As filed September 26, 2001 File No. 333-
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
E-TREND NETWORKS, INC.
(Name of small business issuer in its charter)
DELAWARE 5735 98-0348508
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3
(403) 252-7766
(Address and telephone number of principal executive offices)
5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3
(Address of principal place of business or intended principal place of business)
TIMOTHY J. SEBASTIAN, GENERAL COUNSEL
E-TREND NETWORKS, INC.
5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3
(403) 252-7766
(Name, address and telephone number of agent for service)
Copies of all communications to:
Fay M. Matsukage, Esq.
Dill Dill Carr Stonbraker & Hutchings, P.C.
455 Sherman Street, Suite 300, Denver, Colorado 80203
(303) 777-3737; (303) 777-3823 fax
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of the Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]______________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]___________________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED PROPOSED MAX-
SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING IMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED PRICE PER UNIT<F1> OFFERING PRICE REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------
Common stock issuable to 5,000,000 shares $1.20 $6,000,000 $1,500.00
Swartz Private Equity, LLC
----------------------------------------------------------------------------------------------------------------------
Common stock issuable to 500,000 shares $1.20 $600,000 $150.00
Swartz Private Equity, LLC
upon exercise of warrants
----------------------------------------------------------------------------------------------------------------------
Total 5,500,000 shares $6,600,000 $1,650.00
----------------------------------------------------------------------------------------------------------------------
<FN>
(1)<F1> Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and based upon the average of the high and low
prices for the Common Stock on September 19, 2001, as reported by the
Over-the-Counter Bulletin Board. We expect that in the event the
registered shares are sold, such shares will be sold at the
then-current market price.
</FN>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
Subject to Completion, Dated September 26, 2001
E-TREND NETWORKS, INC.
SHARES OF COMMON STOCK
Unless the context otherwise requires, the terms "we", "our" and "us"
refers to E-Trend Networks, Inc.
This prospectus relates to the resale by Swartz Private Equity, LLC, as
a selling stockholder and warrant holder, of up to 5,500,000 shares of our
common stock. Swartz Private Equity, LLC may sell the common stock at any time
at any price. We will not receive any proceeds from the resale of these shares.
We have agreed to pay for all expenses of this offering. Of the 5,500,000 shares
being offered, up to 5,000,000 shares are issuable to Swartz Private Equity, LLC
as put shares under an investment agreement and up to 500,000 shares are
issuable upon the exercise of commitment warrants issued to Swartz.
Our common stock is traded on the NASD OTC Bulletin Board under the
symbol "ETDN". On September 17, 2001, the closing price of our common stock was
$1.06 per share.
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN ANOTHER SECTION OF THIS
PROSPECTUS, BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
____________, 2001
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................14
USE OF PROCEEDS...............................................................14
MARKET FOR COMMON EQUITY......................................................15
DIVIDEND POLICY...............................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...............................................................16
BUSINESS......................................................................19
MANAGEMENT....................................................................26
EXECUTIVE COMPENSATION........................................................28
PRINCIPAL STOCKHOLDERS........................................................31
CERTAIN TRANSACTIONS..........................................................32
DESCRIPTION OF CAPITAL STOCK..................................................33
INVESTMENT AGREEMENT..........................................................33
SELLING STOCKHOLDER...........................................................36
PLAN OF DISTRIBUTION..........................................................37
LEGAL MATTERS.................................................................38
EXPERTS.......................................................................38
ADDITIONAL INFORMATION........................................................38
REPORTS TO STOCKHOLDERS.......................................................39
INDEX TO FINANCIAL STATEMENTS.................................................39
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should carefully read this entire prospectus and the financial
statements contained in this prospectus before purchasing our securities.
E-TREND NETWORKS, INC.
Founded in April 1999 as a Nevada corporation by VHQ Entertainment Inc.
(formerly Video Headquarters Inc.), a Toronto Stock Exchange ("TSE")-listed
company ("VHQ"), E-Trend is a distributor of packaged entertainment media, with
distribution channels to both online retail e-commerce and traditional bricks
and mortar retail outlets.
We have developed an Internet website, www.EntertainMe.com, our online
"entertainment super-eStore" that offers a variety of products including music,
movies on DVD and VHS, video games, PC gaming software, and other entertainment
related products.
Our wholly-owned subsidiary, Langara Distribution, Inc. offers
fulfillment services to our e-tail sites and third party e-commerce businesses.
Langara Distribution also provides wholesale services to brick and mortar
retailers.
Our principal executive offices are located at 5919 - 3rd Street,
Calgary, Alberta T2H 1K3 Canada. Our telephone number is (403) 252-7766. We also
have offices at 515 Seabreeze Boulevard, Fort Lauderdale, Florida 33316.
THE OFFERING
Securities offered......... Up to 5,000,000 shares of common stock that may
be reoffered by Swartz Private Equity, LLC. We
may issue up to 5,000,000 shares pursuant to an
investment agreement with Swartz. Using the
pricing mechanism and the current market price
and trading volume of our common stock, we
estimate that we will put to Swartz a total of up
to 5,000,000 shares of our common stock over the
next three years.
500,000 shares of common stock that may be
reoffered by Swartz. Swartz may purchase these
shares through the exercise of warrants held by
Swartz as a commitment for entering into the
investment agreement.
Use of proceeds............ We will not receive any of the proceeds from the
selling stockholders of shares of our common
stock. However, upon exercising a put right under
our investment agreement with Swartz, we will
receive cash in consideration for issuing our
common stock. We intend to use these proceeds for
working capital and general corporate purposes.
Securities outstanding..... 5,212,702 shares of common stock as of July 17,
2001
3
SUMMARY SELECTED FINANCIAL INFORMATION
The balance sheet and income statement data shown below were derived
from our audited and unaudited consolidated financial statements. Our results of
operations for any interim period do not necessarily indicate our results of
operations for the full year. You should read this summary financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," and our financial statements.
BALANCE SHEET DATA:
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000(1)<F1> 1999
Current assets................................................ $ 835,964 $ 2,109,759 $ 687,069
Total assets.................................................. $ 1,900,529 $ 3,015,660 $ 743,556
Current liabilities........................................... $ 566,854 $ 201,585 $ 17,820
Long-term liabilities......................................... $ -- $ -- $ --
Stockholders' equity.......................................... $ 1,333,675 $ 2,814,075 $ 725,736
Working capital .............................................. $ 269,110 $ 1,908,174 $ 669,249
INCOME STATEMENT DATA:
APRIL 29, 1999
(INCEPTION)
NINE MONTHS NINE MONTHS YEAR ENDED THROUGH
ENDED JUNE 30, ENDED JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2000 1999
Revenue..................................... $ 1,637,598 $ 448,211 $ 665,075 $ --
Net loss ................................... $ (1,561,656) $ (546,964) $ (811,156) $ (55,339)
Basic and diluted loss per share............ $ (0.35) $ (0.12) $ (0.10) $ (0.02)
<FN>
(1)<F1> The September 30, 2000 balance sheet shown together with the unaudited
June 30, 2001 balance sheet (page F-2) includes as part of the cash and cash
equivalents $74,816, which is the amount of an overdraft balance on our line of
credit. This amount is also reflected as a current liability. The September 30,
2000 balance sheet included as part of the audited financial statements (page
F-12) reflected cash and cash equivalents net of the $74,816 overdraft.
</FN>
4
RISK FACTORS
Before deciding to invest in us or to maintain or increase your
investment, you should carefully consider the risk factors described below,
together with all other information in this prospectus and in our other filings
with the SEC before making an investment decision. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks actually
occurs, our business, financial conditions or operating results could be
materially adversely affected. In such case, the trading price of our common
stock could decline, and you may lose all or part of your investment.
WE HAVE A LIMITED OPERATING HISTORY AND HAVE INCURRED SIGNIFICANT LOSSES. WE MAY
CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.
We were incorporated in April 1999 and began development of our online
operations in November 1999. To date, our costs have greatly exceeded the
revenues we have generated. As of June 30, 2001, our accumulated deficit was
$2,728,351. If we continue our present business, we expect that our operating
expenses will continue to exceed our revenues for the foreseeable future. As a
result, we will need to generate significantly more revenues to achieve
profitability. We may not be able to do so. We will also require additional
financing. We may not be able to obtain the financing or obtain it on terms
acceptable to us. If revenues grow slower than we anticipate, or if operating
expenses exceed our expectations or cannot be reduced accordingly, or if we
cannot obtain additional financing, our business, operating results, and
financial condition may be materially harmed.
Although we recently initiated a restructuring of our business
designed, in part, to reduce costs in a number of areas, we expect to continue
to incur substantial costs and expenses related to:
o the implementation of our business model and our pricing strategies;
o brand development, marketing and promotional activities;
o the expansion of our existing product and service offerings;
o the continued development of our web site, transaction processing
systems, and network infrastructure;
o the development of strategic relationships; and
o our ability to effectively merchandise and manage our product mix.
Further, because we sell a substantial portion of our products at very
competitive prices, we have low gross margins on our product sales. Our ability
to become profitable depends on, among other things:
o our ability to generate and sustain net sales, consistent with the
assumptions underlying our new operating plan with improved gross
margins;
o our ability to maintain reasonable operating expense levels; and
o our ability to provide other higher margin products and services.
If we are unable to manage and reduce our operating expenses and costs,
while at the same time increasing our gross margins, and without experiencing a
significant deterioration in our sales volumes, we will be unable to achieve
positive operating cash flow. If we do not achieve positive operating cash flow
in a timely manner that is consistent with our operating plan, our business
could fail.
WE HAVE ONLY BEEN OPERATING OUR ONLINE BUSINESS SINCE NOVEMBER 1999 AND FACE
CHALLENGES RELATED TO EARLY STAGE COMPANIES IN RAPIDLY EVOLVING MARKETS.
We were founded in April 1999 and began development of our online
operations in November 1999. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies in the
rapidly evolving online commerce market. These risk include, but are not limited
to, an unpredictable business environment, the difficulty of raising working
capital, the difficulty of attracting and retaining qualified management
personnel , and the use of our business model. To address these risks, we must,
among other things:
o access sufficient capital to fund the implementation of our business
model;
o increase our sales volumes and gross margins while limiting our
operating expenses;
5
o expand our customer base;
o enhance our brand recognition;
o expand our product and service offerings;
o access sufficient product inventory to fulfill our customers' orders;
o successfully implement our business and marketing strategy;
o provide high quality customer service and order processing;
o respond effectively to competitive and technological developments; and
o attract and retain qualified personnel.
We cannot assure or guarantee you that we will be successful in achieving any of
the items identified above.
IF WE DO NOT OBTAIN ADEQUATE FINANCING TO FUND OUR FUTURE OPERATIONS, WE MAY NOT
BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
Our projections of future cash needs and cash flows are subject to
substantial uncertainty, and if our current cash balances are insufficient to
meet our anticipated operating cash needs, our business will fail. Further, if
we are unable to operate our business and manage our cash resources in
accordance with the assumptions underlying our new operating plan, we may need
to raise additional working capital sooner than we would otherwise have
expected. The factors that may impair our ability to effectively operate our
business and manage our operating cash include, but are not limited to:
o our ability to retain the support of our distributor and vendor
partners;
o our ability to maintain other key corporate relationships; and
o our ability to maintain sales volumes and gross margins consistent with
our operating plan.
We may also seek to sell additional equity securities, obtain a line of
credit or seek other ways to fund our operations in the event we require
additional working capital to operate our business. We currently do not have any
firm commitments for additional financing other than the investment agreement
with Swartz Private Equity, LLC. We cannot be certain that any other additional
financing will be available when and to the extent required, or that, if
available, it will be on acceptable terms. If adequate funds are not available
on acceptable terms, we may not be able to fund our operations, and our business
will fail. Further, if we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our stockholders will
be diluted. Also, any new securities could have rights, preferences and
privileges senior to those of our common stock.
WE ARE DEPENDENT UPON OUR AFFILIATE, VHQ ENTERTAINMENT INC.
VHQ Entertainment Inc. is our major stockholder, owning approximately
38.4% of the issued and outstanding shares at July 31, 2001. At June 30, 2001,
VHQ owed us $ 376,731 for an advance which bears interest at 8%, is unsecured
and has no fixed terms of repayment, and $ 256,030 for the purchase of products
and the purchase of our stock. During the three and nine months ended June 30,
2001, we sold $315,068 and $779,794, respectively, of our products to VHQ,
representing 44% and 48% of total sales. These transactions are considered to be
in the normal course of business and are measured at the exchange amount which
is the amount of consideration established and agreed to by the related parties.
INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
We face significant competition in the area of Internet retailing of
entertainment products. We expect competition to intensify given the relative
ease with which new web sites can be developed. There are a large number of web
sites that sell videos and other entertainment products through the Internet. We
also compete with traditional and nontraditional "bricks and mortar" retailers
and mass merchandisers in the United States and Canada. Due to our small size,
it can be assumed that most if not all of our competitors have significantly
greater financial, technical, and other resources.
These competitors may be able to respond more quickly to new or
emerging marketing strategies and Internet technologies than we can. Also, our
competitors and potential competitors have greater name recognition
6
and ability to enter into strategic partnerships to engage in marketing efforts.
To compete, we may be forced to narrow our marketing focus, thereby reducing our
likelihood for success.
Price competition in our industry is also intense, and price of one of
the principal factors on which consumers base their purchasing decisions. Price
competition may reduce our gross margins, which could materially harm our
business, operating results, and financial condition. Some of our competitors
use aggressive pricing policies to build market share. Some have also adopted
business models that include selling filmed entertainment, music, and games
products for less than their product cost and not charging customers for
shipping and handling. Software applications are also available that can
determine which online site has the lowest price for a particular title which
could direct customers to our competitors' web sites.
WE RELY ON A RELATIVELY NEW MANAGEMENT TEAM AND NEED TO RETAIN OUR EXISTING
PERSONNEL TO EFFECTIVELY OPERATE OUR BUSINESS.
In March 2001, we appointed Caroline Armstrong as our new chief
executive officer, and in April 2001, we appointed Lorne Cogswell as our new
interim chief financial officer. Our success depends, in part, upon their
ability to transition successfully their new management team and to retain
existing staff and management. Further our business is largely dependent on
assistance from our directors, Gregg Johnson and Trevor Hillman. Any of our
officers or employees can terminate their employment relationship at any time.
We presently do not maintain key man life insurance on any member of our
management team. The loss of any key employee or our inability to attract or
retain other qualified employees could harm our business and results of
operations.
THE SUCCESS OF LANGARA DISTRIBUTION DEPENDS UPON ITS ABILITY TO MAINTAIN AND
ESTABLISH KEY RELATIONSHIPS WITH MUSIC LABELS.
Langara Distribution maintains relationships with music labels in the
entertainment industry. These relationships reside exclusively with Mike
Duszynski and Bob Duszynski, who are the principal managers of Langara
Distribution. Any of our officers or employees, including Mike and Bob
Duszynski, can terminate their employment relationship at any time. We presently
do not maintain key man life insurance on any member of our management team. The
loss of any key employee or our inability to attract or retain other qualified
employees could harm our business and results of operations.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF ONLINE COMMERCE.
If online commerce does not continue to grow or be accepted or grows or
is accepted more slowly than expected, our business will be materially harmed. A
number of factors could slow the growth of online commerce, including the
following:
o the network infrastructure required to support a substantially larger
volume of transactions may not be developed;
o government regulation may increase;
o telecommunications capacity problems may result in slower response
times; and
o consumers may have concerns about the security of online commerce
transactions.
LEGISLATION MAY BE ENACTED WHICH COULD LIMIT THE USE OF E-MAIL MARKETING AND
AWARENESS CAMPAIGNS.
To date, Congress has not enacted any legislation regulating commercial
e-mail, but a number of bills are pending. One proposed law would prohibit
online operators from sending most unsolicited commercial e-mail where the
operators have no existing or personal relationship with the recipient and the
e-mail is not sent at the request of or with the express consent of the
recipient. Another proposed law would require operators of websites and online
services to disclose to users the personal information the operators have
collected and the personal information that it may share with other firms. It
would further require operators to provide simple processes for users to provide
or withhold consent to the operators' dissemination of the information.
7
In the absence of federal legislation, many states, including
California, Connecticut, Delaware, Iowa, Nevada, North Carolina, Oklahoma, Rhode
Island, Tennessee, Virginia, Washington and West Virginia, have passed laws
limiting the use of e-mail marketing. Because these laws have focused primarily
on unsolicited e-mail marketing, E-Trend's business has yet to be affected by
current legislation. Other states have begun to consider placing restrictions on
e-mail marketing. If Congress or additional states pass legislation restricting
commercial uses of e-mail, it could harm our ability to communicate with
existing customers and attract new customers. Our sales growth could be
affected, which could materially harm our business, operating results and
financial condition.
In Canada, there is currently no federal or provincial legislation
regulating e-commerce or commercial e-mail. However, there is no guarantee that
such legislation will not be enacted in the future, which could materially harm
our business and/or restrict our ability to grow.
WE MUST MAINTAIN SATISFACTORY VENDOR RELATIONSHIPS TO COMPETE SUCCESSFULLY.
We rely on wholesalers to fill our customers' orders. We are dependent
upon maintaining these relationships for filling our customers' orders because
there are only a limited number of wholesalers who sell filmed entertainment,
music and games products. If we are unable to maintain suitable relationships
with vendors, we will be materially harmed.
Our wholesalers will need to satisfy our increasing product
requirements on a timely basis. They also must continue to provide adequate
selections of filmed entertainment, music and games titles at competitive
prices. If our wholesalers are unable or unwilling to do so, it would materially
harm our ability to compete, which would in turn materially harm our business,
operating results and financial condition.
WE DO NOT PUBLISH OUR OWN EDITORIAL CONTENT, WHICH MEANS WE MUST RELY ON
LICENSED THIRD-PARTY CONTENT ON OUR WEBSITES.
