce transactions on the
Internet. Our potential customers will likely accept and adopt the Internet as a
medium to conduct business only if the Internet provides them with greater
efficiencies, lower prices and avoided costs, all in a secure environment.
However, the number of Internet users may not continue to grow, and commerce
over the Internet may not become more accepted or widespread.
As this is a new and rapidly evolving industry, the ultimate demand and market
acceptance for Internet-related services is subject to a high level of
uncertainty. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including:
o lack of acceptable security technologies,
o lack of access and ease of use,
o congestion of traffic, whether created in due course by regular market
activity or artificially by computer "hackers",
o inconsistent quality of service,
o lack of availability of cost-effective, high-speed service,
o potentially inadequate development of the necessary infrastructure,
o excessive governmental regulation,
o uncertainty regarding intellectual property ownership or timely
development, and
o commercialization of performance improvements, including high speed
modems.
A necessity of online commerce and communications is the secure transmission of
confidential information over public networks. Our security measures may not
prevent security breaches. Any failure to prevent security breaches could harm
our business. We rely on encryption and authentication technology licensed from
third parties to provide the security and authentication technology to effect
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secure transmission of confidential information, including customer credit card
numbers. Advances in computer capabilities, new discoveries in the field of
cryptography, or other developments may result in a compromise or breach of the
technology used by us to protect customer transaction data. Any compromise of
our security could harm our reputation and, therefore, our business.
We Are Assuming Merchandising, Inventory Management
and Fulfillment Responsibilities
We plan to handle our own merchandising, inventory management and order
fulfillment. Our failure to perform these functions efficiently and in a timely
manner could result in the disruption of our operations, including shipment
delays. In addition, changing trends in consumer tastes in the products we offer
subject us to inventory risks. It is important to our success that we accurately
identify and predict these trends and, to the extent that we do not obtain
products by "just-in-time" shipping, do not overstock unpopular products. The
demand for specific products can change between the time inventory quantities
are ordered and the date of receipt. If products do not achieve sufficient
consumer acceptance, we may be required to take inventory markdowns, which could
reduce our sales and gross margins. We believe that to the extent that demand
for our products increases over time and we are not able to achieve satisfactory
delivery times using "just-in-time" methodologies, we may be forced to increase
inventory levels.
Our Business Will Suffer If Affinity Group Marketing Does Not Succeed
The success of our business model will depend on our ability to attract and
retain affinity groups and their members. We cannot assure you that our
marketing efforts and the quality of each member's experience, including the
number and availability of the products we provide, will generate sufficient
satisfied members. To the extent that our products, prices and incentives
programs do not achieve market acceptance among groups and their members, our
business would be materially and adversely affected.
Any member of an affinity group who is dissatisfied with the quality of an
experience with our company for reasons within or outside of our control could
damage our reputation and/or cause the termination of participation by the
entire affinity group. Any damage to our reputation and/or termination of
participation by an entire affinity group could have a material adverse effect
on our business, results of operations and financial condition.
If Our Affinity Groups Fail to Effectively Promote
Their Sites, Our Revenues Could Suffer
Our business model is substantially dependent upon the promotional efforts of
our affinity groups. For example, if our groups do not prominently display the
availability of their sites to make sales or do not work with us to create
promotional offers that are attractive and understandable to the members of the
affinity groups, their promotions may not be successful, and as a result, we may
not be successful. We cannot assure present or potential investors that our
affinity groups will allocate sufficient technical resources and promotional
budgets and efforts to make regular sales through their sites and other
promotions successful. If our groups' sales programs are not successful, our
revenues could suffer.
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Credit Card Fraud Could Cause Us Losses in the Future
Under current credit card practices, a merchant is liable for fraudulent credit
card transactions when that merchant does not obtain a cardholder's signature,
as is the case with the transactions we process. We may not be able to
adequately control fraudulent credit card transactions.
We Face Intense Competition, and the Failure to Compete Effectively
Could Adversely Affect Our Market Share and Results of Operations
We face intense competition from both traditional and online retailing
businesses. We expect competition to increase due to the lack of significant
barriers to entry for online business generally. As we expand the scope of our
product and service offerings, we may compete with a greater number of companies
across a wide range of retailing services. Our ability to generate significant
revenue from sales will depend on our ability to differentiate ourselves through
the goods and prices we provide and the revenues we generate for affinity
groups. The attractiveness of our program to current and potential members and
affinity groups depends in part on the attractiveness of the incentives or
rewards that we offer. Currently, several companies offer competitive online
products or services, including MyPoints.com, CyberGold and Netcentives. We also
expect to face competition from established online portals and community web
sites that engage in direct marketing and loyalty point programs, as well as
from traditional advertising agencies and direct marketing companies that may
seek to offer online products or services.
Many of our current competitors and potential new competitors (for example,
Amazon.com; eToys.com; Outpost.com; ValueAmerica.com and Buy.com) have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
These advantages may allow them to respond more quickly to new or emerging
technologies and changes in customer requirements. It may also allow them to
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies, and make more
attractive offers to potential employees, strategic partners and advertisers.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products or services to address the needs of our prospective
customers. As a result, it is possible that new competitors may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of our market share. We may not
be able to compete successfully, and competitive pressures may materially and
adversely affect our business, results of operations and financial condition.
See "Business -- Competition."
We Depend On the Services of Our Executive Officers to Manage Our Growth,
and There Is No Assurance We Can Retain Their Services
Our future success depends on the continued service of our key senior
management, David Saltrelli, our President and Chief Executive Officer, and
Peter Schuster, our Secretary and Treasurer. The loss of either of these persons
could have a material adverse effect on our business. We do not have either
employment contracts with or key-person insurance on any of our employees.
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Our success depends on our ability to attract, retain and motivate highly
skilled employees. Competition for employees in our industry is intense. We may
be unable to retain our key employees or to attract, assimilate and retain other
highly qualified employees in the future. We anticipate difficulty from time to
time in attracting the personnel necessary to support the growth of our business
in the future.
We Depend Upon Third Party Support
We are dependent upon third parties to provide maintenance to our Internet site
and to others to provide us with the necessary access to the Internet with
sufficient capacity and bandwidth so that our Store can properly function and
remain "online." Any restrictions or interruption in our connection to the
Internet may cause significant revenue loss.
We also depend upon our accountants, St. John and Landon of Boca Raton, Florida,
for book keeping and related financial control support. We have no in-house
accounting or comptroller support and so the loss of our accountants would
disrupt our business operations until they could be replaced.
We Are Vulnerable To System Failures Which Could Cause
Interruptions or Disruptions In Our Service
Our success depends on the capacity, reliability and security of our networking
hardware, software and telecommunications infrastructure. We maintain our own
hardware for warehousing, purchasing and administrative functions and also rely
on Network 2001, Inc. for hardware support. Despite precautions taken by us and
the host of our Web site, our system is susceptible to natural and man-made
disasters such as earthquakes, fires, floods, power loss and vandalism.
Telecommunications failures, computer viruses, electronic break-ins or other
similar disruptive problems could adversely affect the operation of our systems.
Any such technical failure or security problems could harm our business,
financial condition and results of operations. Our insurance policies may not
adequately compensate us for any losses that may occur due to any damages or
interruptions in our systems. We could be required to make capital expenditures
in the event of damage.
Periodically, we may experience unscheduled system downtime that may result in
our web site being inaccessible to members, or we may experience slow response
times that may result in decreased traffic to our web site. If these problems
arise, it could materially and adversely affect our business, results of
operations and financial condition.
Our Business Will Suffer If We Are Unable To Keep Pace
With Rapid Technological Changes In Our Industry
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions, short development cycles and evolving
industry standards. The recent growth of the Internet and intense competition in
our industry exacerbate these market characteristics. The introduction of
products and services embodying new technologies, the emergence of new industry
standards and changing consumer needs and preferences could render our existing
services obsolete and unmarketable. Our future success will depend in part on
our ability to respond effectively to rapidly changing technologies, industry
21
standards and customer requirements by adapting and improving the performance
features and reliability of our services. We may experience technical
difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. In addition, any new
enhancements to our products and services must meet the requirements of our
current and prospective users. We may experience technical difficulties that
could delay or prevent the successful development, introduction or marketing of
new products and services. We could incur substantial costs to modify our
services or infrastructure to adapt to rapid technological change.
Continued Development and Use of the Internet Infrastructure
Is Critical To Our Ability To Offer Our Services
Our affinity groups and their members depend on Internet service providers for
access to our web site. Internet service providers and web sites have
experienced significant outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
If outages or delays occur frequently in the future, Internet usage, as well as
electronic commerce and the usage of our products and services, could grow more
slowly or decline, and this could have an adverse effect on our business.
A number of factors may inhibit Internet usage, including inadequate network
infrastructure, security concerns, inconsistent quality of service, and lack of
availability of cost-effective, high-speed service. If Internet usage grows, the
Internet infrastructure may not be able to support the demands placed on it by
this growth and its performance and reliability may decline.
Future Regulation of the Internet Could Affect Our Operations
Laws and regulations that apply to the Internet may become more prevalent in the
future. The laws governing the Internet and email services remain largely
unsettled. There is no single governmental body overseeing our industry, and
many state laws that have been enacted in recent years have different and
sometimes inconsistent application to our business.
The governments of foreign countries may also attempt to regulate electronic
commerce. New laws could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a commercial medium. In addition,
existing laws such as those governing intellectual property and privacy may be
interpreted to apply to the Internet. In the event that foreign governments, the
federal government, state governments or other governmental authorities adopt or
modify laws or regulations relating to the Internet, our business, results of
operations and financial condition could be materially and adversely affected.
Some States May Impose a New Sales Tax On Our Business
A 1992 Supreme Court decision confirmed that the commerce clause of the United
States Constitution prevents a state from requiring the collection of its sales
and use tax by a mail-order company unless such company has a physical presence
in the state. However there continues to be uncertainty due to inconsistent
application of the Supreme Court decision by state and federal courts. While
there is no case law on the issue, we believe that this analysis could also
apply to our online business.
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We attempt to conduct our operations consistent with our interpretation of the
applicable legal standard, but there can be no assurance that such compliance
will not be challenged. In recent challenges, various states have sought to
require companies to begin collection of sale and use taxes and/or pay taxes
from previous sales. As of the date of this Annual Report, we have not received
assessments from any state. We currently collect and forward sales tax on all
shipments to Florida.
The Supreme Court decision also established that Congress has the power to enact
legislation which would permit states to require collection of sales and use
taxes by mail-order companies. Congress has from time to time considered
proposals for such legislation. We anticipate that any legislative change, if
adopted, would be applied on a prospective basis.
Recently, several states and local jurisdictions have expressed an interest in
taxing e-commerce companies who do not have any contacts with their
jurisdictions other than selling products online to customers in such
jurisdictions. The Internet Tax Freedom Act imposed a moratorium on new taxes or
levies on e-commerce for a three-year period due to expire in October 2001.
However, there is a possibility that Congress may not renew this legislation.
Any such taxes could have an adverse effect on online commerce, including our
business.
