UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
VHS NETWORK, INC.
(Exact name of Registrant)
FLORIDA 65-0656668
------- ----------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
6705 TOMKEN ROAD, UNIT 12-14
MISSISSAUGA, ONTARIO, CANADA
(905) 795-9139
--------------
(Address and telephone number of principal
executive offices) Copies of all
Communications to:
Stewart & Associates
1 First Canadian Place, P.O. Box 160
Suite 700, 100 King Street West
Toronto, Ontario, Canada
Tel: (416) 368-7881
Fax: (416) 368-7805
Approximate date of proposed sale to the public: from time to time after the
effective date of this Registration Statement
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed
Title of each Class of maximum aggregate Amount of
Securities to be Registered offering price registration fee
================================================================================
Common Shares(1) $2,073,167(2) $547.32
================================================================================
(1) Consists of 4,392,500 issued and outstanding shares of Common Stock, and
5,973,334 shares issuable upon exercise of options, warrants and other
conversion privileges to acquire Common Stock.
(2) Estimated pursuant to Rule 457 under the Securities Act of 1933 solely for
the purpose of calculating the registration fee.
July 10, 2000
VHS NETWORK, INC.
10,365,834 Shares of Common Stock
The Selling Securityholders identified in this Prospectus are selling
up to 10,365,834 common shares in the capital of VHS Network, Inc. (the
"Registrant"). Of such shares, 4,392,500 are currently outstanding and
5,973,334 shares will be issued upon exercise of options, warrants and
other conversion rights which have been granted to certain Selling
Securityholders. The shares were issued, or are issuable upon
conversion or exercise of securities which were issued, by the
Registrant in private placement transactions.
The Selling Securityholders may sell all or a portion of their shares
through public or private transactions at prevailing market prices or
at privately negotiated prices. The Registrant will not receive any
part of the proceeds from the sale of these shares by the Selling
Securityholders. However, the Registrant may receive up to $892,917 in
the event all of the options and warrants are exercised.
The Registrant's common stock was quoted on the NASD OTCBB under the
trading symbol "VHSN" until May 18, 2000 and now trades on the Pink
Sheets.
This investment involves a high degree of risk. You should purchase shares only
if you can afford a complete loss of your investment. See "Risk Factors"
beginning on Page 4.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION FOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE, ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
2
AVAILABLE INFORMATION
The Registrant recently filed a Form 8K/A with United States Securities and
Exchange Commission (the "SEC") to report the acquisition of Exodus Acquisition
Corporation ("Exodus") whereby pursuant to Rule 12g-3(a) of the General Rules
and Regulations of the Securities and Exchange Commission, the Registrant
intended to become the successor issuer to Exodus for reporting purposes under
the Securities Exchange Act of 1934 (the "Act") and elected to report under the
Act effective May 12, 2000. The Registrant is still awaiting further comments
from the SEC with respect to the Form 8K/A. As a reporting company the
Registrant will begin to file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
document the Registrant files at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. The
Registrant's SEC filings will also be publicly available through the SEC's web
site on the Internet at http://www.sec.gov. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
thereto. Descriptions of any contract or other document referred to in this
Prospectus are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement for a more complete description of the matter involved,
each such statement being qualified in its entirety by such reference. At your
written or telephone request, the Registrant, will provide you, without charge,
with a copy of any of the information that is incorporated by reference herein
(excluding exhibits to the information that is incorporated by reference unless
the exhibits are themselves specifically incorporated by reference). Direct your
request to the Registrant at VHS Network, Inc., 6705 Tomken Road, Unit 12-14,
Mississauga, Ontario, CANADA, Attention: Chief Executive Officer, telephone
(905) 795-9139.