We license third-party content, including filmed entertainment, music
and games reviews, news reports and features, in order to attract and retain
website visitors. If we are unable to obtain desirable content from our content
licensors or from existing licensors, it could reduce visits to our websites,
which could materially harm our business. In addition, if we are unable to
obtain content at an acceptable cost, it could materially harm our ability to
compete and our operating results and financial condition.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We regard our trademarks, trade secrets and similar intellectual
property as important to our success. We have applied for the registration of
some of our trademarks and service marks in the United States and Canada.
However, our efforts to establish and protect our intellectual property rights
may be inadequate to prevent misappropriation or infringement of our
intellectual property rights. If we are unable to safeguard our intellectual
property rights, it could materially harm our business, operating results and
financial condition.
WE MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We have established a network of links with numerous small online
sites. Many of the sites may not have licenses for the use of the intellectual
property that they display. The copyright holders of this intellectual property
or their licensees may assert infringement claims against us because of our
relationships with these sites.
Although we believe that our use of third-party material on our
websites is permitted under current provisions of copyright law, some aspects of
Internet content and commerce law are not clearly settled. We may therefore be
the subject of alleged infringement claims of the trademarks and other
intellectual property rights of third parties. If we become subject to these
types of claims, our business could be materially harmed even if we successfully
defend against the claims. It also is possible that future legal developments
would prohibit us from having rights to downloadable information, sound or
video.
8
THE PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN BECAUSE THE REGULATION OF DOMAIN
NAMES IS SUBJECT TO CHANGE.
We currently hold various web domain names relating to our brand,
including, among others EntertainMe.com, VHQMusic.com, MovieSource.com,
VHQGames.com, as well as domain names registered in foreign countries.
Governmental agencies and their designees generally regulate the acquisition and
maintenance of domain names. The regulation of domain names in the United States
and in foreign countries is expected to change in the near future. As a result,
we may be unable to acquire or maintain relevant domain names in all countries
in which we may conduct business. If our ability to acquire or maintain domain
names is limited, it could materially harm our business, operating results and
financial condition.
WE ARE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES THAT MAY BE COSTLY
AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS.
Laws and regulations directly applicable to online commerce or Internet
communications are becoming more prevalent. These laws and regulations could
expose us to compliance costs and substantial liability, which could materially
harm our business, operating results and financial condition. In addition, the
growth of the Internet, coupled with publicity regarding Internet fraud, may
lead to the enactment of more stringent consumer protection laws. These laws
would also be likely to impose additional burdens on our business.
The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our advertising revenues and
margins and increase our cost of doing business. Moreover, the applicability of
existing laws to the Internet is uncertain with regard to many important issues,
including property ownership, intellectual property, export of encryption
technology, libel and personal privacy. The application of laws and regulations
from jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could also harm our business.
WE MAY BE SUBJECT TO LIABILITY FOR SALES AND OTHER TAXES.
Except in Canada, we do not collect sales or other similar taxes in
most states. Our business could be materially harmed if additional sales and
similar taxes are imposed on us, or if penalties are assessed on us for past
nonpayment of these taxes. Recently adopted legislation provides that, prior to
October 2001, a state cannot impose sales taxes on products sold on the Internet
unless these taxes could be charged on non-Internet transactions involving the
products. During this moratorium, it is possible that taxing mechanisms may be
developed that would, following the moratorium, impose increasing sales and
similar tax burdens on us. If these burdens are placed on us, our business could
be materially harmed and there could be a material adverse effect on our
operating results and financial condition.
EVEN IF WE SUCCESSFULLY EXECUTE OUR NEW OPERATING PLAN, WE CANNOT ASSURE YOU
THAT WE WILL ACHIEVE PROFITABILITY.
In mid 2001, we initiated a restructuring of our business and
implemented a new operating plan designed to accelerate our ability to achieve
positive cash flow by, among other things, significantly reducing our overhead
expenses. As part of the new plan we have reduced the size of our workforce and
made reductions in the areas of marketing and software development. To
successfully execute against our operating plan, we must adhere to our expense
reductions and work to achieve the revenue and gross margin targets incorporated
as underlying assumptions to our operating plan. If we are unable to manage our
operating expenses and increase our gross margins, without experiencing
significant deterioration in our projected sales volumes, we may be unable to
achieve positive operating cash flow. Further, we cannot guarantee that we will
be able to maintain the visitor traffic levels, visitor conversion rates,
customer purchase activity and general brand awareness that we have had in the
past with our current marketing budget. Our ability to achieve our annual and
quarterly revenue and gross margin goals could also be negatively impacted by
the softening consumer demand for entertainment products, as well as the
weakening general economic conditions and decreasing consumer confidence.
9
Our new operating plan reflects management's expectations as of the
date of this prospectus, and is based on currently available information, as
well as significant assumptions made by management regarding various revenue,
gross margin and operating expense items. We cannot guarantee that the
assumptions that we have relied upon in developing our operating plan will be
accurate, or that future events or results will conform to our expectations or
assumptions. If our assumptions are inaccurate, or our expectations prove to be
erroneous in light of future events, or if we are unable to maintain the support
of our vendors, distributors, third party advertisers and other key corporate
relationships regardless of the success of our new operating plan, we will need
to raise additional working capital before we achieve positive operating cash
flow. We currently do not have any commitments for additional financing other
than our agreement with Swartz, and we cannot be certain that the Swartz
financing or any other additional financing will be available when and to the
extent required, or that, if available, it will be on acceptable terms. If
adequate funds are not available on acceptable terms, we may not be able to fund
our operations and our business could fail.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO MANAGE GROWTH OF OUR BUSINESS.
Our growth strategy includes growing our customer base both through our
own marketing efforts, as well as through the acquisition of other e-commerce
businesses. If we are unable to manage growth effectively, it could have
material adverse effects on our results of operations, financial condition, or
business. We cannot guarantee that we will successfully expand our customer base
or that any expansion will enhance our profitability. We expect our planned
growth will place a significant strain on our system, management, and
operations. Our future growth will depend in part on the ability of our officers
and other key employees to implement and expand financial control systems and to
expand, train, and manage our employee base and provide support to an expanded
customer base. Also, our future growth will depend on whether our system can
handle increased volumes of customer traffic to our sites. We cannot at this
time guarantee that our system will perform in a manner that will allow our
business to grow and expand.
IN LIGHT OF CERTAIN PERCEPTIONS REGARDING OUR FINANCIAL CONDITION, OUR
CUSTOMERS, DISTRIBUTORS AND VENDOR PARTNERS MAY DECIDE NOT TO DO BUSINESS WITH
US.
Due to concerns regarding our financial condition and our perceived
ability to fulfill our financial and other obligations, our customers,
distributors, vendor partners and other corporate partners and service providers
may decide not to conduct business with us, or may conduct business with us on
terms that are less favorable than those customarily extended by them. For
example, our distributors could seek to limit our credit terms or otherwise
reduce their support of our business, forcing us to leverage our operating cash
by increasing the security required for our secured credit lines. Also, if our
customers and vendor partners choose to do less business with us, our net sales
would decrease and our gross profits would be significantly impacted by reduced
sales volumes, including a corresponding decrease in co-op advertising revenue
WE ARE DEPENDENT ON SEVERAL THIRD PARTY PROVIDERS TO FULFILL A NUMBER OF OUR
RETAIL FUNCTIONS. IF THESE PARTIES ARE UNWILLING OR UNABLE TO CONTINUE PROVIDING
SERVICES TO US, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We are currently dependent on our distribution providers to manage
inventory, process orders and distribute products to our customers in a timely
manner. If we do not maintain our existing relationships with these providers on
acceptable commercial terms, we may not be able to continue to offer a broad
selection of merchandise at low prices, and customers may refuse to shop at our
online store. In addition, manufacturers may decide, for reasons outside our
control, not to offer particular products for sale on the Internet. Other
manufacturers have chosen not to authorize any Internet resellers or Internet
resellers without a traditional "brick and mortar" retail store. If we are
unable to supply products to our customers, or if other product manufacturers
refuse to allow their products to be sold via the Internet, our business will
suffer severely.
We rely on our distributors to fulfill a number of traditional retail
functions, including maintaining inventory. In the future, our vendors may not
be willing to provide these services at competitive rates. We also have no
effective means to ensure that our providers will continue to perform these
services to our satisfaction. Our customers could become dissatisfied and cancel
their orders or decline to make future purchases if our providers or we are
unable to deliver products on a timely basis. If our customers become
dissatisfied with our distributors and third party service providers, our
reputation and the EntertainMe.com brand could suffer.
10
Our operations are also heavily dependent upon a number of other third
parties for credit card processing, and hosting our system infrastructure and
database servers. In addition, our distributors and fulfillment providers use
TNT Canada Inc. and. the Canada and United States Postal Services to deliver
substantially all of our products. If the services of any of these third parties
become unsatisfactory, our customers may experience lengthy delays in receiving
their orders, and we may not be able to find a suitable replacement on a timely
basis or on commercially reasonable terms.
SYSTEM FAILURES COULD PREVENT ACCESS TO OUR ONLINE STORE AND HARM OUR BUSINESS
AND RESULTS OF OPERATIONS.
Our sales would decline and we could lose existing or potential
customers if they are not able to access our online store or if our online
store, transaction processing systems or network infrastructure do not perform
to our customers' satisfaction. Any network interruptions or problems with our
web site could:
o prevent customers from accessing our online stores;
o reduce our ability to fulfill orders;
o reduce the number of products that we sell;
o cause customer dissatisfaction; or
o damage our reputation.
We have experienced brief computer system interruptions in the past,
and these interruptions may recur. If the number of customers visiting our web
site continues to increase, we will need to expand and upgrade our technology,
transaction processing systems and network infrastructure significantly. We may
not be able to make timely upgrades to our systems and infrastructure to
accommodate increases in the number of customers.
Our systems and operations are also vulnerable to damage or
interruption from a number of sources, including fire, flood, power loss,
telecommunications failure, physical and electronic break-ins, earthquakes and
other similar events. Our servers are also vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. Any substantial
disruption of this sort could completely impair our ability to generate revenues
from our web site. We do not presently have a formal disaster recovery plan in
effect and do not carry sufficient business interruption insurance to compensate
us for losses that could occur.
OUR BUSINESS MODEL IS NEW AND UNPROVEN, AND WE MAY NOT BE ABLE TO ACHIEVE
PROFITABILITY.
We are subject to risks due to the unproven and evolving nature of our
business model and aggressive pricing strategy. The success of our business
model depends on the volume of customers that visit our web site and purchase
our products. To this end, we have worked hard to build our brand name and
enhance our customer loyalty by selling our products at extremely low prices and
maintaining very low, gross margins on our product sales. We intend to implement
various strategies to improve our gross margins going forward, which may include
raising prices on products and product categories from time to time. To the
extent we raise the prices on our merchandise, our product sales may decline. We
may also have to increase our prices if distributors receive pressure from
manufacturers to discontinue sales to us as a result of our low price strategy.
ONLINE SECURITY RISKS COULD SERIOUSLY HARM OUR BUSINESS.
A significant barrier to e-commerce and online communications is the
secure transmission of confidential information over public networks. Anyone who
is able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against potential
security breaches or to alleviate problems caused by any breach. We rely on
licensed encryption and authentication technology to provide the security and
authentication necessary for secure transmission of confidential information,
including credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments may
result in a compromise or breach of the algorithms that we use to protect
customer transaction data. In the event someone circumvents our security
measures, it could seriously harm our business and reputation, and we could lose
customers. Security breaches
11
could also expose us to a risk of loss or litigation and possible liability for
failing to secure confidential customer information.
IF WE DO NOT RESPOND TO TECHNOLOGICAL CHANGE, OUR STORES COULD BECOME OBSOLETE,
AND WE COULD LOSE CUSTOMERS.
The development of our web site entails significant technical and
business risks. To remain competitive, we must continue to enhance and improve
the responsiveness, functionality and features of our online stores. The
Internet and the e-commerce industry are characterized by:
o rapid technological change;
o changes in customer requirements and preferences;
o frequent new product and service introductions embodying new
technologies; and
o the emergence of new industry standards and practices.
However, we have significantly reduced the resources dedicated to the
enhancement of our network infrastructure and operating systems. If we are
unable to maintain our existing systems and create a positive customer
experience, our revenues may decline and our business will suffer.
The evolving nature of the Internet could also render our existing
online stores and systems obsolete. Our success will depend, in part, on our
ability to:
o license or acquire leading technologies useful in our business;
o enhance our existing online stores;
o enhance our network infrastructure and transaction processing systems;
o develop new services and technology that address the increasingly
sophisticated and varied needs of our current and prospective
customers; and
o adapt to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible
with our business. Furthermore, we may not use new technologies effectively or
adapt our web site and transaction processing systems to customer requirements
or emerging industry standards on a timely basis, or at all, depending on our
financial condition. If we are unable to adapt to changing market conditions or
user requirements in a timely manner, our stores may become obsolete and we will
lose customers.
VHQ ENTERTAINMENT INC. AND ITS AFFILIATES CONTROL A MAJORITY OF OUR OUTSTANDING
COMMON STOCK WHICH WILL ENABLE THEM TO CONTROL MANY SIGNIFICANT CORPORATE
ACTIONS AND MAY PREVENT A CHANGE IN CONTROL THAT WOULD OTHERWISE BE BENEFICIAL
TO OUR STOCKHOLDERS.
VHQ Entertainment Inc and its affiliates own approximately 38.4% of our
outstanding stock as of July 31, 2001. This control by VHQ Entertainment Inc.
and its affiliates could have a substantial impact on matters requiring the vote
of the stockholders, including the election of our directors and most of our
corporate actions. This control could delay, defer or prevent others from
initiating a potential merger, takeover or other change in our control, even if
these actions would benefit our stockholders and us. This control could
adversely affect the voting and other rights of our other stockholders and could
depress the market price of our common stock.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS.
Our limited operating history and the emerging nature of the markets in
which we operate make it difficult to accurately predict our future revenues. We
expect that our revenues and operating results will fluctuate significantly from
quarter to quarter, due to a variety of factors, many of which are beyond our
control. If our quarterly revenues or operating results fall below the
expectations of investors or securities analysts, the price of our common stock
could decline significantly. The factors that could cause our operating results
to fluctuate include, but are not limited to:
12
o fluctuations in the amount of customer spending on the Internet;
o our ability to maintain the operation of all of our specialty stores;
o our ability to build and maintain customer loyalty;
o the introduction of new or enhanced web pages, services, products, and
strategic alliances by us and our competitors;
o price competition on the Internet or higher wholesale prices in
general;
o the success of our brand building and marketing campaigns;
o our ability to effectively merchandise and manage our product mix;
o our ability to maintain our distributor, vendor, and other key
corporate relationships;
o increases in the cost of online or offline advertising;
o unexpected increases in shipping costs or delivery times;
o government regulations related to use of the Internet for commerce;
o our ability to maintain, upgrade and develop our web site, transaction
processing systems, and network infrastructure;
o technical difficulties, system downtime, or Internet brownouts;
o the amount and timing of operating costs and capital expenditures
relating to maintaining our business, operations, and infrastructure;
and
o general economic conditions and economic conditions specific to the
Internet and online commerce.
These and other external factors have caused and may continue to cause
the market price and demand for our common stock to fluctuate substantially,
which may limit or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our common stock.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. If securities class action litigation is brought against us it could
result in substantial costs and a diversion of our management's attention and
resources, which could hurt our business.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION THAT MAY AFFECT THE
LIQUIDITY FOR OUR COMMON STOCK.
Our common stock is subject to regulations of the Securities and
Exchange Commission relating to the market for penny stocks. These regulations
generally require that a disclosure schedule explaining the penny stock market
and the risks associated therewith be delivered to purchasers of penny stocks
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors. The
regulations applicable to penny stocks may severely affect the market liquidity
for our common stock and could limit your ability to sell your securities in the
secondary market.
TRADING IN OUR COMMON STOCK ON THE OTC BULLETIN BOARD MAY BE LIMITED THEREBY
MAKING IT MORE DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES OF OUR COMMON
STOCK.
Our common stock trades on the OTC Bulletin Board. The OTC Bulletin
Board is not an exchange and, because trading of securities on the OTC Bulletin
Board is often more sporadic than the trading of securities listed on an
exchange or NASDAQ, you may have difficulty reselling any of the shares that you
purchase from the selling shareholders.
YOU MAY SUFFER DILUTION IN YOUR OWNERSHIP OF OUR SHARES FROM THE EXERCISE OR
CONVERSION OF OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES ISSUED TO OTHER
PERSONS.
There are outstanding options, warrants, or convertible securities to
acquire shares of our common stock and we may grant additional rights in the
future. If any of the outstanding options, warrants, or convertible securities
are exercised or converted, your percentage ownership in will be reduced. So
long as these options, warrants, or convertible securities are exercisable, the
holders will have the opportunity to profit from a rise in the price of our
common stock. The existence of such options, warrants, or convertible securities
may adversely affect the terms on which we can obtain additional financing. The
holders of such options, warrants, or convertible securities can be expected to
exercise them at a time when we would probably be able to obtain additional
capital by
13
an offering of our common stock at a price higher than the exercise price of
these outstanding options, warrants, or convertible securities.
THE EXERCISE OF OUR PUT RIGHTS MAY LOWER THE MARKET PRICE OF OUR COMMON STOCK
AND SUBSTANTIALLY DILUTE THE INTERESTS OF OTHER HOLDERS OF OUR COMMON STOCK.