We Face Risks Associated With Third Party Claims and Protection of
Our Intellectual Property Rights, and Any Litigation Relating
To Intellectual Property Rights Could Harm Our Business
Our business activities may infringe upon the proprietary rights of others, and
other parties may assert infringement claims against us. An adverse
determination in any litigation of this type could require us to make
significant changes to the structure and operation of our affinity sales or
online rewards program, attempt to design around a third party's patent, or
license alternative technology from another party. Implementation of any of
these alternatives could be costly and time consuming, and might not be
possible. Accordingly, an adverse determination in any litigation that might
ensue between a third party and us could have a material adverse effect on our
business, results of operations and financial condition. In addition, any
intellectual property litigation, even if successfully defended, would result in
substantial costs and diversion of resources and management attention and could
therefore have a material adverse effect on our business, results of operations
and financial condition.
Our success and ability to compete depends on our internally developed
technologies and trademarks, which we will seek to protect through a combination
of patent, copyright, trade secret and trademark laws. Despite actions we take
to protect our proprietary rights, it may be possible for third parties to copy
or otherwise obtain and use our proprietary information without authorization or
to develop similar technology independently. In addition, legal standards
relating to the validity, enforceability and scope of protection of proprietary
rights in Internet-related businesses are uncertain and still evolving. We
cannot give any assurance regarding the future viability or value of any of our
proprietary rights. In addition, we cannot give any assurance that the steps
taken by us will prevent misappropriation or infringement of our proprietary
information. Any infringement or misappropriation, should it occur, could have a
material adverse effect on our business, results of operations and financial
condition. See "Business -- Intellectual Property."
23
Substantial Control Will Remain With Our Management and Major Stockholders
and This Could Delay or Prevent a Change of Control
As of April 6, 2001, our executive officers, directors and 5% stockholders
together beneficially owned approximately 41.69% of our outstanding common
stock. These stockholders, if they vote together, will retain substantial
control over matters requiring approval by our stockholders, such as the
election of directors and approval of significant corporate transactions. This
concentration of ownership might also have the effect of delaying or preventing
a change in control. See "Security Ownership of Certain Beneficial Owners and
Management."
Future Sales of Our Common Stock Could Cause the Price of Our Shares To Decline
As of April 6, 2001, we have 39,957,149 shares of common stock outstanding. Of
these shares, 20,705,770 are transferable without restriction or registration
under the Securities Act of 1933, or pursuant to the volume and other
limitations of Rule 144 promulgated under the Securities Act. An offering of a
substantial number of shares of our common stock into the public market could
cause its price to decline. This is particularly the case because a substantial
portion of our outstanding shares of common stock are held by persons who
purchased their shares at prices significantly below the current market price.
As of April 6, 2001, 859,149 shares of common stock are subject to lock-up
agreements between the holders of those shares and us. Under those agreements,
the holders have agreed not to offer, sell, contract to sell, grant any option
to purchase or otherwise dispose of their common stock until a managing
underwriter of a public offering releases the holders from the lockup
agreements. Following the release, those shares subject to the lock-up
agreements will become available for immediate resale in the public market
subject, in some instances, to the volume and other limitations of Rule 144.
As of April 6, 2001, we had outstanding options to purchase an aggregate of
7,809,600 shares of common stock which were granted under our stock option plan.
Holders of such options, as those options continue to vest, are likely to
exercise them when we might obtain additional capital on terms more favorable
than those provided by the options. Further, while options are outstanding, our
ability to obtain additional financing on favorable terms may be adversely
affected. See also Item 3, Legal Proceedings.
As of April 6, 2001, we had outstanding warrants to purchase an aggregate of
2,424,728 shares of common stock which were issued pursuant to various private
placements of our securities. Holders of such warrants are likely to exercise
them when we might obtain additional capital on terms more favorable than those
provided by the warrants. Further, while the warrants are outstanding, our
ability to obtain additional financing on favorable terms may be adversely
affected. See also Item 5, Recent Sales of Unregistered Securities.
We Must Comply with the OTC Bulletin Board Eligibility Rule
In January of 1999, the SEC granted approval to the NASD OTC Bulletin Board
Eligibility Rule 6530 which requires a company listed on the OTC Bulletin Board
to be a reporting company and current in its reports filed with the SEC. As a
result of this rule change, we filed a Registration Statement on Form 10 with
the SEC in order to become a full reporting company. That Registration Statement
24
became effective on February 7, 2000. Following the effective date, we filed an
annual report on Form 10K for the year ended December 31, 1999, and thereafter
have filed regular quarterly reports on Form 10-Q, all pursuant to the
Securities Exchange Act of 1934, as amended and the rules and regulations of the
SEC promulgated thereunder. The SEC reporting requirements will add additional
expenses to our operations.
There Is No Assurance That a Public Market For
Our Common Stock Will Continue To Develop
There has only been a limited public market for our common stock. We cannot
predict the extent to which investor interest in our common stock will lead to
the development of a trading market or how liquid that market might become.
Our Stock Price Could Be Volatile
The stock market has experienced significant price and volume fluctuations, and
the market prices of technology companies, particularly Internet-related
companies, have been highly volatile. Investors may not be able to resell their
shares at or above the current OTCBB price. In addition, our results of
operations during future fiscal periods might fail to meet the expectations of
stock market analysts and investors. This failure could lead the market price of
our common stock to decline and cause us to become the subject of securities
class action lawsuits.
We Do Not Intend To Pay Future Cash Dividends
We currently do not anticipate paying cash dividends on our common stock at any
time in the near future. Any decision to pay dividends will depend upon our
profitability at the time, cash available and other factors. We may never pay
cash dividends or distributions on our common stock.
ITEM 2. PROPERTIES
We currently lease our principal business office at 4400 North Federal Highway,
Boca Raton, Florida pursuant to a series of leases, each of which is
approximately one year in duration. The total monthly rent payments under the
leases are approximately $6,000, plus tax, which includes our pro rata share of
common area expenses such as insurance, cleaning services, and maintenance
related to the space we rent.
As of February 1, 2000, we began leasing approximately 9,000 square feet of
warehouse space at 3560 Investment Lane, Suite 201, Riviera Beach, Florida,
pursuant to a lease that expired on January 31, 2001. Since January 31, we have
continued to lease that facility on a month-to-month basis. The monthly rental
payments for the lease are $5,000. We pay all of our own utilities, maintenance
and cleaning for the warehouse space we lease, but pay no share of expenses for
any other or common areas.
Other than described above, we do not presently own or lease any other real
property.
25
ITEM 3. LEGAL PROCEEDINGS
On January 9, 2001, Charles Aker filed suit against the Company,
alleging that he is owed compensation under an agreement dated June 7, 1999,
pursuant to which Mr. Aker was to have enhanced the Company's image and promoted
the Company's stock for a minimum period of twelve months. The compensation in
the agreement, as amended by an addendum dated the same date as the original
agreement, called for the issuance of options to purchase up to 276,432
(pre-split) shares of our common stock at a purchase price of $10.00 per share,
a monthly fee of $6,000 plus reimbursement of expenses. (Giving effect to the
three-for-one stock split that has subsequently occurred, this would equate to
829,296 shares at an exercise price of $3.33 per share.) The stock options were
never issued, however, which is the likely reason Mr. Aker is seeking "specific
performance" of the promise to issue the options. Specific performance is an
equitable remedy, against which the Company has asserted the complete defense of
unclean hands, based on Mr. Aker's alleged fraud. The Company has counterclaimed
for fraudulent inducement and breach of contract, seeking rescission of the
contract and restitution of all funds previously paid to Mr. Aker. No formal
discovery has yet been done on the merits, if any, of Mr. Aker's claims.
Although the Company believes that Mr. Aker's claims are wholly without merit,
at this early state of the litigation, management cannot assess the likely
outcome of the litigation or whether the outcome will materially impact the
Company's financial condition or results of operations. The Company intends to
vigorously prosecute its action against Mr. Aker and to vigorously defend the
actions against it by Mr. Aker.
From time to time, the Company is a party to routine litigation
incidental to its business. Management does not believe that any of these
pending legal proceedings and that listed above, individually or in the
aggregate, will materially impact the Company's financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 2000, the issuer did not submit any matters to the
vote of its security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 18, 1998, our common stock was approved for trading on the OTCBB under
the symbol "RLNR" (reflecting our former name, RLN Realty Associates, Inc.). On
March 1, 1999, we changed our name to "Netmaximizer.com, Inc.", and our OTCBB
symbol was changed to "MAAX". The following table sets forth, for the periods
indicated, the range of the high and low bid quotations (as reported by NASD).
There were no trades of our securities on the OTCBB prior to March 11, 1999.
26
The bid quotations set forth below, reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions:
OTCBB
2000 High Low
---- ---- ---
1st Quarter $17.70 $15.80
2nd Quarter $18.60 $17.40
3rd Quarter $14.90 $11.30
4th Quarter $6.40 $2.90
As of April 6, 2001, there were 31 holders of record of our common stock.
In January of 1999, the SEC granted approval to the NASD OTC Bulletin Board
Eligibility Rule 6530 which requires a company listed on the OTC Bulletin Board
to be a reporting company and current in its reports filed with the SEC. As a
result of this rule change, we filed a Registration Statement on Form 10 in
order to become a full reporting company. That Registration Statement became
effective on February 7, 2000. Subsequently, we have filed all our reports in a
timely fashion.
We have not declared or paid any cash dividends on our common stock since our
inception, and our Board of Directors currently intends to retain all earnings
for use in the business for the foreseeable future. Any future payment of
dividends will depend upon our results of operations, financial condition, cash
requirements and other factors deemed relevant by our Board of Directors.
Recent Sales of Unregistered Securities
On March 8, 1999, after our name was changed to Netmaximizer.com, Inc., but
before our shares were being quoted on the OTCBB, we sold 12,000,000 (pre-split)
shares of our common stock for $0.001 per share to raise $12,000 in cash. This
private placement was made to ten investors, including David Saltrelli and Peter
Schuster, and was fully subscribed. The placement was not underwritten, but was
conducted with the advice of the Venture Law Corporation. This sale was exempt
from registration in reliance upon Rule 504 under Regulation D promulgated under
the Securities Act. The aggregate offering price did not exceed $1,000,000, and
the offering was otherwise in compliance with Rules 501 and 502 promulgated
under the Securities Act.
On March 23, 1999, we sold 16,000 (pre-split) shares of our common stock for
$3.125 per share to raise $50,000 in cash. Our shares had begun to be quoted at
this point, but the price was very volatile, ranging between $1.06 and $12.00
during the month of March 1999 for no apparent reason. As there were no trades
on March 23, 1999, this offering was made to one non-affiliated subscriber at
the negotiated and agreed "fair value" of $3.125 per share. The offering was not
underwritten. This sale was exempt from registration in reliance upon Rule 504
under Regulation D promulgated under the Securities Act. The aggregate offering
price did not exceed $1,000,000, and the offering was otherwise in compliance
with Rules 501 and 502 promulgated under the Securities Act.
27
On September 27, 1999, we issued 1,170 (pre-split) shares of our common stock
for $14.531 per share to raise $17,000 in cash. On September 30, 1999, we issued
13,115 (pre-split) shares of our common stock for $15.250 per share to raise
$200,000 in cash. On October 20, 1999, we issued 1,832 (pre-split) shares of our
common stock for $16.375 per share to raise $30,000 in cash. These sales were
made to one, non-affiliated purchaser, Monavia, Ltd. The price paid by Monavia
on each of those dates was equal to the closing bid price on the date of sale of
the shares to Monavia. These offerings were not underwritten and were exempt
from registration in reliance upon Section 4(2) of the Securities Act because
they did not involve a public offering.
