TONGLI PHARMACEUTICALS (USA), INC. - SB-2 - 19990615 - CAPITALIZATION
CAPITALIZATION
The following table sets forth our short-term debt and the capitalization as of
January 31, 1999 on an actual basis and on an as adjusted basis to give effect
to the sale of 5,610,098 shares of Common Stock at a public offering price of
$1.7825, after deducting the legal and accounting fees and estimated offering
expenses and fees totaling approximately $200,000. The table shown below should
be read in conjunction with our Consolidated Financial Statements including the
accompanying notes included elsewhere in this Prospectus.
JANUARY 31, 1999
--------------------------------
ACTUAL AS ADJUSTED
----------- ------------
Short term debt and current portion of long-term debt.......... $3,563,141 $ 3,563,141
----------- ------------
----------- ------------
Long-term debt, less current portion........................... 2,126,277 2,126,277
----------- ------------
Stockholders' equity (deficit):
Preferred Stock, no par value - 10,000,,000 shares
Authorized ; none issued and outstanding:
Common Stock, no par value - 100,000,000 shares
Authorized; 31,246,215 shares outstanding (actual)
40,332,096 shares outstanding (as adjusted)............... 17,319,746 27,119,746
Accumulated deficit......................................... (16,323,975) (16,323,975)
----------- ------------
Total stockholders' equity (deficit)..................... 995,771 10,795,771
----------- ------------
Total capitalization........................... 6,685,189 16,485,189
----------- ------------
----------- ------------
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DILUTION
The difference between the initial public offering price per share of
Common Stock and the pro forma net tangible book value per share of Common Stock
after this offering constitutes the dilution to investors in this offering. Net
tangible book value per share is determined by dividing our net tangible book
value (total tangible assets less total liabilities) by the number of shares of
Common Stock outstanding.
At January 31, 1999, our net tangible book deficit was $(4,385,478), or
$(0.14) per share of Common Stock. After giving effect to our sale of
5,610,098 shares of Common Stock in this offering and the receipt of the
estimated net proceeds from this offering (after deducting legal and accounting
fees and estimated expenses of this offering), our pro forma net tangible book
value as of January 31, 1999 would have been $5,414,522, or $0.13 per share of
Common Stock, representing an immediate increase in net tangible book value of
$0.27 per share to existing stockholders and an immediate dilution of $1.65
(93%) per share to new investors. The following table illustrates the
foregoing information with respect to new investors on a per share basis:
Initial public offering price................................................... $1.7825
Net tangible book deficit per share before Pro Forma Adjustments........... (0.14)
Increase attributable to investors in this offering........................ 0.27
--------
Adjusted net tangible book value per share after this offering.................. 0.13
------
Dilution per share to new investors............................................. 1.65
------
------
The following table sets forth, with respect to existing stockholders
(including stockholders who were issued shares in connection with the Pro Forma
Adjustments) and new investors in this offering, a comparison of the number of
shares of Common Stock we have issued, the percentage ownership of such shares,
the total cash consideration paid, the percentage of total cash consideration
paid and the average price per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical and pro forma financial
and operating data for us for the periods indicated. This data for the year
ended July 31, 1998 are derived from our financial statements and the notes
included in this Prospectus. You should read the following data in conjunction
with our financial statements and with the section of this Prospectus entitled
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
SIX MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED FISCAL YEAR FISCAL YEAR
JANUARY 31, 1998 JANUARY 31, 1999 JULY 31, 1996 ENDED ENDED
JULY 31, 1997 JULY 31, 1998
------------------------------------------------------------ ------------- -------------
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $4,738 $2,765,594 $1,170 $224,516 $2,107,991
Cost of goods sold...... 145,029 6,350,071 11,784 274,437 2,694,735
------------ ------------ ------------ ------------ ------------
Gross profit............ (140,291) (3,584,477) (10,164) (49,921) (586,744)
Selling, general and
administrative expenses. 1,434,846 4,002,497 1,283,292 2,215,710 4,461,397
------------ ------------ ------------ ------------ ------------
Loss from operations.... (1,575,137) (7,586,974) (1,293,906) (2,265,631) (5,048,141)
Other Income (Expense).. - (18,031) - - -
Interest expense........ (21,750) (16,192) (3,269) (34,747) (40,746)
Interest income......... 4,729 4,613 - - 9,076
------------ ------------ ------------ ------------ ------------
Net loss................ $(1,592,158) (7,616,584) $(1,297,175) $(2,300,378) $(5,079,811)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net loss per share...... $(.06) $(.26) $(.09) $(.14) $(.19)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average shares
outstanding............. 26,233,000 29,500,000 13,123,000 16,439,000 26,747,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. BECAUSE OF OUR RAPID GROWTH, WE BELIEVE THAT
PERIOD-TO-PERIOD COMPARISONS OF OUR HISTORICAL OPERATING RESULTS ARE NOT
MEANINGFUL AND THAT THE RESULTS FOR ANY PERIOD SHOULD NOT BE RELIED UPON AS AN
INDICATION OF FUTURE PERFORMANCE.
OVERVIEW
We have incurred significant losses since our operations began in March
1996, and as of January 31, 1999 had an accumulated deficit of $16,323,975. We
expect to significantly increase our operating expenses from historical levels
in order to expand our sales and marketing operations and to continue roll-out
of our advertising systems in additional regional malls.
We offer advertising on our SmartAIM Shopper Network-TM- to third party
advertisers with pricing determined on a CPM (cost per thousand ads
delivered) basis. Discounts are offered based on a variety of factors,
including the duration and gross dollar amount of advertising campaigns.
Advertisements delivered by us are typically sold pursuant to purchase order
agreements that are subject to cancellation.
We offer marketing and e-commerce services on the SmartAIM Shopper
Network-TM- to third party retailers. Pricing is determined as a monthly fee per
E-Shopper using the system and a commission based on the value of the product
sold to these E-Shoppers through the network. The monthly fee and commissions
are negotiated for each retailer and based on a variety of factors, including
product value, frequency of purchases and product margin.
Our revenue is received from the advertiser that orders the ad and from
retailers that use our marketing and e-commerce service, and we pay the mall
owner 50% of the net revenue received. We are responsible for billing and
collecting for ads delivered on the SmartAIM Shopper Network-TM- and typically
assume the risk of non-payment from advertisers. If the advertiser does not pay,
we still have to pay the mall owner a minimum guaranteed amount defined as rent.
Advertising revenue is recognized in the period that the advertisement is
delivered, provided that no significant obligations remain and collection of the
resulting receivable is probable. The marketing fees and e-commerce commissions
are paid within 90 days after the period that the order was generated. The
revenue is recognized in the period where the marketing services are delivered
and the e-commerce commissions are generated.
We expect that revenue generated from the SmartAIM Shopper Network-TM- will
continue to account for a substantial portion of our revenue for the foreseeable
future. The failure to successfully market the SmartAIM Shopper Network-TM-, the
loss of one or more of the mall owner partners or any reduction in traffic on
such Internet sites could have a material adverse effect on our business,
results of operations and financial condition.
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Gross margin is impacted on a quarterly basis by service and customer mix.
Operating expenses have increased in each of our fiscal quarters. Sales and
marketing expenses have increased as a result of increased sales personnel and
commissions and advertising and promotion. Our sales and marketing organization
has grown from 2 employees as of July 31, 1997 to 49 employees as of May 31,
1999. General and administrative expenses have increased due primarily to
additional personnel, professional fees and facilities costs.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of operations
data for the years ended July 31, 1996, 1997 and 1998 in dollar value and as a
percentage of revenue:
YEAR ENDED JULY 31, 1996 YEAR ENDED JULY 31, 1997 YEAR ENDED JULY 31, 1998
CONSOLIDATED STATEMENT OF
OPERATIONS INFORMATION:
REVENUE:
Marketing services $1,170 100.00% $199,516 88.86% $1,907,991 90.51%
Marketing area licenses - - 25,000 11.14% 200,000 9.49%
------------------------------ -------------------------- ----------------------------
Total revenue 1,170 100.00% 224,516 100.00% 2,107,991 100.00%
------------------------------ -------------------------- ----------------------------
COST OF REVENUE:
Outside services - - 96,857 43.14% 42,365 2.01%
Lease expense 4,500 384.62% 65,250 29.06% 1,765,988 83.78%
Salary expense 577 49.32% 55,907 24.90% 643,841 30.54%
Communications expense - - 17,896 7.97% 189,677 9.00%
Other 6,707 573.24% 38,527 17.16% 52,864 2.51%
------------------------------ -------------------------- ----------------------------
Total cost of revenue 11,784 1,007.18% 274,437 122.23% 2,694,735 127.84%
------------------------------ -------------------------- ----------------------------
GROSS PROFIT (10,614) (907.18)% (49,921) (22.23)% (586,744) (27.84)%
SELLING, GENERAL AND 1,283,292 109,683.07% 2,215,710 986.88% 4,461,397 211.64%
ADMINISTRATIVE EXPENSES
------------------------------ -------------------------- ----------------------------
LOSS FROM OPERATIONS (1,293,906) (110,590.25)% (2,265,631) (1,009.12)% (5,048,141) (239.48)%
INTEREST EXPENSE (3,269) 279.40% (34,747) 15.48% (40,746) 1.93%
INTEREST INCOME - - - - 9,076 .43%
------------------------------ -------------------------- ----------------------------
NET LOSS $ (1,297,175) (110,869.65)% $(2,300,378) (1,024.59)% $(5,079,811) (240.98)%
------------------------------ -------------------------- ----------------------------
------------------------------ -------------------------- ----------------------------
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(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute basic and
diluted net loss per share.
REVENUE. Our revenue is attributable to marketing services and marketing
area licenses. Marketing services are advertising on our pavilions and our
personal computer-based and internet-based catalog and advertising system.
Marketing area licenses are license fees received from sales of marketing areas
to private investors. Our revenue from marketing services grew from $1,170
during the year ended July 31, 1996 to $199,516 during the year ended July 31,
1997, and to $1,907,991 during the year ended July 31, 1998 as a result of
installation of advertising systems in ten additional regional malls. Our
revenue from marketing area licenses grew from $0 during the year ended July 31,
1996 to $25,000 during the year ended July 31, 1997, and to $200,000 during the
year ended July 31, 1998, as a result of the roll-out of the advertising systems
in additional regional malls.
COST OF REVENUE. Cost of revenue primarily consists of the cost of
outsourced services, such as Internet service, lease expense (attributable to
our pavilions at shopping malls) and wages for pavilion managers, marketeers and
tech people working at the malls. Cost of revenue increased from $11,785 during
the year ended July 31, 1996 to $274,437 during the year ended July 31, 1997,
and to $2,694,735 during the year ended July 31, 1998, as a result of rolling
out pavilions at malls and the build up of the free internet service. Cost of
revenue was approximately 1007%, 122% and 128% of total revenue during the years
ended July 31, 1996, 1997 and 1998 respectively. We expect that cost of revenue
will increase in absolute dollars to the extent we are successful in expanding
our operations, and that cost of revenue will decrease as a percentage of total
revenue due to an increase in revenue.
GROSS PROFIT. Gross profit was $(10,615), $(49,921) and $(586,744) during
the years ended July 31, 1996, 1997 and 1998, respectively. Gross profit during
the years ended July 31, 1996, 1997 and 1998 was a result of our roll-out of
existing mall installations. Gross profit was approximately (907)%, (22)% and
(28)% of total revenue during the years ended July 31, 1996, 1997 and 1998,
respectively. We expect that gross profit will increase in absolute dollars to
the extent we are successful in expanding our operations, and that gross profit
will also increase as a percentage of total revenue due to revenue growing at
the malls without us having to take on additional costs in the same proportion.
We already have the employees in place at installed malls and also pay the
minimum rent, both included in the Cost of Revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of payroll, amortization of software
and sales and marketing expenses. Selling, general and administrative expenses
increased from $1,283,221 during the year ended July 31, 1996 to $2,215,710
during the year ended July 31, 1997, and to $4,461,397 during the year ended
July 31, 1998, as a result of the expanded operations and the roll-out to
additional malls. We expect that selling, general and administrative expenses
will increase in absolute dollars due to the additional overhead needed to
support an increase in sales and an increase in the number of malls we have
installed systems in and that selling, general and administrative expenses will
decrease as a percentage of total revenue due to increased sales per mall and
lower overhead per mall when the number of malls installed increases. Sales and
marketing expenses of $237,177 for the year ended July 31, 1996, $152,797 for
the year ended July 31, 1997 and $606,998 for the year ended July 31, 1998 are
included in the SG&A numbers. Some sales and marketing expenses are also
included in the Cost of Revenue, e.g. salary for the sales people working at the
mall locations.