TABLE OF CONTENTS
PAGE
----
The Offering..................................................................4
Principal Office .............................................................4
Risk Factors..................................................................4
Use of Proceeds...............................................................7
Selling Securityholders.......................................................7
Plan of Distribution..........................................................8
Legal Matters.................................................................9
Directors, Executive Officers, Promoters and Control Persons.................10
Security Ownership of Certain Beneficial Owners and Management...............10
Description of Securities....................................................13
Disclosure of Commission Position of Indemnification.........................16
Description of Business......................................................17
Management's Discussion and Analysis ........................................24
Description of Property......................................................25
Certain Relationships and Related Transactions...............................25
Market for Common Equity and Related Stockholder Matters ....................26
Executive Compensation.......................................................27
Financial Statements.........................................................28
Changes in and Disagreements with Accountants ...............................28
Indemnification of Directors and Officers....................................29
Recent Sales of Unregistered Securities......................................29
Exhibit Index................................................................32
3
THE OFFERING
Securities offered by Selling Securityholders: 10,365,834 Shares
Issued and outstanding (4,392,500)
Underlying shares of options, warrants
and conversion privileges (5,973,334)
Common Stock Outstanding Prior to the Offering: 19,535,268 Shares
Risk Factors: This Offering involves
a high degree of risk.
See "Risk Factors".
PRINCIPAL OFFICE
The principal office and telephone number of the Registrant is:
VHS NETWORK, INC.
6705 Tomken Road
Mississauga, Ontario
CANADA L5T 2J6
TEL: (905) 795-9139
FAX: (905) 795-9682
email: elwinc@groupmark.com
RISK FACTORS
An investment in the Registrant's securities is speculative in nature and
involves a high degree of risk. In addition to the other information contained
in this Prospectus, you should carefully consider the following factors in
evaluating the Registrant and the Registrant's business before purchasing the
securities offered hereby. This Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Registrant's actual results may differ materially from the results discussed
in the forward-looking statements. Factors that might cause or contribute to
such differences include, without limitation, those discussed below and
elsewhere in this Prospectus.
Limited History of Operations; History of Losses. The Registrant and its
subsidiaries have only a limited history of operations with periods of net
operating losses. According to the Registrant's audited financial statements for
(a) the year ended December 31, 1998, the Registrant had a net loss of $816,446
on revenues of $0, (b) for the year ended December 31, 1999, the Registrant had
a net loss of $453,877 on revenues of $0. According to the Registrant's interim
financial statements, the Registrant continued to operate at a loss during the
first three months of 2000, with a net loss of $103,727 on revenues of $0.
4
The Registrant's operations are subject to the risks and competition inherent in
the establishment of a relatively new business enterprise in a competitive field
of Internet start-up companies. There can be no assurance that future operations
will be profitable. Revenues and profits, if any, will depend upon various
factors, including market acceptance of its concepts, market awareness, its
ability to expand its electronic commerce business, reliability and acceptance
of the Internet commerce, and general economic conditions. There is no assurance
that the Registrant will achieve its expansion goals and the failure to achieve
such goals would have an adverse impact on it.
Competition From Larger and More Established Companies. There are several
companies that engineer, design and market applications for chip-based
smartcards, with vast financial, personnel, marketing and sales resources in
comparison with the Registrant. However, these companies are focusing their
marketing of these cards for security purposes and debit or charge cards,
whereas the Registrant will be focusing its marketing of these cards as a
loyalty reward to a company's customers.
The business of China eMall Corporation, a subsidiary of the Registrant, will
compete with the traditional export market including wholesalers and
distributors as well as with other Internet wholesalers and distributors
focusing on the Chinese market.
Reliance on Future Acquisitions Strategy. The Registrant expects to continue to
rely on acquisitions as a component of its growth strategy. The Registrant
regularly engages in evaluations of potential target candidates, including
evaluations relating to acquisitions that may be material in size and/or scope.
There is no assurance that the Registrant will continue to be able to identify
potentially successful companies that provide suitable acquisition opportunities
or that the Registrant will be able to acquire any such companies on favorable
terms. Also, acquisitions involve a number of special risks including the
diversion of management's attention, assimilation of the personnel and
operations of the acquired companies, possible loss of key employees. There is
no assurance that the acquired companies will be able to successfully integrate
into the Registrant's existing infrastructure or to operate profitably. There is
also no assurance given as to the Registrant's ability to obtain adequate
funding to complete any contemplated acquisition or that such acquisition will
succeed in enhancing the Registrant's business and will not ultimately have an
adverse effect on the Registrant's business and operations.