The Company accounted for the sales of restricted stock issued in both March and
September of 1999 by recording common stock and additional paid in capital for
the total of the proceeds received.
On February 8, 2000, we issued a non-negotiable, 9% promissory note due February
7, 2003 plus a three-year warrant to purchase 681,987 shares of our common stock
at an exercise price of $15.00 per share (the market price on the date of the
warrant). This sale was made to Monavia. Ltd. This offering was not
underwritten. The sale was exempt from registration in reliance upon Section
4(2) of the Securities Act since it did not involve a public offering.
On July 21, 2000, we issued a non-negotiable, 9% promissory note due July 20,
2003 plus a three-year warrant to purchase 321,932 shares of our common stock at
an exercise price of $16.50 per share (the market price on the date of the
warrant). This sale was made to Monavia. Ltd. This offering was not
underwritten. The sale was exempt from registration in reliance upon Section
4(2) of the Securities Act since it did not involve a public offering.
On September 13, 2000, we entered into an agreement with Carousel Finance
Limited to issue up to 1,000,000 units, each comprised of one share of our
common stock and one warrant to purchase an additional share of our common
stock, for a purchase price of $5.00 per unit. The warrant entitles the holder
to purchase the common stock at an exercise price of $10 for a term of five
years. The following purchases of Units were made pursuant to that agreement:
Date Amount Number of Units
---- ------ ---------------
9/18/2000 $100,000 20,000
10/02/2000 $50,000 10,000
10/26/2000 $50,500 10,100
11/06/2000 $161,885 32,377
12/29/2000 $75,000 15,000
The sale was exempt from registration in reliance upon Section 4(2) of the
Securities Act since it did not involve a public offering.
On February 14, 2001, we entered into an agreement with Consensus Investments
Limited to issue 666,666 shares of our common stock and warrants to purchase an
additional 1,333,332 shares of our common stock, for a purchase price of
$1,000,000.00. The warrant entitles the holder to purchase the common stock at
an exercise price of $1.875 for a term of five years. The sale was exempt from
registration in reliance upon Section 4(2) of the Securities Act since it did
not involve a public offering.
28
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding our operating
results and financial position. The data has been derived from our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States ("US GAAP"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operation." The
following selected financial data is qualified in its entirety by, and should be
read in conjunction with, the financial statements and notes thereto included
elsewhere in this Annual Report.
Year Ended
December 31,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
[Restated]
$ $ $ $ $
Net Revenue 18,763 15,002 nil nil nil
General & Administrative Expenses 1,854,557 612,025 900 nil nil
Non-cash Compensation
Stock Options 200,000 6,163,321 nil nil 5,000
Net Income (Loss) (3,983,139) (6,819,904) (900) nil (5,000)
Net Income (Loss) per Share (.10) (.17) nil nil nil
December 31,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
[Restated]
$ $ $ $ $
Total Assets 934,701 415,127 nil nil nil
Total Liabilities 2,318,412 1,566,531 900 nil nil
Shareholders' Equity (Deficiency) (1,383,711) (546,483) (900) nil nil
Long-Term Obligations 1,566,531 810,000 nil nil nil
Cash Dividends nil nil nil nil nil
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's results of operations and
financial position should be read in conjunction with the Selected Financial
Data and the Company's financial statements, including the notes thereto,
appearing elsewhere in this Annual Report.
Overview
We were incorporated in the State of Florida on June 29, 1995 under the name
"RLN Realty Associates, Inc." with an authorized share capital of 7,500 shares
of common stock with a $1.00 par value per share. On June 9, 1998, we filed
Articles of Amendment to amend our Articles of Incorporation to increase our
authorized share capital to 50,000,000 shares of common stock with a $.001 par
value per share. In addition to increasing our authorized capital, we authorized
a split of our 5,000 outstanding shares of common stock on a 200-for-one basis
effective on June 9, 1998.
On February 26, 1999, David Saltrelli replaced the sole board member and became
our President. On March 1, 1999, we amended our Articles of Incorporation to
change our name to "Netmaximizer.com, Inc." to reflect our new e-commerce focus,
and Peter Schuster joined the board and became our Secretary and Treasurer.
March 1, 1999 also marks the beginning of the development of our new business
plan. On March 8, 1999, David Saltrelli and Peter Schuster each purchased
2,430,000 shares of our common stock for cash at a purchase price of $.001 per
share (a total of $2,430 each) as part of the private placement of 12,000,000
shares of our common stock. The remainder of the 12,000,000 shares offered
during this placement were sold for cash at the same purchase price of $.001 per
share to accredited investors not affiliated with Netmaximizer.com, Inc. (see
"Recent Sales of Unregistered Securities").
On October 19, 1999, we authorized a split of our 13,049,170 then-outstanding
shares of common stock on a 3-for-1 basis effective as of November 1, 1999.
On April 10, 2000 we filed an amendment to our Articles of Incorporation
increasing the total number of shares that we may issue to 77,000,000,
consisting of 75,000,000 shares of common stock, par value $.001 per share and
2,000,000 shares of "blank check" preferred stock, par value $.001 per share.
Our primary objective will be Internet development, marketing and merchandising
to provide (i) turnkey, individually branded, e-commerce department stores to
affinity groups such as churches, schools and unions and (ii) redemption centers
for recipients of premiums from various merchants.
During the next twelve months, we intend to increase the number of affinity
groups and numbers of merchants for which we develop Affinity Stores and
Redemption Centers, respectively.
Material Changes in Results of Operations
We remain a development stage company. As of December 31, 2000, the Company
continued organizational activities, the development of a strategic plan and
raising capital. Full operations, as defined by our strategic plan, have not
30
commenced. Prior to June 1999, we had no active business operations and from
June 1999 through December 31, 2000 there have been no material or substantive
transactions or results of operations. As a result, no meaningful comparison can
be made between our present operations and our operations during the years ended
December 31, 1994 to December 31, 1999.
Material Changes in Financial Condition
Our total assets were approximately $935,000 at December 31, 2000 compared with
$1,019,000 at September 30, 2000, $934,000 at June 30, 2000, $1,078,000 at March
31, 2000 and $415,000 at December 31, 1999. During this fourth quarter, our
inventory, property and equipment have remained relatively constant. Most of the
decline in total assets is attributed to amortization of our web site design
and, to a lesser degree, our comprehensive, on-line marketing and Power PointTM
presentation. Our cash and short-term investments were approximately $80,000 as
of December 31, 2000, compared with $9,000 at September 30, 2000, $30,000 at
June 30, 2000, $202,000 at March 31, 2000 and $39,000 at December 31, 1999. Our
current liabilities were approximately 752,000 as of December 31, 2000, compared
with $507,000 at September 30, 2000, $504,000 at June 30, 2000, $217,000 at
March 31, 2000, and 152,000 at December 31, 1999. This increase was principally
the result of operating costs and deposits received on stock to be issued.
For the twelve months ended December 31, 2000 we had revenues from operations of
$18,763, $5,800 during the fourth quarter, $3,625 during the third quarter,
$5,055 during the second quarter, and $4,283 during the first quarter. During
the twelve months ended December 31, 2000 we had no active business operations.
As a result, we had no material transactions or results of operations that
require a comparison to our operations during the twelve-month period ended
December 31, 1999. Because we have not begun actual operations as of this date,
we consider these revenue numbers to be immaterial. During the twelve months
ended December 31, 2000, we incurred direct costs and total expenses of
$4,001,902 (includes $200,000 stock options issued for services), as compared to
$6,834,906 (includes $6,163,321 stock options issued for services), for the
twelve months ended December 31, 1999. The costs and total expenses incurred
were primarily to continue the development of an infrastructure to operate the
business pursuant to our business plan. The components of the costs and total
expenses for the twelve months ended December 31, 2000 in the amount of
$4,001,902 are as follows: payroll, casual labor and related benefits $696,776;
professional fees $271,039; commissions $214,656; consulting fees $278,805; rent
$192,011; interest on promissory notes $600,480; amortization of web site design
and comprehensive, on-line marketing and Power PointTM presentation costs
$387,680; and deferred compensation expense in connection with employee stock
options $964,972; telephone $78,999; office supplies $30,763; travel and related
costs $68,299; advertising $30,848; depreciation $13,647; equipment lease
expense $15,912; insurance costs $24,884; marketing costs $8,624; other
operating costs $123,507.
Liquidity and Capital Resources
During the period December 1, 1999 through March 31, 2000, we raised an
aggregate of $1,333,975 in a financing transaction that was begun on December 1,
1999, and completed on February 8, 2000. We received approximately $9,300 from
our operations during the six-month period ending June 30, 2000. During the
period June 30, 2000, through September 30, 2000, we raised an additional
31
$746,964 in financing, and received approximately $3,625, in cash from our
operations. During the period September 30, 2000 through December 31, 2000 we
raised additional financing in the amount of $337,388, and we generated
approximately $5,800 from operations. For the year ended December 31, 2000 we
have generated cash from financing of approximately $2,265,000. During the same
time period we have used cash of approximately $1,634,000, for operating
activities, and we have used cash of approximately $589,000 for investments in
fixed assets, web site and a comprehensive, on-line Power PointTM presentation.
As of December 31, 2000, we had $80,448 in cash. We intend to raise the
additional $2.1M in capital we require for the remainder of the year through
additional sales of unregistered shares of our common stock conducted under
exemptions provided by the Securities Act or by the rules of the SEC. We also
intend to fund a portion of our inventory expansion by using lines of credit,
which may be secured by such inventory. There can be no assurance that we will
be able to raise additional capital or obtain line-of-credit financing on
favorable terms and in the time required. If we are unable to meet the
requirements necessary to finance our inventory expansion, our implementation
plans could be severely and adversely impacted, and it is questionable whether
we could continue as a going concern. We anticipate that our cash requirements
will continue to increase during the remainder of calendar year 2001 as a result
of salaries, professional fees and related expenses associated with the
anticipated expansion of our operations. There can be no assurance that our
actual expenditures for such periods will not exceed our estimated operating
budget. Actual expenditures will depend upon a number of factors, some of which
are beyond our control, including, among other things, reliability of the
assumptions of management in estimating costs and timing, and the time expended
by professionals and consultants and fees associated therewith.
Recent Financing
Our business activities and operations have been partially funded to date
through issuance of shares of our common stock. The following transactions had
been completed as of December 31, 2000:
On February 8, 2000, we obtained more than $1.3 Million in a financing
transaction with Monavia, Limited, a corporation organized and legally existing
under the laws of the Isle of Man. Monavia received our non-negotiable, 9%
promissory note due February 7, 2003 plus a three-year warrant to purchase
681,987 shares of our common stock at an exercise price of $15.00 per share (the
market price on the date of the warrant).
On July 21, 2000, we issued a non-negotiable, 9% promissory note due July 20,
2003 plus a three-year warrant to purchase 321,932 shares of our common stock at
an exercise price of $16.50 per share (the market price on the date of the
warrant). This sale was made to Monavia. Ltd. This offering was not
underwritten. The sale was exempt from registration in reliance upon Section
4(2) of the Securities Act since it did not involve a public offering.