INTEREST EXPENSE. Interest expense increased from $3,269 in the period from
inception to July 31, 1996 to $34,747 during the year ended July 31, 1997, and
to $40,746 during the year ended July 31, 1998, as a result of the expanded
operations.
26
NET LOSS. As a result of the factors described above, our net loss was
$1,297,175, $2,300,378, $5,079,811 during the years ended July 31, 1996, 1997
and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
From inception, we have financed substantially all of our operations from
private investment and an insignificant portion has been financed with cash
generated from operations.
Net cash used in operating activities was $3,192,592 in the year ended
July 31, 1998, primarily as a result of net operating losses. Net cash used in
investing activities was $2,552,313 in the year ended July 31, 1998. Cash used
in investing activities was primarily related to purchase of software license
and capitalized software development in addition to purchases of property and
equipment. Cash provided by financing activities was $6,759,867 in the year
ended July 31, 1998. Cash provided by financing activities was primarily related
to proceeds from the issuance of Common Stock.
At January 31, 1999, we had cash and cash equivalents of $57,356 and a
working capital deficit of $3,450,166. Our principal commitments consisted of
obligations under operating leases of $39,713,000.
Although we have no material commitments for capital expenditures, we
anticipate that we will experience an increase in our capital expenditures and
lease commitments consistent with anticipated growth in the number of installed
pavilions (advertising systems in ten additional regional malls), operations,
infrastructure and personnel. We anticipate that we will continue to experience
growth in our operating expenses for the foreseeable future and that operating
expenses will be a material use of our cash resources. In order to support our
anticipated growth, we will need to raise additional capital through equity or
debt financing. There can be no assurance that such financing will be available
on terms favorable to us or at all. If we are unable to secure sufficient
financing, we will be required to reorganize our operations.
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BUSINESS DESCRIPTION
INDUSTRY BACKGROUND
INTRODUCTION
Since the beginning of time, human beings have had a need to communicate.
The ability of human beings to communicate has evolved in the following manner:
- One-to-one, or person-to-person,
- One-to-many, beginning with the printing press, then
- Cheaper and quicker one-to-many vehicles, beginning with radio,
evolving into television and then encompassing other 20th century
media including the Internet.
Through the convergence of technologies, the SmartAIM Solution enables the
return of personalized one-to-one communications. However, the SmartAIM Solution
enables such communication on an automated, instantaneous basis, but with the
cost benefits normally seen only from modern one-to-many vehicles.
THE MALL INDUSTRY
Across the United States, the regional malls have evolved as a broad
product and service distribution vehicle that reaches nearly the entire
population. In fact, they may be one of the very few avenues of INTERACTIVE
access to virtually the entire population on a mass basis.
Traditionally, a new media channel takes from five to ten years to be
adopted and trusted broadly across the population. The mall industry has
established itself as a trusted channel for product information, products and
services across the country at large. We believe that our alliance with the mall
industry will allow us to capitalize on this existing relationship between the
malls and the community around the malls. We believe that this relationship will
enable us to provide an efficient, trusted communication and media channel for
the advertisers that want to communicate with this community without having to
endure the normal acceptance period for our media channel.
At the same time, a common belief is that store traffic in malls is under
downward pressure from other shopping alternatives, including direct response,
catalog and electronic commerce. As a result, the majority of mall owners and
managers have been searching for alternatives to help them regain or maintain
mall traffic, as well as other means to compete with these other alternatives.
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The SmartAIM Solution, as previously described, provides mall owners and
managers with the ability to:
- INCREASE STORE TRAFFIC AND SALES. The SmartAIM shopper pavilion
delivers the retailers' product information and its suppliers'
marketing messages to bargain hunters, target shoppers and the impulse
buyers, therefore increasing sales.
- INCREASE MARKET COVERAGE AND SHARE. The SmartAIM Shopper Network-TM-
provides the regional malls and the catalog shoppers with
e-commerce-based access to products and services, with the addition of
instant gratification. We expect the regional mall to become the cyber
mall of choice for the local community.
- TAKE BACK LOST MARKET SHARE from the direct response channel. The
SmartAIM Shopper Network-TM- provides regional malls and the direct
response shoppers with an interactive delivery system for customer
service and infomercials.
- INCREASE THEIR OWN REVENUE from the expected increases in the
"percentage rents" from the in-mall retailers.
- INCREASE THEIR OWN REVENUE through other means, including
participation in the advertising revenue streams from the
SmartAIM Shopper Network-TM- and the SmartAIM in-mall Pavilions;
THE INTERNET AND COMMUNICATIONS
While our SmartAIM Shopper Network-TM- operates independently of the
Internet, it also provides free access to the Internet for our users, a likely
important benefit of being a user of the Network. As a result, the cyber-based
advertising delivered over the SmartAIM Shopper Network-TM- realistically
competes with advertising that is delivered and/or managed over the Internet by
others. Accordingly, we believe that an understanding of Internet use,
advertising thereon, e-commerce over it, as well as potential for the growth of
these activities may be germane to understanding its prospects.
The Internet has enjoyed unprecedented growth in recent years. According to
International Date Corp. (IDC) there were over 38 million Internet users in the
United States at the end of 1997. Further, IDC estimates that this number rose
to approximately 55 million by the middle of 1998, and that the number of
Internet users in the United States is expected to increase to over 100 million
in the United States by the end of 2002.
We further believe that, along with the growth in the number of Internet
users, the amount of time users spend on cyber-based activity will also
increase. Evolving new technologies, such as videophone conferencing where a
user has a television, telephone and a television set top device (without the
use of a computer) permit the resources available on the Internet to be
available to the masses. We believe that this will encourage people to
increasingly use cyber-based vehicles such as the SmartAIM Shopper Network-TM-
in particular as well as the Internet in general, for communications.
We also believe that as online shopping increases, advertisers and direct
marketers will increasingly seek to use the cyber-based means to locate
customers and to advertise and facilitate transactions. Online transactions can
be faster, less expensive and more convenient than transactions conducted in
person.
Additionally, a growing number of Internet users have transacted business
over the Internet, including trading securities, buying goods, purchasing
airline tickets and paying bills. According to a mid-1998 survey by The
Information Technology Association of America (ITAA), 15% of U.S. adults have
begun to use the Internet to purchase goods and services. Forrester Research
(Forrester) estimates that
29
$2.4 billion of retail sales occurred over the Internet in 1997. Forrester
further estimates that this figure will double in 1998 to $4.8 billion, and
continue rising rapidly to $17.4 billion in the year 2001.
INTERNET-BASED ADVERTISING
Internet users generally have demographic profiles advertisers desire.
According to survey work done by both Forrester and ITAA, an estimated 48% of
Internet users had a college degree, 69% were between the ages of 18 and 49, the
median age of Internet users was about 41, and their mean household income was
approximately $56,000. Based upon the information available, we believe that the
demographics of SmartAIM Shopper Network-TM- users will include these people in
general, those of the mall shoppers and, in particular, the current customer
base of the advertisers.
Advertisers are attracted to the Internet for numerous reasons, such as its
interactive nature, its potential to establish dialogues and one-to-one
relationships with potential customers and the ability to receive direct
feedback on their advertising in order to adapt their advertising in response.
The key attraction of Internet advertising, however, has been the potential to
offer advertisers the ability to measure the number of times that a particular
advertisement has been viewed, the responses to the advertisement and certain
demographic characteristics of the viewers of the advertisement. Accordingly,
Internet advertising can be a cost-effective means of reaching a significant
number of users with desirable characteristics.
The unique characteristics of Internet and communications-related
advertising, combined with the growth in the number of Internet users and their
attractive demographic profiles, has led to a significant increase in Internet
advertising. Estimates of the dollar value of advertising vary widely among the
various market research firms. For example, Forrester estimates that about $466
million was spent on Internet advertising in 1997, while the Internet
Advertising Bureau estimates the figure to have been $907 million. Whatever the
early starting points are, virtually all such pundits expect the growth to
continue to be very rapid. For example, Forrester forecasts that $1.3 billion
will be spent on Internet advertising in 1998, and that this figure will rise to
over $10 billion in the year 2003. In comparison, there was an estimated $175
billion spent in 1997 on traditional media (television, radio, cable and print)
advertising in the United States.
To date, the leading Internet advertisers have been technology companies,
search engines and Web publishers. However, many of the largest advertisers on
traditional media, including consumer products companies, automobile
manufacturers and others, have expanded their use of cyber-based advertising. We
believe that cyber-based advertising will become an increasing component of
their total advertising budgets as the Internet reaches a larger portion of the
U.S. population.
30
DIRECT MARKETING
We believe that the cyber-based medium represents an attractive vehicle for
direct marketing, which has traditionally been conducted through direct mail
solicitations, infomercials and telemarketing. This is so because highly
targeted product offers can be made to consumers at the point-of-sale. The
success of a direct marketing campaign is generally based on a direct marketer's
return on investment, which is measured by the response rate (e.g. number of
leads, number of sales) and cost-per-response.
We believe that an estimated $153 billion was spent in 1997 on direct
marketing in the United States. The Internet has the potential to provide direct
marketers with the ability to target and deliver direct marketing campaigns to
users with specific characteristics and interests. In addition, unlike many of
the traditional methods of direct marketing, the Internet provides direct
marketers with the opportunity to contact consumers at the point-of-sale (i.e.,
their personal computers).
31
THE COMPANY
We are an interactive Internet-based communication services company
providing:
- Advertising messages from advertisers to shoppers;
- Product and customer service information from retailers to shoppers;
- Orders from shoppers to retailers;
- Consumer preference information to advertising and marketing companies;
- Interactive Internet-based communication between households and the
Internet; and
- Long-distance phone service.
Local, regional and national advertisers pay to advertise on the AIM Smart
communications network. The network consists of a high quality telecommunication
network between the consumers' homes or offices and our hubs. The communication
hubs are connected to customer service access stations located in regional malls
throughout the United States. The consumers of these network services receive
these services free of charge.
Upon joining the network, users provide consumer preference information. As
the consumers use the system, the network collects the information. We use this
information to provide interactive micro-marketing solutions for advertising
clients.
We acquire our consumers, among other ways, through affiliation with the
exclusive frequent shopper programs present in regional malls. We believe that
the SmartAIM Shopper Network-TM-, when fully developed through the regional mall
channel, will be available to 90% of the US population.
STRATEGY - NECESSARY SUCCESS FACTORS
We believe that the following are critical elements for our business model
to be a success:
- GET ACCESS TO CONSUMERs
We have secured access to consumers through relationships
with the owners/managers of the targeted malls.
We believe that the mall market in United States consists of
less than 1,600 major malls that service over 95% of the US population.
Further, we believe that 550 of these malls service over 90% of the US
population.
As of May 31, 1999, contracts had been signed with the owners
and managers of about 350 major malls. National roll-out of the service
was initiated at the beginning of 1998.
Based upon the negotiations to date, we believe we will be
able to receive installation commitments from owners of approximately
550 of the largest malls in this country. Our current plans indicate
that the roll-out of the AIM Smart communications network to these
malls should be completed sometime in the year 2000.
- DEVELOP THE USER BASE
32
Industry wide, the mall owners are increasingly focusing the
mall marketing budgets on the development of their frequent shopper
programs. We believe these budgets typically range from $250,000 to
$1,500,000 per mall per year.
The three mall owners with whom we currently have contracts
are believed to currently have over 2 million members in their frequent
shopper programs. These mall owners' typical goal is to expand their
membership to 30,000 members or more per mall. They have made the
SmartAIM Shopper Network-TM- an integral part in expanding the base of
their frequent shopper programs.
As a result, we believe that we can develop a large user base
with a low acquisition cost through the tie-in of the SmartAIM Shopper
Network-TM- with the malls' frequent shopper programs.
- PROVIDE STABLE AND TOLERANT TECHNOLOGY
We believe that to retain a large user base, the underlying
technology must be stable as well as tolerant of human error and system
fault. We have acquired existing technology and developed enhancements
that we believe achieve this end.
Our technology received two Microsoft Retail Application
Development (RAD) awards in 1997 for its "best of breed" capabilities.
- ESTABLISH THE NETWORk
The SmartAIM Shopper Network-TM- consists of four elements: an
in-mall pavilion, two communications networks and the connection to the
Internet. The first communications network ties the malls together into
one, high quality communications network. The second network ties the
homes and offices to their local malls. We believe that the critical
path is the installation of the communications networks.
The installation and the management of the two communications
networks and the connection to the Internet is outsourced to Klein
Technologies International LLC of Vienna, Virginia (KTI). KTI uses
state-of-the-art equipment from Ascend Communications and, as of the
date of this document, is one of Ascend's three national systems
integrators. The other two are IBM and Digital Equipment. We believe
that KTI is capable of installing the communication networks into more
than 25 malls per month.