As we exercise our put rights under our investment agreement with
Swartz Private Equity, LLC, we will be required to issue shares of our common
stock to Swartz at a price below the prevailing market price of our common
stock. The shares issuable to Swartz upon exercise of put rights will be issued
at a price equal to the lesser of (a) the market price for our common stock
minus $0.15 or (b) 92% of the market price for our common stock. Accordingly, we
will issue the shares issuable to Swartz upon exercise of our put rights at a
rate that will be below the market price of our common stock. This, in turn, may
decrease the price of our common stock and entitle Swartz to receive a greater
number of shares of our common stock upon exercise of our put rights.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This reoffer prospectus contains forward-looking statements that
involve risks and uncertainties. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "except," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," as
well as the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale by Swartz Private
Equity, LLC of the shares offered under this prospectus. We will, however,
receive the sale price of any common stock we sell to Swartz Private Equity, LLC
under our investment agreement with Swartz. We have the ability to sell to
Swartz, subject to an effective registration statement and applicable volume and
other limitations, up to $10,000,000 of our common stock. Additional amounts may
be received if the warrants to purchase common stock are exercised. We intend to
use the net proceeds received from Swartz in the following order of priority:
DESCRIPTION: US $:
Expenses of Swartz Investment Agreement:
Legal, accounting, issuance and distribution..........................$ 900,000
Inventory:
DVD, CD and VHS cassettes............................................. 700,000
Software development:
Development and new software.......................................... 300,000
Marketing:................................................................. 1,000,000
Wages, salaries and additional employees:
Customer service, sales, and vendor relations......................... 300,000
-------------
Subtotal:..................................................................$ 3,200,000
Other working capital:..................................................... 6,800,000
-------------
TOTAL:.....................................................................$ 10,000,000
=============
14
The amount and timing of our actual expenditures for each of these
purposes will vary significantly depending upon a number of factors, including
Web site development efforts, competition, marketing and sales activity, and
market acceptance of our Web sites. While we have prepared internal forecasts,
we believe that these forecasts, as they apply to periods extending beyond the
next few months, are inherently unreliable and that our actual cash requirements
will differ materially from those we presently forecast. Our directors have
discretion in the allocation and use of the net proceeds. Pending such uses, we
intend to invest the proceeds in short term, investment-grade, and interest
bearing securities.
A portion of the net proceeds may also be used for possible future
strategic alliances and acquisitions. This would reduce the use of the net
proceeds for one or more of the uses indicated in the preceding table. We
presently do not have any understandings, commitments, or agreements concerning
these types of transactions.
MARKET FOR COMMON EQUITY
Our common stock has been trading on the over-the-counter bulletin
board ("OTCBB") under the symbol "ETDN" since February 22, 2001. The common
stock was first listed on June 9, 1998 under the symbol "MNGD." From March 1,
1999 to February 22, 2001, the stock traded under the symbol "CULE." The
following table sets forth the range of high and low bid quotations for each
fiscal quarter for the last two fiscal years. These quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commissions and may
not necessarily represent actual transactions.
FISCAL QUARTER ENDING HIGH BID LOW BID
December 31, 1998...................... $ 150.00 $ 100.00
March 31, 1999......................... $ 156.30 $ 29.00
June 30, 1999.......................... $ 156.30 $ 81.00
September 30, 1999..................... $ 100.00 $ 44.00
December 31, 1999...................... $ 70.00 $ 23.00
March 31, 2000......................... $ 100.00 $ 29.00
June 30, 2000.......................... $ 62.50 $ 15.62
September 30, 2000..................... $ 23.44 $ 7.81
December 31, 2000...................... $ 9.38 $ 1.56
March 31, 2001......................... $ 4.69 $ 1.02
June 30, 2001.......................... $ 2.25 $ 0.65
On September 17, 2001, the closing price for the common stock was
$1.06.
As of July 17, 2001, there were 213 record holders of our common stock.
Since our inception, no cash dividends have been declared on our common stock.
DIVIDEND POLICY
We do not anticipate paying dividends on our common stock at any time
in the foreseeable future. Our board of directors plans to retain earnings for
the development and expansion of our business. Our directors also plan to
regularly review our dividend policy. Any future determination as to the payment
of dividends will be at the discretion of our directors and will depend on a
number of factors, including future earnings, capital requirements, financial
condition and other factors as the board may deem relevant. We are not
restricted by any contractual agreement by paying dividends.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Effective February 21, 2001 an arrangement was completed between the
company, then known as Cool Entertainment, Inc. and E-Trend Networks, Inc., a
Nevada corporation, whereby the shareholders of E-Trend Networks, Inc. exchanged
all of their common shares for 4,439,371 shares of Cool common stock.
Following the acquisition the former shareholders of E-Trend Networks,
Inc. held a majority of Cool's total issued and outstanding common shares;
E-Trend Networks, Inc. was thereby deemed to be the acquiror. Accordingly, the
transaction has been accounted for as a reverse takeover using the purchase
method whereby the assets and liabilities of Cool have been recorded at their
fair market values and operating results have been included in the company's
financial statements from the effective date of purchase. The fair value of the
net assets acquired is equal to their book values. The excess of $300,200 of the
consideration given over the net assets acquired has been recognized as a
capital transaction and charged directly to the deficit.
RESULTS OF OPERATIONS
PERIODS ENDED JUNE 30, 2001. We are considered to be in the early
stages of implementing our business plan, since we have not generated
significant revenues and are continuing to develop our business, particularly
the Web-based site that is currently in its initial customer acquisition phase.
The site (EntertainMe.com) and traditional distribution via Langara Distribution
Inc., our wholly owned subsidiary, will be the engine that drives future growth.
Sales for the three months ended June 30, 2001 increased approximately
$226,671 over the previous quarter and $453,300 over the comparable quarter of
the previous fiscal year. Similarly, sales of the nine months ended June 30,
2001 increased 265% from the previous fiscal year, since commercial launch of
our retail web sites did not take place until March 2000. We note increased
traffic on the website, as we increase our marketing initiatives and
affiliations with other sites.
Gross margins were 17% for the three months ended June, 2001 and 14%
overall for the nine-month period, compared to 32% and 30% respectively for
fiscal 2000 periods because of a price increase from our suppliers in the
previous quarter that was not passed on to customers until close to the end of
the previous quarter and unrecovered shipping expenses from a promotional event.
Operating and development costs continued to rise because of the need
to retain the services of an external contractor to complete the website design
and testing. These costs, of approximately $32,000 per month, ceased at the end
of June.
Net loss for the quarter was $748,247, compared to $397,967 for the
previous quarter and $239,995 for the same quarter of the previous fiscal year.
The net loss for the nine-month period increased to $1,561,656 from $546,964
from fiscal 2000.
FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND 1999. We experienced a
substantial increase in revenues for the year ended September 30, 2000 compared
to the same period in the previous fiscal year. Revenues increased to $665,075,
compared to the fiscal 1999 results of $nil. The increase is primarily as a
result of the acquisition of Langara Distribution Inc. effective January 1,
2000, as well as the commercial launch of our retail web sites in March 2000.
Cost of sales was $503,938 for the year ended September 30, 2000.
Management expects that such costs will continue to increase as we increase our
revenues through our planned growth. Our operating margins were 24% of sales for
the year ended September 30, 2000.
Operating and development costs were $436,764 for year ended September
30, 2000, compared to no costs in the prior fiscal year. These costs consist of
leased computer equipment, computer and data content services, and salaries of
staff in the site development and technology groups. General and administrative
expenses increased to
16
$435,745 for the year ended September 30, 2000 compared to $59,564 in same
period in the previous fiscal year. Expenses rose in connection with additional
administrative personnel that were brought on to accommodate our growth, head
office rent and utilities, professional fees and telephone charges. Advertising
costs were $108,703 for year ended September 30, 2000, compared to no costs in
the prior fiscal year. These costs reflect test market campaigns done in Calgary
and Ottawa as well as online web-based advertising. Sales and marketing costs
were $28,921 for year ended September 30, 2000, compared to no costs in the
prior fiscal year. These costs consist of consulting fees and salaries paid to
staff in our marketing group.
Amortization of capital assets was $31,756 for year ended September 30,
2000, compared to no costs in the prior fiscal year. The increase is due to
amortization of computer hardware and software, furniture and leasehold
improvements. Amortization of goodwill was $20,329 for year ended September 30,
2000, compared to no costs in the prior fiscal year. The amortization relates to
the goodwill allocated to the acquisition of Langara Distribution Inc. effective
January 1, 2000.
Other income was $89,925 for year ended September 30, 2000, compared to
$4,225 in the prior fiscal year. The increase is due to interest earned on
excess cash invested in money market funds and funds advanced to a major
shareholder, VHQ Entertainment Inc., during the fiscal year.
Net loss for the year increased to $811,156 for the year ended
September 30, 2000 compared to $55,339 for the period ended fiscal 1999. The
increase is due to increased expenses associated with development, maintenance
and marketing of our e-commerce sites offset by income from our distribution
subsidiary.
The unrealized gain from the investment of $89,102 relates to the
difference between the market value and cost of our investment in shares of VHQ
Entertainment Inc. The foreign currency translation of $18,792 adjustment
relates to unrealized losses on the translation of the financial statements to
$U.S. for financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
JUNE 30, 2001. At June 30, 2001, we had a working capital surplus of
$269,110 compared to a surplus of $1,908,174 at September 30, 2000. To date,
virtually all of our resources have been provided from the sale of common stock.
At the current rate of expenditure, additional funds from the sale of common
stock or debt will have to be secured to enable us to continue to operate.
SEPTEMBER 30, 2000 AND 1999. Our operations used cash of $770,549 for
the year ended September 30, 2000 versus $85,876 for the previous fiscal period.
The increase was due to additional expenses associated with development,
maintenance and marketing of our e-commerce site. During the twelve months ended
September 30, 2000, we received net proceeds of $2,394,185 from the issuance of
share capital. We advanced $200,222 to our major shareholder VHQ Entertainment
Inc. during the fiscal year. During the twelve months ended September 30, 2000,
we expended $195,967 on the purchase of capital assets, which included computer
hardware and software, leasehold improvements and office furniture.
At September 30, 2000, we had positive working capital of $1,908,174.
This compares to September 30, 1999, when we had positive working capital
$669,249.
PLAN OF OPERATION
The e-commerce sales and distribution of filmed entertainment, video
games and music is very competitive. We face a number of competitors, with
competition existing on a global basis. The main competitive factors are
availability, price and service. Management continues to review and assess our
competitors, and is continually vigilant for industry trends.
To be successful, we must increase sales. To do this, we must rely on
working capital and outside sources of capital to finance current operations and
new marketing initiatives designed to drive additional traffic. Our board of
directors and management are confident that we are on the right track for
significant gains in the future. The news media has been rife with reports of
e-commerce failures, among them many of our competitors. However, overall
Internet sales continue to increase as consumers become more comfortable with
the security of the systems.
17
We continue to believe that our strategy of being a `second wave' online company
will allow us to take advantage of the tremendous number of online purchasers in
our product categories - especially as our first-wave competition continues to
experience financial trouble.
We will continue to seek strategic alliances and acquisitions that will
complement our existing business and overall corporate strategy as expressed in
our business plan. We believe we are poised to implement key strategic
initiatives that will include:
o increasing the number of music titles carried in Langara's
inventory,
o adding DVD and key VHS titles to the Langara product mix,
o amending movie purchasing agreements to reduce product cost,
o improving the data model and overall scalability of the
e-commerce engine,
o improving site capacity to seamlessly manage the planned
increase in site traffic and sales volumes,
o merging our three internet sites (MovieSource.com, VHQMusic.com
and EntertainMe.com) into one brandable entertainment-focused
supersite {EntertainMe.com (and EntertainMe.ca in Canada)},
o initiating new online marketing campaigns,
o implementing new software to enable seamless B2B2C (Business to
Business to Consumer) applications,
o obtaining new equity capital, and
o adding strategic alliances to expand the reach of entertainment
products.
As of June 30, 2001, we had a working capital surplus of only $269,110.
As a result, we will need external financing to implement our plan of
operations. On July 3, 2001, we entered into an investment agreement with Swartz
Private Equity, LLC. The investment agreement entitles us to issue and sell our
common stock from time to time for up to an aggregate of $10 million. This
financing allows us to issue common stock at our discretion as often as monthly
as funds are needed in amounts based upon certain market conditions, and subject
to an effective registration statement. The pricing of each common stock sale is
based upon 92% of the current market prices at the time of each drawdown, or
current market prices minus $0.15, whichever is lesser, and we may set a floor
price for the shares at our discretion.
There is no assurance that this financing arrangement will enable us to
implement our long-term growth strategy. Accordingly, our sources of financing
are uncertain if the desired proceeds from the investment agreement with Swartz
are not obtained. Our failure to obtain additional financing when needed could
result in delay or the indefinite postponement of attaining profitability, and
the possible loss of your entire investment.
18
BUSINESS
BACKGROUND
We were incorporated in the State of Colorado on June 17, 1996, under
the name Minas Novas Gold Corp., to engage in mining operations. From inception
to January 1999, we obtained options to acquire various mining properties. On
January 29, 1999, we abandoned all mining operations and proceeded to acquire
all of the issued and outstanding capital stock of Cool Entertainment, Inc., a
Washington corporation, in exchange solely for 65% of our outstanding common
stock. The acquisition of the Washington corporation was completed March 1,
1999, and effective February 22, 1999, we changed our name to Cool
Entertainment, Inc.
From February 2000 to November 2000, we offered a variety of
entertainment products on the Internet through our website,
WWW.COOLENTERTAINMENT.COM. We also offered value-added services such as
celebrity interviews, book reviews, online chat rooms, online games, and free
e-mail accounts on its website to attract users to the website.
Realizing that we were undercapitalized and unable to market our
services properly, we searched for another business opportunity. On February 21,
2001, we acquired all of the issued and outstanding capital stock of E-Trend
Networks, Inc., a Nevada corporation, in exchange solely for approximately 92%
of our common stock. We changed our name to E-Trend Networks, Inc., changed our
domicile to Delaware, and effected a 1-for-100 reverse split of our issued and
outstanding shares of common stock.
All of our operations are conducted through our wholly-owned
subsidiary, E-Trend Networks, Inc., a Nevada corporation, which we refer to as
"E-Trend", and its wholly-owned subsidiary, Langara Distribution Inc., an
Alberta corporation.
E-TREND NETWORKS
E-Trend was founded as a Nevada corporation in April 1999 by VHQ
Entertainment Inc., formerly Video Headquarters Inc. The stock of VHQ trades on
the Toronto Stock Exchange under the symbol "VHQ." VHQ founded E-Trend to
mitigate the effects of technology on "bricks and mortar" retail operations and
to expand its geographic reach by taking advantage of the continuing growth in
the online market for home entertainment sales. E-Trend seeks to increase the
depth of its entertainment marketing presence through the development of
entertainment-related websites and through the acquisition of or distribution to
both online and bricks and mortar retailers.
We distribute packaged entertainment media, with distribution channels
to both online retail e-commerce and traditional bricks and mortar retail
outlets. We operate an online retail website and, through Langara Distribution,
we offer fulfillment services to other Internet retailers and wholesale services
to traditional retailers. By generating sales from both bricks and mortar and
online organizations, we believe we are mitigating our risks and maximizing our
chances for success, especially during our managed growth phase.
Despite the failures of many Internet "dot com" companies in 2000,
industry analysts still predict growth in the online retail market. We will seek
to grow our online operations by:
o maintaining a focus on marketing through a network of affiliates;
o considering prudent mergers, acquisitions, and/or partnerships;
o increasing our depth of product offering;
o assessing technology, such as broadband streaming and wireless, with
the goal of enhancing the online experience and broadening the reach of
our site if the addition of such technology is economically feasible;
o capitalizing on our relationship with VHQ Entertainment by pursuing
sales from within its growing customer base.
19
We also seek to expand the operations of Langara Distribution in the
following ways:
o add movies to its inventory and expand the number of music titles it
inventories;
o capitalize on the growth of VHQ Entertainment by selling music into new
stores and by increasing the inventory within existing locations;
o increase inventory levels and SKU's in order to increase fill rates and
reduce shipping times, thus offering a more attractive distribution
package to customers;
o expand strategic alliances with insurance companies to fulfill claims
for replacement movies and music CDs;
o pursue additional e-commerce and bricks and mortar accounts;
o offer movies and games to accounts that currently only stock music;
o further automate the distribution process in order to increase the
volume of business that it can efficiently manage;
o investigate the ability to expand its reach into additional retail
outlets by installing Internet-enabled kiosks to enable sales of our
full range of product.
ENTERTAINME.COM
We developed EntertainMe.com as an Internet entertainment superstore.
Through this website, we offer movies on DVD and VHS, music on CDs and cassette,
and video games, with convenience of shopping 24 hours a day, seven days a week.
Our goal is to combine the advantages of online commerce with superior customer
focus in order to be the preferred online retailer for filmed entertainment,
music and video games. We have designed our online storefront to offer a broad
selection of products in each category, informative content, easy-to-use
navigation and search capabilities, a high level of customer service,
competitive pricing and personalized retail store-style merchandising and
recommendations. We offer a virtual inventory that provides a selection of
products that is five to ten times that of a typical "brick and mortar" retailer
operating out of a traditional physical location. The site features live
customer service NetReps, who are able to interact with customers in a
chat-based format to offer assistance and product recommendations.
As part of our strategic repositioning in mid-2001, we have moved our
movie inventory in-house. Langara Distribution now arranges for the distribution
of music, movie and game titles to our customers. These are steps toward our
plan to provide the customer with one-stop shopping. The customer can now
combine their orders for all of our entertainment media in one shopping cart.
The customer's credit card is charged only once an order is shipped.
LANGARA DISTRIBUTION
Early in calendar 2000, we purchased Langara Distribution from a
non-affiliated third party for E-Trend common stock and warrants. Langara
Distribution has direct buying relationships with all the major music labels and
currently handles music supply and fulfillment for E-Trend and other Internet
retailers, as well as for a number of other traditional brick and mortar
companies' wholesale accounts. Further, in July 2001, Langara Distribution
assumed responsibility for the supply and fulfillment of all our movies, music
and video games, although Langara does not inventory any games at this time.