On September 13, 2000, we entered into an agreement with Carousel Finance
Limited to issue up to 1,000,000 units, each comprised of one share of our
common stock and one warrant to purchase an additional share of our common
stock, for a purchase price of $5.00 per unit. The warrant entitles the holder
to purchase the common stock at an exercise price of $10 for a term of five
years. The following purchases of Units were made pursuant to that agreement:
32
Date Amount Number of Units
---- ------ ---------------
9/18/2000 $100,000 20,000
10/02/2000 $50,000 10,000
10/26/2000 $50,500 10,100
11/06/2000 $161,885 32,377
12/29/2000 $75,000 15,000
The sale was exempt from registration in reliance upon Section 4(2) of the
Securities Act since it did not involve a public offering.
Subsequent to the end of the year, on February 14, 2001, we entered into an
agreement with Consensus Investments Limited to issue 666,666 shares of our
common stock and warrants to purchase an additional 1,333,332 shares of our
common stock, for a purchase price of $1,000,000.00. The warrant entitles the
holder to purchase the common stock at an exercise price of $1.875 for a term of
five years. The sale was exempt from registration in reliance upon Section 4(2)
of the Securities Act since it did not involve a public offering.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB 101
provides guidance for revenue recognition under certain circumstances, and is
effective for the fourth quarter of 2000. The Company does not expect SAB 101 to
have a material effect on its results of operations, financial position or cash
flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of the gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. On June 30, 1999 the FASB issued SFAS No. l 137
"Accounting for Derivative Instruments and Hedging Activities Deferred as of the
Effective Date of FASB Statement No. 133." SFAS No. 133, as amended by SFAS 137,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. Historically, the Company has not entered into derivatives contracts to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data to be provided pursuant to this
Item 8 are included under Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We retained Rachlin Cohen & Holtz (RCH) as our independent accountants to audit
our financial statements effective as of October 7, 1999. Subsequent to that
date, in connection with their audits of our financial statements, there were no
disagreements with RCH on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Officers
Both of our directors are elected annually by the shareholders and hold office
until the next annual general meeting of shareholders or until their successors
are duly elected and qualified, unless they sooner resign or cease to be
directors in accordance with our Articles and Bylaws. Our executive officers are
appointed by and serve at the pleasure of our Board of Directors.
As of April 6, 2001, the following persons were our directors and/or executive
officers:
Name and present office held Director and Officer since
David Saltrelli, President, Director March 1999
Peter Schuster, Secretary, Treasurer, March 1999
Director
The following is a brief biographical information on each of the officers and
directors of listed:
DAVID SALTRELLI. Age 52. David Saltrelli holds a Masters in Business
Administration (MBA) from the Simon School of Business at the University of
Rochester where he majored in Finance & Economics. After completing four years
in the United States Navy, David went on to become a leading stock and commodity
broker for the Investment Firms of Merrill Lynch and Prudential Bache where he
pioneered computerized commodity trading. He went into the Real Estate
Development business in 1981 when he became President of Pantra Investments and
quickly became one of the largest Developers of Vacation Timeshare Property in
34
the United States with sales totaling over $50,000,000. Realizing the need for
up to the minute marketing and sales techniques David went on to build a
successful direct mail and premium incentive company that serviced many of the
Fortune 500 companies. David's companies employed over 200 full time employees
that concentrated in traffic building for over 1,000 companies nationwide. His
newest endeavors have been focused on delivering downloadable online premiums
and incentives that can be used to generate large amounts of traffic (hits) to
web sites on the Internet. He brings his over 30 years of direct marketing to
Netmaximizer.com, Inc. and he concentrates his efforts in building vast amounts
of online traffic for the company and linking webmasters as well.
PETER SCHUSTER. Age 54. Peter Schuster, subsequent to completing undergraduate
and graduate degrees in Rochester, New York, began a career in the
telecommunications industry during which he held numerous managerial positions
at the largest independent operating telco including Customer Service Manager,
Operations Manager, and finally Personnel Manager during which he was
responsible for all corporate employment, human resource planning, management
training, and organization development. As a business leader, Schuster served as
a director of the Monroe County Industrial Development Council where he was
responsible for the approval of all bank submitted proposals for commercial
development in Monroe County (Rochester, N.Y.) applying for tax exempt revenue
bonds. As an independent real estate developer, completing several commercial
and residential rehab projects, Schuster received the "Best Rehab Conversion"
award for historical preservation properties, and subsequently developed
numerous commercial properties within the Interval Ownership industry. He brings
years of corporate organizational and human resource skills along with
entrepreneurial development and marketing background to Netmaximizer.com, Inc.
and focuses principally on building and managing the human resource
infrastructure.
Other Information
The Board of Directors is elected by our shareholders. Currently, both of our
Directors review significant developments affecting our company and act on
matters requiring Board approval. Although the Board of Directors may delegate
many matters to others, it reserves certain powers and functions to itself.
Our directors do not receive any salary for their services as directors or as
members of committees of the Board of Directors. Directors may also serve our
company in other capacities as an officer, agent or otherwise, and may receive
compensation for their services in such other capacity.
Neither of our directors or executive officers is a party to any arrangement or
understanding with any other person pursuant to which he was elected as a
director or officer.
Neither of our directors or executive officers has any family relationship with
the other officer or director.
We presently have no agreements with anyone to serve as an independent director
and can offer no assurance that we will obtain the agreement of any individual
to serve as an independent director. Accordingly, we have no audit committee.
35
Injunction
In June 1993, following the filing of a complaint by the Federal Trade
Commission, David Saltrelli, our President and director, (and other individuals
and entities not affiliated with Netmaximizer.com, Inc.) entered into a
Stipulated Permanent Injunction and Final Judgment with the FTC. The Injunction
was entered by the United States District Court for the Middle District of
Florida, Orlando Division. In the proceedings leading up to the Injunction,
allegations were made that (a) consumers acquired travel-related services and
products (both as incentives and as direct purchases) from telemarketing
entities either controlled by or affiliated with Mr. Saltrelli; (b) that the
descriptions of and disclosures regarding these travel-related products or
services were inadequate; (c) that consumers were at times required to pay
undisclosed fees or increased costs with regard to the travel-related products
to services; and (d) that at times the travel-related products or services were
not available at the times or on the terms advertised. Mr. Saltrelli denied all
material allegations contained in the FTC's complaint. He agreed to the
injunction, without trial or adjudication of any issue of law or fact, to
resolve all matters in dispute between him and the FTC.
The Injunction enjoins Mr. Saltrelli, as well those acting with him or
participating in his activities, from supplying travel-related services and
products for use in telemarketing and from assisting in the telemarketing of any
travel-related product or service. The Injunction also states that, in
connection with the advertising, promotion, marketing, distribution, offering
for sale or sale of travel-related products or services (including premiums and
incentives), Mr. Saltrelli and the related parties are permanently enjoined
from, among other things, failing to disclose or misrepresenting in any manner
any restriction, limitation or condition on any consumer's use of a
travel-related product or service, or failing to provide to each consumer who
obtains such travel-related product or service the exact trip, product or
service as was represented to the consumer.
During its initial testing phase beginning on November 4, 1999 and continuing to
March 1, 2000, the Company offered premiums and incentives including Airchecks,
hotel vouchers and merchandise to affinity group members to promote the sale of
products, albeit never in a telemarketing context. As of March 1, 2000, we
eliminated the use of travel-related incentives, as we determined that our
affinity group members relate better to a more tangible, name-product incentive.
Nonetheless, if the FTC were to determine that Mr. Saltrelli, as our President,
or Netmaximizer.com itself had violated the terms of the Injunction between
November 4, 1999 and March 1, 2000, by engaging in prohibited conduct, it may
seek to enforce the Injunction directly against us.
The Injunction gives the FTC the right to access during normal business hours
the premises of any businesses which Mr. Saltrelli is involved in, including the
offices of Netmaximizer.com, Inc. Until June of 2000, Mr. Saltrelli was required
to disclose the existence and contents of the Injunction to any of his
employees, agents, independent contractors, distributors or sales persons
engaged in the marketing, distribution or sale of any travel-related products or
services or premiums or incentives.
36
IRS Tax Liens
The Internal Revenue Service has filed several federal tax liens against David
Saltrelli relating to unpaid federal income taxes. One lien covers the periods
beginning with the tax year ending December 31, 1979 and continuing through the
tax year ending December 31, 1982 in the aggregate amount of $902,889.20. The
second covers tax years 1993, 1994 and 1995 in the aggregate amount of
$36,721.98. These tax liens should have no effect on Netmaximizer.com, Inc.
Except for the foregoing, neither of our officers or directors have been
involved in the past five years in any of the following: (1) bankruptcy
proceedings; (2) subject to criminal proceedings or convicted of a criminal act;
(3) subject to any order, judgment or decree entered by any court limiting in
any way his or her involvement in any type of business, securities or banking
activities; or (4) subject to any order for violation of federal or state
securities laws or commodities laws.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who own more than 10% of the
Company's Common Stock (collectively, the "Reporting Persons") to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and to furnish the Company with copies of these reports. Based on our
review of these reports and written representations from the persons required to
file them, we believe each of our directors and executive officers timely filed
all the required reports during fiscal year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Our President received total cash compensation from us of $30,920 for 1999, and
$180,000 for 2000. Our Secretary received total cash compensation from us of
$24,379 for 1999 and $144,000 for 2000. No cash compensation was paid to either
our President or Secretary prior to September 30, 1999. Our intent going forward
is to pay to our President a monthly salary of $15,000 and to our Secretary a
monthly salary of $12,000. Additionally, our two executive officers, Peter
Schuster and David Saltrelli, were granted stock options on April 5, 1999 as set
forth on the table below. No grants of stock options to executive officers and
directors were made prior or subsequent to April 5, 1999.
37
Stock Options
We reserved 7,809,600 shares of common stock for issuance pursuant to the 1999
Employee Stock Option Plan. On April 5, 1999, we granted stock options for
7,809,600 shares of common stock to our officers, employees and consultants. No
grants of stock options were made prior to April 5, 1999 and no stock
appreciation rights were granted to these individuals. The grants to consultants
were compensation for services rendered in connection with the web site design,
sales platform design, affinity group program design, and other similar
services. See also Item 3, Legal Proceedings.
Pursuant to the Plan, the following stock options were issued on April 5, 1999
to our executive officers. The table shows the hypothetical gains or "option
spreads" that would exist for the respective options. These gains are based on
assumed rates of annual compound stock price appreciation of five percent (5%)
and ten percent (10%) from the date the options were granted over the full term
of the options.
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES PERCENT OF TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS OPTIONS GRANTED APPRECIATION FOR OPTION
GRANTED T0 EMPLOYEES EXERCISE EXPIRATION TERM(4)
PRICE DATE ------
NAME (#)(1) (2) ($/SH)(3) ---- 5% 10%
---- ------ --- --------- -- ---
David A. Saltrelli.. 1,815,648 48.6% 2.00 04/05/04 $4,634,556 $7,310,298
Peter G. Schuster... 1,815,648 48.6% 2.00 04/05/04 $4,634,556 $7,310,298
--------- ----- ---------- ----------
TOTAL 3,631,296 97.2% $9,269,112 $14,620,596
========= ===== ========== ===========
(1) Each of the options listed in the table is currently exercisable. The
initial grant was for options to purchase 605,216 shares. The number
indicated in the chart reflects the effect of our stock split. Each of the
options has a five-year term.
(2) Options were issued to purchase a total of 7,809,600 shares of our common
stock under our 1999 Employee Stock Option Plan. Of that, 4,178,304 were
issued to consultants.