- PROTECT CHANNEL DURING DEVELOPMENT OF PROJECt
We have four-to-five year partnership agreements with the mall
owners/managers providing SmartAIM with:
- Preferential access to the frequent shoppers in the mall.
- Exclusive direct access to the frequent shoppers that are using the
SmartAIM Shopper Network-TM-.
- Contractual commitments from the mall owners/managers to NOT allow
any other similar service to operate from the mall.
We believe that these agreements are a very important barrier
to potential competition.
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- GENERATE REVENUE FROM THE FACTORS DESCRIBED ABOVE, as discussed in the
following sections.
REVENUE GENERATION
We have five distinct revenue sources:
1. INTERACTIVE, MICRO-TARGETABLE CYBER-ADVERTISING AND E-COMMERCE delivered
over the SmartAIM Shopper Network-TM- is integrated with our modified
version of the Microsoft Internet Explorer-TM- browser (the SmartAIM
Shopper Explorer-TM-), combined with updates delivered via the Network.
Therefore, advertising delivered over the SmartAIM Shopper Network-TM- is
seen whether the user is using the Network to access the local mall, access
the Internet, or as a telecommunications vehicle (like a video phone).
Because the advertising is tightly integrated into the SmartAIM Shopper
Explorer-TM- application, we are unaware of currently existing technology
that can filter out the advertising messages we deliver.
We believe that advertising delivered over the SmartAIM Shopper
Network, when combined with the consumer preference, demographic and
purchase pattern information on members of the Network, can be highly
targetable (commonly called micro-targetable), as well as interactive. We
further believe that these characteristics substantially expand the
potential effectiveness of cyber-advertising for national and regional
advertisers, as well as provide an effective, controllable cyber-vehicle
for local advertisers.
There are two types of advertising used on the SmartAIM Shoppers
Network-TM-:
- Advertising targeted to specific user demographic, life-style and
or consumer preference characteristics displayed in the SmartAIM
Shopper Explorer/SmartAIM Cyber Catalogue, including:
- Products that reach catalog shoppers,
- Products that reach impulse buyers, and
- Products that reach bargain hunters.
Additionally, we provide the order forwarding and delivery dispatching
service to the local retailers (both within and without the malls) that
offer goods and services for sale online over the SmartAIM Shoppers
Network-TM-. We believe two factors may well help accelerate acceptance of
consumer electronic commerce over the SmartAIM Shoppers Network-TM-:
- The supplier of goods and services will be a known, and presumably
trusted, local supplier. One of the current obstacles to
widespread use of electronic commerce by consumers seems to be the
lack of confidence in the supplier.
- Delivery and other services (such as gift wrapping) is within half
an hour to three hours, dependent on service level ordered, of
order placement, providing "instant gratification." In today's
society, speed of service generally provides the difference
between a sale and no sale. We believe that this will be an
important competitive edge.
34
2. IN-MALL ADVERTISING is delivered via video and interactive, touch-screen
displays and interactive directories (yet to be installed) located at
free-standing pavilions or at the centrally-located Help Desks. It is
through these displays that mall shoppers can get up-to-the-minute
information regarding coupon/product/promotion/location information
specific to their own interests. At the same time, advertising messages
from locally-based (both tenants of the mall and advertisers from outside
the mall) and national advertisers are streamed to the displays around the
shopper. The advertising displayed is divided into three different types of
product:
35
3. INTERACTIVE INTERNET-BASED ADVERTISING products, including
- Products that reach bargain hunters,
- Products that reach impulse buyers, and
- Product that reach catalog shoppers.
- Broadcast advertising products. (Electronic billboards - made for
everybody and nobody in particular.)
- Narrowcast advertising products, which are targeted based on consumer
demographics.
4. MARKETING FEES AND COMMISSION FROM SMART OPTION PROGRAM PARTNERS.
The Smart Option Retailer provide their products and services to our
members in exchange for a monthly customer access fee and sales commission
that we partially turn into e-rewards points (e-points) redeemable by our
E-Rewards members for products and services from our e-commerce system. The
shoppers use these e-points for monthly Free Shopping Sprees. The potential
loss of the monthly Free Shopping Spree provides additional barriers for
shoppers to change supplier of product or service provided by the Smart
Option Retailer.
The Smart Option program provides the following sources of revenue to us:
- We will receive commission from Smart Option retailers based on the
amount of the products and services sold to each member. We turn part
of this commission into E-points that the shopper can redeem in the
E-Commerce System, for short, E-System.
- We will receive a monthly minimum marketing fee from the Smart Option
Retailers for each person that purchase the products or services during
the month.
- We receive commission from the retailers that provide the goods that
are advertised and ordered over the SmartAIM Shopper Network-TM-.
- It is also anticipated that this program may lead to increased
advertising based on the premise that the members will be highly
motivated to spend their e-commerce dollars.
5. MARKET RESEARCH on the consumer preference, demographic and purchase
pattern information will be collected and sold. This revenue source has not
been developed yet. We believe granular data generated from the above
services (in-mall services, communications network services and on-line
shopping), when combined with the demographic information from the
mall-based Frequent Shopper clubs, will create a database that will be
highly valuable to advertisers. This database can be tabulated to meet
specific queries from advertisers and agencies with respect to consumer
behavior. Furthermore, it can be matched to specific, additional research
efforts by advertisers and agencies. These efforts can focus at any level
the client base requires, from the local level on up to a national level.
We expect the market research business to become a three-way
partnership among ourselves, the mall owners and an as yet unnamed third
party. The third party will be selected on the basis of its expertise in
this area, and will be expected to manage the effort. The economics of our
position remain to be determined, but could include a royalty, revenue
stream share and/or equity position.
36
One particularly unique aspect of our business is that it enables
advertisers to engage in micro-targeted advertising, and measures results
on a real-time basis. Notable uses to date have included: (a) use of
locally (at the Pavilions) printed coupons by national fast-food retailers
to build store traffic during slow periods, (b) testing of varied
advertising messages and their effectiveness, (c) test marketing new
products using locally-focused messages, and (d) automated buying-impulse
creation with proof of traffic at the retailer provided to the advertiser.
In June 1996 we installed the test site in Laguna Hills, California.
During the final Beta test during the period November 1996 though January
1997, we were satisfied that the advertising products developed would work
in a real life environment.
MARKETING
There are two key elements to our marketing efforts: getting the major
mall owners/managers under contract for the SmartAIM Solution and acquiring
users of the SmartAIM Shopper Network-TM-.
EFFORTS DIRECTED TOWARD MALL OWNERS
Since the fall of 1997, our marketing efforts directed toward the major
mall owners and managers have been focused principally in two areas:
- Direct one-on-one conversations and negotiations with the mall
owners and managers, and
- Annual participation in the mall industry's largest annual trade
show, the International Counsel of Shopping Centers (ICSC) Show in
Las Vegas.
In addition to our current agreements with the three mall owners, we
continue to actively and aggressively engage in substantive conversations with
many of the other major mall owners in the industry. The levels of conversation
vary, but are serious enough that many of the mall owners approached have
visited our headquarters to engage in detailed discussions. Based upon our
recent successes and the indications of interest from these owners, we believe
that we will continue to be successful in signing contracts with additional mall
owners for the SmartAIM Solution.
EFFORTS DIRECTED TOWARD BUILDING THE SMARTAIM SHOPPER NETWORK-TM- USER BASE
We are engaged in a number of marketing activities intended to build
the user base on the SmartAIM Shopper Network-TM-, including on-Pavilion
promotions, direct mail, in-mall solicitations, use of local food delivery
service customer lists, providing services to local lifestyle clubs in return
for access to their membership lists, and other efforts.
We believe one current avenue, in particular, will be a significant,
low cost-of-acquisition source of users of the SmartAIM Shopper Network-TM-.
This is the cooperative tie-in to the mall owners' frequent shopper clubs. These
frequent shopper clubs are called different things by various mall owners,
including, for example, The Premier Shopper Club-TM- at The Rouse Company, Mall
Perks-TM- at Simon De Bartolo Group, and Mall Awards-TM- at The WellsParkGroup.
During the past two years the regional malls have, in an effort to
enhance their income, focused on methods to increase loyal traffic to the malls
and to capitalize on this traffic. In that effort, the mall owners are directing
their local mall marketing funds to expand their frequent shopper clubs, both
concerning the value they offer to the shoppers and the number of members that
are enrolled in the
37
programs. The mall owners are interested in adding new shoppers to these
programs because that will enhance the sales base for the retailers, and
therefore enhance the rental base for the mall owner.
The local mall marketing funds of the three mall owners currently under
contract for the SmartAIM Shopper Network-TM- typically range from $250,000 to
$1,500,00 per mall per year. We believe that the collective value of the annual
local mall marketing expenditures of these three mall owners exceeds several
hundred million dollars.
Importantly, these mall owners are currently focusing the bulk of their
local marketing fund expenditures on their shopper loyalty programs, using the
SmartAIM Shopper Network-TM- as an integral element. As a result, we believe
that the average mall under contract to us is signing up between 50 and 100 new
members per day for its shopper loyalty program. Furthermore, we believe that
the mall owners we expect to have under contract by the year 2001 will have over
15 million members in their clubs at that time.
SALES
TARGET CUSTOMERS
Our sales efforts are focused on the following "target" customers:
1. LOCAL SELLERS OF GOODS AND SERVICES. This group of advertising customers
includes two broad types of organizations:
- In-mall retailers of goods and services, including the independent
stores, small regional chains, as well as the typical "anchor" stores
of the national retailing chains.
- Retailers of goods and services in the local area, but that do not have
a presence within the malls.
2. NATIONAL/REGIONAL RETAILERS WITH MALL PRESENCE. National and large
regional retailers often have a substantial part of the advertising
decisions made centrally, and need to be dealt with accordingly.
3. NATIONAL ADVERTISERS. This group of advertising customers includes the
following types of companies:
- Companies/brands that sell or distribute their products through the
retailers within the mall, and
- Companies/brands/products/services whose distribution transcends the
mall channel.
Our local sales efforts are based on in-mall marketers and a local outside
sales force. The in-mall marketers (approximately one for every 50 stores in a
mall) are responsible for selling the advertising services to the independent
retailers of goods and services within the mall, as well as coordinating with
the local store managers of national or regional retailers serviced directly
from our national sales force. The local outside sales force (typically 1 or 2
people per mall, depending upon the local market size) are responsible for
selling our advertising services to sellers of goods and services, as well as
other organizations, that do not have a direct presence within the mall.
EMPLOYEES
38
As of May 31, 1999, we employed 110 persons and consultants, including 41
in sales and marketing, 48 in product development and customer support and 21 in
accounting, human resources and administration. We are not subject to any
collective bargaining agreements.
PROPERTIES
Our principal executive offices are located in Goodrich, Michigan in a
facility consisting of a total of approximately 5,635 square feet. We also have
an office in Waterford, Michigan consisting of a total of approximately 8,000
square feet, which houses our equipment assembly operations, inventory and Media
control group. We believe that our office facilities need to be expanded.
39
STATUS AS OF MAY 31, 1999
As of May 31, 1999, we have:
- Signed roll-out contracts with owners/managers of over 350 properties.
- Installed Pavilions and Internet services in 11 malls.
- Installed Internet Service only in an additional 40 malls.
COMPETITION
The markets for SmartAIM Shopper Network-TM- and Pavilion advertising and
related products and services are intensely competitive and this competition is
expected to continue to increase.
Within the mall itself, we are not aware of any other mall-sponsored
competitor that offers a comprehensive interactive Internet-based advertising
solution. On the Internet itself we compete for advertising revenue with large
Web publishers and portals, such as America Online, Yahoo!, Excite and Infoseek.
Further, the SmartAIM Shopper Network-TM- competes with a variety of Internet
advertising networks, including DoubleClick and 24/7 Media.
We also encounter competition from a number of other sources, including
content aggregation companies, companies engaged in advertising sales networks,
advertising agencies, and other companies that facilitate Internet advertising.
Many of our current Internet competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources. As a result, they may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products and
services.
Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential employees, strategic partners, advertisers and mall owners.
Further, there can be no assurance that our competitors will not develop
products or services that are equal or superior to our solutions or that achieve
greater market acceptance than our solutions.
We also expect that competition may increase as a result of industry
consolidation. 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 advertising and mall owner partners. Accordingly, new
competitors or alliances among existing or potential competitors may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
would adversely affect our business, results of operations and financial
condition. We cannot assure you that we will be able to compete successfully
against existing or potential competitors or that competitive pressures will not
have a material adverse effect on our business, results of operations and
financial condition.