In December 2000, we entered into an agreement with Video One Canada
Ltd. ("Video One"), a wholesaler of pre-recorded movies and games. Video One is
one of the largest distributors of pre-recorded movies in Canada. However, since
Langara assumed the responsibility for the supply and fulfillment for our
movies, music and video games, Langara Distribution purchases the product from
Video One to fulfill all orders for our customers. We cannot assure anyone that
either E-Trend or Langara will maintain our relationships with Video One, or any
other supplier capable of meeting our order fulfillment requirements beyond the
term of our existing strategic marketing agreements. Langara has not yet entered
into an agreement directly with Video One, but is currently negotiating
20
with Video One to finalize a distribution agreement. Currently, Video One
charges Langara cost plus 11% for catalog titles and cost plus 16% for new
release titles.
We believe that Langara Distribution is able to compete within its
market because:
o it maintains relationships and alliances with a substantial number of
manufacturers of entertainment products, which in turn eliminates the
middleman;
o it carries key titles in both movie and music categories;
o it has developed a comprehensive business-to-business system;
o it has developed an extensive product database which currently has
approximately 115,000 music products and 39,000 video products;
o it is able take advantage of favorable currency exchange rate in
Canada; and
o it offers both imported and domestic entertainment products.
The primary competitors of Langara Distribution are:
o PINDOFF MUSIC SALES, which owns and operates the Music World stores
throughout Canada and is a wholesaler and distributor of music
products.
o TOTAL SOUND, based in Edmonton, Canada, is a distributor and wholesaler
of music products mainly to independent retailers located in western
Canada.
o HANDELMAN, which provides wholesale product for racking in department
stores such as Wal-Mart and Zeller's.
o RECORDS ON WHEELS, based in Ontario, Canada, is a distributor and
wholesaler of music products mainly to independent retailers located in
eastern and central Canada.
o VALLEY MEDIA INC., is a U.S. based company with warehouses in
California and Kentucky. Valley Media focuses its wholesale
distribution of music, video, related products and data in the U.S.
Valley Media is also one of the leaders in Internet fulfillment
distribution.
COMPETITION
Our competitive marketplace can be broken into two main camps: online
and traditional retailers. In both cases, there are two sub-categories of
retailers: those who are in the entertainment business exclusively, and those
who sell multiple products, usually extending beyond the entertainment category,
such as department stores.
The online commerce market is new and rapidly evolving. We expect that
our online competition will further intensify. In addition, the broader retail
filmed entertainment, prerecorded music and video game industries are intensely
competitive. Our competitors include, among others:
o online retailers, such as Amazon.com, CDNow.com, DVDEmpire.com,
Buy.com, and 800.com;
o publishers and wholesalers, such as Time Life Video and Sony;
o traditional retailers, such as Blockbuster, Hollywood Entertainment,
Tower Records, Music World, Sam Goody, Sam the Record Man, and VHQ
Entertainment;
o mail order clubs, such as Columbia House;
o specialty retailers;
o electronic consumer stores; and
o mass merchandisers and department stores, such as K-mart; Target;
Wal-Mart; Sears; Costco.
Many of our competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than us. Some of our competitors, like Hollywood
Entertainment, Blockbuster, VHQ Entertainment, Wal-Mart, Costco and Amazon.com,
also may be able to secure merchandise from vendors on more favorable terms,
devote greater resources to marketing and promotional campaigns, adopt more
aggressive pricing or inventory availability policies, and devote substantially
more resources to web site and systems development than we can. We believe that
the principal competitive factors in our market are:
21
o price;
o merchandising and appeal of site;
o delivery;
o live customer service;
o positive shopping experience;
o ease of use, content quality and web site convenience;
o brand recognition; and
o selection.
We believe we can position our business to meet the challenges facing
on-line filmed entertainment, music and video game retailers because of the
following key strengths:
o FOCUSED PRODUCT OFFERING - We believe that being entirely focused on
home entertainment media gives a distinct advantage over the
competition. We are not trying to be everything to everyone and we
believe this allows our merchandising to be more dynamic and exciting
for the shopper.
o EXPERIENCED DISTRIBUTION - Through Langara Distribution, we believe
that we have the talent, experience and direct purchasing arrangements
to not only fulfill efficiently for EntertainMe.com, but also for other
online and traditional retail companies.
o SATISFYING SHOPPING EXPERIENCE - With aggressive merchandising,
seamless eCommerce engine and live customer service representatives, we
believe that we make the total shopping experience satisfying and
relevant and as close to the in-store experience as possible.
o PERSONAL CUSTOMER SERVICE - We bring personal service to the web with
our online, real-time, live customer service representatives. Our
representatives answer questions about the products, offer advice, and
deliver the help that the customer needs. When answering a question for
a customer, our representatives have the ability to "push" a page right
to the customer's browser, bringing us one step closer to the sale. For
customers who prefer the more traditional methods of communication, our
customers are encouraged to reach us via email.
o RESPONSIBLY AGGRESSIVE PRICING - We believe that we are able to offer
pricing that is more aggressive than the category leaders, while
maintaining industry-leading margins on all product lines.
MARKETING STRATEGY
We have adopted a strategy of capturing market share by focusing on
marketing to very targeted consumers on sites that contain relevant content. We
believe that this strategy allows us to dramatically reduce new customer
acquisition costs.
We utilize several online marketing opportunities to reach our market
and drive targeted traffic to our sites:
o CONTENT SITES - Content sites offer entertainment and news features to
visitors, but do not sell product directly themselves. Examples are
BigStar.com, Reel.com, DVDReview.com, and DVDTalk.com. We attempt to
reach visitors to these sites through a variety of affiliate
arrangements, sponsored links, and placement of dynamic banners.
o PRICE COMPARISON SEARCH ENGINES - These allow surfers to compare the
prices offered by vendors on a single site. Examples are MySimon.com,
BizRate.com, CoolSavings.com, and PriceGrabber.com. Inclusion on such
sites involves uploading the database, which is then called up by a
surfer's search for a specific title. When a surfer clicks through to
our listing, we pay a minimal charge to the price comparison site.
Buy-rates are extremely high from this type of traffic, since the
customer has already selected the product and vendor, and knows the
price.
o PAY FOR POSITION SEARCH ENGINES - This type of search engine allows
firms to "sponsor" results, by bidding on key words - the higher the
bid, the higher the result appears in the ranking. We have been able to
drive significant traffic to our site by using this strategy on sites
such as GoTo.com. Rankings on GoTo.com are also syndicated to over 75%
of all search engine sites, including AOL.com and AskJeeves.com.
22
o AFFILIATE SITES - Affiliates provide links directly to our site and are
paid a commission on all sales that result from a visit that originates
from their sites.
Subject to the availability of capital resources, we also plan to
utilize broader marketing strategies that are designed to drive traffic to our
site that is pre-qualified by interest in the product lines. These strategies
include:
o OPT-IN EMAIL CAMPAIGNS - Lists will be utilized from customers on third
party sites who have requested notification of information on either
movies (especially DVD) or CDs. Lists from About.com, AOL and Yahoo.com
will be accessed and aggressively targeted with motivating content.
o AFFILIATE NETWORKS - Agencies have created networks of sites in which
they place virtual shopping malls within existing sites, such as
iVillage.com and ABC.com, on a commission basis, similar to the
affiliate model described above. We believe that alliance such networks
allows us to extend the reach of both EntertainMe.com's products and
branding, with payment only required upon sale of products.
o ENTERTAINMENT NETWORK SITES - Several media companies have assembled
networks by joining many sites that are contextually relevant and
accept third party advertising such as ours. We believe that
advertising in this manner allows us to cast a broad net, while still
staying within the framework of entertainment, specifically movies or
music.
o THIRD PARTY CO-REGISTRATION - Tremendous volume is being generated
through lottery and gaming sites. This traffic can be efficiently
harvested by messaging that requires the viewer to agree that he wishes
to sign up to a new site or take advantage of an offer for a specific
site. Viewers are then encouraged to "sign up" on the spot and a
minimal charge is generated to the originating site. Although these
viewers are not on an entertainment site, they have "agreed" to see the
message about DVDs or CDs, which gives the offer a more targeted
audience.
o PUBLICITY - We try to ensure that all relevant publications, such as
Yahoo's Internet Life, Sympatico's NetLife,and eCompany, have
EntertainMe.com prominently displayed in editorial coverage, especially
in their fall/Christmas 2001 online shopping guides.
Lastly, we will employ several different loyalty strategies to not only
retain the customers who come to our site, but encourage them to purchase more
frequently. This strategy includes opt-in email messages and offers, frequency
discounts, coupons, and other benefits that we believe will differentiate us
from the competition.
TECHNOLOGY
Through our consultants and technical staff, we have developed
technologies and implemented systems to support distributed, reliable and
scalable online retailing in a secure and easy-to-use format. Using a
combination of proprietary solutions and commercially available licensed
technologies, we intend to deploy systems for online content dissemination,
online transaction processing, customer service, market analysis and electronic
data interchange.
HARDWARE. Our web delivery system runs on IBM NetFinity Servers. As our
computing requirements grow, we intend to evaluate other platforms for
additional reliability and scalability over the current Intel-based
architecture.
Our hardware is rack-mounted in "server farms" and is designed so that
as business volume grows it can be duplicated in various hosting facilities to
provide full redundancy in case of an Internet outage. Since outages mean
downtime and an inability to do business, the system has been configured to
insure that more than one piece of hardware is available to perform each
business function. If any one component is out of service, traffic will be
rerouted without impacting the performance of our e-commerce system.
Graphics and basic static HTML text and graphics are served from a web
server. The web server is not responsible for connectivity to the database, and
is under relatively light load, as the application servers actually do all the
intensive computing.
23
Application servers run the catalog system. These machines are
responsible for retrieving information from the database and generating
personalized pages to be sent to the individual browser sessions. The servers
run on the Linux platform to ensure speed.
SOFTWARE. We believe that flexible, adaptable, and robust software is
the key to our success. We must be able to adapt our site to maximize ease of
use, consumer appeal, and competitive advantage. Software must also be robust
enough to handle rush hour and peak season business volumes. Our web delivery
system is composed of several software packages working together to comprise the
entire system. The major software packages are configured as follows:
o DATABASE - The current system runs on Oracle. The database holds all
the system information such as products, pricing, contents of
customer's carts, and actual orders.
o FIREWALL - We currently run a commercial firewall product but are
considering implementing a customized Linux solution in the future. The
firewall software secures our information, yet is fast enough to handle
the load of peak traffic times.
o WEB SERVER - The web server that runs our website is Apache, the de
facto industry standard. This server was selected for its scalability
and performance, plus its ability to run on several platforms.
o APPLICATION SERVER SOFTWARE - The current application server
configuration runs on a Tom Cat, chosen for its scalability and
performance.
CONNECTIVITY. We use WorldCom, Inc. in its Calgary, Canada location for
our Internet access and web hosting.
SECURITY. Lynk Systems handles credit card payments for us. Lynk is a
secure Internet payment system that the customer accesses directly from our
website. To assure maximum privacy and customer security, we never see the
customer's credit card number. Instead, Lynk provides a purchase authorization
that can be used for future reference to the customer's order.
ENTERTAINME.COM IS A VERISIGN SECURE SITE. The VeriSign Secure Site
Program allows surfers to verify that a site offers security measures before
they submit any confidential information. The logo and valid digital
certificates appearing on our site assure customers that all information sent to
this site, is in a secure socket layer session, is encrypted and protected
against disclosure to third parties. Inclusion of the VeriSign logo encourages
purchases on our site, so it is prominently displayed, especially in the final
check out pages. To become a VeriSign Secure Site, we have to purchase an annual
digital certificate from VeriSign.
DATA TRANSFER. Our distribution efforts are supported by two-way data
transfer applications which allow us to transmit orders to Langara Distribution
and in return receive order status information, which is capable of being
downloaded onto our web site.
INTELLECTUAL PROPERTY
We use technology that we have developed internally, as well as
technologies that are readily available from third party commercial packages. We
enter into confidentiality and assignment agreements with all of our consultants
and vendors who have access to our proprietary information.
We currently own and use the unregistered trademark "entertainme".
There is an existing Intended Use Trade Mark Application filed in the United
States by Metro One Telecommunications, Inc. ("Metro One"), serial # 76189444,
for the trademark "ENTERTAINME". It is our intention to oppose the trademark
application of Metro One based on the fact that we have used the "entertainme"
trademark since at least June 2000. We are in the process of filing our own
application in the United States and Canada for the "entertainme" trademark. We
cannot predict at this time if we will obtain a registration for this mark in
either the United States or Canada.
24
GOVERNMENT REGULATION
There are currently few laws or regulations that apply directly to the
Internet. Due to the increasing popularity of the Internet, it is possible that
a number of local, state, national or international laws and regulations may be
adopted with respect to issues such as the pricing of services and products,
advertising, user privacy, intellectual property, information security, or
anti-competitive practices over the Internet. In addition, tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in Internet commerce. New state tax regulations may subject us
to additional state sales, use, and income taxes. Because our business is
dependent on the Internet, the adoption of any such laws or regulations may
decrease the growth of Internet usage or the acceptance of Internet commerce
that could, in turn, decrease the demand for our services and increase costs or
otherwise have a material adverse effect on our business, results of operations,
and financial condition. To date, we have not spent significant resources on
lobbying or related government affairs issues, but we may need to do so in the
future.
EMPLOYEES
As of June 30, 2001, E-Trend and Langara Distribution had a total of 23
full time employees and contractors, including 5 in technology positions, 2 in
marketing, 2 in site development, 3 in customer service, 7 in administrative
positions, and 4 in operations. None of our employees is covered by a collective
bargaining agreement. As part of our initiative to reduce overhead expenses, we
will be reducing our workforce by seven positions effective October 12, 2001.
PRINCIPAL OFFICES
Our principal executive offices are located at 5919-3rd St. S.E.,
Calgary, Alberta, Canada, T2H 1K3 where we lease approximately 46,008 square
feet of space on a lease expiring November 2004. VHQ Entertainment Inc., our
majority shareholder, and we entered into the lease with a non-affiliated third
party. We also have offices in the United States located at Suite 530, 515
Seabreeze Boulevard, Fort Lauderdale, Florida 33316.
LEGAL PROCEEDINGS
There are no legal proceedings pending against us.
25
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are:
NAME AGE POSITION
Caroline G. Armstrong 39 President and Chief Executive Officer
Michael McKelvie 49 Senior Vice President, Marketing and Communications
Mike Duszynski 39 President, Langara Distribution
Lorne Cogswell 50 Chief Financial Officer
Timothy J. Sebastian 36 General Counsel and Secretary
Gregg C. Johnson 36 Director
Trevor M. Hillman 32 Director
Len Voth 54 Director
Effective October 12, 2001, Mr. McKelvie will be leaving E-Trend. Our
directors are elected by our shareholders and our officers are appointed
annually by our board of directors. Vacancies in our board are filled by the
board itself. Set forth below are brief descriptions of the recent employment
and business experience of our executive officers and directors.
CAROLINE G. ARMSTRONG, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Ms.
Armstrong has been our president and chief executive officer since March 2001.
She served as our chief operating officer and executive vice president from
December 1999 to March 2001. In the fall of 1999, she founded Infinite
Possibilities, a management consulting firm based in Calgary, Alberta. From
August 1998 to December 1999, Ms. Armstrong served as vice president of Westech
Industrial Ltd., a private company located in Calgary, Alberta, a company in the
business of industrial manufacturing and sales. Ms. Armstrong's duties at
Westech Industrial Ltd. included finance, management relations, operations and
strategic planning. From June 1997 to August 1998, she held the position of
technical sales manager for the Calgary office of Onward Canada, a Canadian
technology solution provider based in Toronto, Ontario. From August 1993 to
February 1997, Ms. Armstrong served as acting general manager of BMS Ltd., a
private company headquartered in Bermuda that engaged in the business of
corporate computer consulting and sales. She served as an administrative
director of ECS Ltd. from 1989 to 1991, an Ontario-based company, where she
focused on strategic realignment and ownership consolidation. Ms. Armstrong
received an honors business degree from the University of Guelph in 1984.
MICHAEL MCKELVIE, SENIOR VICE PRESIDENT, MARKETING AND COMMUNICATIONS.
Mr. McKelvie joined E-Trend from Blockbuster Canada & Universal Studios Home
Video in May 2000. Mr. McKelvie helped pioneer the home video business in Canada
and has held senior level marketing, sales and communications positions in the
industry since it started in 1979. After serving as director, sales and
marketing for Universal Studios Home Entertainment Canada in Toronto, Ontario,
for 13 years from August 1977 to July 1989, he was the founding partner of EMG
Media Inc., where he created and launched HOLLYWOOD@home(TM), a popular home
video trade magazine. Mr. McKelvie served as president of EMG Media Inc.,
Oshawa, Ontario, from July 1989 to November 1997. EMG also created consumer
promotions with such clients as Coca-Cola, Pepsi-Cola, Spalding, Alliance Home
Entertainment and Petro-Canada. From November 1997 to April 2000, Mr. McKelvie
served as senior marketing and communications manager for Blockbuster Canada Co.
in Toronto, Ontario, where he managed marketing television campaigns and the
creation and launch of WWW.BLOCKBUSTER.CA.
MIKE DUSZYNSKI, PRESIDENT, LANGARA DISTRIBUTION. Mr. Duszynski is a
founder of Langara Distribution Inc., our subsidiary. E-Trend purchased Langara
from Mr. Duszynski and his brother in January 2000. In addition to his
responsibilities with Langara, he has owned and operated a music retail store in
Calgary since September 1984. His store was named Canadian retail store of the
year by the Canadian Country Music Association for eight years out of the past
nine as a result of excellent customer service and the best music selection in
Calgary. Mr. Duszynski is a voting member of the Canadian Academy of Recording
Arts and Sciences and the Canadian Country Music Association.
26
LORNE COGSWELL, CHIEF FINANCIAL OFFICER. Mr. Cogswell joined E-Trend in
April 2001. Since September 1998, he has been the president of LRC Strategies
Inc., a company focused on assisting small and medium-sized businesses in
developing business, financial, and human resource management plans. He served
as the chief financial officer for Century Services Inc., a firm located in
Calgary, Alberta, engaged in liquidations, auctions, and asset-based lending,
from January 1998 to September 1998. From September 1996 to January 1998, Mr.