(3) The exercise price is equal to the OTCBB closing price for shares of our
stock on April 4, 1999 ($6.00), adjusted for the stock split. The exercise
price may be paid in cash or by check or through a cashless exercise
procedure.
(4) The dollar amounts under these columns represent the potential tangible
value, before income taxes, of each option assuming that the market price of
the common stock appreciates in value from fair market value at the date of
grant to the end of the option term at five percent (5%) and ten percent
(10%) annual rates and therefore are not intended to forecast possible
future appreciation, if any, of the price of the common stock.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the number of
shares of our common stock owned beneficially as of April 6, 2001 by: (i) each
person (including any group) known to us to own more than five percent (5%) of
any class of our voting securities, (ii) each of our directors and officers, and
(iii) officers and directors as a group. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the
shares shown.
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percentage of Class(1)
-------------- ---------------- -------------------- ----------------------
Common Stock David Saltrelli 9,065,648(2) 21.7%
4400 N. Federal Highway, Suite 307
Boca Raton, FL 33431
Common Stock Peter Schuster 9,105,648(2) 21.8%
4400 N. Federal Highway, Suite 307
Boca Raton, FL 33431
Common Stock Steven Howell 4,371,303(3) 9.6%
437 West Bockman Way
Sparta, TN 38583
Common Stock Acuff Wilson Acuff Nisbet P.C. 3,348,000(4) 8.4%
101 South Jefferson
Cookeville, TN 38501
Common Stock Martin Leigh 2,250,000(4) 5.6%
Room E61 Suite 42533
Freeport Bahamas
Common Stock All executive officers and 18,171,296 41.7%
directors as a group (2 persons)
(1) Based on an aggregate of 39,957,149 shares outstanding as of April 6, 2001,
and, with respect to each holder of options exercisable, or notes
convertible, within 60 days of April 6, 2001, the shares issuable under
such instruments.
(2) Includes 1,815,648 shares of common stock for David Saltrelli and 1,815,648
shares of common stock for Peter Schuster that may be purchased pursuant to
the exercise of vested stock options within 60 days.
(3) As disclosed in the Schedule 13D filed by Steven Howell ("Howell") on May
12, 2000, Mr. Howell has sole voting power and sole investment power with
respect to all of the reported shares. Includes 56,655 shares of common
stock owned by Network 2001, Inc., a corporation solely owned by Howell,
and 1,614,648 shares of common stock that may be acquired upon the exercise
of vested stock options.
(4) Based solely upon the report of transfer agent dated as of April 6, 2001.
39
Changes in Control
We are not aware of any arrangement that might result in a change in control in
the future.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective March 31, 1999, we entered into an agreement with Network 2001, Inc.
("Network") for the design and development of our web site. Network is a
corporation wholly-owned by Mr. Steven Howell, one of our shareholders who owns
more than 5% of our outstanding shares of common stock. We have subsequently and
continue to be supported in our software development efforts by Network. For a
discussion of the subsequent transactions, please see "Development of our
Website" under the section entitled "Development of the Business."
As discussed above under "Recent Shares of our Unregistered Securities, Monavia,
Limited, purchased two promissory notes plus warrants to acquire 1,003,919
shares of our common stock for cash in transactions during February, 2000 and
July, 2000. At the time of those transactions, Monavia was a shareholder holding
less than 0.1% of our outstanding shares.
Except for the ownership of our securities and the development of our web site
that we have disclosed above, none of our directors, executive officers, holders
of five percent (5%) of our outstanding shares of common stock, or any associate
or affiliate of such person, have, to our knowledge, had a material interest,
direct or indirect, during the three fiscal years ended December 31, 1998, 1999
and 2000 in any proposed transaction which may materially affect us.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
(1) Financial Statements:
Report of Independent Certified Public Accountants....................... F-1
Balance Sheets........................................................... F-2
Statements of Operations................................................. F-3
Statements of Stockholders' Equity (Deficiency........................... F-4
Statements of Cash Flows F-5
Notes to Financial Statements............................................ F-7
(2) Financial Statement Schedules:
Not applicable.
40
(3) Exhibits filed as part of this Report:
Exhibit
Number Description
------ -----------
* 3.1 Articles of Incorporation of RLN Realty Associates, Inc.
effective June 29, 1995.
* 3.2 Articles of Amendment to RLN Realty Associates, Inc. filed on
June 9, 1998.
* 3.3 Articles of Amendment to RLN Realty Associates, Inc. filed on
March 1, 1999.
* 3.4 Bylaws of Netmaximizer.com, Inc.
** 10.1 Lease Agreement by and between Netmaximizer.com, Inc. and
Sanctuary of Boca, Inc. dated January 3, 2000.
** 10.2 Lease Agreement by and between Netmaximizer.com, Inc. and
Sanctuary of Boca, Inc. dated January 20, 2000.
** 10.3 Lease Agreement by and between Netmaximizer.com, Inc. and
Sanctuary of Boca, Inc. dated March 3, 2000.
** 10.4 Warehouse Lease Agreement by and between Netmaximizer.com,
Inc. and American Sales Industries dated February 1, 2000.
** 10.5 Purchasing Agreement by and between Netmaximizer.com, Inc. and
American Sales Industries dated March 14, 2000.
** 10.6 Non-negotiable 9% Promissory Note from Netmaximizer.com, Inc.
to Monavia, Limited, dated as of February 8, 2000.
** 10.7 Monavia, Limited, Warrant to Purchase 681,987 Shares of Common
Stock of Netmaximizer.com, Inc. dated February 8, 2000.
10.8 Carousel Finance Limited Securities Purchase Agreement dated
September 13, 2000
10.9 First Amendment to Carousel Finance Limited Securities
Purchase Agreement dated October 1, 2000
10.10 Form of Warrant to purchase shares of Netmaximizer.com, Inc.
common stock issued to Carousel Finance Limited between
September and December, 2000
10.11 Subscription Agreement from Consensus Investments Limited
dated February 12, 2001, for $1,000,000.
10.12 Warrant to purchase shares of Netmaximizer.com, Inc. common
stock issued to Consensus Investment Limited on February 12,
2001
* Previously filed as an exhibit to the Company's Registration Statement on
Form 10, dated December 7, 1999 and incorporated by reference.
** Previously filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form 10, dated April 6, 2000 and incorporated by
reference.
(b) The following reports on Form 8-K have been filed by the Company during the
last quarter of the period covered by this report: None
(c) The Financial Statements and Schedules to this Form 10-K begin on page F-1
of this Form 10-K.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Netmaximizer.com, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 12, 2001 NETMAXIMIZER.COM, INC.
(Registrant)
By: /s/ David A. Saltrelli
--------------------------
David A. Saltrelli, President
Each person whose signature appears below hereby constitutes and appoints
David Saltrelli his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying all
that said attorney-in-fact and agent or his substitute or substitutes, or any of
them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/David A. Saltrelli President and Director April 12, 2001
--------------------------------- (Principal Executive
David A. Saltrelli Officer)
/s/Peter G. Schuster Secretary, Treasurer and April 12, 2001
--------------------------------- Director (Principal
Peter G. Schuster Financial Officer)
42
================================================================================
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
================================================================================
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Deficiency F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Stockholders
Netmaximizer.com, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheets of Netmaximizer.com, Inc. (a
development stage enterprise) as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' deficiency and cash flows for each of
the three years in the period ended December 31, 2000, and cumulative from
inception. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 Netmaximizer.com, Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 and cumulative
from inception, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company is subject to certain risks and uncertainties,
which conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans with regard to these matters are also
described in Note 2 to the financial statements. The financial statements do not
include any adjustments that might result from the outcome of these risks and
uncertainties.
As discussed in Note 3 to the financial statements, an error in accounting for
payments made on behalf of the Company by certain stockholders and an obligation
to issue options to purchase common stock granted pursuant to a certain
agreement was discovered by management. Accordingly, an adjustment has been made
to properly reflect this transaction in the accompanying financial statements.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
February 16, 2001
F-1
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
December 31,
------------------------------
2000 1999
------------- ------------
(Restated)
ASSETS
------
Current Assets:
Cash, including restricted cash of $1,272 and $683 $ 80,448 $ 39,055
Inventories 158,287 29,886
------------- ------------
Total current assets 238,735 68,941
Property and Equipment 80,637 28,843
Web Site Design, Net of Amortization of $413,611 and $50,000 521,389 300,000
Other Assets 93,940 17,343
------------- ------------
Total assets $ 934,701 $ 415,127
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities:
Accrued interest, stockholder $ 134,961 $ --
Related parties 113,450 --
Other 475,728 123,790
Due to officer/stockholder 23,046 27,820
Note payable, other 4,696 --
------------- ------------
Total current liabilities 751,881 151,610
------------- ------------
Long-Term Debt and Other Obligations:
Notes payable, stockholder, net of unamortized discount of $1,519,421
in 2000 461,518 150,000
Deposits on stock to be issued 437,388 --
Obligation related to stock options to be issued 660,000 660,000
Note payable, other 7,625 --
------------- ------------
1,566,531 810,000
------------- ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Deficiency:
Preferred stock, $.001 par value; authorized 2,000,000 shares;
none issued and outstanding -- --
Common stock, $.001 par value; authorized 75,000,000 shares;
issued and outstanding 39,203,006 and 39,153,006 shares 39,203 39,153
Additional paid-in capital 9,386,029 7,205,140
Deficit accumulated during the development stage (10,808,943) (6,825,804)
Deferred compensation -- (964,972)
------------- ------------
Total stockholders' deficiency (1,383,711) (546,483)
------------- ------------
Total liabilities and stockholders' deficiency $ 934,701 $ 415,127
============= ===========
See Notes to financial statements
F-2
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
Year Ended December 31, Cumulative
----------------------- from
2000 1999 1998 Inception
---- ---- ---- ---------
(Restated) (Restated)
$ 18,763 $ 15,002 $ -- $ 33,765
----------- ----------- ---------- ------------
Revenue
Costs and Expenses:
Direct costs of revenue 18,292 9,560 -- 27,852
Stock and options issued for services 200,000 6,163,321 -- 6,363,321
General and administrative 1,854,557 612,025 900 2,472,482
Amortization of deferred compensation expense 964,972 -- -- 964,972
Amortization of web site design 363,601 50,000 -- 413,601
Amortization of debt discount 461,518 -- -- 461,518
Interest expense, stockholder 138,962 -- -- 138,962
----------- ----------- ---------- ------------
4,001,902 6,834,906 900 10,842,708
----------- ----------- ---------- ------------
Net Loss $(3,983,139) $(6,819,904) $ (900) $(10,808,943)
=========== =========== ========== ============
Net Loss Per Share - Basic and Diluted $ (0.10) $ (0.17) $ --
=========== =========== ==========
Weighted Average Shares Outstanding 39,166,705 39,066,446 3,000,000
=========== =========== ==========
See Notes to financial statements
F-3
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Deficit
Common Stock Accumulated
------------ Additional During the
Paid-In Development Deferred
Shares Amount Capital Stage Compensation Total
------ ------ ------- ----- ------------ -----
(Restated) (Restated)
Inception (June 29, 1995) to December 31, 1995 -- $ -- $ -- $ -- $ -- $ --
---------- ---------- ----------- ---------- --------- -----------
Balance, December 31, 1995 -- -- -- -- -- --
Year Ended December 31, 1996:
Stock issued for services ($.0017 per share) 3,000,000 3,000 2,000 -- -- 5,000
Net loss -- -- -- (5,000) -- (5,000)
---------- ---------- ----------- ---------- --------- -----------
Balance, December 31, 1996 3,000,000 3,000 2,000 (5,000) -- --
Year Ended December 31, 1997:
Net loss -- -- -- -- -- --
---------- ---------- ----------- ---------- --------- -----------
Balance, December 31, 1997 3,000,000 3,000 2,000 (5,000) -- --