Along with the Internet, in general, we, in particular, also must compete
for a share of advertisers' total advertising budgets with traditional
advertising media such as television, radio, cable and print.
40
To the extent that the SmartAIM Shopper Network-TM- and in-mall Pavilions
are perceived as limited or ineffective advertising media, advertisers may be
reluctant to devote a significant portion of their advertising budgets to our
solutions, which could limit growth and could adversely affect our business,
results of operations and financial condition.
41
MANAGEMENT
Our directors and executive officers are as follows:
Name Age Position Term
-------------------------------------------------------------------------------
Roland Jonsson 43 Chief Executive Officer,
Chief Financial Officer, Secretary
and Director
Garry Eberhardt 43 Chairman of the Board, Executive Vice
President of Operations, Chief Operating
Officer and Director
ROLAND JONSSON has served as our Treasurer and CFO since inception and CEO
since the first of April 1999. From October of 1993 to the present, he has also
served as a Director of WinPoint Retail Consulting Services, Inc., a private
company (WinPoint). He has been the CFO, Secretary and Treasurer of WinPoint
since January of 1995. From 1991 to January of 1995, Mr. Jonsson was a Director
of LifeSoft Corporation. Mr. Jonsson studied at the University of Lund in
Sweden.
GARRY EBERHARDT has served as our Vice President of Operations since its
inception. He is also our Chief Operating Officer. He has served as a Director
and Vice President, Operations of WinPoint from January 1995 to the Present. He
has served as Chairman of the Board since May 1, 1999. Since the mid-seventies
Mr. Eberhardt has been involved in the computer industry in various management
and development capacities. Mr. Eberhardt studied business administration and
computer science at the University of Lund in Sweden.
While we did not have independent members of our Board of Directors as of
May 31, 1999, we recognize the need for them and the value such board members
can contribute to our ongoing success. We are currently looking for and
evaluating independent candidates for our Board of Directors, and we expect to
have such persons in place in the near future.
42
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth as to each person (Named Executive
Officers), information concerning all compensation paid or to be paid for
services rendered to the Company in all capacities during the fiscal year ended
July 31, 1998.
SUMMARY COMPENSATION TABLE
------------------------------------------ ----------------------------------------------------------- -------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
SECURITIES
OTHER ANNUAL UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
------------------------------------------ --------- ----------------- ---------- -------------------- -------------------
Roland Jonsson 1998 $108,000 - - 375,357
Chief Executive Officer, Chief
Financial Officer and Secretary
Garry Eberhardt 1998 $108,000 - - 375,357
Chairman of the Board,
Executive Vice President of
Operations and Chief Operating
Officer
Robert Van Duren 1998 $108,000 - - 375,357
Former Chairman of the Board and
President [1]
------------------------------------------ --------- ----------------- ---------- -------------------- -------------------
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes option grants made under the 1997 Smart AIM
Incentive Plan during the fiscal year ended July 31, 1998 to our named executive
officers. No options were granted prior to fiscal 1998.
------------------------------- ------------------- ---------------------- -------------------- ---------------------
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES EXERCISE PRICE PER
NAME OPTIONS GRANTED IN FISCAL YEAR SHARE EXPIRATION DATE
ROLAND JONSSON 375,357 11.9% $2.23 11/30/2007
GARRY EBERHARDT 375,357 11.9% $2.23 11/30/2007
ROBERT VAN DUREN(1) 375,357 11.9% $2.23 11/30/2007
---------------------------------------------------------------------------------------------------------------------
43
(1) Mr. Van Duren's non-vested options were cancelled in April 1999 when he
resigned as our Chairman of the Board, President and a Director.
The exercise price for the options increases at a constant rate of 0.5%
per month starting November 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS
No options have been exercised before or during the last fiscal year.
44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Eberhardt and Jonsson own 30% (20% directly and 10% by his wife,
Helen Eberhardt) and 35%, respectively, of the outstanding voting stock of
WinPoint and the holder of approximately 46.8% of the outstanding Common Stock
of the Company. The Company's wholly-owned subsidiary, SmartAIM, entered into an
Original Equipment Manufacturer (OEM) Source Code Access License and OEM
Distribution Agreement with WinPoint in late 1997. The licensing agreement gives
SmartAIM the right to use and resell any technology developed or licensed by
WinPoint for at least 20 years for no charge. In addition, in late 1997,
SmartAIM, WinPoint, each of the Messrs. Eberhardt and Jonsson, and certain other
individuals entered into a consulting agreement. The consulting agreement
obligates each of the individuals to dedicate their full-time efforts to the
business of SmartAIM for three years.
We were originally formed in April 1988 for the purpose of acquiring one or
more businesses. In December 1997, we completed the acquisition of SmartAIM
through an exchange of 22,665,000 shares of our common stock for 100% of the
outstanding stock of Smart AIM, leaving SmartAIM as our wholly-owned subsidiary
(Exchange). The former stockholders of SmartAIM owned approximately 84% of our
outstanding common stock immediately following the Exchange.
RELATED PARTY TRANSACTIONS
We have party transactions with several of our directors and officers as well as
other affiliated corporations. All related party transactions within the
consolidated group have been eliminated.
1. During the year ended July 31, 1997, we had the following related party
transactions with WinPoint:
1.1. From inception through July 31, 1997, WinPoint acquired our common stock
(giving effect to 523 for 1 exchange) through two conversions of
accounts payable totaling $4,985,702 for 15,697,558 shares of common
stock ($3,785,702 for 14,136,533 shares of common stock during the year
ended July 31, 1997).
1.2. As of July 31, 1997, we have deferred revenue totaling $2,725,000. On
July 31, 1997, we assigned the rights of collection of all outstanding
Marketing Agreements, at full contract value, less amounts already
received by us, to WinPoint in exchange for a $2,540,000 reduction in
amounts due to WinPoint. All remaining obligations under the Marketing
Agreements reside with us.
1.3. On July 16, 1997, we entered into an agreement with WinPoint to assign
the rights to certain accounts receivable totaling approximately
$172,000 in exchange for a reduction in amounts due to WinPoint.
1.4. WinPoint provided certain management and programming services,
facilities and supplies to us. WinPoint charged all costs back to us on
a monthly basis. As discussed in Note 1.1, we exchanged common stock for
certain of these services. For the year ended July 31, 1997, we incurred
approximately $2,200,000 ($3,500,000 since inception) in charges from
WinPoint (excluding the programming services that were capitalized).
Amounts due from WinPoint total $3,825 as of July 31, 1997.
2. During the year ended July 31, 1998, we had the following related party
transactions with WinPoint:
2.1. We entered into an independent sales representative agreement on June
10, 1997 for the purpose of marketing its products through various
channels. Under this agreement, the sales representative was
45
granted the right to purchase up to 1.000 shares of our unregistered,
restricted stock at a price of $560 per share. This agreement was
terminated on November 4, 1997, at which point the rights expired
unexercised.
2.2. We entered into four separate Marketing Agreements totaling $1 million
with a related party. The contractual down payment of $100,000 was
received from the related party. No revenue related to the Marketing
Agreement has been recognized as of July 31, 1997, as none of the
related pavilions have been installed in the related malls. The
outstanding amount due under these Marketing Agreements was assigned to
WinPoint in conjunction with the assignment of collection rights to all
outstanding marketing agreements.
2.3. Per an agreement dated November 1, 1997, we agreed to pay and have paid
WinPoint a monthly consulting fee of $9,000 per month, per person, which
shall include full-time services of Garry Eberhardt, Roland Jonsson,
three additional senior developers and Robert Van Duren. We also agreed
to pay WinPoint a monthly fee of $4,500 which shall include full-time
services of one junior developer and 100% of overhead charges which
cover all office expenses, support staff and equipment of WinPoint.
2.4. The initial term of the agreement shall remain in effect for three years
from its date, unless earlier terminated. It shall be automatically
extended for one year periods unless at least thirty days prior to the
end of the initial term or any extension term either party gives written
notice of its intention to terminate this agreement. Prior to November
1, 1997, WinPoint provided certain management and programming services,
facilities and supplies to us on a monthly basis. For the year ending
July 31, 1998, total services provided by WinPoint for the above
agreements were $1,294,844. Other additional costs for legal and
marketing expenses totaled $125,425.
2.5. We capitalized $1,038,750 of software development costs. These costs
were incurred by WinPoint and invoiced to us during the year ended July
31, 1998. During the year ended July 31, 1997 and the period from
inception to July 31, 1996, we capitalized an additional $4,990,250 of
software development costs from WinPoint.
2.6. During the year ended July 31, 1998, we purchased Pavilions totaling
$1,420,000 from WinPoint. We also purchased computer equipment totaling
$84,000 from WinPoint.
2.7. We entered into an Original Equipment Manufacturer (OEM) Source Code
Access License and OEM Distribution Agreement ("License") with WinPoint
in May 1996. The original License granted us the right to use, copy,
market, and sub-license specified software of WinPoint, in exchange for
a $1 fee and future royalty payments, as defined in the License. The
license terminates upon the expiration of the last copyright
(statutorily determined) license issued to us. On November 12, 1997, we
amended the license with WinPoint by eliminating provisions for future
royalty payments in exchange for 1,718 shares of SMART AIM stock valued
at $2,000,000. These shares were subsequently converted into
approximately 898,500 shares of our common stock.
2.8. As of July 31, 1998, we have a payable to WinPoint in the amount of
$407,646.
3. In April 1999, we entered into employment agreements with Messrs.
Jonsson and Eberhardt. These employment agreements are for a term of
five years. The agreements provide that if there is a change-of-control
in which more than 50% of our common stock is acquired by an individual
or a group acting in concert, than the respective employee shall have
the right to purchase 1.5 million shares of our common stock at a
purchase price of $0.01 per share, regardless of the actual value of
the common stock at the time of such corporate transaction. These
agreements were approved by the holders of a majority of the
46
outstanding shares of our common stock. These agreements were entered
into for purposes of providing comfort to our key personnel that if
there was a change-of-control, such personnel would receive adequate
compensation.
47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth certain information with respect to (i) each
of our directors, (ii) Named Executives, (iii) all directors and executive
officers as a group at July 31, 1998, including the number of shares
beneficially owned by each of them, and (iv) each person known by us to own
beneficially or of record more than 5% of the outstanding shares of Common
Stock. Unless otherwise indicated below, the business address of each individual
is the same as the address of our principal executive offices.
--------------------------------------------------------------------------------------------------------------
PRE-OFFERING POST-OFFERING
--------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES(2) PERCENTAGE OF CLASS PERCENTAGE OF CLASS
NAME OF SHAREHOLDER (1)
--------------------------------------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
Roland Jonsson 16,629,484 47.9% 41.2%
Garry Eberhardt 17,029,554 49.1% 42.2%
Officers and Directors as a
Group (2 people) 17,410,108 50.1% 43.2%
5% SHAREHOLDERS
WinPoint Retail Consulting
Services, Inc. 16,248,930 46.8% 40.3%
--------------------------------------------------------------------------------------------------------------
(1) Unless otherwise indicated, the address of each beneficial owner is in the
care of the Company, 11280 Hegel Road, Goodrich, Michigan 48438.
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of Common Stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities, which may be acquired by such person within 60 days from the date of
this Prospectus upon the exercise of options, warrants, or convertible
securities. Each beneficial owner's percentage ownership is determined by
assuming that options, warrants or convertible securities that are held by such
person (but not those held by any other person) and which are exercisable or
convertible within 60 days of this Prospectus have been exercised or converted.
Assumes a base of 40,332,096 shares of Common Stock outstanding immediately
after this offering, before any consideration is given to other outstanding
options.
48
PLAN OF DISTRIBUTION
GENERAL
We are offering for sale in this offering a total of 5,610,098 shares of
its Common Stock at a purchase price of $1.7825 per share to raise proceeds of
up to $10,000,000 for us. There is no minimum amount and all proceeds will be
received directly by us. We intend to sell all the common stock offered by this
Prospectus directly to the public.
The shares are being offered to the public through the directors and
officers of the Company. No director or officer is affiliated with a securities
broker or dealer. No commission or other sales compensation will be paid to any
organizer in connection with this offering. We have not entered into any
marketing or consulting agreement with a registered broker/dealer. If necessary,
we may enter into an agreement with a registered broker/dealer to assist in the
sale of Common Stock in this public offering, without notice to purchasers.
None of our directors and officers participating in this offering are
registered or licensed as a broker or dealer or an agent of a broker or dealer.