Cogswell was a controller for Maritime Hydraulics (Canada) Ltd., an oilfield
equipment manufacturer in Calgary, Alberta. He obtained his professional
accounting designation as a Certified Management Accountant in 1994.
TIMOTHY J. SEBASTIAN, GENERAL COUNSEL AND SECRETARY. Mr. Sebastian was
appointed general counsel and secretary of VHQ Entertainment Inc. (TSE: VHQ) and
E-Trend effective October 1, 2000. Mr. Sebastian graduated from the University
of Alberta Law School in 1990. Mr. Sebastian articled, was an associate and then
a partner with, the law firm of Bryan & Company in Edmonton and Calgary,
Alberta, from July 1990 until October 2000. During his law career, Mr. Sebastian
specialized in the areas of general corporate law, corporate finance, securities
and intellectual property. Mr. Sebastian is also senior vice president, general
counsel and corporate secretary for IROC Systems Corp. (CDNX: IRC) and corporate
secretary for Chinook Testing Inc. (CDNX: NDT).
GREGG C. JOHNSON, DIRECTOR. Mr. Johnson was the president and chief
executive officer of E-Trend from July 1999 to March 2001. He has been a
director since E-Trend's inception. He has been the executive vice president and
a director of VHQ Entertainment since December 1997. A graduate of Osgoode Hall
Law School of York University in Toronto, Canada, Mr. Johnson brings
international experience to E-Trend. In his law career, he specialized in the
areas of international corporate finance, banking, and commercial and securities
law. Mr. Johnson was called to the Alberta bar in 1989, entering private
practice in Calgary, Alberta. He then moved to Japan and joined the Japanese law
firm Aoki, Christensen & Nomoto in November 1989, and focused his practice on
corporate finance, concentrating on Japanese equities and the Eurobond markets.
In March 1991, Mr. Johnson joined the law office of Dr. Mujahid
Al-Sawwaf in Jeddah, Saudi Arabia, and focused his practice on international
banking, joint venture, construction, and commercial law matters. In November
1993, he joined The Tracker Corporation of Toronto, Ontario, a public company
trading on the NASDAQ OTC market, where he was primarily responsible for legal,
financing and public reporting matters.
Since August 1995, Mr. Johnson has provided investment banking services
with Summit Capital Corporation, and has been instrumental in securing seed
capital for several start-up ventures. He was a past director of a number of
public companies, including Merch Performance Inc. (CDNX: MRCH), Sat-Tel
Corporation (CDNX: SAJ) and IROC Systems, Corp. (CDNX: IRC), and he currently is
an officer of and holds directorships with several companies, including VHQ
Entertainment Inc. (TSE: VHQ), Cervus Corporation (CDNX: CVC), and Chinook
Testing Inc. (CDNX: NDT).
TREVOR M. HILLMAN, DIRECTOR. Mr. Hillman has served as a director of
E-Trend since July 1999. Mr. Hillman was the operations manager of Video View
Ltd., a video rental business operating in Red Deer, Alberta, Canada, from 1983
to 1994. Mr. Hillman then provided consulting services to entertainment-based
retail clients through TMH Holdings Ltd. from 1994 to 1997. Since mid-1997, he
has been the president of Integrated Retail Corp., a home entertainment
retailer, and in late 1997, became president, chief executive officer and
director of VHQ Entertainment Inc. (formerly Video Headquarters Inc.) (TSE:
VHQ). Video Headquarters Inc. acquired Integrated Retail Corp. in 1998 and now
operates 45 home entertainment retail stores in western Canada under the name
VHQ Entertainment. Mr. Hillman is also a director of IROC Systems Corp. (CDNX:
IRC) and Chinook Testing Inc. (CDNX: NDT).
LEN VOTH, DIRECTOR. Mr. Voth has been a director since March 1999. Mr.
Voth has held numerous computer and information systems technical and management
positions at Chevron Standard Limited and British Columbia Hydro Authority
throughout his career. . When BC Hydro sold off its computer systems division to
Westech Information Systems Ltd. in 1988, Mr. Voth assumed the position of
marketing director for the new spin-off firm, holding this position for six
years before the company was reacquired by BC Hydro. He has been Managing
Consultant at Westech since January 1996, providing project management,
consulting and advisory services for technology selection, contract services,
marketing, and operations. Mr. Voth received a bachelor's degree in mathematics
in 1970 from the University of British Columbia and a diploma in computer
programming from McKay Technical Institute in 1968. He is a former director and
active member of the Canadian Information
27
Processing Society and has professional certifications as a Certified Data
Processor (CDP), Information Systems Professional (ISP), and Computer Systems
Professional (CSP). He has held board positions with the Better Business Bureau,
mining companies, and provincial political constituencies.
CONFLICTS OF INTEREST
Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company.
Insofar as the officers and directors are engaged in other business activities,
we anticipate they will devote only a minor amount of time to our affairs.
Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.
We do not have any standing audit, nominating, or compensation
committees of our board of directors.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information the remuneration of our
chief executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
--------------------------------------------------------------------------------------------------------------------------
Caroline G. 2000 Cdn$79,182 -0- -0- -0- 75,000 -0- -0-
Armstrong -0- -0- -0- -0- -0- -0-
President &
CEO(1)<F1>
--------------------------------------------------------------------------------------------------------------------------
Gregg C. 2000 US$16,000 -0- US$8,400(3)<F3> -0- -0- -0- -0-
Johnson Cdn$99,420
President<F2> 1999 Cdn$32,000 -0- US$946(3)<F3> -0- -0- -0- -0-
--------------------------------------------------------------------------------------------------------------------------
-------------------
<FN>
(1)<F1> Ms. Armstrong has been the President and Chief Executive Officer since March 2001.
(2)<F2> Mr. Johnson was the President and Chief Executive Officer from July 1999 through February 2001.
(3)<F3> At the time, we paid Mr. Johnson a car allowance as part of his compensation. We no longer pay this allowance.
</FN>
28
OPTION/SAR GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS GRANTED TO
UNDERLYING OPTIONS/SARS EMPLOYEES IN FISCAL YEAR
NAME GRANTED (#) EXERCISE OR BASE
PRICE ($/SH) EXPIRATION DATE
------------------------------------------------------------------------------------------------------------------------
Caroline G. Armstrong 75,000(1)<F1> 11.0% $4.00 06/15/2010
------------------------------------------------------------------------------------------------------------------------
Gregg C. Johnson -0- -- -- --
------------------------------------------------------------------------------------------------------------------------
-------------------
<FN>
(1)<F1> One-third of the options vested June 15, 2001, one-third vests June 15, 2002, and one-third vest June
15, 2003
</FN>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES ACQUIRED ON UNEXERCISED IN-THE-MONEY
NAME EXERCISE (#) VALUE REALIZED ($) OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
----------------------------------------------------------------------------------------------------------------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------
Caroline G. Armstrong -0- -0- -0-/75,000 -0-/-0-
----------------------------------------------------------------------------------------------------------------------
Gregg C. Johnson -0- -0- -0-/-0- -0-/-0-
----------------------------------------------------------------------------------------------------------------------
In May 2001, we issued 30,000 shares each to Gregg Johnson, Trevor
Hillman, and Len Voth for directors' fees for the remainder of fiscal 2001, and
issued 30,000 shares each to Gregg Johnson and Trevor Hillman for management
fees for the remainder of fiscal 2001. Also in May 2001, we granted options to
purchase 100,000 shares of our common stock to each of Gregg Johnson, Trevor
Hillman, and Len Voth. The options are exercisable through May 11, 2011 at $1.00
per share.
We reimburse our officers and directors for reasonable expenses
incurred during the course of their performance. Directors are issued shares of
common stock on an annual basis for their attendance at meetings. Although we
offer a standard medical plan, we have no longer-term incentive or compensation
plans. We anticipate offering some form of incentive-based monetary compensation
in the future.
STOCK OPTION PLANS
On January 26, 2001, our shareholders adopted a new stock option plan,
under which an aggregate of 4,000,000 shares of common stock are reserved for
issuance pursuant to the exercise of stock options. These options may be granted
to our employees, officers, directors, and consultants. We may also make awards
of restricted stock under this plan. Shares issued under this plan are
"restricted" in the sense that they are subject to repurchase by us at cost
during the vesting period. The options issued under our previous 2001 option
plan were assumed under our new stock option plan.
The plan is designed to (i) induce qualified persons to become
employees, officers, or directors of us; (ii) reward such persons for past
services to us; (iii) encourage such persons to remain in our employ or
associated with us; and (iv) provide additional incentive for such persons to
put forth maximum efforts for the success of our business. Transactions under
the plan are intended to comply with all applicable provisions under the
Securities Exchange Act of 1934. This plan will remain in effect until December
22, 2010, unless soon terminated by the Board of Directors.
Our board of directors administers the plan and determines:
o who will be granted options or awards;
o when options or awards will be granted;
o the number of options or shares to be granted;
o which options may be intended to qualify as incentive stock options
under the Internal Revenue Code of 1986, versus non-qualified options
which are not intended to so qualify;
o the time or times when each option becomes exercisable;
o the duration of the exercise period for options;
29
o the form or forms of the instruments evidencing options or awards
granted under the plan;
o the purchase price of the shares issued under the plan;
o the period or periods of time during which we will have a right to
repurchase the shares; and
o the terms and conditions of such repurchase.
The board may adopt, amend, and rescind such rules and regulations as
in its opinion may be advisable for the administration of the plan. It may amend
the plan without shareholder approval where such approval is not required to
satisfy any statutory or regulatory requirements. The board also may construe
the plan and the provisions in the instruments evidencing options granted under
the plan to employee and officer participants. The board has the power to make
all other determinations deemed necessary or advisable for the administration of
the plan. The board may not adversely affect the rights of any participant
without the consent of such participant.
The plan contains provisions for proportionate adjustment of the number
of shares for outstanding options and the option price per share in the event of
stock dividends, recapitalizations resulting in stock splits or combinations or
exchanges of shares.
The board may select participants in the plan from employees and
officers of us and our subsidiaries and consultants to us and our subsidiaries.
In determining the persons to whom options and awards will be granted and the
number of shares to be covered by each option, the board will take into account
the duties of the respective persons, their present and potential contributions
to our success, and such other factors as the board deems relevant to accomplish
the purposes of the plan.
STOCK OPTIONS. Only employees of us and our subsidiaries, as the term
"employee" is defined for the purposes of the Internal Revenue Code will be
entitled to receive incentive stock options. The option price of any incentive
stock option may be not less than 100% of the fair market value per share on the
date of grant of the option; provided, however, that any incentive stock option
granted under the plan to a person owning more than ten percent of the total
combined voting power of the common stock will have an option price of not less
than 110% of the fair market value per share on the date of grant of the
incentive stock option. The exercise period of options granted under the plan
may not exceed ten years from the date of grant thereof. Incentive stock options
granted to a person owning more than ten percent of the total combined voting
power of our common stock will be for no more than five years. Except in the
case of options granted to disinterested directors who administer the plan, the
board will have the authority to accelerate or extend the exercisability of any
outstanding option at such time and under such circumstances as it, in its sole
discretion, deems appropriate. However, no exercise period may be extended to
increase the term of the option beyond ten years from the date of the grant.
An option may not be exercised unless the optionee then is an employee,
officer, or consultant of us or our subsidiaries, and unless the optionee has
remained continuously as an employee, officer, or consultant since the date of
grant of the option. If the optionee ceases to be an employee, officer, or
consultant other than by reason of death, disability, or for cause, all options
granted to such optionee, fully vested to such optionee but not yet exercised,
will terminate three months after the date the optionee ceases to be an
employee, officer or consultant. All options which are not vested to an
optionee, under the conditions stated in this paragraph for which employment
ceases, will immediately terminate on the date the optionee ceases employment or
association.
If an optionee dies while an employee, officer or consultant, or if the
optionee's employment, officer, or consultant status terminates by reason of
disability, all options theretofore granted to such optionee, whether or not
otherwise exercisable, unless earlier terminated in accordance with their terms,
may be exercised at any time within one year after the date of death or
disability of said optionee, by the optionee or by the optionee's estate or by a
person who acquired the right to exercise such options by bequest or inheritance
or otherwise by reason of the death or disability of the optionee.
Options granted under the plan are not transferable other than by will
or by the laws of descent and distribution or pursuant to a qualified domestic
relations order. Options may be exercised, during the lifetime of the optionee,
only by the optionee and thereafter only by his legal representative. An
optionee has no rights as a shareholder with respect to any shares covered by an
option until the option has been exercised.
30
Unless otherwise specified in an optionee's agreement, options granted
under the plan will become vested with the optionee over the course of four
years from date of grant under the following schedule: 25% upon the first
anniversary of the option grant and the remaining 75% monthly over the following
36 months.
RESTRICTED STOCK AWARDS. Shares issued under the plan will be evidenced
by a written restricted stock purchase agreement between us and the participant.
Shares issued under the plan are transferable only if the transferee agrees to
be bound by all of the terms of the plan, including our right to repurchase the
shares, and only if such transfer is permissible under federal and state
securities laws. To facilitate the enforcement of the restrictions on transfer,
the board may require the holder of the shares to deliver the certificate(s) for
such shares to be held in escrow during the period of restriction.
Unless otherwise specified in a participant's agreement, awards of
shares issued under the plan will become vested with the participant over the
course of four years from date of grant under the following schedule: 25% upon
the first anniversary of the grant and the remaining 75% monthly over the
following 36 months.
OUTSTANDING OPTIONS. Upon our acquisition of E-Trend, we assumed
E-Trend's outstanding stock options. As of June 30, 2001, there were 966,500
stock options outstanding under the plan
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock on July 17, 2001, by
each officer and director, and all officers and directors as a group, as well as
all persons who own greater than 5% of our outstanding shares, and as adjusted
to reflect the issuance of the shares covered by this prospectus:
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)<F2>
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER (1)<F1> BENEFICIALLY OWNED ISSUANCE ISSUANCE
VHQ Entertainment 2,000,000 38.4% 18.7%
6201 - 46th Avenue
Red Deer, AB T4N 6Z1 Canada
Sara Hallitex Corporation 500,000 9.6% 4.7%
4344 Promenade Way No. 102P
Marina del Rey, CA 90292-6281
Gregg C. Johnson 415,905 (3)<F3> 7.8% 3.8%
6201 - 46th Avenue
Red Deer, AB T4N 6Z1 Canada
Trevor M. Hillman 410,000 (3)<F3> 7.7% 3.8%
46 Kirkwood Crescent
Red Deer, AB T4P 3F3 Canada
Len Voth 194,660 (3)<F3> 3.7% 1.8%
Mike Duszynski 57,500 (4)<F4> 1.1% 0.5%
Caroline G. Armstrong 25,000 (5)<F5> 0.5% 0.2%
Timothy J. Sebastian 9,333 (6)<F6> 0.2% 0.1%
31
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)<F2>
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER (1)<F1> BENEFICIALLY OWNED ISSUANCE ISSUANCE
Michael McKelvie 8,333 (6) 0.2% 0.1%
Lorne Cogswell -0- -- --
All executive officers and directors as a 1,120,731 (7)<F7> 20.0% 10.1%
group (8 persons)
---------------
<FN>
(1)<F1> To our knowledge, except as set forth in the footnotes to this table and
subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares set
forth opposite such person's name.
(2)<F2> Percentages before issuance are based on 5,212,702 shares of common stock
outstanding as of July 17, 2001. Where the persons listed on this table
have the right to obtain additional shares of common stock within 60 days
from July 17, 2001, these additional shares are deemed to be outstanding
for the purpose of computing the percentage of class owned by such persons,
but are not deemed to be outstanding for the purpose of computing the
percentage of any other person. Percentages after issuance also include
(solely for purposes of this prospectus) up to an aggregate of 5,000,000
shares of our common stock that we may sell to Swartz pursuant to our
investment agreement with Swartz and 500,000 shares of common stock
underlying warrants to purchase shares of our common stock issuable in
connection with the investment agreement.
(3)<F3> Includes 100,000 shares issuable upon exercise of stock options.
(4)<F4> Includes 55,000 shares issuable upon exercise of common share purchase
warrants held of record by Mr. Duszynski's wife.
(5)<F5> Includes 25,000 shares issuable upon exercise of stock options.
(6)<F6> Includes 8,333 shares issuable upon exercise of stock options.
(7)<F7> Includes 396,666 shares issuable upon exercise of stock options.
</FN>
CERTAIN TRANSACTIONS
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.
VHQ ENTERTAINMENT. We have advanced Cdn.$515,000 to VHQ. The loan bears
interest at 8%, is unsecured, and has no fixed terms of repayment. At June 30,
2001, $376,731 was due.
During the nine months ended June 30, 2001, we sold $779,794 of our
products to VHQ, representing 48% of our total sales. These transactions were
made in the normal course of business. At June 30, 2001, $256,030 was due from
VHQ for product purchases.
DIZ INVESTMENTS LTD. Mike Duszynski, the president of Langara
Distribution, owns Diz Investments Ltd, which retails primarily music and video
products. During the nine months ended June 30, 2001, we sold $57,744 of our
products to Diz Investments in the normal course of business. At June 30, 2001,
$5,704 was due from Diz Investments for product purchases.
32
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
We are authorized to issue up to 20,000,000 shares of common stock,
$0.0001 par value per share. As of July 17, 2001, there were 5,212,702 shares of
common stock outstanding, which were held of record by 213 stockholders. The
holders of the common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. We do not have
cumulative voting rights in the election of directors, and accordingly, holders
of a majority of the shares voting are able to elect all of the directors.
Subject to preferences that may be granted to any then outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends as
may be declared by the board of directors out of funds legally available
therefor as well as any distributions to the stockholders. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all of our assets remaining after payment of liabilities and
the liquidation preference of any then outstanding preferred stock. Holders of
common stock have no preemptive or other subscription of conversion rights.