Year Ended December 31, 1998:
Net loss -- -- -- (900) -- (900)
---------- ---------- ----------- ---------- --------- -----------
Balance, December 31, 1998 3,000,000 3,000 2,000 (5,900) -- (900)
Year Ended December 31, 1999:
Sale of common stock, proceeds of which were
remitted directly to web site developer:
Issuance of common stock ($.001 per share) 36,000,000 36,000 (24,000) -- -- 12,000
Issuance of common stock ($1.04 per share) 48,000 48 49,952 -- -- 50,000
Sale of common stock for cash:
Issuance of common stock ($4.84 per share) 3,510 3 16,997 -- -- 17,000
Issuance of common stock ($5.08 per share) 39,345 39 199,961 -- -- 200,000
Issuance of common stock ($5.46 per share) 5,496 6 29,994 -- -- 30,000
Issuance of common stock for web site
development services ($5.08 per share) 56,655 57 287,943 -- -- 288,000
Options granted for services -- -- 6,468,293 -- (964,972) 5,503,321
Credit for officer compensation -- -- 150,000 -- -- 150,000
Consulting fees paid by stockholder on behalf
of Company -- -- 24,000 -- -- 24,000
Net loss -- -- -- (6,819,904) -- (6,819,904)
---------- ---------- ----------- ---------- --------- -----------
Balance, December 31, 1999 39,153,006 39,153 7,205,140 (6,825,804) (964,972) (546,483)
Year Ended December 31, 2000:
Amortization of deferred compensation 964,972 964,972
Discount on notes payable, stockholder 1,980,939 1,980,939
Issuance of common stock for services 50,000 50 199,950 200,000
Net loss -- -- -- (3,983,139) -- (3,983,139)
---------- ---------- ----------- ------------ --------- -----------
Balance, December 31, 2000 39,203,006 $ 39,203 $ 9,386,029 $(10,808,943) $ -- $(1,383,711)
=========== ========== =========== ============ ========= ===========
See Notes to financial statements
F-4
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
Year Ended December 31, Cumulative
----------------------- from
2000 1999 1998 Inception
---- ---- ---- ---------
(Restated) (Restated)
Cash Flows from Operating Activities:
Net loss $(3,983,139) $(6,819,904) $ (900) $(10,808,943)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation 964,972 -- -- 964,972
Options granted for services -- 6,163,321 -- 6,163,321
Common stock issued for services 200,000 -- -- 205,000
Officer compensation -- 150,000 -- 150,000
Consulting fees paid by stockholder on behalf
of Company -- 24,000 -- 24,000
Depreciation and amortization 401,327 54,755 -- 456,082
Amortization of discount 461,518 -- -- 461,518
Changes in operating assets and liabilities:
Inventories (128,401) (29,886) -- (158,287)
Other assets (37,216) (11,542) -- (48,758)
Accounts payable and accrued liabilities 351,938 122,890 900 475,728
Accrued interest , stockholder 134,961 -- -- 134,961
----------- ----------- ----- ------------
Net cash used in operating activities (1,634,040) (346,366) -- (1,980,406)
----------- ----------- ----- ------------
Cash Flows from Investing Activities:
Web site design costs (535,000) -- -- (535,000)
Expenditures for property and equipment (49,647) (9,739) -- (59,386)
Other (4,774) (1,840) -- (6,614)
----------- ----------- ----- ------------
Net cash used in investing activities (589,421) (11,579) -- (601,000)
----------- ----------- ----- ------------
Cash Flows from Financing Activities:
Proceeds from long-term debt, stockholder 1,830,939 150,000 -- 1,980,939
Proceeds from sales of common stock 437,388 247,000 -- 684,388
Repayments on notes payable, other (3,473) -- -- (3,473)
----------- ----------- ----- ------------
Net cash provided by financing activities 2,264,854 397,000 -- 2,661,854
----------- ----------- ----- ------------
Net Increase in Cash 41,393 39,055 -- 80,448
Cash, Beginning 39,055 -- -- --
----------- ----------- ----- ------------
Cash, Ending $ 80,448 $ 39,055 $ - $ 80,448
=========== =========== ====== ============
Non-Cash Investing and Financing Transactions:
Purchase of equipment in exchange for note payable $ 15,794 $ --
=========== ===========
Common stock issued for web site development services $ -- $ 288,000
=========== ===========
Proceeds from sales of common stock remitted directly to
web site developer $ -- $ 62,000
=========== ===========
Equipment purchased from officer in exchange for debt $ -- $ 23,859
========== ===========
See Notes to financial statements
F-5
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
F-6
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
The Company was incorporated under the laws of the state of Florida
on June 29, 1995 under the name RLN Realty Associates, Inc.
Initially the Board authorized 7,500 shares of $1.00 par value
common stock of which 5,000 shares were issued in exchange for
services in 1996. On June 9, 1998, the Company filed amended
Articles of Incorporation to change the par value to $.001 and
increase the authorized number of shares of common stock to
50,000,000 shares. On June 9, 1998, the Board of Directors
authorized a 200 for 1 stock split, which increased the issued and
outstanding shares to 1,000,000.
On March 1, 1999, the Articles of Incorporation were amended to
reflect the change in corporate name to "Netmaximizer.com, Inc."
On October 19, 1999, the Board of Directors authorized a 3 for 1
stock split, effective November 1, 1999, which increased the then
issued and outstanding shares to 39,153,006.
On April 10, 2000, the Articles of Incorporation were amended
increasing the total number of shares that the Company may issue to
77,000,000 shares, consisting of 75,000,000 shares of common stock,
par value $.001 per share and 2,000,000 shares of "blank check"
preferred stock, par value $.001 per share.
The effect of all these actions has been reflected retroactively in
the accompanying financial statements.
Business
The Company is an Internet marketing and merchandising company that
sells an array of products via an e-commerce site. The Company
provides access to an e-commerce department store primarily to
members of affinity groups such as churches, schools and unions.
Development Stage Enterprise
As described above, the Company was incorporated on June 29, 1995,
and, since that time, has been primarily involved in organizational
activities, developing a strategic plan for the marketing of its
products, and raising capital. Planned operations, as described
above, have not commenced to any significant extent. Accordingly,
the Company is considered to be in the development stage, and the
accompanying financial statements represent those of a development
stage enterprise.
F-6
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles. In
preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets
and liabilities as of the date of the balance sheet and operations
for the period. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. The
Company maintains its cash, which consists primarily of demand
deposits, with high quality financial institutions, which the
Company believes limits this risk.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash,
accounts payable, and long-term debt with a related party. The
carrying amounts of such financial instruments, as reflected in the
balance sheet, approximate their estimated fair value as of
December 31, 2000 and 1999. The estimated fair value is not
necessarily indicative of the amounts the Company could realize in
a current market exchange or of future earnings or cash flows.
Inventories
Inventories, comprised primarily of consumer products held for
sale, are stated at the lower of cost or market. Cost is determined
on the first in, first out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets. Gain or loss on disposition of assets is recognized
currently. Repairs and maintenance which do not extend the lives of
the respective assets are charged to expense as incurred. Major
replacements or betterments are capitalized and depreciated over
the remaining useful lives of the assets.
Web Site Design
Web site design includes costs incurred by the Company to develop
the Company's web site. Pursuant to Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," the Company has capitalized the costs
incurred to develop the web site and is amortizing such costs over
the estimated life of the web site (thirty-six months) (see Note
4).
F-7
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Assets
The Company developed a marketing presentation which is being used
to market the Company. The cost of the presentation, which is being
amortized over twenty-four months, was incurred to a company owned
by an employee and is included in other assets in the amount of
approximately $80,000 as of December 31, 2000.
Income Taxes
The Company accounts for its income taxes using Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax
liabilities and assets for expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
Revenue Recognition
The Company recognizes revenue, including shipping and handling
fees, when the merchandise is shipped to customers. Allowances for
estimated returns are provided when sales are recorded. Costs
associated with shipping and handling are included with direct
costs of revenue.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs
incurred for 2000, 1999, and 1998 were not material.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
No. 25"), and related interpretations, in accounting for its
employee stock options rather than the alternative fair value
accounting allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation." APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based
on the intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a pro-forma
disclosure of the impact of applying the fair value method of SFAS
No. 123.
The Company follows SFAS No. 123 in accounting for stock options
issued to non-employees.
F-8
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss Per Common Share
The Company computes loss per share in accordance with SFAS No.
128, "Earnings Per Share." This standard requires dual presentation
of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
diluted earnings per share computation.
Net loss per common share (basic and diluted) is based on the net
loss divided by the weighted average number of common shares
outstanding during the year.
The Company's potentially issuable shares of common stock pursuant
to outstanding stock options are excluded from the Company's
diluted computation as their effect would be anti-dilutive.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB 101 provides guidance for revenue
recognition under certain circumstances, and is effective for the
fourth quarter of 2000. The implementation of SAB 101 did not have
a material effect on the Company's results of operations, financial
position and cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of the gain
or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or
liability that is attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change. On June 30, 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 133 as amended by SFAS No. 137
is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133 as amended by SFAS No. 137 and 138 is
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Accordingly, adoption of the new standard during fiscal year 2000
did not have a material effect on the Company's financial
statements.
F-9
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of
APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of
APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequences of
various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective
July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12,
2000. The Company adopted FIN 44 in the third quarter of 2000 and
there was no material impact on the Company's results of operations
or financial position.
NOTE 2. SUMMARY OF CERTAIN RISKS AND UNCERTAINTIES
Governmental Regulation and Injunction
The activities of the Company are governed by the Federal Trade
Commission ("FTC"). In 1993, the FTC secured a permanent injunction
against the Company's president (who is also a director and major
stockholder), and other entities not related to the Company,
enjoining them, directly or indirectly, from supplying
travel-related services and products for use in telemarketing and
from assisting in the telemarketing of any travel-related product
or service.
The injunction also states that, in connection with the
advertising, promotion, marketing, distribution, offering for sale
or sale of travel-related products or services, all named parties
are permanently enjoined from participating in or assisting others
that participate in (a) misrepresenting in any manner, any
restriction, limitation or condition on any consumer's use of a
travel-related product or service; (b) failing to disclose in
writing any material fact regarding any such restriction; (c)
misrepresenting the total cost any consumer must pay to use such
travel-related product or service; and (d) misrepresenting the
consumer's right to any refund. The injunction also restricts
activities in connection with the use of travel-related products or
services, whether as a premium or incentive or otherwise. Beginning
November 4, 1999 and continuing to March 1, 2000, the Company
offered airchecks and hotel vouchers as a premium or incentive to
customers to promote the sale of products and, therefore, certain
aspects of the Company's business could fall within the scope of
the activities addressed in the injunction. As of March 1, 2000,
the Company eliminated the use of travel-related incentives.