Our unlicensed officers and directors will assist in sales activities in
connection with this offering pursuant to an exemption from registration as a
broker or dealer provided by Rule 3a4-1 promulgated under the Securities
Exchange Act (Rule 3a4-1). Rule 3a4-1 generally provides that an "associated
person of an issuer" of securities shall not be deemed a broker solely by
participating in the sale of securities of the issuer if the associate meets
certain conditions. Such conditions include, but are not limited to, that the
associate participating in the sale of an issuer's securities not be compensated
at the time of participating, that the person not be associated with a broker or
dealer and that such person observe certain limitations on his participation in
the sale of securities. For purposes of this exemption, "associated person of an
issuer" also means any person who is a director, officer or employee of the
issuer or a company that controls, is controlled by, or is under common control
with, the issuer.
This offering will remain open until all of the common stock is sold unless
sooner terminated by us in our sole discretion.
Following our acceptance, subscriptions are binding on subscribers and may
not be revoked by subscribers. We reserve the right to reject, in whole or in
part and in our sole discretion, any subscription.
HOW TO SUBSCRIBE
All subscriptions must be made by completing a Subscription Agreement.
Additional copies of this Prospectus and the Subscription Agreement may be
obtained by contacting us at the address set forth below. Subscriptions will not
be binding on subscribers until accepted by us. SUBSCRIPTIONS WILL NOT BE
ACCEPTED UNLESS ACCOMPANIED BY PAYMENT IN FULL AT THE SUBSCRIPTION PRICE. We
reserve the right to reject any subscription, in whole or in part, with or
without cause, but will inform the subscriber of the reason for such rejection.
We will refuse any subscription by sending written notice to the subscriber by
personal delivery or first-class mail within ten calendar days after receipt of
the subscription, and the subscriber's Subscription Agreement and refund of
49
payment will accompany the notice, together with a statement as to the reason
for such rejection. Any Subscription Agreement which is completely and correctly
filled out, which is accompanied by proper and full payment and which is
physically received at our offices by any of our employees or agents, shall be
deemed to have been accepted if it is not refused as hereinbefore provided
within ten business days after such receipt.
50
A completed Subscription Agreement and payment in full (made in the manner
specified below) of the total subscription price for the number of shares
subscribed should be mailed to us at the following address:
Subscriptions and payment in full also may be delivered in person to our
office at 11280 Hegel Road, Goodrich, Michigan 48438 between 10:00 a.m. and 5:00
p.m., Monday through Friday. All subscriptions are final and will not be
refunded unless the subscription is rejected by us.
IMPORTANT: PAYMENTS MUST BE MADE IN UNITED STATES FUNDS BY CHECK, BANK
DRAFT OR MONEY ORDER PAYABLE TO "AIM SMART CORPORATION". FAILURE TO INCLUDE THE
FULL SUBSCRIPTION PRICE WITH THE SUBSCRIPTION AGREEMENT WILL RESULT IN OUR
RETURN OF THE SUBSCRIPTION.
We will deliver an effective Prospectus to all persons to whom the
securities offered hereby are to be sold at least 48 hours prior to the
acceptance or confirmation of sale to such persons or to send such a prospectus
to such persons under circumstances that it would normally be received by them
48 hours prior to acceptance or confirmation of the sale. We expect to have
multiple closings.
51
DESCRIPTION OF SECURITIES
Upon the completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our articles of
incorporation and by-laws, which are included as exhibits to the registration
statement of which this Prospectus forms a part, and by the provisions of
applicable Colorado law.
COMMON STOCK
As of May 31, 1999, there were 34,721,998 shares of Common Stock
outstanding, held of record by 336 stockholders. In addition, as of May 31,
1999, there were options to purchase an aggregate of 3,476,741 shares of Common
Stock outstanding. After giving effect to the sale of the shares offered by us
in this offering, there will be 40,471,998 shares of Common Stock outstanding
(assuming no exercise of outstanding options under our stock option plans and
warrants after June 14, 1999).
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available for that purpose. SEE
"DIVIDEND POLICY." In the event of our liquidation, dissolution or winding up,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. The outstanding shares
of Common Stock to be issued upon completion of this offering will be fully paid
and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 10,000,000 shares of Preferred
Stock in one or more series and to fix or alter the designations, preferences,
rights and any qualifications, limitations or restrictions of the shares of each
such series thereof, including the dividend rights, dividend rates, conversion
right, voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. We have no Preferred
Stock outstanding and have no present plans to issue any shares of Preferred
Stock.
DIVIDEND POLICY
We have never paid any dividends on our Common Stock. The Board of
Directors has no current intention to declare dividends on the Common Stock in
the foreseeable future and intends to follow a policy of retaining earnings, if
any, to finance the growth of our business. Any future determination to declare
dividends will be at the discretion of the Board of Directors and will be
dependent on our results of operations, financial condition, contractual and
legal restrictions and other factors deemed relevant by the Board of Directors
at that time. In addition, the payment of cash dividends on the Common Stock in
the future could be limited or prohibited by the terms of financing agreements
that we may enter (e.g., a bank line of credit or an agreement relating to the
issuance of other debt securities of the Company) or by the terms of any
Preferred Stock that may be authorized and issued. SEE "DESCRIPTION OF
SECURITIES."
52
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Our by-laws provide that we may indemnify a person made a party to a
proceeding because the person is or was a director or officer against liability
incurred in the proceeding if:
(1) The person conducted himself or herself in a good faith; and
(2) The person reasonably believed:
(A) In the case of conduct in an official capacity with us, that his or
her conduct was in the Company's best interests; and
(B) In all other cases, that his or her conduct was at least not
opposed to our best interests; and
(3) In case of any criminal proceeding, the person had no reasonable
cause to believe his or her conduct was unlawful.
We may not indemnify a director or officer:
(1) In connection with a proceeding by us or in our right in which the
director was adjudged liable to us; or
(2) In connection with any other proceeding charging that the director
derived an improper personal benefit, whether or not involving action in an
official capacity, in which proceeding the director was adjudged liable on
the basis that he or she derived an improper personal benefit.
Our by-laws also provide that we must indemnify a person who was wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the person was a party because the person is or was a director, against
reasonable expenses incurred by him or her in connection with the proceeding.
Under certain circumstances, we may pay for or reimburse the reasonable
expenses incurred by a director or officer who is a party to a proceeding in
advance of final disposition of the proceeding.
A director or officer who is or was a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction.
We may purchase and maintain insurance on behalf of a person who is or was
a director, officer, employee, fiduciary, or agent of the Company, or who, while
a director, officer, employee, fiduciary, or agent of the Company, is or was
serving at the request of the Company as a director, officer, partner, trustee,
employee, fiduciary, or agent of another domestic or foreign corporation or
other person or of an employee benefit plan, against liability asserted against
or incurred by the person in that capacity or arising from his or her status as
a director, officer, employee, fiduciary, or agent, whether or not the Company
would have power to indemnify the person against the same liability under the
by-laws.
53
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares offered
hereby are being passed upon for us by Troop Steuber Pasich Reddick & Tobey,
LLP, Los Angeles, California and the Law Offices of Baylee Reid, Birmingham,
Michigan.
EXPERTS
The Financial Statements at July 31, 1997 and 1998 included in this Prospectus
have been audited by Merdinger, Fruchter, Rosen & Corso, P.C., New York City,
New York, independent auditors, as stated in their report appearing herein and
are included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
54
AIM SMART CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F5 - F6
Consolidated Statements of Cash Flows F7 - F8
Notes to Consolidated Financial Statement F9 - F22
-F1-
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
AIM SMART CORPORATION
We have audited the accompanying consolidated balance sheets of AIM SMART
CORPORATION AND SUBSIDIARY as of July 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AIM SMART
CORPORATION AND SUBSIDIARY as of July 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As shown in the accompanying financial
statements, the Company has incurred significant operating losses to date and
had negative cash flows from operations. Management's plans with respect to
those matters are discussed in Note 1(a) to the financial statements. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
February 26, 1999, except as to Note 10 which is as of June 14, 1999.
-F2-
AIM SMART CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
January 31, July 31,
----------- -------------------------
1999 1998 1997
----------- ----------- ----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and Cash Equivalents $ 57,356 $ 1,048,159 $ 33,197
Accounts Receivable, net of allowance for
doubtful accounts of $0 at July 31, 1998
and 1997, respectively 2,058 51,978 3,846
Stock Subscription Receivable - - 447,474
Advances to Supplier - 313,460 -
Due From Related Party - - 3,825
Prepaid Expenses and Other Current Assets 53,561 3,376 -
------------- ----------- ----------
Total Current Assets 112,975 1,416,973 488,342
Property and Equipment, net of accumulated
depreciation of $340,887 and $85,393, at July 31,
1998 and 1997, respectively 1,190,965 1,461,279 203,210
Software License Costs, net of accumulated
amortization of $472,222 and $0, at July 31,
1998 and 1997, respectively 1,194,445 1,527,778 -
Software Development Costs, net of accumulated
amortization of $837,361 and $0, at July 31,
1998 and 1997, respectively 4,186,804 5,191,639 4,990,250
------------- ----------- ----------
TOTAL ASSETS $ 6,685,189 $ 9,597,669 $5,681,802
------------- ----------- ----------
------------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 3,414,788 $ 656,327 $ 180,689
Current Portion of Obligations under Capital Leases 63,380 90,299 81,963
Deferred Revenue - 800,000 200,000
Due to Related Parties 84,973 407,646 -
------------- ----------- ----------
Total Current Liabilities 3,563,141 1,954,272 462,652
Long Term Portion of Obligations under Capital Leases - 20,041 110,340
Note Payable 401,277 - -
Deferred Revenue 1,725,000 1,725,000 2,525,000
------------- ----------- ----------
Total Liabilities 5,689,418 3,699,313 3,097,992
------------- ----------- ----------
Commitments and Contingencies (Note 7) - - -
STOCKHOLDERS' EQUITY
Common Stock - no par value; authorized 100,000,000
shares; 27,721,540 and 27,344,271 issued and outstanding
at July 31, 1998 and 1997, respectively 17,319,746 14,605,747 6,211,390
Preferred Stock - no par value; authorized
10,000,000 shares; none issued and outstanding - - -
Accumulated Deficit (16,323,975) (8,707,391) (3,627,580)
------------- ----------- ----------
Total Stockholders' Equity 995,771 5,898,356 2,583,810
------------- ----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,685,189 $ 9,597,669 $ 5,681,802
------------- ----------- ----------
------------- ----------- ----------
The accompanying notes are an integral part of the consolidated financial
statement.
-F3-
AIM SMART CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The
Six Months Ended For The Years Ended
January 31, July 31,
---------------------------- --------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
REVENUE (Unaudited)
Marketing Services $ 1,965,594 $ 4,738 $ 1,907,991 $ 199,516
Marketing Area Licenses 800,000 - 200,000 25,000
----------- ----------- ----------- -----------
Total Revenue 2,765,594 4,738 2,107,991 224,516
----------- ----------- ----------- -----------
COST OF REVENUE
Lease Expense 3559,083 24,000 1,765,988 65,250
Salary Expense 1,119,185 30,310 643,841 55,907
Communications Expense 1,558,262 11,491 189,677 17,896
Outside Services 7,176 69,750 42,365 96,857
Other 106,365 9,478 52,864 38,527
----------- ----------- ----------- -----------
Total Cost of Revenue 6,350,071 145,029 2,694,735 274,437
----------- ----------- ----------- -----------
GROSS PROFIT (3,584,477) (140,291) (586,744) (49,921)
----------- ----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Salary and Employee Benefits 734,023 85,845 554,933 49,194
Depreciation and Amortization 1,639,679 189,375 1,565,078 80,545
Professional Fees 108,037 110,766 240,556 832,724
Outside Services 824,250 927,080 1,779,876 1,083,027
Travel and Entertainment 186,494 8,976 55,911 44,470
Rent Expense 19,516 6,417 11,817 -
Marketing and Promotion 193,072 19,492 106,673 49,133
Communications Expense 94,036 15,923 59,597 -
Other General and Administrative Expenses 203,390 70,972 86,956 76,617
----------- ----------- ----------- -----------
Total Selling, General and
Administrative Expenses 4,002,497 1,434,846 4,461,397 2,215,710
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (7,586,974) (1,575,137) (5,048,141) (2,265,631)
OTHER INCOME (EXPENSE)
Interest Income 4,613 4,729 9,076 -
Interest Expense (16,192) (21,750) (40,746) (34,747)
Other Income (18,031) - - -
----------- ----------- ----------- -----------
Total Other Income (Expense) (29,610) (17,021) (31,670) (34,747)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (7,616,584) 1,592,158) (5,079,811) (2,300,378)
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET LOSS $(7,616,584) $ (1,592,158) $ (5,079,811) $(2,300,378)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE
Basic $( .26) $ ( .06) $(.19) $(.14)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $( .26) $ ( .06) $(.19) $(.14)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statement.