Management of Growth. The Registrant may experience significant growth, which
will place severe demands on its management, employees, operations and
resources. To manage such growth, the Registrant must improve its operating
systems and attract and train additional qualified personnel, and it may be
required to expand its facilities. If the Registrant is unable to effectively
manage growth, its business, operating results and financial condition could be
adversely affected.
Loss of the Registrant's Key Management May Adversely Affect Growth Objectives.
The Registrant's success in achieving its growth objectives depends upon the
efforts of Elwin Cathcart, Chairman and Chief Executive Officer of the
5
Registrant as well as other key management personnel. Their experience and
industry-wide contacts significantly benefit the Registrant. The loss of the
services of these individuals could have a material adverse effect on the
Registrant business, financial condition and results of operations. There is no
assurance that the Registrant will be able to maintain and achieve its growth
objectives should it lose any of its key management members' services.
Voting Control of Officers and Directors. The Registrant's executive officers
and directors beneficially own a significant percentage of the outstanding
shares of common stock. Mr. Cathcart owns over 47% of the outstanding shares of
common stock. The Registrant's officers and directors currently are, and in the
foreseeable future will continue to be, in a position to control the Registrant
by being able to nominate and elect the Registrant's board of directors. The
board of directors establishes corporate policies and has the sole authority to
nominate and elect the Registrant's officers to carry out those policies.
Prospective investors therefore will have limited participation in the
Registrant's affairs.
No Dividends. The Registrant has never paid any dividends on its Common Stock
and does not intend to pay any dividends in the foreseeable future.
Limited Market for Stock; Volatile Stock Price. The Registrant's common stock
was quoted on the NASD Over-the-Counter Bulletin Board until on or about May 18,
2000 and is currently trading on the Pink Sheets. However, in view of the
relatively small supply of shares eligible for public resale, trading has been
limited. It is uncertain as to whether a more regular trading market will
develop. Selling the shares is more difficult because smaller quantities of
shares are bought and sold and security analysts' and news media's coverage of
the Registrant is limited. These factors could result in lower prices and larger
spreads in the bid and ask prices for the Registrant's shares. Since the shares
are not currently listed on a national exchange, they are subject to Rule 15g-9
under the Securities Exchange Act of 1934. That rule imposes additional sales
practice requirements on broker-dealers that sell low-priced securities to
persons other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule affects
the ability of broker-dealers to sell the shares and may affect the ability of
shareholders to sell their shares in the secondary market.
As of the date of this Prospectus, there are 19,535,268 outstanding shares of
common stock of which approximately 5,894,825 shares are eligible for public
trading. The trading market for the Registrant's common stock may be adversely
affected by the subsequent influx into the market of the 10,365,834 shares of
common stock being registered for resale hereunder. This increase in the number
of shares available for public sale could have a depressive effect on the
market. In addition, the stock markets generally have experienced, and continue
to experience, extreme price and volume fluctuations which have affected the
market price of many small capitalization companies.
These market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of the Registrant's common stock.
6
The Registrant Depends on Intellectual Property Rights. The Registrant's success
depends in part on the ability to obtain and maintain proprietary protection for
technologies, products, and processes that the Registrant develops or is
licensed to use, and the Registrant's ability to operate without infringing the
proprietary rights of other parties. The Registrant may not be able to obtain
copyright, patent or other protection for its proprietary technologies. Any
copyrights, patents or other registrations may not sufficiently protect the
Registrant against competitors with similar technology. In addition, the
intellectual property rights the Registrant has may be challenged, narrowed,
invalidated or circumvented.
The Registrant may have to initiate litigation to enforce its intellectual
property rights. If the Registrant's competitors file patent applications
covering technology that the Registrant employs, it may have to participate in
interference or opposition proceedings to determine the priority of invention.
An adverse outcome could subject the Registrant to significant liabilities to
third parties and require the Registrant to cease using the technology or to
license the disputed rights from third parties. The Registrant may not be able
to obtain any required licenses on commercially acceptable terms or at all. The
cost of any litigation or proceeding relating to intellectual property rights,
even if resolved in the Registrant's favor, could be substantial. Some of the
Registrant's competitors may be able to sustain the costs of litigation more
effectively than the Registrant can because of their substantially greater
resources. Uncertainties resulting from the initiation and continuation of any
intellectual property litigation could have a material adverse effect on the
Registrant's ability to compete in the marketplace.