F-10
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. SUMMARY OF CERTAIN RISKS AND UNCERTAINTIES (Continued)
Governmental Regulation and Injunction (Continued)
The injunction gives the FTC the right to access during normal
business hours the premises of any businesses which the Company's
president is involved in, including the business of the Company.
Until June 2000, the Company's president was required to disclose
the existence and contents of the injunction to any of his
employees, agents, independent contractors, distributors or sales
persons engaged in the marketing, distribution or sale of any
travel-related products or services or premiums or incentives.
As a result of the injunction, it may be possible for the FTC to
enforce the injunction against the Company if the FTC determined
that the Company had violated the terms of the injunction by
engaging in prohibited conduct.
Going Concern Considerations
The accompanying financial statements have been presented in
accordance with generally accepted accounting principles, which
assume the continuity of the Company as a going concern. However,
as discussed above, the Company is in the development stage and,
therefore, has generated virtually no revenue to date, has incurred
substantial net losses in 2000 and 1999, partially as the result of
the issuance of certain stock options, and reflects a stockholders'
deficiency (liabilities in excess of assets) as of December 31,
2000. The Company has also used substantial amounts of cash in
operating activities and investing activities, primarily web site
design costs, which cash outflows have been funded primarily by
long-term borrowings from a stockholder and sales of common stock.
Additionally, the Company is subject to the impacts, if any, of the
injunction put in place by the FTC against the Company's president,
as described above. These conditions raise substantial doubt as to
the ability of the Company to continue as a going concern.
Management's plans with regard to these matters include:
o The adoption of a business plan intended to address the
Company's strategy for growth and expansion of the
affinity group membership base;
o Raising additional capital through a Securities Purchase
Agreement executed during 2000 (see Note 11);
o Debt financing from a stockholder (see Note 6).
o Additional equity financing (see Note 12).
The eventual success of management's plans cannot be ascertained
with any degree of certainty.
F-11
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. SUMMARY OF CERTAIN RISKS AND UNCERTAINTIES (Continued)
Summary
The accompanying financial statements do not include any
adjustments that might result from the outcome of the risks and
uncertainties described above.
NOTE 3. PRIOR PERIOD ADJUSTMENT
As more fully described below, management determined that an error had
occurred in the accounting for payments made on behalf of the Company
by stockholders and the liability for options to be granted to purchase
common stock pursuant to a compensation agreement entered into on June
7, 1999. The accompanying financial statements for 1999 have been
restated for the correction of this error in order to reflect the
consulting fees incurred measured by the sum of the cash paid by
stockholders on the Company's behalf ($24,000) and the fair value of
the stock options which would have vested if they were issued
($660,000), a total of $684,000 ($__________ per share).
On June 7, 1999, the Company entered into a compensation agreement in
connection with financial relations consulting services to be rendered
to the Company. The agreement, which is for a term of twelve months
provided for, among other things, fees of $6,000 payable monthly,
expense reimbursements, and incentive stock options for 829,296 shares
(giving effect to the 3-for-1 split described in Note 1) of common
stock. The options were to have an exercise price of $3.33 per share
(giving effect to the 3-for-1 split described in Note 1), a minimum 5
year expiration term and were to be registered. The options were to
vest in four equal tranches, based upon (a) execution of a definitive
Engagement Agreement; (b) acquiring four new marketmakers for the
Company; (c) attaining a total of 500 round lot owners for the purpose
of assisting the Company to successfully apply for NASDAQ listing; and
(d) achieving 250,000 shares of trading activity within 60 days, all as
described and defined in the agreement.
Certain stockholders paid the monthly fee on behalf of the Company for
the initial four months. In the fourth quarter of 1999, the Company
terminated the contract for nonperformance, among other things. The
contract does not specifically provide for termination for cause.
On January 9, 2001, the consultant filed a legal claim alleging bad
faith on the part of the Company, seeking unpaid fees of $48,000,
specific performance of the stock options and damages, attorney's fees
and costs.
The Company has filed a counterclaim for breach of contract, alleging
that the consultant failed to uphold any part of his obligation and
that the consultant, by failing to disclose prior felony convictions,
fraudulently induced the Company into entering into the contract.
Management intends to defend and prosecute this litigation vigorously.
It is not possible to predict the probable outcome with any degree of
certainty at this time.
F-12
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. PRIOR PERIOD ADJUSTMENT (Continued)
The 1999 financial statements have been restated to record as an
expense the consulting fees of $684,000 relating to cash and stock
options, and the corresponding increase in additional paid-in capital
and an obligation for stock options to be issued. At such time as the
outstanding claims are settled or resolved, additional consulting fees
or costs to be paid, if any, will be recorded in the financial
statements at that time.
NOTE 4. WEB SITE DESIGN COSTS
Web site design costs are comprised of the following fees aggregating
$935,000 paid to a consultant, which is owned and controlled by a major
stockholder:
Cash $597,000
Accounts payable and accrued liabilities 50,000
56,655 shares of common stock valued at the market
value of such stock on the date of issuance ($5.08
per share) (see Note 10) 288,000
--------
$935,000
========
The following is an analysis of web site design costs by Phase as of
December 31, 2000:
Phase One Phase Two Phase Three Phase Four Total
--------- --------- ----------- ---------- -----
Cost $350,000 $330,000 $155,000 $100,000 $935,000
Accumulated amortization 350,000 55,000 8,611 -- 413,611
-------- -------- -------- -------- --------
Unamortized cost $ -- $275,000 $146,389 $100,000 $521,389
========= ======== ======== ======== ========
Phase One of the web site was available for use on November 4, 1999,
and the Company commenced amortizing the cost of Phase One ($350,000)
over an estimated useful life of fourteen months as of that date.
Phases Two and Three were placed in service during 2000 and are being
amortized over an estimated useful life of thirty-six months. Phase
Four of the web site has not been placed in service as of December 31,
2000 and, as a result, is not being amortized. The Company will
commence amortizing those costs when Phase Four is placed in service
(see Note 12).
NOTE 5. PROPERTY AND EQUIPMENT
Estimated
Useful Lives 2000 1999
------------ ------- -------
Furniture and Equipment 5-7 years $90,966 $33,597
Leasehold improvements 7 years 8,073 --
------- -------
99,039 33,597
Less accumulated depreciation 18,402 4,755
------ -------
$80,637 $28,843
======= =======
F-13
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. RELATED PARTY TRANSACTIONS
Long-Term Debt, Stockholder
On February 8, 2000, the Company issued a promissory note in the
amount of $1,333,975 to a stockholder in exchange for cash. This
note bears interest at 9%, with principal due February 7, 2003. As
of December 31, 1999, the Company had received an advance of
$150,000 against the total funds to be received in consideration
for the promissory note. The remaining $1,183,975 proceeds of the
note payable were received by February 8, 2000.
In connection with the promissory note, the Company issued warrants
to purchase 681,987 shares of common stock at $15.00 per share, the
market price of the Company's common stock on the date of issuance
of the warrant. These warrants can be exercised at any time before
February 7, 2003.
On July 21, 2000, the Company issued an additional promissory note
in the amount of $646,964 to this stockholder in exchange for cash.
The note bears interest at 9%, with principal due July 20, 2003.
Prior to June 30, 2000, the Company received an advance of $200,000
against the total funds to be received in consideration for the
promissory note. The remaining $446,964 proceeds of the note
payable were received by July 21, 2000.
In connection with the second promissory note, the Company issued
warrants to purchase 321,932 shares of common stock at $16.50 per
share, the market price of the Company's common stock on the date
of issuance of the warrant. These warrants can be exercised at any
time before July 21, 2005.
The Company estimated the fair value of the warrants issued in
connection with these promissory notes at the grant date by using
the Black-Scholes option-pricing model with the following
weighted-average assumptions; no dividend yield; an expected life
of three or five years; 100% expected volatility; and 6.00% risk
free interest rate.
The total estimated fair value of the warrants exceeded the face
amounts of the promissory notes individually. As a result, the
Company recorded discounts in the amount of the face value of the
notes ($1,980,939) and is amortizing these discounts as interest
expense (additional costs of financing) over the three-year term of
the promissory notes in the accompanying financial statements.
Note 1 Note 2 Total
------ ------ -----
Promissory note $1,333,975 $646,964 $1,980,939
Unamortized discount 926,370 593,051 1,519,421
---------- ------- ----------
$ 407,605 $ 53,913 $ 461,518
========== ======== ==========
F-14
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. RELATED PARTY TRANSACTIONS (Continued)
Officer/Employees Compensation
The officer/employees received no compensation for the period from
March to August 1999, other than stock options issued (see Note 8).
Compensation expense was recorded in the amount of $150,000 for
this period with a corresponding increase in additional paid-in
capital. During the period from September to December 1999, these
officer/employees received $55,229 of cash compensation.
Web Site Design Costs
See Notes 4 and 12 regarding payments made to a consultant, which
is owned and controlled by a major stockholder.
NOTE 7. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." SFAS No. 109 is an asset and liability approach for
computing deferred income taxes.
A reconciliation of income tax computed at the statutory federal rate
to income tax expense (benefit) is as follows:
2000 1999 1998
---- ---- ----
(Restated)
Tax provision at the statutory rate of 34% $ (1,354,000) $ (2,319,000) $ (300)
State income taxes, net of federal income tax (119,000) (204,000) --
Change in valuation allowance (17,978,000) 19,105,000 300
Stock options not exercised 19,281,000 (16,582,000) --
Amortization of discount 170,000 -- --
------------- ------------ ------
$ -- $ -- $ --
============= ============ ======
The net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes are reflected in deferred
income taxes. Significant components of the Company's deferred tax
assets are as follows:
December 31,
2000 1999
---- ----
Benefit of net operating loss carryforwards $ 1,053,000 $ 181,000
Stock options issued for services -- 18,924,000
Stock issued for compensation 74,000 --
Less valuation allowance (1,127,000) (19,105,000)
----------- ------------
Net deferred tax asset $ -- $ --
=========== ============
F-15
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. INCOME TAXES (Continued)
At December 31, 2000, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $2,845,000, which are
available to offset future federal taxable income, if any, through
2020.
As of December 31, 2000, sufficient uncertainty exists regarding the
realizability of these deferred tax assets and, accordingly, a 100%
valuation allowance has been established.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. Such a
change in ownership occurred in 1999. However, based upon the amount of
the taxable loss incurred to March 19, 1999 (approximately $6,000), the
Company estimates that no annual limitation will apply to the net
operating loss carryforward existing as of that date.
NOTE 8. STOCK OPTION PLAN
In April 1999, the Board of Directors of the Company (the "Board")
authorized the 1999 Employee Stock Option Plan (the "Stock Option
Plan") for those employees, consultants, and advisors (the
"Participants") of the Company who, in the judgment of the
Administrator (defined below) are or will become responsible for the
direction and financial success of the Company. The adoption of the
Stock Option Plan was ratified by the stockholders on September 30,
1999. The purpose of the Stock Option Plan is to provide the
Participants with an increased incentive to make significant
contributions to the long-term performance and growth of the Company.
Under the Stock Option Plan, the Participants may only receive awards
of non-qualified stock options. A maximum of 2,603,200 shares of common
stock are subject to the Stock Option Plan.
The Stock Option Plan may be administered by the Board, or in the
Board's sole discretion, by the Compensation Committee of the Board
(the "Committee," and with the Board, the "Administrator") or such
other committee as may be specified by the Board to perform the
functions and duties of the Committee under the Stock Option Plan.