-F4-
AIM SMART CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JULY 31, 1997
Common Stock Stock Held
---------------------------- in Escrow
Shares Amount ------------
----------- ------------
Balance at July 31, 1996 10,000,000 $ 200,195 $( 175,000)
Giving Effect to 523 for 1Exchange 4,683,599 1,200,666 -
----------- ----------- ------------
Balance at July 31, 1996, Restated 14,683,599 1,400,861 ( 175,000)
Cancellation of Common Stock Held in Escrow (7,000,000) ( 175,000) 175,000
Issuance of Common Stock for Cash
Giving Effect to 523 for 1 Exchange 709,937 203,758 -
Issuance of Common Stock for Accounts
Payable Giving Effect to 523 for 1 Exchange 14,136,533 3,785,702 -
Issuance of Common Stock for Obligations
Under Capital Leases Giving Effect to 523
For 1 Exchange 214,340 57,450 -
Issuance of Common Stock for Compensation and
Commission Giving Effect to 523 for 1 Exchange 520,690 141,085 -
Issuance of Common Stock for Subscription
Receivable Giving Effect to 523 for 1 Exchange 784,172 789,474 -
Issuance of Common Stock for Services 1,295,000 3,238 -
Issuance of Common Stock for Cash 2,000,000 5,000 -
Offering Costs - ( 178) -
Net Loss for the Year Ended July 31, 1997 - - -
----------- ----------- ------------
Balance at July 31, 1997 27,344,271 $ 6,211,390 $ -
----------- ----------- ------------
----------- ----------- ------------
Total
Preferred Accumulated Stockholders'
Stock Deficit Equity
------------- ------------- -------------
Balance at July 31, 1996 $ - $( 30,027) $( 4,832)
Giving Effect to 523 for 1Exchange - (1,297,175) ( 96,509)
------------- ----------- -------------
Balance at July 31, 1996, Restated - (1,327,202) ( 101,341)
Cancellation of Common Stock Held in Escrow - - -
Issuance of Common Stock for Cash
Giving Effect to 523 for 1 Exchange - - 203,758
Issuance of Common Stock for Accounts
Payable Giving Effect to 523 for 1 Exchange - - 3,785,702
Issuance of Common Stock for Obligations
Under Capital Leases Giving Effect to 523
For 1 Exchange - - 57,450
Issuance of Common Stock for Compensation and
Commission Giving Effect to 523 for 1 Exchange - - 141,085
Issuance of Common Stock for Subscription
Receivable Giving Effect to 523 for 1 Exchange - - 789,474
Issuance of Common Stock for Services - - 3,238
Issuance of Common Stock for Cash - - 5,000
Offering Costs - - ( 178)
Net Loss for the Year Ended July 31, 1997 - (2,300,378) (2,300,378)
------------- ----------- -------------
Balance at July 31, 1997 $ - $(3,627,580) $ 2,583,810
------------- ----------- -------------
------------- ----------- -------------
The accompanying notes are an integral part of the consolidated financial
statement.
- F5 -
AIM SMART CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JULY 31, 1998
Common Stock
---------------------------- Stock Held
Shares Amount in Escrow
----------- ----------- ------------
Balance at July 31, 1997 27,344,271 $ 6,211,390 $ -
Common Stock Cancelled During the Year (1,960,000) - -
Issuance of Common Stock Giving
Effect to 523 for 1 Exchange 1,615,729 3,584,000 -
Issuance of Common Stock 721,540 5,351,177 -
Offering Costs - ( 540,820) -
Net Loss for the Year Ended
July 31, 1998 - - -
----------- ----------- ------------
Balance at July 31, 1998 27,721,540 $ 14,605,747 $ -
$ 5,898,356
Issuance of Common Stock (Unaudited) 3,524,675 2,713,999 -
Net Loss for the Six Months
Ended January 31, 1999 (Unaudited) - - -
----------- ----------- ------------
Balance at January 31, 1999 (Unaudited) 31,246,215 $ 17,319,746 $
----------- ----------- ------------
----------- ----------- ------------
Total
Preferred Accumulated Stockholders'
Stock Deficit Equity
------------ ------------ ------------
Balance at July 31, 1997 $ - $(3,627,580) $ 2,583,810
Common Stock Cancelled During the Year - - -
Issuance of Common Stock Giving
Effect to 523 for 1 Exchange - - 3,584,000
Issuance of Common Stock - - 5,351,177
Offering Costs - - ( 540,820)
Net Loss for the Year Ended
July 31, 1998 - (5,079,811) (5,079,811)
------------ ------------ ------------
Balance at July 31, 1998 $ - $(8,707,391) $ -
$ 5,898,356
Issuance of Common Stock (Unaudited) - - 2,713,999
Net Loss for the Six Months
Ended January 31, 1999 (Unaudited) - ( 7,616,584) ( 7,616,584)
------------ ------------ ------------
Balance at January 31, 1999 (Unaudited) - $(16,323,975) $ 995,771
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statement.
- F6 -
AIM SMART CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The
Six Months Ended For The Years Ended
January 31, July 31,
-------------------------- ---------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ------------ ----------- -----------
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $(7,616,584) $(1,592,158) $(5,079,811) $(2,300,378) $(1,297,175)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities
Depreciation and Amortization 1,639,679 189,375 1,565,078 80,545 6,222
Common Stock Issued for Services and for
Interest on Obligations Under Capital Leases - - - 162,492 -
Changes in Certain Assets and Liabilities:
Decrease (Increase) in Accounts Receivable 49,920 1,089 ( 48,132) ( 139,780) -
Marketing Area License Receivables, net of
Related Deferred Revenue - - - 75,000 110,000
Decrease (Increase) in Advances to Suppliers 313,460 - ( 313,460) - -
Increase in Prepaid Expenses and
Other Current Assets ( 50,185) ( 11,679) ( 3,376) - ( 35,666)
Decrease in Due From Related Party - 3,825 3,825 - -
Increase (Decrease) in Accounts Payable and
Accrued Expenses 2,758,461 ( 16,544) 475,638 55,570 120,109
Decrease in Deferred Revenue ( 800,000) - ( 200,000) - -
(Decrease) Increase in Due to Related Parties ( 322,673) 437,500 407,646 1,578,486 1,124,742
----------- ----------- ------------ ----------- -----------
Total Cash Used in Operating Activities (4,027,922) ( 988,592) (3,192,592) ( 488,065) 28,232
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase of Property and Equipment ( 31,197) ( 171,417) (1,513,563) ( 11,875) ( 24,102)
Increase in Software Development Costs - ( 980,250) (1,038,750) - -
----------- ----------- ------------ ----------- -----------
Total Cash Used in Investing Activities ( 31,197) (1,151,667) (2,552,313) ( 11,875) ( 24,102)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Increase) Decrease in Stock Subscription Receivable - (3,552,526) 447,474 - -
Contribution to Capital 2,714,000 5,848,765 6,601,852 550,758 666
Offering Costs - ( 222,239) ( 207,496) - -
Convertible Loan 401,277 340,000 - - -
Payments on Capital Leases ( 46,961) ( 39,110) ( 1,963) ( 17,621) ( 4,796)
----------- ----------- ------------ ----------- -----------
Total Cash Provided by Financing Activities 3,068,316 2,374,890 6,759,867 533,137 ( 4,130)
----------- ----------- ------------ ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ( 990,803) 234,631 1,014,962 33,197 -
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEA R 1,048,159 33,197 33,197 - -
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS -
END OF YEAR $ 57,356 $ 267,828 $ 1,048,159 $ 33,197 $ -
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
CASH PAID DURING THE YEAR FOR:
Interest Expense $ 16,192 $ 21,750 $ 40,746 $ 16,758 $ -
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Income Taxes $ - $ - $ - $ - $ -
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statement.
- F7 -
AIM SMART CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
a) WinPoint has acquired common stock of the Company through a conversion of
accounts payable totaling $3,785,702 for 14,136,533 shares of common
stock (giving effect to 523 for 1 exchange) during the year ended July
31, 1997. (See Note 5(a)).
b) On July 16, 1997, the Company entered into an agreement with WinPoint to
assign the rights to certain accounts receivable totaling approximately
$172,000 in exchange for a reduction in amounts Due to WinPoint. (See
Note 5(c)).
c) On July 31, 1997, the Company assigned the rights of collection of all
outstanding Marketing Agreements, at full contract value less amounts
already received by the Company, to WinPoint in exchange for a $2,540,000
reduction in amounts Due to WinPoint. (See Note 5(b)).
d) On November 12, 1997, the Company purchased various software license
costs. These costs represent various royalty and license fees the Company
must pay to utilize software licensed and patented by WinPoint Retail
Consulting Services, Inc., a related third party. The purchase was
consummated for a purchase price totaling $2,000,000. In payment, the
Company's subsidiary Smart Aim issued 1,718 shares of its common stock.
(See Note 5(j)).
e) The Company incurred offering costs of $333,325 during the year ended
July 31, 1998. These costs were incurred relating to the issuance of
common stock at purchase price below its market value.
The accompanying notes are an integral part of the consolidated financial
statement.
- F8 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of AIM Smart Corporation (the "Company"), formerly
known as Gatwick, LTD. ("Gatwick"), a holding company
organized under the laws of Colorado on April 27, 1988 and its
wholly-owned subsidiary, Smart AIM Corporation ("SMART AIM"),
acquired on December 3, 1997. (See Note 3). Smart AIM was
incorporated under the laws of Michigan on March 4, 1996. In
December 1997, the Company changed its name to AIM Smart. The
Company is publicly traded and is currently exempt from the
requirement to register with the United States Security and
Exchange Commission. The Company ceased being a development
stage company during the year. (See Note 1(m)).
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles, which contemplate continuation of the Company as a
going concern. However, the Company has experienced net
operating losses of $8,707,391 since inception. In addition,
the Company has used, rather than provided, cash from its
operations. These factors raise substantial doubt about the
Company's ability to continue as going concern. In view of the
matters described above, recoverability of a major portion of
the recorded asset amounts shown in the accompanying balance
sheet is dependent upon the Company's ability to raise
sufficient capital to fund its working capital requirements
until the Company can generate sufficient sales volume to
cover its operating expenses. The financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should
the Company be unable to continue in existence.
All significant intercompany accounts and transactions have
been eliminated in consolidation.
b) LINE OF BUSINESS
The Company is a communication and media company primarily
engaged in the development and implementation of a nationwide
advertising and merchandising network through the placement of
computerized pavilions in large malls throughout the United
States. In addition to providing a channel for advertising,
the pavilions will also serve as a gateway to providing
Intranet and Internet access to customers of the participating
retailers. The intranet component is designed to provide
customers on-line ability to purchase the goods of
participating retailers.
c) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and
the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
- F9-
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d) CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be
credit-worthy financial institutions. However, cash balances
exceeded FDIC insured levels at various times during the year.
As of July 31, 1998, the Company had non-insured funds of
$1,106,000.
e) REVENUE RECOGNITION
The Company has entered into several marketing area license
and distribution agreements (Marketing Agreements) whereby the
Company has granted the contracted party an exclusive license
to market and distribute its product for installation and use
in a defined marketing area in exchange for payments totaling
$250,000. The Marketing Agreements generally require a down
payment ranging from 4% to 25% of the contract amount with the
remaining payments being due over a period of 24 to 60 months.
(See Note 5(d)). The contracted party receives 5% to 8% of net
profit generated by the pavilions, as defined in the related
contract. Net profits have not been generated through July 31,
1998.
Revenue realized from the Marketing Agreements is recognized
ratably upon the installation of computerized pavilions in the
related malls. Revenue is recognized at the point at which no
significant remaining obligations to the customers exist.
Deferred revenue mainly represents the portion of revenue
received under the Marketing Agreements whereby the company
has granted the contracted party an exclusive license to
market and distribute its product for installation and use in
a defined marketing area in exchange for payments totaling
$250,000. Revenue from these agreements is deferred until such
time that the Pavilion is installed and on-line at the defined
marketing area.
Marketing service revenue arises from pavilion advertising and
intranet sales agreements entered into with the mall
retailers. Revenue is recognized at the point the advertising
occurs and the intranet service is provided.
f) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents.
g) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is
computed using the straight-line method based upon the
estimated useful lives of the assets. Maintenance and repairs
are charged to expense as incurred.
- F10 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h) SOFTWARE LICENSE COST
Software license cost is recorded at its fair market value at
date of purchase. These costs represent various royalty and
license fees the Company must pay to utilize software licensed
and patented by WinPoint Retail Consulting Services, Inc.