There are no redemption or sinking fund provisions applicable to the common
stock.
PREFERRED STOCK
We are authorized to issue up to 1,000,000 shares of preferred stock,
$0.0001 par value per share. There are no shares of preferred stock issued or
outstanding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc. Its address is 12039 West Alameda Parkway, Suite Z-2,
Lakewood, Colorado 80228, and its telephone number is (303) 986-5400.
INVESTMENT AGREEMENT
OVERVIEW
On July 3, 2001, we entered into an investment agreement with Swartz
Private Equity, LLC. The investment agreement entitles us to issue and sell our
common stock from time to time for up to an aggregate of $10 million during a
maximum of three years following the effective date of the registration
statement of which this prospectus forms a part, so long as we meet certain
listing and pricing requirements described in the investment agreement. For each
common share put to Swartz, we will receive the lesser of 92% of the market
price or the market price less $0.15. This right is referred to as a "put
right." As of the date of this prospectus, Swartz does not have, nor has ever
had, a short position in our stock.
PUT RIGHTS
In order to invoke a put right, we must have an effective registration
statement on file with the SEC registering the resale of the shares of our
common stock that we issue as a consequence of our invoking the put right.
Additionally, we must give at least 10 but not more than 20 business days
advance notice to Swartz of the date on which we intend to exercise a particular
put right and we must indicate the number of shares of common stock we intend to
sell to Swartz. At our option, we may also designate a maximum dollar amount of
common stock (not to exceed $2 million) that we will sell to Swartz during the
put and/or a minimum purchase price per common share at which Swartz may
purchase shares during the put. The designated minimum put purchase price per
share can be no more than the lesser of: (a) 80% of the closing bid price on the
business day before our advance notice or (b) the closing bid price on the
business day before the advance put notice minus $0.225. This could affect
Swartz's potential return on investment in that Swartz's purchase price may not
be less than the minimum price designated by us. The number of shares of our
common stock we sell to Swartz may not exceed the lesser of:
(1) 1,500,000 shares;
(2) 20% of the sum of the aggregate daily reported trading volumes
of our common shares, excluding certain block trades of our
common stock, during the 20 business days after the put date,
excluding any trading days in which our common stock trades
below a price based upon a minimum price, if any, that we
specify in our put notice;
33
(3) a number of shares which, when multiplied by their respective
put share prices, equals the maximum put dollar amount; and
(4) a number of shares that, when added to the number of shares
acquired by Swartz under the investment agreement during the
61 days preceding the put date, would exceed 9.99% of our
total number of shares of common stock outstanding (as
calculated under Section 13(d) of the Securities Exchange Act
of 1934).
However, in no event shall Swartz be required to purchase an amount
greater than 20% of the sum of the aggregate daily reported trading volume of
our common stock, excluding certain block trades, during the 20 business days
before the advance notice we give to Swartz.
The market price of shares of our common stock during the 20 business
days immediately following the put date is used to determine the purchase price
Swartz will pay and the number of shares we will issue in return. For each share
of our common stock, Swartz will pay us the lesser of (1) the market price for
each share, minus $0.15, or (2) 92% of the market price for each share, except
that Swartz must pay at least the designated minimum per share price, if any, we
specify in our notice. However, if we specify a minimum price, the volume
limitations discussed above may reduce the number of shares which Swartz is
required to purchase. Market price is defined as the lowest closing bid price
for our common stock during the 20 business day pricing period immediately
following the put date.
The following is an example of the calculation of a put we would issue
to Swartz in connection with that put based on hypothetical assumptions:
For purposes of this example, suppose we provide a put notice
to Swartz, and that we set the threshold price at $1.25 per share,
below which we will not sell any shares to Swartz during this purchase
period. For the first trading day in the example in the table below, we
multiply 20% times the total shares traded (1,200) to get 240 shares
and perform this calculation for each of the 20 trading days during the
purchase period, excluding any days on which the daily trading price
was below the trigger price. The trigger price is defined as the
greater of the threshold price ($1.25 in this example) plus $0.15 or
the threshold price divided by .92. In this example, the trigger price
is $1.40 and trading day 18 must be excluded.
-------------------------------------------------------------------------------------------------------------
CLOSING BID TOTAL SHARES NUMBER OF
TRADING DAY PRICE ($) (1)<F1> TRADED SHARES SOLD
-------------------------------------------------------------------------------------------------------------
1 2.25 1,200 240
2 2.15 1,500 300
3 2.00 1,200 240
4 2.05 2,800 560
5 2.10 1,800 360
6 2.10 1,500 300
7 1.75 2,500 500
8 1.75 7,000 1,400
9 2.00 4,000 800
10 1.65 100 20
11 1.65 100 20
12 1.80 12,600 2,520
13 1.60 2,300 460
14 1.60 1,000 200
15 1.50 3,600 720
16 1.45 2,700 540
17 1.55 1,600 320
18 1.25 300 *
19 1.65 600 120
20 1.60 500 100
-------------------------------------------------------------------------------------------------------------
Totals 48,900 9,720
-------------------------------------------------------------------------------------------------------------
---------------------
34
<FN>
<F1> (1) The share prices are illustrative only and should not be
interpreted as a forecast of share prices or the expected or
historical volatility of the share prices of our common stock.
</FN>
The total number of shares that we would issue to Swartz for this
put would be 9,720 shares. Swartz will purchase the shares at a
purchase price equal to the lesser of: (a) the market price for the
applicable pricing period (market price is defined as the average of
the three lowest volume weighted average prices during the pricing
period) minus $0.15 Or (b) 92% of the market price. In this case,
Swartz would pay $1.32 Per share for 9,720 shares equaling $12,830.
There is no placement agent involved in this transaction to receive any
other fees.
We are registering 5,000,000 shares to be sold to swartz in puts.
Therefore, in order for us to receive $10,000,000 the average sale price of
these shares would need to be $2.00. Unless our share price increases
substantially, we will need to register additional shares in order to access the
$10,000,000 maximum.
Our average closing price for the 30-day trading period beginning on
June 18, 2001 on the OTC Bulletin Board was $1.89. The maximum allowable number
of shares per put under the Investment Agreement is 1,500,000 shares. Assuming
our trading price remained at its current level, even if we put the maximum
allowable shares per put to swartz under the Investment Agreement, each put
would yield only $2,608,200 in proceeds to us. The restrictions discussed, such
as the restriction limiting the put amount to a percentage of our aggregate
trading volume, may operate to prevent us from putting the maximum allowable
number of shares. The average trading volume for the 30-day trading period
beginning on June 18, 2001, was 2,860 shares per day. Therefore, we would have
been restricted to putting 572 (20% of 2,860 shares) per day yielding
approximately $19,900 in the 20-day put period. The 5,000,000 shares that Swartz
may sell under this prospectus would represent almost 49% of our outstanding
shares if they were all issued, and assuming that we do not issue any other
shares in the future.
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS
We may not initiate a put if, as of the proposed date of such put:
o we have issued shares of our common stock that have been paid for
by Swartz and is equal to the maximum offering amount;
o the registration statement covering the resale of the shares
becomes ineffective or unavailable for use; or
o our common stock is not actively trading on the OTC Bulleting
Board, the Nasdaq Small Cap Market, the Nasdaq National Market,
the American Stock Exchange, or the New York Stock Exchange, or is
suspended or delisted with respect to the trading of the common
stock on such market or exchange.
If any of the following events occur during the pricing period for a
put, the volume accrual shall cease. For the put, the pricing period shall be
adjusted to end 10 business days after the date that we notify Swartz of the
event, and any minimum price per share we specified shall not apply to the put:
o we have announced or implemented a stock split or combination of
our common stock between the advanced put notice date and the end
of the pricing period;
o we have paid a common stock dividend or made any other
distribution of our common stock between the advanced put notice
date and the end of the pricing period;
o we have made a distribution to the holders of our common stock of
all or any portion of our assets or evidences of indebtedness
between the put notice date and the end of the pricing period;
o we have consummated a major transaction (including a transaction,
which constitutes a change of control) between the advance put
notice date and the end of the pricing period, the registration
statement covering the resale of the shares becomes ineffective or
unavailable for use, or our stock becomes delisted for trading on
our then primary exchange; or
35
o we discover the existence of facts that cause us to believe that
the registration statement of which this prospectus is a part
contains an untrue statement or omits to state a material fact.
SHORT SALES
Swartz and its affiliates are prohibited from engaging in short sales
of our common stock or other hedging or similar arrangements unless they have
received a put notice and the amount of shares involved in a short sale does not
exceed the number of shares specified in the put notice. All short sales
completed by Swartz will be conducted in compliance with Regulation M.
STOCKHOLDER APPROVAL
If we become listed on the Nasdaq Small Cap Market or the Nasdaq
National Market, then we must get stockholder approval to issue more than 19.99%
of our outstanding shares. Since we are currently quoted on the OTC Bulletin
Board, we do not need this stockholder approval at this time.
TERMINATION OF INVESTMENT AGREEMENT
We may terminate our right to initiate further puts or terminate the
investment agreement by providing Swartz with notice of such intention to
terminate; however, any such termination will not affect any other rights or
obligations we have concerning the investment agreement or any related
agreement, except that non-usage fees will cease to accrue thereafter. In the
event of a termination, we are required to pay Swartz a fee equal to $200,000
minus 10% of the aggregate dollar amount of stock put to Swartz until the
termination date.
RESTRICTIVE COVENANTS
During the term of the investment agreement and for a period of 60 days
thereafter, we are prohibited from certain transactions. These include the
issuance of any convertible debt or equity securities in a private transaction.
We are also prohibited from entering into any private equity line type
agreements similar to the investment agreement.
RIGHT OF FIRST REFUSAL
Swartz has a right of first refusal to purchase any shares of our
common stock or any other equity securities we may issue, including debt that is
convertible, exercisable, exchangeable for, or carries the right to receive,
additional shares offered by us in any private capital raising transaction of
equity securities that closes on or prior to 60 days after the termination of
the investment agreement.
INDEMNIFICATION
We are obligated to indemnify Swartz (including its members, officers,
directors, employees, investors and agents) from all liability and losses
resulting from any misrepresentations or breaches we made in connection with the
investment agreement, our registration rights agreement, other related
agreements, or the registration statement, including liability for violations of
the Securities Act relating to integration of the private sale of stock to
Swartz and the public resale of stock by Swartz.
SELLING STOCKHOLDER
SWARTZ PRIVATE EQUITY, LLC
The following table sets forth information regarding beneficial
ownership of shares which could be issued to Swartz Private Equity, LLC. We are
registering 5,000,000 of the shares of common stock that can be sold to Swartz
under the investment agreement. The shares are being registered to permit public
secondary trading of such shares, and Swartz may offer the common stock for
resale as it wishes. Swartz has not had any position, office, or material
relationship with us within the past three years.
36
PERCENTAGE OF SHARES BENEFICIALLY OWNED (1)<F1>
BENEFICIAL MAXIMUM NUMBER OF
OWNERSHIP OF SHARES OF COMMON
COMMON STOCK STOCK OFFERED FOR
(2)<F2> SALE (2)<F2>
NAME OF BENEFICIAL OWNER BEFORE OFFERING AFTER OFFERING
Swartz Private Equity, LLC 5,500,000 5,500,000 51.3% 0%
--------
<FN>
(1)<F1> Based on 5,212,702 shares of common stock outstanding as of July 17,
2001, and includes (solely for purposes of this prospectus) up to an
aggregate of 5,000,000 shares of common stock that we may sell to
Swartz pursuant to our investment agreement with Swartz and 500,000
shares of common stock underlying warrants to purchase shares of our
common stock issuable in connection with the investment agreement.
(2)<F2> Assumes that Swartz will sell all 5,000,000 of its shares purchasable
under the investment agreement and 500,000 shares of common stock
issuable upon exercise of outstanding warrants issued to Swartz as a
commitment fee for entering in the investment agreement. We cannot
assure you that Swartz will sell all or any of its shares. The 500,000
shares purchasable under the commitment warrant would not be deemed
beneficially owned within the meaning of Sections 13(d) and 13(g) of
the Exchange Act before their acquisition by Swartz.
</FN>
PLAN OF DISTRIBUTION
We are registering the resale of our common stock on behalf of Swartz
Private Equity, LLC, the selling stockholder. A selling stockholder includes
donees, transferees and pledgees selling shares of common stock received from
Swartz after the date of this prospectus. This prospectus may also be used by
transferees of the selling stockholder or by other persons acquiring shares,
including brokers who borrow the shares to settle short sales of our common
stock. If the selling stockholder transfers any of its shares, each transferee
must be bound to the same restrictions and limitations that apply to the selling
stockholder described in this prospectus. We will bear all costs, expenses and
fees in connection with the registration of the shares offered in this
prospectus. The selling stockholder will bear all brokerage commissions and
similar selling expenses associated with the sale of the shares.
The selling stockholder may offer its shares of our common stock at
various times in one or more of the following transactions:
o on any stock exchange, market or trading facility on which the shares
are traded;
o in privately negotiated transactions or otherwise, including an
underwritten offering;
o in connection with short sales of the shares of our common stock;
o in ordinary brokerage transactions and transactions in which a broker
solicits purchasers;
o in connection with the writing of non-traded and exchange-traded call
or put options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
o in a block trade in which a broker-dealer, as agent, may resell a
portion of the block, as principal, in order to facilitate the
transaction;
o in a purchase by a broker-dealer, as principal, and resale by the
broker-dealer for its account;
o in a combination of any of the above transactions; or any other method
permitted pursuant to applicable law.
37
The selling stockholder may sell its shares at market prices prevailing
at the time of sale, at prices related to the prevailing market prices, at
negotiated prices or at fixed prices. The selling stockholder reserves the right
to accept, and together with its agents from time to time, to reject, in whole
or in part, any proposed purchase of the common stock to be made directly or
through agents.
The selling stockholder may use broker-dealers to sell its shares in
which case broker-dealers will either receive discounts, commissions or
concessions from purchasers of shares for whom they act as agents.
Broker-dealers engaged by the selling stockholder may allow other broker-dealers
to participate in resales.
Swartz Private Equity, LLC is an underwriter within the meaning of
Section 2(11) of the Securities Act of 1933 with respect to any shares of common
stock that it sells. Any broker-dealers or agents that act in connection with
the sale of shares might be deemed to be underwriters and any commissions
received by such broker-dealers and any profit on the resale of the shares sold
by them while acting as principals might be deemed to be underwriting discounts
or commissions under the Securities Act.
Because Swartz Private Equity, LLC is an underwriter within the meaning
of Section 2(11) of the Securities Act, it will be subject to the prospectus
delivery requirements of the Securities Act. We have informed Swartz that the
anti-manipulative provisions of Regulation M promulgated under the Securities
Exchange Act of 1934 may apply to its sales of our common stock in the market.
We have provided Swartz with a copy of such rules and regulations.
The anti-manipulation rules may apply to the sales activities of the
selling stockholder and its affiliates. Regulation M may also restrict the
ability of any person engaged in the distribution of our common stock to engage
in market-making activities for a period of up to five business days prior to
the commencement of such distribution. Furthermore, Regulation M generally
prohibits certain participants in a distribution from bidding or purchasing for
an account in which the participant has a beneficial interest. Regulation M also
governs bids and purchases made to stabilize the price of a security in
connection with a distribution of that security. For these reasons, Regulation M
may affect the overall marketability of our common stock.
Swartz will pay all commissions, transfer taxes and other expenses
associated with its sales.
LEGAL MATTERS
Dill Dill Carr Stonbraker & Hutchings, P.C., Denver, Colorado, has
given an opinion on the validity of the securities.
EXPERTS
We have included the financial statements of the company as of
September 30, 2000 and 1999 and for the year ended September 30, 2000 and the
period from incorporation on April 29, 1999 to September 30, 1999, in reliance
upon the report of Ernst & Young LLP, independent chartered accountants, whose
report has been included in this prospectus given upon the authority of that
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have been subject to the reporting requirements under federal
securities laws since February 2000. We have filed with the SEC a registration
statement on Form SB-2 and amendments to the registration statement with respect
to the securities offered through this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules that are part of the registration statement. For further
information about the securities and us, you should review the registration
statement and the exhibits and schedules. Statements made in this prospectus
regarding the contents of any contract or document filed as an exhibit to the
registration statement are not necessarily complete. You should review the copy
of such contract or document so filed.
38
You can inspect the registration statement, as well as the exhibits and
the schedules, filed with the SEC without charge, at the SEC's office at
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. You can also
obtain copies of these materials from the SEC's Public Reference Section at 450
Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. The SEC maintains
a web site on the Internet that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at http://www.sec.gov.
REPORTS TO STOCKHOLDERS
We are subject to the reporting requirements of the federal securities
laws, and are required to file periodic reports, proxy statements, and other
information with the SEC. We will furnish our shareholders with annual reports
containing audited financial statements certified by independent public
accountants following the end of each fiscal year, proxy statements, and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year following the end of such fiscal quarter.
INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Consolidated Financial Statements - Nine Months Ended
June 30, 2001 and 2000....................................................................................F-1
Consolidated Balance Sheets as of June 30, 2001 (Unaudited) and September 30, 2000...................F-2
Consolidated Statements of Operations and Deficit for the Three and Nine Months Ended
June 30, 2001 and 2000 (Unaudited)...............................................................F-3
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
June 30, 2001 (Unaudited)........................................................................F-4
Consolidated Statements of Cash Flows for the Three and Nine Months Ended
June 30, 2001 and 2000 (Unaudited)...............................................................F-5
Notes to Interim Consolidated Financial Statements for the Nine Months Ended
June 30, 2001 and 2000 (Unaudited)...............................................................F-6
Financial Statements - September 30, 2000.................................................................F-10
Independent Auditors' Report ........................................................................F-11
Consolidated Balance Sheets as at September 30, 2000 and 1999........................................F-12
Consolidated Statements of Operations and Deficit for the Twelve Months Ended September 30, 2000
and for the Period from Incorporation on April 29, 1999 to September 30, 1999....................F-13
Consolidated Statement of Stockholders' Equity as at September 30, 2000..............................F-14
Consolidated Statements of Cash Flows for the Twelve Months Ended September 30, 2000
and for the Period from Incorporation on April 29, 1999 to September 30, 1999....................F-15
Notes to Consolidated Financial Statement - September 30, 2000.......................................F-16
39
Unaudited Interim Consolidated Financial Statements of
E-TREND NETWORKS, INC.