The Participants in the Stock Option Plan may include officers and
directors who are also employees of the Company.
The exercise period for stock options and stock appreciation rights
will be determined by the Administrator, but no stock option or stock
appreciation right may be exercisable prior to the expiration of six
months from the date of grant or after 10 years from the date of grant,
subject to certain conditions and limitations.
The Stock Option Plan may be abandoned or terminated at any time by the
Board. Unless sooner terminated, the Stock Option Plan will terminate
on the date ten years after its adoption by the Board. The termination
of the Stock Option Plan will not affect the validity of any stock
option, stock appreciation right, or restricted stock outstanding on
the date of termination.
F-16
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. STOCK OPTION PLAN (Continued)
The Company has issued options to purchase a total of 7,809,600 shares
of common stock (3,631,296 to employees and 4,178,304 to consultants)
out of the shares of common stock provided for in the Stock Option
Plan, at an exercise price of $2.00 per share, the price at which the
stock was trading as of the day of the grant of the options (giving
effect to the stock splits described in Note 1). These options are for
a term of five years and contain an anti-dilution provision. The
options issued to employees were, among other things, in lieu of
compensation for services provided during this organizational stage
when no salary was paid to officer/employees prior to September 30,
1999 (see Note 6).
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation", requires the Company to
provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's employee stock options
has been determined in accordance with the fair value based method
prescribed in SFAS 123.
The fair value of the options granted to consultants in 1999 has been
recorded as a charge to operations in the accompanying financial
statements over the period in which they vest. As of December 31, 1999,
$964,972 has been reflected as deferred compensation, representing the
unamortized portion of the options which vest in October 2000, and is
presented as a reduction of stockholders' equity.
The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999 (no options were
granted prior to 1999 or in 2000); no dividend yield; an expected life
of five years; 100% expected volatility, and 6.00% risk free interest
rate.
The option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are
fully transferable. In addition, valuation models require the input of
highly subjective assumptions including the expected price volatility.
Since the Company's stock options have characteristics significantly
different from those of traded options, and since variations in the
subjective input assumptions can materially affect the fair value
estimate, the actual results can vary significantly from estimated
results.
Under the accounting provisions of SFAS 123, the Company's net loss and
loss per share would have been adjusted in connection with options
issued to employees to the pro forma amounts indicated below:
2000 1999
---- ----
(Restated)
Net loss:
As reported $(3,983,139) $ (6,819,904)
Pro forma $(3,983,139) $(12,291,000)
Loss per share - basic and diluted:
As reported $(0.10) $(0.17)
Pro forma $(0.10) $(0.31)
F-17
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. STOCK OPTION PLAN (Continued)
A summary of the status of options under this plan and additional
options, granted outside of the plan (if any), as of December 31, 2000
and changes during the year ended on that date are presented below:
Weighted Average
Shares Exercise Price
------ --------------
Balance, January 1, 1999 -- --
Options granted 7,809,600 $2.00
Options exercised -- --
Options expired -- --
----------
Balance, December 31, 1999 7,809,600 $2.00
Options granted -- --
Options exercised -- --
Options expired -- --
Balance, December 31, 2000 7,809,600 $2.00
==========
Note: No options were granted prior to 1999.
The following table summarizes information about options under the plan
which are outstanding at December 31, 2000 after giving effect to the
November 1, 1999 stock split:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Number Weighted
Outstanding Average Weighted Exercisable Average
Range of at Remaining Average at Remaining
Exercise December 31, Contractual Exercise December 31, Contractual
Prices 2000 Life Price 2000 Life
------ ---- ---- ----- ---- ----
$2.00 7,809,600 3.5 $2.00 7,809,600 3.5
==== ========= === ==== ========= ===
NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases operating facilities under one year operating
leases expiring through January 2002. Monthly rent expense,
including cost reimbursements, aggregates approximately $6,000 per
month.
The Company leases equipment under an operating lease which expired
December 2000. Monthly payments were approximately $1,200.
F-18
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases (Continued)
Beginning February 2000, the Company leased warehouse space from
the entity which serves as the purchasing agent for the Company.
The lease expired January 31, 2001, after which the Company
occupied these premises on a month-to-month basis. The monthly rent
is $5,300.
The future minimum lease payments pursuant to these leases are as
follows:
Year ending December 31:
2001 $70,000
2002 3,000
-------
$73,000
Merchant Service Agreement
In connection with the hosting of its interactive on-line store,
the Company entered into a Yahoo! Store Merchant Service Agreement
("YSMA"). In exchange for a monthly fee, Yahoo! grants the Company
a non-exclusive license to use its Yahoo! store software which
enables the Company to process its on-line e-commerce transactions.
The YSMA, among other things, is for a term of ninety days,
automatically renews, and may be terminated by either party with
thirty days notice.
Fulfillment Provider
In the ordinary course of business, the Company has established an
arrangement with a fulfillment and warehouse provider. This
provider maintains custody of the products purchased by the Company
and ships the products to the ultimate consumer once they are
ordered. No written contract exists between the Company and this
fulfillment provider for these services. The Company pays $2,000
per month plus a per product fee ranging from $.50 to $1.00 for
these services. Effective March 2000, the Company ceased using this
provider and began doing fulfillment in-house.
Affinity Group Agreements
The Company has entered into agreements with certain affinity
groups such as churches, schools and unions whereby the Company has
agreed to pay a commission to the group of 15% of the purchase
price of products purchased as defined. In addition, the Company
agreed to pay $.30 per free product, as defined. Each agreement is
cancelable without notice by either party.
F-19
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
Merchant Banking Agreement
In April 1999, the Company entered into an agreement with a banking
institution for the processing and collection of credit card
transactions. The agreement defines, among other things, various
fees and chargebacks, which may be applicable to the Company, and
requires that a merchant reserve account be established to cover
potential chargebacks or other loss resulting from transactions
deposited into the merchant account. As of December 31, 2000, the
Company had established a reserve account of $1,272. The agreement
may be terminated by either party with thirty days notice.
Non-Exclusive Purchasing Agent Agreement
The Company has entered into an agreement, commencing March 14,
2000, with an unrelated party to act as the Company's purchasing
agent. The purchasing agent will receive a fee per unit purchased
ranging from $.50 to $1.00 determined by the cost of the units
purchased. The agreement may be canceled by either party.
NOTE 10. COMMON STOCK
During March 1999, the Company raised capital through two private
placements of equity securities. The private placements of equity
securities were exempt from registration in reliance on Rule 504 under
Regulation D promulgated under the Securities Act of 1933. The common
stock was offered by the Company without the services of a placement
agent.
These sales of common stock resulted in the following: 36,000,000
shares were issued at $.001 per share for proceeds of $12,000; and
48,000 shares were issued at $1.08 per share for proceeds of $50,000.
The combined proceeds of $62,000 were remitted directly to the
consultant for web site design by the investors.
On September 27, 1999, the Company issued 3,510 shares of common stock
for proceeds of $17,000.
On September 30, 1999, the Company issued 39,345 shares of common stock
for proceeds of $200,000.
On September 30, 1999, the Company issued 56,655 shares of common stock
pursuant to an agreement with the web site design consultant in payment
for web site development services of $288,000.
On October 20, 1999, the Company issued 5,496 shares of common stock
for proceeds of $30,000.
F-20
NETMAXIMIZER.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMON STOCK (Continued)
On September 18, 2000 the Board of Directors authorized the issuance of
50,000 shares of Company common stock as compensation for consulting
services. These shares were recorded as consulting expense in the
accompanying financial statements. The consulting expense was measured
using the fair value of the common shares issued, amounting to
$200,000.
NOTE 11. DEPOSITS ON STOCK TO BE ISSUED
On September 13, 2000 the Company entered into an agreement to issue up
to 1,000,000 units, comprised of one share of Company common stock and
one warrant, for $5.00 per unit for total proceeds of up to $5,000,000.
The warrant entitles the holder to purchase one share of Company common
stock for $10.00 for a term of five years. As of December 31, 2000, the
Company received $437,388 for the purchase of 87,477 units. Since these
shares were not formally issued as of December 31, 2000, the amounts
received are classified as deposits on stock to be issued in the
accompanying financial statements.
NOTE 12. SUBSEQUENT EVENTS
Web Site Design
In January 2001, the Company incurred an additional $525,000 in
costs associated with the web site design. The web site designer is
a Company owned and controlled by a major stockholder. These costs
were substantially paid in February 2001.
Loan and Consulting Fees - Stockholder
In January 2001, the Company received $125,000 in loans from a
stockholder and the Company incurred $75,000 in consulting fees
with a company owned by that stockholder. In February 2001, the
Company paid the stockholder $200,000 as repayment of loans and for
consulting services rendered.
Sale of Units
On February 12, 2001, the Company entered into an agreement to sell
666,666 units, comprised of one share of Company common stock and
two warrants, for $1.50 per unit for total proceeds of $1,000,000.
The warrant entitles the holder to purchase two shares of Company
common stock for $1.875 per share for a term of five years. The
Company received $1,000,000 of proceeds on February 14, 2001.
F-21
Exhibit Index
-------------
Exhibit
Number Description
------ ------------
* 3.1 Articles of Incorporation of RLN Realty Associates, Inc.
effective June 29, 1995.
* 3.2 Articles of Amendment to RLN Realty Associates, Inc. filed on
June 9, 1998.
* 3.3 Articles of Amendment to RLN Realty Associates, Inc. filed on
March 1, 1999.
* 3.4 Bylaws of Netmaximizer.com, Inc.
** 10.1 Lease Agreement by and between Netmaximizer.com, Inc. and
Sanctuary of Boca, Inc. dated January 3, 2000.
** 10.2 Lease Agreement by and between Netmaximizer.com, Inc. and
Sanctuary of Boca, Inc. dated January 20, 2000.
** 10.3 Lease Agreement by and between Netmaximizer.com, Inc. and
Sanctuary of Boca, Inc. dated March 3, 2000.
** 10.4 Warehouse Lease Agreement by and between Netmaximizer.com,
Inc. and American Sales Industries dated February 1, 2000.
** 10.5 Purchasing Agreement by and between Netmaximizer.com, Inc. and
American Sales Industries dated March 14, 2000.
** 10.6 Non-negotiable 9% Promissory Note from Netmaximizer.com, Inc.
to Monavia, Limited, dated as of February 8, 2000.
** 10.7 Monavia, Limited, Warrant to Purchase 681,987 Shares of Common
Stock of Netmaximizer.com, Inc. dated February 8, 2000.
10.8 Carousel Finance Limited Securities Purchase Agreement dated
September 13, 2000
10.9 First Amendment to Carousel Finance Limited Securities
Purchase Agreement dated October 1, 2000
10.10 Form of Warrant to purchase shares of Netmaximizer.com, Inc.
common stock issued to Carousel Finance Limited between
September and December, 2000
10.11 Subscription Agreement from Consensus Investments Limited
dated February 12, 2001, for $1,000,000.
10.12 Warrant to purchase shares of Netmaximizer.com, Inc. common
stock issued to Consensus Investment Limited on February 12,
2001
* Previously filed as an exhibit to the Company's Registration Statement on
Form 10, dated December 7, 1999 and incorporated by reference.
** Previously filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form 10, dated April 6, 2000 and incorporated by
reference.