("WinPoint"), a related third party. (See Note 5 (f)).
Amortization is computed using the straight-line method over a
period of three years.
i) SOFTWARE DEVELOPMENT COSTS
All software development work is performed by WinPoint (See
Note 5) and subsequently charged to the Company. Software
development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. Software
development costs incurred subsequent to the establishment of
technological feasibility are capitalized, if material. The
establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require
considerable judgement by management with respect to certain
external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic product lives
and changes in software and hardware technology.
As of July 31, 1998, the Company has capitalized $6,029,000 of
software development costs ($1,038,750 were capitalized during
the year ended July 31, 1998, $3,529,500 were capitalized
during the year ended July 31, 1997 and $1,460,750 were
capitalized during the period from inception to July 31,
1996). The Company started amortizing these costs during the
year ended July 31, 1998. Amortization did not begin before
since the product related to the development efforts was not
available for general release to customers. Amortization
expense for the year ended July 31, 1998 totaled $837,161.
j) INCOME TAXES
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". The
liability method requires the recognition of deferred tax
assets and liabilities for the expected future tax
consequences of temporary differences between the reported
amount of assets and liabilities and their tax basis.
k) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts
receivable, advances to supplier, accounts payable and accrued
expenses, approximates fair value due to the relatively short
maturity of these instruments.
- F11 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l) OFFERING COSTS
Offering costs consist primarily of professional fees. These
costs are charged against the proceeds of the sale of common
stock in the periods in which they occur.
m) DEVELOPMENT STAGE COMPANY
From inception to March 1, 1998, the Company was in the
development stage. Through March 1, 1998, the Company had a
deficit accumulated during the development stage of
approximately $6,500,000.
n) LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", was issued ("SFAS
No. 121"). SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has
adopted this statement and determined that no impairment loss
need be recognized for applicable assets of continuing
operations.
o) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS No. 123")
encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans
at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
p) EARNINGS PER SHARE
During 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which requires presentation of basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS").
The computation of basic earnings per share is computed by
dividing income available to common stockholders by the
weighted average number of outstanding common shares during
the period. Diluted earnings per share gives effect to all
dilutive potential common shares outstanding during the
period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that
would have an anti-dilutive effect on earnings.
- F12 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
p) EARNINGS PER SHARE (CONTINUED)
The shares used in the computation were as follows:
q) COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", was issued ("SFAS
No. 130"). SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its
components in the financial statements. As of July 31, 1998,
the Company has no items that represent comprehensive
income, therefore, has not included a schedule of
comprehensive income in the financial statements.
r) IMPACT OF YEAR 2000 ISSUE
During the year ended July 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined
that it was necessary to modify or replace portions of its
software in order to ensure that its computer systems will
properly utilize dates beyond December 31, 1999. The Company
expects to complete any Year 2000 systems modifications and
conversions by the beginning of 1999. Currently, the Company
does not expect that costs associated with becoming Year 2000
compliant to be material. At this time, the Company cannot
determine the impact the Year 2000 will have on its key
customers or suppliers. If the Company's customers or
suppliers do not convert their systems to become Year 2000
compliant, the Company may be adversely impacted. The Company
is addressing these risks in order to reduce the impact on the
Company.
s) RECENT ACCOUNTING PRONOUNCEMENTS
Additionally, during 1998, the FASB issued statement of
Financial Accounting Standards No. 131 (SFAS No. 131),
"Disclosure About Segments of an Enterprise and Related
Information" which changes the way public companies report
information about segments. SFAS No. 131, which is based on
the selected segment information quarterly and entity-wide
disclosures about products and services, major customers, and
the material countries in which the entity holds assets and
reports revenue. This statement is effective for the Company's
1998 fiscal year. The Company is in the process of evaluating
the disclosure requirements under this standard.
During 1998, the American Institute of Certified Accountants'
Executive Committee issued Statement of Position Number 98-1n
(SOP 98-1), "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. Management
believes that the Company is substantially in compliance with
this pronouncement and that the implementation of this
pronouncement will not have a material effect on the Company's
financial position, results of operations or cash flows.
- F13 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
t) UNAUDITED FINANCIAL STATEMENTS
The financial statements for the six months ended January 31,
1999 and 1998 are unaudited; however, in the opinion of
management, such statements include all adjustments
(consisting solely of normal recurring adjustments) necessary
to a fair presentation of the financial position, results of
operations and changes in financial position of the Company.
The results of operations for the six months ended January 31,
1999 are not necessarily indicative of the results to be
obtained for the full fiscal year.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
July 31,
-------- 1998 1997
----------- -----------
Pavilions $ 1,704,000 $ 284,000
Computer and Other Equipment 98,166 4,603
----------- -----------
1,802,166 288,603
Less: Accumulated Depreciation ( 340,887) ( 85,393)
----------- -----------
Property and Equipment, net $ 1,461,279 $ 203,210
----------- -----------
----------- -----------
Depreciation expense for the years ended July 31, 1998 and
1997 was $255,494 and $80,545, respectively.
NOTE 3 - ACQUISITION
On December 3, 1997, the Company acquired 100% of the issued
and outstanding shares of Smart Aim Corporation ("Smart AIM")
through a share exchange agreement, dated November 14, 1997.
This acquisition was effected through the exchange of
approximately 523 shares of the Company's no par value, common
stock for each share of Smart AIM's issued and outstanding
common stock. Smart AIM's shares were exchanged, and
represented control of Smart AIM immediately before and after
the exchange of shares.
At the date of consummation, the former shareholders of Smart
AIM's common stock owned approximately 84% of the 27 million
outstanding shares of the Company's common stock and nominated
all of the directors of the Company. This action effectively
allows the former holders of Smart AIM's common stock to
control the Company.
Due to the fact that the exchange of shares occurred among
entities under common control, the financial statements
reflect the historical financial statements of the entity
acquired, similar to a pooling of interests.
- F14 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 4 - INCOME TAXES
The components of the provision for income taxes are as
follows:
July 31,
-------- 1998 1997
----------- -----------
Current Tax Expense
U.S. Federal $ - $ -
State and Local - -
----------- -----------
Total Current - -
----------- -----------
Deferred Tax Expense
U.S. Federal $ - $ -
State and Local - -
----------- -----------
Total Deferred - -
----------- -----------
Total Tax Provision from Continuing Operations $ - $ -
----------- -----------
----------- -----------
The reconciliation of the effective income tax rate to the
Federal statutory rate is as follows:
Federal Income Tax Rate ( 34.0)%
Deferred Tax Charge (Credit) -
Effect on Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit -
--------
Effective Income Tax Rate 0.0%
--------
--------
At July 31, 1998 and 1997, the Company had net carryforward
losses of approximately $12,800,000 and $7,050,000 that can be
utilized to offset future taxable income through 2013.
Utilization of these net carryforward losses is subject to the
limitations of Internal Revenue Code Section 382. Because of
the current uncertainty of realizing the benefit of the tax
carryforward, a valuation allowance equal to the tax benefit
for deferred taxes has been established. The full realization
of the tax benefit associated with the carryforward depends
predominantly upon the Company's ability to generate taxable
income during the carryforward period.
- F15 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 4 - INCOME TAXES (Continued)
Deferred tax assets and liabilities reflect the net tax effect
of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and amounts
used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are summarized
as follows:
Net operating loss carryforwards expire starting in 2007
through 2013.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company has related party transactions with several
directors and officers of the Company as well as other
affiliated corporations. All related party transactions within
the consolidated group have been eliminated.
During the year ended July 31, 1997, the Company had the
following related party transactions with WinPoint:
a) From inception through July 31, 1997, WinPoint acquired
common stock of the Company (giving effect to 523 for 1
exchange) through two conversions of accounts payable
totaling $4,985,702 for 15,697,558 shares of common
stock ($3,785,702 for 14,136,533 shares of common stock
during the year ended July 31, 1997).
b) As of July 31, 1997, the Company has deferred revenue
totaling $2,725,000. On July 31, 1997, the Company
assigned the rights of collection of all outstanding
Marketing Agreements, at full contract value, less
amounts already received by the Company, to WinPoint in
exchange for a $2,540,000 reduction in amounts Due to
WinPoint. All remaining obligations under the Marketing
Agreements reside with the Company.
c) On July 16, 1997, the Company entered into an agreement
with WinPoint to assign the rights to certain accounts
receivable totaling approximately $172,000 in exchange
for a reduction in amounts Due to WinPoint.
- F16 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 5 - RELATED PARTY TRANSACTIONS (Continued)
d) WinPoint provided certain management and programming
services, facilities and supplies to the Company.
WinPoint charged all costs back to the Company on a
monthly basis. As discussed in Note 5(a), the Company
exchanged common stock for certain of these services.
For the year ended July 31, 1997, the Company incurred
approximately $2,200,000 ($3,500,000 since inception)
in charges from WinPoint (excluding the programming
services that were capitalized as discussed in Note
1(i). Amounts due from WinPoint total $3,825 as of July
31, 1997.
During the year ended July 31, 1998, the Company had
the following related party transactions with WinPoint:
e) The Company entered into an independent sales
representative agreement on June 10, 1997 for the
purpose of marketing its products through various
channels. Under this agreement, the sales
representative was granted the right to purchase up to
1.000 shares of non-registered, restricted stock of the
Company at a price of $560 per share. This agreement
was terminated on November 4, 1997, at which point the
rights expired unexercised.
f) The Company entered into four separate Marketing
Agreements totaling $1 million with a related party.
The contractual downpayment of $100,000 was received
from the related party. No revenue related to the
Marketing Agreement has been recognized as of July 31,
1997, as none of the related pavilions have been
installed in the related malls. The outstanding amount
due under these Marketing Agreements was assigned to
WinPoint in conjunction with the assignment of
collection rights to all outstanding marketing
agreements. (See Note 5 (b)).
g) Per an agreement dated November 1, 1997, the Company
shall pay WinPoint a monthly consulting fee of $9,000
per month, per person, which shall include full-time
services of Garry Eberhardt, Roland Jonsson, three
additional senior developers and Robert Van Duren. The
Company also agrees to pay WinPoint a monthly fee of
$4,500 which shall include full-time services of one
junior developer and 100% of overhead charges which
cover all office expenses, support staff and equipment
of WinPoint.
The initial term of the agreement shall remain in
effect for three years from its date, unless earlier
terminated. It shall be automatically extended for one
year periods unless at least thirty days prior to the
end of the initial term or any extension term either
party gives written notice of its intention to
terminate this agreement. Prior to November 1, 1997,
WinPoint provided certain management and programming
services, facilities and supplies to the company on a
monthly basis. For the year ending July 31, 1998, total
services provided by WinPoint for the above agreements
were $1,294,844. Other additional costs for legal and
marketing expenses totaled $125,425.
- F17 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 5 - RELATED PARTY TRANSACTIONS (Continued)
h) As discussed in Note 1(i), the Company capitalized
$1,038,750 of software development costs. These costs were
incurred by WinPoint and invoiced to the Company during the
year ended July 31, 1998. During the year ended July 31,
1997 and the period from inception to July 31, 1996, the
Company capitalized an additional $4,990,250 of software
development costs from WinPoint.
i) During the year ended July 31, 1998, the Company purchased
Pavilions totaling $1,420,000 from WinPoint. The Company also
purchased computer equipment totaling $84,000 from WinPoint.
j) The Company entered into an Original Equipment Manufacturer
(OEM) Source Code Access License and OEM Distribution
Agreement ("License") with WinPoint in May 1996. The
original License granted the Company the right to use, copy,
market, and sub-license specified software of WinPoint, in
exchange for a $1 fee and future royalty payments, as
defined in the License. The license terminates upon the
expiration of the last copyright (statutorily determined)
license issued to the Company. On November 12, 1997, the
Company amended the license with WinPoint by eliminating
provisions for future royalty payments in exchange for 1,718
shares of SMART AIM stock valued at $2,000,000. These shares
were subsequently converted into approximately 898,500
shares of the Company's common stock. (See Note 3).
k) As of July 31, 1998, the Company has a payable to WinPoint in
the amount of $407,646.
NOTE 6 - CONCENTRATION OF CREDIT RISK
During the year ended July 31, 1998, the Company had revenue
from one customer ("Customer") that accounted for
approximately 51% of total revenue for the year. At July 31,
1998, 99% of the accounts receivable balance outstanding was
due from the customer. The receivable was collected by the
Company subsequent to year-end. During the year ended July 31,
1998, the Company issued a credit to the customer totaling
$631,040.