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
F-1
E-TREND NETWORKS, INC.
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
===============================================================================================================
June 30, September 30,
2001 2000
---------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 3) $ 213,279 $ 1,866,159
Accounts receivable 60,053 63,290
Due from related parties (note 4):
VHQ Entertainment Inc. 256,030 207,716
Diz Investments Ltd. 5,704 6,293
Summerhill Investment Corp., note receivable 5,686 -
Inventory 246,012 40,344
Prepaid expenses 49,200 773
----------------------------------------------------------------------------------------------------------
835,964 2,184,575
Advances to VHQ Entertainment Inc. (note 4) 376,731 231,709
Investment in VHQ Entertainment Inc. (note 5) 141,522 232,382
Property and equipment 380,098 266,641
Goodwill 166,214 175,169
---------------------------------------------------------------------------------------------------------------
$ 1,900,529 $ 3,090,476
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 3) $ - $ 74,816
Accounts payable and accrued liabilities 566,854 201,585
----------------------------------------------------------------------------------------------------------
566,854 276,401
Stockholders' equity:
Common shares (note 6) 842,643 8,854
Deferred stock-based compensation (361,000) -
Advance due from stockholder (note 4) (23,720) -
Additional paid-in capital 3,601,406 3,601,406
Deficit (2,728,351) (866,495)
Accumulated other comprehensive income (losses):
Unrealized gain from investment (note 5) 1,382 89,102
Cumulative translation adjustment 1,315 (18,792)
----------------------------------------------------------------------------------------------------------
1,333,675 2,814,075
Subsequent event (note 7)
---------------------------------------------------------------------------------------------------------------
$ 1,900,529 $ 3,090,476
===============================================================================================================
See accompanying notes to interim consolidated financial statements.
F-2
E-TREND NETWORKS, INC.
Consolidated Statements of Operations and Deficit
(Expressed in U.S. Dollars)
(Unaudited)
===============================================================================================================
Three months ended Nine months ended
June 30, June 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------
Sales $ 713,376 $ 260,076 $ 1,637,598 $ 448,211
Cost of sales 590,208 176,804 1,410,527 314,532
---------------------------------------------------------------------------------------------------------------
123,168 83,272 227,071 133,679
Expenses 863,680 301,175 1,821,672 641,425
Depreciation 22,188 11,841 55,861 27,294
Amortization of goodwill 4,970 10,251 15,004 15,251
Interest and other income (19,423) - (103,810) (3,327)
---------------------------------------------------------------------------------------------------------------
Net loss for the period (748,247) (239,995) (1,561,656) (546,964)
Other comprehensive income (loss):
Unrealized loss on investment (7,310) - (87,720) -
Foreign currency translation
adjustment (31,214) - 20,108 -
----------------------------------------------------------------------------------------------------------
(38,524) - (67,612) -
---------------------------------------------------------------------------------------------------------------
Comprehensive loss $ (786,771) $ (239,995) $ (1,629,268) $ (546,964)
===============================================================================================================
Deficit, beginning of period $ (1,980,104) $ (362,308) $ (866,495) $ (55,339)
Charge for excess of
consideration given over net book
value of assets acquired (note 2) - - (300,200) -
Net loss for the period (748,247) (239,995) (1,561,656) (546,964)
---------------------------------------------------------------------------------------------------------------
Deficit, end of period $ (2,728,351) $ (602,303) $ (2,728,351) $ (602,303)
===============================================================================================================
Net loss per common share,
basic and diluted $ (0.17) $ (0.05) $ (0.35) $ (0.12)
===============================================================================================================
Weighted average common
shares outstanding, basic 4,472,228 4,439,371 4,472,228 4,439,371
===============================================================================================================
See accompanying notes to interim consolidated financial statements.
F-3
E-TREND NETWORKS, INC.
Consolidated Statement of Stockholders' Equity
Nine months ended June 30, 2001
(Expressed in U.S. Dollars)
(Unaudited)
===================================================================================================================
Issued Common Shares Additional
------------------------------------ Paid-In
Number Amount Capital
-------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 8,853,734 $ 8,854 $ 3,601,406
Issued in exchange for property and equipment 30,000 30,000 -
---------------------------------------------------------
8,883,734 38,854 3,601,406
=====================================================================
Common shares of Cool Entertainment, Inc.
at time of acquisition (note 2) 38,340,636 13,488,710 -
Effect of 1:100 reverse stock split (37,957,305) - -
---------------------------------------------------------------------
383,331
Issued in exchange for common shares of Cool
Entertainment, Inc. (note 2) 4,439,371 - -
Elimination of Cool Entertainment, Inc. share capital
under reverse-take-over accounting - (13,488,710) -
Issued for settlement of notes payable (note 2) 25,000 93,789 -
Issued for settlement of notes payable (note 2) 15,000 45,000 -
Issued in exchange for fees and services provided 160,000 304,000 -
Issued for deferred stock-based compensation 190,000 361,000 -
-------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 5,212,702 $ 842,643 $ 3,601,406
===================================================================================================================
See accompanying notes to interim consolidated financial statements.
F-4
E-TREND NETWORKS, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited)
==============================================================================================================
Three months ended Nine months ended
June 30, June 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss for the period $ (748,247) $ (239,995) $ (1,561,656) $ (546,964)
Add items not involving cash:
Shares issued in exchange
for services 304,000 - 304,000 -
Unrealized foreign exchange
loss (46,512) (8,327) (67,037) (14,814)
Depreciation 22,188 11,841 55,861 27,294
Amortization of goodwill 4,970 10,251 15,004 15,251
------------------------------------------------------------------------------------------------------
Funds used in operations (463,601) (226,230) (1,253,828) (519,233)
Net change in non-cash
working capital 240,714 (304,051) 61,000 (391,353)
----------------------------------------------------------------------------------------------------------
(222,887) (530,281) (1,192,828) (910,586)
Financing activities:
Decrease in bank indebtedness (316,977) - (74,816) -
Advances from (to) related party (24,235) 259 (145,022) (178,695)
Proceeds from capital
contributions - - - 2,542,351
---------------------------------------------------------------------------------------------------------
(341,212) 259 (219,838) 2,363,656
Investing activities:
Purchase of property and
equipment (14,170) (59,794) (72,214) (352,133)
Acquisition - - (168,000) -
----------------------------------------------------------------------------------------------------------
(14,170) (59,794) (240,214) (352,133)
---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (578,269) (589,816) (1,652,880) 1,100,937
Cash and cash equivalents,
beginning of period 791,548 2,329,465 1,866,159 638,712
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 213,279 $ 1,739,649 $ 213,279 $ 1,739,649
===============================================================================================================
See accompanying notes to interim consolidated financial statements.
F-5
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
1. BASIS OF PRESENTATION:
These unaudited interim consolidated financial statements of E-Trend
Networks, Inc. ("E-Trend" or the "Company") have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information, including all normal recurring adjustments
that are, in the opinion of management, necessary for the fair presentation
of the consolidated balance sheet and the consolidated statements of
operations and deficit, stockholders' equity and cash flows for the interim
periods. There have been no changes to the accounting policies as detailed
in the Company's audited financial statements for the year ended September
30, 2000 during the interim periods presented. These interim financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended September 30, 2000. The financial
information included herein is unaudited.
2. ACQUISITION:
Effective February 21, 2001 an arrangement was completed between E-Trend
and Cool Entertainment, Inc. ("Cool") whereby the shareholders of E-Trend
exchanged all of their common shares for 4,439,371 common shares of Cool.
Following the acquisition, the former shareholders of E-Trend held a
majority of the total issued and outstanding common shares of Cool; E-Trend
was thereby deemed to be the acquiror. Accordingly, the transaction has
been accounted for as a reverse-take-over using the purchase method whereby
the assets and liabilities of Cool have been recorded at their fair market
values and the operating results of Cool have been included in the
Company's financial statements from the effective date of the purchase. The
fair values of the net assets acquired is equal to their book values.
As Cool was a non-operating public shell prior to the combination, no
goodwill has been recognized and the excess of the consideration paid over
the fair value of the identifiable assets acquired has been charged to
stockholders' equity.
F-6
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
2. ACQUISITION (CONTINUED):
===========================================================================
Net book value of assets acquired:
Property and equipment of Cool, at book value $ 10,940
Assets acquired in associated transactions 68,000
Less working capital deficiency (72,351)
---------------------------------------------------------------------------
$ 6,589
===========================================================================
Assigned value of 4,441,867 shares issued in exchange
for shares of Cool $ -
Settlement of liability assumed by the issue of 25,000
common shares 93,789
Issue of 15,000 on acquisition of assets in associated
transaction 45,000
Cash paid on acquisition of assets in associated transaction 23,000
Cash paid for transaction costs 145,000
---------------------------------------------------------------------------
306,789
Less excess of consideration given over net book value of
assets acquired (300,200)
--------------------------------------------------------------------------
$ 6,589
===========================================================================
Other transactions relating to the arrangement were as follows:
(a) Change of the Company's name from Cool Entertainment, Inc. to E-Trend
Networks, Inc.;
(b) Re-domestication of the Company to the State of Delaware from the State
of Nevada;
(c) Reverse stock split of 1-for-100 common shares;
(d) Continuance, on an equivalent basis, of all of the unexpired and
unexercised outstanding stock options and warrants of the former
E-Trend under the same terms and conditions;
(e) Cancellation of all of the outstanding warrants of Cool;
(f) Settlement of a note payable of $93,789 to Fictional Media Inc., a
company controlled by stockholders of Cool, by way of the issuance of
25,000 common shares; and
(g) Cash payment of $23,000 and the issuance of a promissory note of
$45,000 by E-Trend to Fictional Media Inc. in exchange for property and
equipment, subsequently settled by way of the issuance of 15,000 common
shares.
3. BANK INDEBTEDNESS:
The Company has a line of credit of $150,000 Canadian. Drawings bear
interest at prime plus 1/2% and are secured by a $150,000 U.S. deposit
included in cash and cash equivalents.
F-7
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
4. RELATED PARTY TRANSACTIONS:
(a) VHQ Entertainment Inc.:
VHQ Entertainment Inc. ("VHQ") represents the Company's major
stockholder. The advances to VHQ, totaling $571,757 Canadian, bear
interest at 8%, are unsecured and have no fixed terms of repayment. For
the three and nine months ended June 30, 2001, the Company accrued
interest income of $6,925 and $20,985, respectively (2000 - $4,832 and
$12,596, respectively).
During the three and nine months ended June 30, 2001 the Company sold
$315,068 and $779,794, respectively, (2000 - $217,781 and $357,258,
respectively) of its products to VHQ, representing 44% and 48% of total
sales (2000 - 84% and 80%). These transactions are considered to be in
the normal course of business and are measured at the exchange amount,
which is the amount of consideration established and agreed to by the
related parties. The current amount due from VHQ relates to such sales.
(b) Diz Investments Ltd.:
During the three and nine months ended June 30, 2001 the Company sold
$3,764 and $57,744, respectively, (2000 - $488 and $1,282,
respectively) of its products to Diz Investments Ltd., a company owned
by two of the Company's stockholders. These transactions are considered
to be in the normal course of business and are measured at the exchange
amount, which is the amount of consideration established and agreed to
by the related parties.
(c) Summerhill Investment Corp.:
Summerhill Investment Corp. is a shareholder of the Company. The
receivable of $5,686 is for unpaid interest on a fully-paid loan.
(d) Stockholder:
The advance due from a stockholder relates to the purchase of common
shares of the Company. The subject shares serve as security for the
advance.
F-8
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
5. INVESTMENT:
On January 21, 2000 the Company purchased 99,900 common shares of VHQ, a
publicly-traded Canadian company, in exchange for 100,000 shares of the
Company at an assigned value of $150,000.
=========================================================================================================
June 30, 2001
------------------------------------------------------
Translated Unrealized Recorded
cost basis gain basis
---------------------------------------------------------------------------------------------------------
Video Headquarters Inc. common shares $ 140,140 $ 1,382 $ 141,522
=========================================================================================================
6. SHARE CAPITAL:
There were 1,067,160 stock options outstanding at June 30, 2001 having a
weighted average exercise price of $4.59 and expiring on various dates to
December 2004.
There were 100,000 common share purchase warrants outstanding at June 30,
2001. Each warrant entitles the holder to purchase one common share of the
Company for $4.00 and expires on April 20, 2002. These warrants were issued
in connection with the acquisition of Langara Distribution Inc.
Effective April 20, 2001 the shareholders approved a change to the
Company's authorized share capital from 20,000,000 preferred shares with a
par value of $0.0001 per share and 80,000,000 common shares with a par
value of $0.0001 per share to 1,000,000 preferred shares with a par value
of $0.0001 per share and 20,000,000 common shares with a par value of
$0.0001 per share.
7. SUBSEQUENT EVENT:
On July 3, 2001 the Company executed an equity financing agreement with a
U.S.-based corporation. The agreement is subject to the completion and
filing of the required regulatory documentation. Under the agreement the
Company can, under certain conditions, put common shares to the investor to
a maximum of $10 million over a three-year period.
F-9
Financial Statements
E-TREND NETWORKS, INC.
(formerly The Moviesource.com Corp.)
September 30, 2000
F-10
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
E-Trend Networks, Inc.
We have audited the accompanying consolidated balance sheets of E-Trend
Networks, Inc. and subsidiary (formerly The Moviesource.com Corp.) as at
September 30, 2000 and 1999 and the related statements of operations and
deficit, stockholders' equity and cash flows for the year ended September 30,
2000 and for the period from incorporation on April 29, 1999 to September 30,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the financial position of E-Trend
Networks, Inc. (and subsidiary) as at September 30, 2000 and the results of its
operations and its cash flows for the year ended September 30, 2000 and for the
period from incorporation on April 29, 1999 to September 30, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Calgary, Canada
November 21, 2000 Chartered Accountants
F-11
E-TREND NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
As at September 30
2000 1999
(U.S. $) (U.S. $)
----------------------------
ASSETS
CURRENT
Cash and cash equivalents [NOTE 6] 1,791,343 638,712
Accounts receivable 69,583 3,297
Due from related company [NOTE 9] 207,716 --
Inventory 40,344 --
Prepaid expenses 773 45,060
----------------------------
2,109,759 687,069
INVESTMENT [NOTE 4] 232,382 --
DUE FROM RELATED COMPANY [NOTE 9] 231,709 31,487
CAPITAL ASSETS [NOTE 5] 266,641 25,000
GOODWILL [NOTE 3] 175,169 --
----------------------------
3,015,660 743,556
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 201,585 17,820
----------------------------
COMMITMENTS [NOTE 11]
STOCKHOLDERS' EQUITY
Authorized
25,000,000 preferred shares, par value $0.001
25,000,000 common shares, par value $0.001
Issued
Common shares [NOTE 7] 8,854 6,850
Additional paid in capital [NOTE 7] 3,601,406 774,225
Accumulated deficit (866,495) (55,339)
Unrealized gain from investment 89,102 --
Cumulative translation adjustment (18,792) --
----------------------------
2,814,075 725,736
----------------------------
3,015,660 743,556
============================
SEE ACCOMPANYING NOTES
On behalf of the Board:
Director Director
F-12
E-TREND NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE TWELVE FOR THE PERIOD FROM
MONTHS ENDED INCORPORATION ON
SEPTEMBER 30, APRIL 29, 1999 TO
2000 SEPTEMBER 30, 1999
(U.S. $) (U.S. $)
---------------------------------------
REVENUE 665,075 --
COST OF SALES 503,938 --
---------------------------------------
161,137 --
---------------------------------------
EXPENSES
Operating and development 436,764 --
General and administrative 435,745 59,564
Advertising costs 108,703 --
Sales and marketing 28,921 --
Amortization of capital assets 31,756 --
Amortization of goodwill 20,329 --
---------------------------------------
1,062,218 59,564
---------------------------------------
LOSS BEFORE THE FOLLOWING (901,081) (59,564)
INTEREST INCOME 89,925 4,225
---------------------------------------
NET LOSS FOR THE PERIOD [NOTE 10] (811,156) (55,339)
---------------------------------------
OTHER COMPREHENSIVE INCOME
Unrealized gain from investment 89,102 --
Foreign currency translation adjustment (18,792) --
---------------------------------------
70,310 --
---------------------------------------
COMPREHENSIVE LOSS (740,846) (55,339)
=======================================
DEFICIT, BEGINNING OF PERIOD (55,339) --
NET LOSS FOR THE PERIOD (811,156) (55,339)
---------------------------------------
DEFICIT, END OF PERIOD (866,495) (55,339)
=======================================
BASIC AND DILUTED LOSS PER SHARE [NOTE 8] (0.10) (0.02)
=======================================
SEE ACCOMPANYING NOTES
F-13
E-TREND NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
As at September 30, 2000
COMMON STOCK
-----------------------------
PAID IN
NUMBER OF AMOUNT CAPITAL
SHARES (U.S. $) (U.S. $)
-----------------------------------------
Issuance of common stock [NOTE 7] 6,850,000 6,850 774,225
-----------------------------------------
Balance, September 31, 1999 6,850,000 6,850 774,225
Issuance of common shares for cash [NOTE 7] 1,618,734 1,619 2,395,732
Issuance of common shares for services [NOTE 7] 85,000 85 84,915
Issuance of common shares on acquisition of
subsidiary [NOTES 3 AND 7] 200,000 200 199,800
Issuance of common shares for shares in investment
[NOTES 4 AND 7] 100,000 100 149,900
Share issue costs -- -- (3,166)
-----------------------------------------
Balance, September 30, 2000 8,853,734 8,854 3,601,406
=========================================
SEE ACCOMPANYING NOTES
F-14
E-TREND NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE FOR THE PERIOD FROM
MONTHS ENDED INCORPORATION ON
SEPTEMBER 30, APRIL 29, 1999 TO
2000 SEPTEMBER 30, 1999
(U.S. $) (U.S. $)
---------------------------------------
CASH WAS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net loss for the period (811,156) (55,339)
Amortization 52,085 --
Add (deduct) following item:
Net change in non-cash working capital (11,478) (30,537)
---------------------------------------
(770,549) (85,876)
---------------------------------------
FINANCING ACTIVITIES
Proceeds from capital contributions 2,394,185 781,075
Due from related company (200,222) (31,487)
---------------------------------------
2,193,963 749,588
---------------------------------------
INVESTING ACTIVITY
Purchase of capital assets (195,967) (25,000)
---------------------------------------
INCREASE IN CASH 1,227,447 638,712
CASH, BEGINNING OF PERIOD 638,712 --
---------------------------------------
CASH, END OF PERIOD 1,866,159 638,712
=======================================
SEE ACCOMPANYING NOTES
F-15
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
1. BASIS OF PRESENTATION
The Corporation was incorporated as The Moviesource.com Corp. under the Business
Corporations Act (Nevada) on April 29, 1999. The Corporation changed its name
effective February 10, 2000 to E-Trend Networks, Inc. The Corporation is
committed to the business of e-commerce sales and distribution of filmed
entertainment, video games and music.
The consolidated financial statements include the accounts of the Corporation
and its wholly owned subsidiary, Langara Distribution Inc., an Alberta, Canada
corporation.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Corporation have been prepared in accordance
with accounting principles generally accepted in the United States. The
presentation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS
The Corporation considers cash invested in money market funds with a maturity of
90 days or less, amounting to $1,812,301 (1999 - $617,328), to be cash
equivalents.
CAPITAL ASSETS
Capital assets are recorded at cost. Amortization is provided on the bases and
at rates designed to amortize the cost of assets over their estimated useful
lives. Amortization is recorded using the declining balance method at the
following annual rates:
Furniture and fixtures - 10%
Computer hardware - 30%
Computer software - 20%
Leasehold improvements Over term of lease
CONCENTRATION OF CREDIT RISK
The financial instruments of the Corporation that are exposed to concentration
of credit risk consist primarily of cash and short term deposits. The
Corporation's cash and cash equivalents are placed with high quality major
Canadian chartered banking institutions, limiting its exposure of credit risk.
GOODWILL
Goodwill is recorded at cost and is being amortized on a straight-line basis
over 10 years. The recoverability of goodwill is assessed periodically based on
management estimates of undiscounted future operating income from each of the
acquired businesses to which the goodwill relates.
F-16
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
FINANCIAL INSTRUMENTS
Financial instruments of the Corporation consist mainly of cash and cash
equivalents, accounts receivable, due from related company and accounts payable
and accrued liabilities. At September 30, 2000, there are no significant
differences between the carrying values of these amounts and their estimated
market values.
REVENUE RECOGNITION
Gross revenue from product sales is recognized as the product is delivered.
Sales returns are limited to 15% of the total sales to each unrelated customer
and are credited against future sales.
INCOME TAXES
Income taxes are computed using the liability method. Under the liability
method, deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
INVESTMENT
Investment is publicly traded equity securities classified as available for sale
and are recorded at market. Unrealized gains and losses are reflected in other
comprehensive income.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
STOCK BASED COMPENSATION
The Corporation applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost is recognized in the accounts as options are granted with
an exercise price that approximates the prevailing market price.
COMPUTATION OF LOSS PER SHARE
Basic loss per stock is computed by dividing the net loss attributable to common
stockholders by the weighted average number of common stock outstanding for that
period. Diluted loss per stock is computed giving effect to all dilutive
potential common stock that were outstanding during the period. Dilutive
potential common stock consist of incremental common stock issuable upon
exercise of convertible securities. At September 30, 2000, there were no
dilutive potential common stock and therefore the dilutive loss per stock is
equivalent to the basic loss per stock.
F-17
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Corporation and its subsidiary is the Canadian
dollar. Accordingly, all assets and liabilities are translated at the year end
exchange rate and revenues and expenses are translated at average exchange
rates. Gains and losses arising from the translation of the financial statements
of the Corporation are recorded in a "Cumulative Translation Adjustment" account
in stockholders' equity.
Transactions denominated in foreign currencies are translated at the exchange
rate on the transaction date. Foreign currency denominated monetary assets and
liabilities are translated at the exchange rate in effect of the balance sheet
date. The resulting exchange gains and losses on these items are included in net
earnings.
3. ACQUISITION
The Corporation acquired all of the issued and outstanding shares of Langara
Distribution Inc. ("Langara") effective January 1, 2000 for consideration of
200,000 common shares valued at $1.00 per share and 200,000 share purchase
warrants exercisable at $2.00 per warrant from the date of issuance. The
ascribed value of this transaction was $200,000 and no value has been ascribed
to the warrants. This acquisition was accounted for by the purchase method
allocating all of the purchase price to goodwill. The operating results of
Langara are included in the consolidated statements of operations and deficit
from the date of acquisition. The pro-forma loss and pro-forma loss per share
for the year ended September 30, 1999 giving effect to the acquisition of
Langara as though it had occurred as at October 1, 1998 do not differ materially
from that recorded.
4. INVESTMENT
On January 21, 2000, the Corporation swapped 99,900 common shares of Video
Headquarters Inc., ("Video Headquarters") a publicly traded Canadian company,
for 100,000 shares of the Corporation at a value of $150,000.
SEPTEMBER 30, 2000
-----------------------------------------
TRANSLATED UNREALIZED RECORDED
COST BASIS GAIN BASIS
$ $ $
-----------------------------------------
Video Headquarters common shares 143,280 89,102 232,382
=========================================
F-18
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
5. CAPITAL ASSETS
SEPTEMBER 30, 2000
----------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
----------------------------------------------------
Furniture and fixtures 8,196 404 7,792
Leasehold improvements 25,545 1,277 24,268
Computer hardware 31,718 4,468 27,250
Computer software 232,938 25,607 207,331
----------------------------------------------------
298,397 31,756 266,641
====================================================
SEPTEMBER 30, 1999
----------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
----------------------------------------------------
Computer software 25,000 -- 25,000
====================================================
6. LINE OF CREDIT
The Corporation has a line of credit with a limit of $150,000 which accrues
interest at prime plus 0.5% per annum. As at September 30, 2000, this line of
credit had an overdraft balance of $74,816.
7. SHARE CAPITAL
AUTHORIZED
25,000,000 common shares at $0.001 per value
25,000,000 preferred shares at $0.001 per value
COMMON STOCK ISSUED
As of September 30, 1999, 6,075,000 and 775,000 common shares had been issued at
$0.001 and $1.00 per share.
On October 1, 1999, 85,000 common shares were issued for services provided by
three consultants in relation to the development of the Corporation's website
for $1.00 per share.
On March 22, 2000, 1,618,734 common shares were issued for cash consideration at
prices of $1.00 and $1.50 per share.
On January 21, 2000, 100,000 common shares were issued at $1.50 in exchange for
common shares in Video Headquarters.
On January 1, 2000, 200,000 shares were issued to acquire Langara with an
ascribed value of $1.00 per share.
F-19
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
OPTIONS
The Company is authorized to grant employees, directors and officers options to
purchase up to 2,000,000 common shares. The following table details the options
outstanding at September 30, 2000:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
# $
---------------------------------------
Outstanding at September 30, 1999 -- --
Granted 1,438,000 1.99
---------------------------------------
Outstanding at September 30, 2000 1,438,000 1.99
=======================================
Exercisable at September 30, 2000 9,700 1.26
=======================================
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions.
2000
$
---------------
Risk free interest rate 7.50%
Dividend yield 0%
Volatility factors of expected market price 100%
Weighted average expected life of the options 2 years
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, the valuation model calculates the expected
stock price volatility based on highly subjective assumptions. Because the
Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Pro forma disclosures of loss and loss per common share are presented below as
if the Corporation had adopted the cost recognition requirements under FAS 123.
The compensation cost for the stock-based compensation was approximately
$1,048,300.
2000
$
------------
Loss As reported 811,156
Pro forma 1,859,456
Basic and diluted loss per common share As reported ($/share) (0.10)
Pro forma ($/share) (0.23)
WARRANTS
On September 30, 2000, there were 200,000 common share purchase warrants issued
and outstanding. Each warrant entitles the holder to purchase one common share
of the Corporation for $2.00 per share expiring April 20, 2002.
F-20
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
8. LOSS PER SHARE
SEPTEMBER SEPTEMBER
30, 2000 30, 1999
$ $
-------------------------------
Net loss 811,156 55,339
Weighted average number of common shares outstanding 7,946,310 2,857,943
-------------------------------
Loss per common share - basic and diluted (0.10) (0.02)
===============================
9. RELATED PARTY TRANSACTIONS AND ECONOMIC DEPENDENCE
The due from related company of $231,709 represents an advance to the
Corporation's major shareholder, Video Headquarters. The advance bears interest
at 8% per annum, is unsecured and has no fixed terms of repayment. At September
30, 2000, the Corporation received interest income of $17,056 from Video
Headquarters.
The Corporation sold $608,305 of its products to Video Headquarters and at
September 30, 2000, owes the Corporation $207,716 in trade receivables. The
Corporation does not limit sales returns from Video Headquarters and receives
91.5% of its sales from Video Headquarters.
10. INCOME TAXES
The income tax benefit differs from the amount computed by applying the Canadian
federal statutory tax rates to the loss before income taxes for the following
reasons:
SEPTEMBER SEPTEMBER
30, 2000 30, 1999
$ $
-------------------------------
Income tax benefit at Canadian statutory rates (44.62%) (373,714) (24,692)
Increase (decrease) in taxes resulting from:
Change in deferred tax asset valuation allowance 373,714 24,692
-------------------------------
Income tax benefit -- --
===============================
Future income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The components of the
Corporation's future income tax assets are as follows:
SEPTEMBER SEPTEMBER
30, 2000 30, 1999
$ $
-------------------------------
Non-capital loss carryforwards 371,374 24,692
Undepreciated capital costs in excess of book value of capital
assets 17,961 --
-------------------------------
Net future tax assets 389,335 24,692
Valuation allowance (389,335) (24,692)
-------------------------------
-- --
===============================
F-21
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
11. COMMITMENTS
The Corporation is committed to the following rental payments under various
equipment leases:
$
-------------
2001 82,820
2002 53,958
2003 55,812
2004 21,404
2005 5,351
-------------
219,345
=============
12. SUBSEQUENT EVENT
On November 3, 2000, the Corporation entered into a letter of intent to be
acquired, by way of a share exchange and reorganization, by Cool Entertainment
Inc. The Corporation will be the successor company after conclusion of the
proposed transaction.
F-22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of
Delaware, the Registrant has broad powers to indemnify its directors and
officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Bylaws (Exhibit 3.2 hereto) also provide for mandatory
indemnification of its directors and executive officers, and permissive
indemnification of its employees and agents, to the fullest extent permissible
under Delaware law.
The Registrant's Certificate of Incorporation (Exhibit 3.1 hereto)
provides that the liability of its directors for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law. Pursuant to
Delaware law, this includes elimination of liability for monetary damages for
breach of the directors' fiduciary duty of care to the Registrant and its
Stockholders. These provisions do not eliminate the directors' duty of care and,
in appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 1,457.50
Accounting fees and expenses......................... 5,000.00
Blue sky fees and expenses........................... 1,000.00
Legal fees and expenses.............................. 20,000.00
Transfer agent fees and expenses..................... 2,000.00
Printing expenses.................................... 2,000.00
Miscellaneous expenses............................... 8,542.50
--------------
Total................................................$ 40,000.00
==============
All amounts are estimates except the SEC filing fee. The Selling
Stockholder will be bearing the cost of its own brokerage fees and commissions
and its own legal and accounting fees.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since July 1998, the Registrant has issued and sold the unregistered
securities set forth in the tables below. The information has been adjusted to
reflect the reorganization of the Common Stock.
COMMON STOCK:
----------------------------------------------------------------------------------------------------------------------
DATE PERSONS OR CLASS OF PERSONS NUMBER OF SHARES CONSIDERATION
----------------------------------------------------------------------------------------------------------------------
01/29/99 Advantage Investment Holdings, Ltd. 2,498 cash of $99,927
and Andrew Robinson
----------------------------------------------------------------------------------------------------------------------
01/29/99 Clement Lau, William Hadcock, Len 231,840 Shares of Cool Entertainment, Inc.
Voth, and Marc Belcourt
----------------------------------------------------------------------------------------------------------------------
II-1
------------------------------------------------------------------------------------------------------------------------
DATE PERSONS OR CLASS OF PERSONS NUMBER OF SHARES CONSIDERATION
------------------------------------------------------------------------------------------------------------------------
04/26/99 - Advantage Investment Holdings Ltd., 19,242 cash of $776,000
11/22/00 Cerris Finance Limited, Worgan
Corporation and Merrow International
------------------------------------------------------------------------------------------------------------------------
02/01/00 Orienstar Finance Limited 4,778 cash of $224,000
------------------------------------------------------------------------------------------------------------------------
03/01/00 - Charterbridge Financial 2,660 consulting services valued at $151,480
08/24/00
------------------------------------------------------------------------------------------------------------------------
03/01/00 Bulletin Board Times 50 services rendered valued at $3,125
------------------------------------------------------------------------------------------------------------------------
02/21/01 Shareholders of E-Trend Networks, Inc. 4,441,867 Shares of E-Trend Networks, Inc. (a
Nevada corporation)
------------------------------------------------------------------------------------------------------------------------
05/23/01 Clement Lau, William Hadcock, Len Voth 40,000 payment of notes in the amount of
and Marc Belcourt $137,789
------------------------------------------------------------------------------------------------------------------------
05/23/01 Garrett K. Krause 200,000 consulting services valued at $380,000
------------------------------------------------------------------------------------------------------------------------
05/23/01 Gregg Johnson, Len Voth, and Trevor 90,000 directors' fees for fiscal year 2001
Hillman valued at $90,000
------------------------------------------------------------------------------------------------------------------------
05/23/01 Gregg Johnson and Trevor Hillman 60,000 management fees for fiscal year 2001
valued at $114,000
------------------------------------------------------------------------------------------------------------------------
No underwriters were used in the above transactions. The registrant
relied upon the exemption from registration contained in Section 4(2) as to all
of the transactions except for the sales of shares in January 1999, the sale of
shares to Orienstar Finance Limited, and the exchange of shares with the
shareholders of E-Trend Networks, Inc. The registrant relied upon Rule 504 for
the sales of shares in January 1999 and the sale of shares to Orienstar Finance
Limited, and upon Rule 506 for the exchange transaction. With regard to the
transactions made in reliance on the exemption contained in Section 4(2), the
purchasers were deemed to be sophisticated with respect to the investment in the
securities due to their financial condition and involvement in the registrant's
business. Restrictive legends were placed on the stock certificates evidencing
the shares issued in the Section 4(2) transactions.
ITEM 27. EXHIBITS
--------------------------------------------------------------------------------
EXHIBIT
NO. DOCUMENT
--------------------------------------------------------------------------------
2.1 Agreement and Plan of Share Exchange (1)
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended
--------------------------------------------------------------------------------
3.2 Bylaws
--------------------------------------------------------------------------------
5.1 Opinion of Dill Dill Carr Stonbraker & Hutchings, P.C.
--------------------------------------------------------------------------------
10.1 Amended and Restated Investment Agreement with Swartz Private
Equity, LLC
--------------------------------------------------------------------------------
10.2 Amended and Restated Registration Rights Agreement with Swartz
Private Equity, LLC
--------------------------------------------------------------------------------
10.3 Amended Warrant to Purchase Common Stock issued to Swartz Private
Equity, LLC
--------------------------------------------------------------------------------
10.4 Proposed Form of Video One Canada Ltd. Business Agreement
with Langara Distribution (2)
--------------------------------------------------------------------------------
II-2
EXHIBIT
NO. DOCUMENT
--------------------------------------------------------------------------------
10.5 2001 Stock Plan (1)
--------------------------------------------------------------------------------
21 Subsidiaries of the Registrant
--------------------------------------------------------------------------------
23.1 Consent of Dill Dill Carr Stonbraker & Hutchings, P.C.
Reference is made to Exhibit 5.1
--------------------------------------------------------------------------------
23.2 Consent of Ernst & Young, LLP
--------------------------------------------------------------------------------
-----------------
(1) Incorporated by reference to the exhibits to the registrant's definitive
proxy statement filed January 2, 2001
(2) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the issuer pursuant to the foregoing provisions, or
otherwise, the issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 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 or controlling person of the issuer 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
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, 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 issuer 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 the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial BONA FIDE
offering of those securities.
The Registrant hereby undertakes to:
(1) 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 Commission pursuant to Rule
424(b) 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.
II-3
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
II-4
SIGNATURES
In accordance with 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 of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Calgary,
Province of Alberta, Canada on September 24, 2001.
E-TREND NETWORKS, INC.
By: /s/ CAROLINE G. ARMSTRONG
--------------------------------------------
Caroline G. Armstrong
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
President and Chief Executive Officer
/s/ CAROLINE G. ARMSTRONG (Principal Executive Officer) September 24, 2001
------------------------------------ ------------------------
Caroline G. Armstrong
Interim Chief Financial Officer
(Principal Financial and Accounting
/s/ LORNE COGSWELL Officer) September 24, 2001
------------------------------------ ------------------------
Lorne Cogswell
/s/ GREG C. JOHNSON Director September 24, 2001
------------------------------------ ------------------------
Gregg C. Johnson
Director
------------------------------------ ------------------------
Trevor M. Hillman
/s/ LEN VOTH Director September 24, 2001
------------------------------------ ------------------------
Len Voth
II-5