- F18 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES
a) The Company leases mall space under non-cancelable operating
lease agreements that expire at various times over the next
five years. Future minimum lease payments under these
non-cancelable operating leases are as follows:
July 31,
--------
1999 $ 9,102,000
2000 9,102,000
2001 9,102,000
2002 9,102,000
2003 3,305,000
-------------
Total $ 39,713,000
-------------
-------------
Rent expense under mall leases for the year ending July 31,
1998 was $1,765,988.
b) Rent expense under operating leases less than one year totaled
$11,817 for the year ending July 31, 1998.
c) The Company leases pavilion structures under non-cancelable
capital leases expiring through fiscal year 2000. Assets
recorded under capital leases have a cost of $254,000 and
accumulated depreciation of $159,755 as of July 31, 1998.
The following is a schedule by years of the Company's future
minimum annual lease payments required under capital leases
together with the present value of the minimum lease payments:
July 31,
--------------------------------
1998 1997
-------------- ------------
Year ending July 31,
--------------------
1998 $ - $ 110,916
1999 102,852 102,852
2000 20,844 20,844
------------ ------------
Total Minimum Lease Payments 123,696 234,612
Less: Amounts Representing Interest ( 13,356) ( 42,309)
------------ ------------
Present Value of Minimum Lease Payments 110,340 192,303
Less: Current Portion Under Capital Leases ( 90,299) ( 81,963)
------------ ------------
Long-Term Portion Under Capital Leases $ 20,041 $ 110,340
------------ ------------
------------ ------------
d) The Company has various non-complete employment contracts with
employees that expire after a period of two years.
- F19 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
e) On October 22, 1997, the Company entered into a three-year
agreement with The Winslow Group Consultants, Inc.
("Winslow"). The agreement stipulates that Winslow will manage
the Company's sales force in exchange for an established
monthly retainer of $20,000 and the reimbursement of certain
expenditures, as defined in the related agreement. This
agreement was cancelled subsequent to July 31, 1998. (See Note
10).
f) On October 20, 1997, the Company entered into a four-year
agreement with Mel Simon Management, Inc., the management
company of the Simon DeBartolo Group, Inc. The agreement
anticipates that the Company's computerized pavilions will be
installed in a majority of the more than 200 malls owned
and/or managed by Mel Simon Management, Inc.
g) On February 4, 1998, the Company entered into an agreement
with The Rouse Company to place computerized pavilions into
malls owned or managed by The Rouse Company. The agreement
will expire based upon the lease terms of the individual mall
agreements.
h) On June 15, 1998, the Company entered into a four-year
agreement with Wells Park Group Limited Partnership. The
agreement anticipates that the Company's computerized
pavilions will be installed in a majority of the malls owned
and/or managed by The Wells Park Group.
i) On March 26, 1998, the Company entered into a three-year
agreement with Klein Technologies International, LLC
("Klein"). The agreement states that Klein will provide
services associated with the ordering, procuring and managing
the installation of the cable and communication equipment
necessary for the performance of the effort and to manage the
availability, performance and reliability of the WAN
communications equipment and services associated therewith.
j) The Company has entered into numerous five-year cooperative
advertising purchase agreements with certain malls. These
agreements provide that the malls will purchase a minimum
amount of advertising totaling $25,000 per month from the
Company.
NOTE 8 - STOCK SPLIT
a) On July 15, 1997, Smart Aim authorized a five-hundred to one
reverse split of all outstanding common shares so that for
each five hundred shares issued and outstanding prior to the
reverse split the holder of the shares would own one share.
b) Prior to the acquisition of Smart Aim through the share
exchange agreement dated November 14, 1997, the Company
effected a two-for-one stock split of its common stock.
All share and per share data have been retroactively restated
to reflect these stock splits.
- F20 -
AIM SMART CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998 AND 1997
NOTE 9 - STOCK OPTION PLAN
On November 12, 1997, the Company's Board of Directors
approved the 1997 Stock Option Plan (the "Plan") under which
incentive and non-qualified stock options to purchase the
Company's common stock may be granted to employees, officers,
directors, agents, independent contractors and consultants of
the company or any successor thereto or of any parent or
subsidiary. Under the Plan, incentive (excluding options
granted to stockholders with ownership in the company greater
than 10%) and non-qualified stock options are exercisable at a
price not less than the fair market value of the stock at the
date of the grant, as determined by the Plan Administrator.
The term of these stock options shall be established by the
Plan Administrator and, if not so established, shall be ten
years from the date of grant. Incentive stock options
(excluding options granted to stockholders with ownership in
the company greater than 10%) may not have a term exceeding
ten years. The term of incentive stock options granted to
stockholders with ownership in the Company greater than 10%
shall not exceed five years and the exercise price shall not
be less than 110% of the fair market value of the stock at the
date of grant. All options vest, as set forth in each option
agreement and if not set forth shall be fully exercisable upon
grant. As of July 31, 1998, 3,136,686 stock options (giving
effect to 523 for 1 exchange) were outstanding.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to July 31, 1998, the Company issued an additional
7,000,458 shares of common stock for $7,078,876.43.
On August 31, 1998, Winslow (See Note 7(e)) filed a suit
against the Company claiming an anticipatory breach of
contract asking for damages in excess of $560,000. The Company
subsequently counter sued for a breach of contract. The
Company has reached a tentative settlement requiring the
Company to pay $140,000 to Winslow over the course of 12
months. This lawsuit relates to amounts due subsequent to July
31, 1998.
On November 25, 1998, the Company entered into an agreement
with Cable & Wireless, Inc. to allow the Company to sell Cable
& Wireless, Inc. long distance phone service in return for
various payments and commissions.
On February 16, 1999, the Company's Board of Directors
approved the 1999 Stock Award Plan (the "Plan") under which
common stock and derivative security awards may be granted
to employees, officers, directors, agents, independent
contractors and consultants of the company or any successor
thereto or of any parent or subsidiary. Awards are not
restricted to any specified form or structure and may
include, but need not be limited to, sales, bonuses and
other transfers of stock, restricted stock, stock options,
reload stock options, stock purchase warrants, other rights
to acquire stock or securities convertible into or
redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or
performance shares, or any other type of Award which the
Board shall determine is consistent with the objectives and
limitations of the Plan. As of May 31, 1999, 326,000 stock
options were outstanding.
- F21 -
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation limits the liability of directors to
the maximum extent permitted by Colorado law. Colorado law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i) any
breach of their duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or with involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
recession.
Our Certificate of Incorporation and Bylaws provide that we shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our Bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our Bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity, regardless
of whether the Bylaws would permit indemnification.
We plan to enter into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
Bylaws. These agreements, among other things, provide for indemnification of our
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of AIM Smart
Corporation, arising out of such person's services as a director or executive
officer of AIM Smart Corporation, any subsidiary of AIM Smart Corporation or any
other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
We maintain director and officer liability insurance.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
Document EXHIBIT NUMBER
-------- --------------
Registrant's Certificate of Incorporation..................... 3.3
Registrant's Bylaws .......................................... 3.4
Registrant's Form of Indemnification Agreement................ 10.4
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by AIM Smart
Corporation in connection with the issuance and distribution of the Securities
being registered. All the amounts shown are estimates except the Securities and
Exchange Commission registration fee and the NASD filing fee.
Registration fee - Securities and Exchange Commission............... $2,780
Accounting fees and expenses........................................ *
Legal fees and expenses (other than blue sky)....................... *
Blue sky fees and expenses, including legal fees.................... *
Printing; stock certificates........................................ *
Transfer agent and registrar fees................................... *
Consulting fees .................................................... *
Miscellaneous....................................................... *
Total......................................................$ *
* To be filed by amendment.
ITEM 25. RECENT SALES OF UNREGISTERED SECURITIES.
Date # of Shares Price per Share Total Amount Buyer Description*
---- ------------- ----------------- -------------- ------- --------------
1/4/98 37,849 11.62499987 $ 439,994.62 Thomas Kernaghan Debt conversion
1/18/98 37,849 11.62499987 $ 439,994.62 Thomas Kenaghan Debt conversion
1/18/98 258 8.71875969 $ 2,249.44 Thomas Kenaghan Debt conversion
2/11/98 46,496 9.75 $ 453,336.00 Thomas Kenaghan Debt conversion
2/11/98 561 7.312495544 $ 4,102.31 Thomas Kenaghan Debt conversion
2/12/98 20,000 7.00 $ 140,000.00 Ronald Maxheimer bought restricted stock
6/1/98 12,500 3.60 $ 45,000.00 Stanley Gotlieb bought restricted stock
6/8/98 12,500 3.60 $ 45,000.00 Eileen & David Raines bought restricted stock
6/22/98 250,000 4.00 $1,000,000.00 Talisman Capital bought restricted stock
7/13/98 100,000 3.60 $ 360,000.00 H.T. Ardinger bought restricted stock
7/30/98 6,000 6.00 $ 36,000.00 John R. Smith bought restricted stock
7/31/98 197,500 20.00++ $3,955,500.00 Cashman & Associates for services
11/9/98 82,000 1.00 $ 82,000.00 Federal Ventures, Inc. bought restricted stock
11/9/98 500,000 1.00 $ 500,000.00 Federal Ventures, Inc. bought restricted stock
11/9/98 118,000 1.00 $ 118,000.00 Federal Ventures, Inc. bought restricted stock
11/9/98 50,000 1.00 $ 50,000.00 Federal Ventures, Inc. for services
11/23/98 700,000 1.00 $ 700,000.00 Pacific Century Holdings bought restricted stock
12/30/98 700,000 1.00 $ 700,000.00 American Income Partnership bought restricted stock
12/30/98 700,000 1.00 $ 700,000.00 Proctor Company bought restricted stock
1/6/99 700,000 1.00 $ 700,000.00 New Directions Intl. bought restricted stock
(issued 5/11/99)
1/11/99 50,000 1.00 $ 50,000.00 New Directions Intl. for services
1/11/99 100,000 1.00 $ 100,000.00 Pacific Century Holdings for services
1/11/99 100,000 1.00 $ 100,000.00 David Siegel for services
1/11/99 100,000 1.00 $ 100,000.00 Forward Looking Technologies for services
3/10/99 575,000 1.022608696 $ 588,000.00 Forward Looking Technologies to pay back a short term loan
4/6/99 46,730 1.07 $ 50,001.10 Victor E. Rahhal bought in a 504 offering
4/6/99 93,457 1.07 $ 99,998.99 Torrey Pines Securities, Inc. bought in a 504 offering
4/6/99 770,998 1.07 $ 824,967.86 Rush & Co bought in a 504 offering
4/6/99 23,364 1.07 $ 24,999.48 Darren Caris bought in a 504 offering
4/12/99 1,304,545 1.00 $1,304,545.00 Asesoria De Negocios Intl. bought restricted stock
4/12/99 286,364 1.00 $ 286,364.00 New Directions Intl. for services
*Other than the sales made on April 6, 1999, each of these sales was exempt
pursuant to Section 4(2) of the Securities Act of 1933 as a transaction not
involving a public offering.
ITEM 26. EXHIBITS.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
3.1 Certificate of Incorporation of Registrant.*
3.4 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.*
10.1 Stock Incentive Plan.*
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock
Option).*
10.3 Form of Registrant's Stock Option Agreement (Incentive Stock
Option).*
10.4 Form of Director and Officer Indemnification Agreement.*
10.5 Office Space Lease for Registrant's principal offices.*
10.6 Agreement between Registrant and Cable & Wireless.*
10.7 Agreement between Registrant and Rouse & Company.*
10.8
23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (to be included
in its opinion filed as Exhibit 5.1 hereto).*
23.2 Consent of Auditors.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
* To be filed by Amendment.
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to
a. File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
i. Include any prospectus required by section 10(a)(3) of the
Securities Act;
ii. Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) of the Securities Act of
1933 if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
iii. Include any additional or changed material information on
the plan of distribution.
b. File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California,
on June 11, 1999.
AIM SMART CORPORATION
BY:________
Roland Jonsson
CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Garry Eberhardt and Baylee Reed, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933 and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
Chief Executive Officer, June 11, 1999
----------------------------------------------- Chief Financial Officer,
Roland Jonsson Secretary and Director
(Principal Financial and
Accounting Officer)
Chairman of the Board, Executive June 11, 1999
----------------------------------------------- Vice President of Operations and
Garry Eberhardt Chief Operating Officer
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Registration Statement of Aim Smart
Corporation on Form SB-2 of our report dated February 26, 1999, except as to
Note 10 which is as of June 14, 1999, appearing in the Prospectus, which is a
part of such Registration Statement relating to the consolidated financial
statements of Aim Smart Corporation and Subsidiary and to the reference to
our Firm under caption "Experts" in such Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
--------------------------------------------
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 14, 1999
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