USE OF PROCEEDS
The Registrant will not receive any proceeds upon the sale of shares by the
Selling Securityholders. However, this Prospectus relates to the sale of up to
2,708,334 shares of the Registrant's common stock that may be issued in the
event of exercise of outstanding options and warrants held by Selling
Securityholders. In the event all of such options and warrants are exercised,
the Registrant will receive proceeds of $892,917. Such proceeds, if received,
will be used for working capital.
SELLING SECURITY HOLDERS
The following table sets forth the name of each Selling Securityholder, the
number of shares of common stock beneficially owned by such Selling
Securityholder as of the date of this Prospectus, giving pro forma effect to the
exercise of the Selling Securityholders' warrants, options or conversion
privileges into shares of common stock as described below, and the number of
shares being offered by each Selling Securityholder. Except as otherwise noted
below, during the past three years no Selling Securityholder has been an
officer, director or affiliate of the Registrant, nor has any Selling
Securityholder had any material relationship with the Registrant during such
period. The shares of common stock being offered hereby are being registered to
permit public secondary trading, and the Selling Securityholders may offer all
or part of the shares for resale from time to time. However, such Selling
7
Securityholders are under no obligation to either (a) exercise the Selling
Securityholders' options, warrants and/or conversion privileges, as the case may
be, or (b) if exercised, to sell all or any portion of such shares of common
stock immediately under this Prospectus. Since the Selling Securityholders may
sell all or a portion of their shares of common stock, no estimate can be given
as to the number of shares of common stock that will be held by any Selling
Securityholder upon termination of this offering. Accordingly, the following
table assumes (i) the exercise of the Selling Securityholders' warrants, options
and/or conversion privileges, even if not yet vested, and (ii) the sale of all
shares of common stock by the Selling Securityholders immediately following the
date of this Prospectus. All expenses of the registration of the common stock on
behalf of the Selling Securityholders are being borne by the Registrant;
however, the Registrant will receive none of the proceeds of this offering
except as stated under the heading "Use of Proceeds".
Maximum Number
Of Beneficially Owned
Selling Securityholder Shares to be Sold
----------------------------------------------------------------
Groupmark Canada Limited(1) 1,000,000
Elwin Cathcart(2) 500,000
David J. Smelsky(3) 500,000
Forte Management Corp. 2,208,334
Gang Chai(5) 1,048,502
Qin Lu Chai 1,048,498
QingWang 1,022,000
Tai Xue Shi 1,022,000
Charles He 1,274,000
Alexander Stewart 50,000
Hofheimer Gartlir & Gross LLP 7,500
Total 10,365,834(6)
-----------------------------------------------------------------
(1) The sole shareholder of Groupmark Canada Limited is Elwin Cathcart
a director and officer of the Registrant.
(2) Elwin Cathcart is a director and officer of the Registrant as well
as a director, officer and sole shareholder of Groupmark Canada
Limited. The 500,000 shares being registered consist of 250,000
shares underlying options to purchase common shares at an exercise
price of $0.35 per share expiring December 31, 2001 and 250,000
common shares.
(3) David Smelsky is a director and officer of the Registrant.
(4) Thomas Roberts is a director of the Registrant.
(5) Gang Chai is a director ofthe Registrant.
(6) This figure includes 2,708,334 options and warrants outstanding;
4,015,000 common shares of the Registrant into which 4,015,000
Class B Special Shares of China eMall Corporation (a subsidiary of
the Registrant) are exchangeable; and 4,392,500 issued and
outstanding common shares of the Registrant.
PLAN OF DISTRIBUTION
The sale of the common stock by the Selling Securityholders may be effected from
time to time in various transactions (which may include block transactions by or
for the account of the Selling Securityholders). Alternatively, the Selling
8
Securityholders may from time to time offer such securities through dealers or
agents. The distribution of the securities by the Selling Securityholders may be
effected in one or more transactions that may take place on the over-the-counter
market, including ordinary broker's transactions, privately-negotiated
transactions or through sales to one or more broker-dealers for resale of such
shares as principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Usual and
customary or specifically negotiated brokerage fees or commissions may be paid
by the Selling Securityholders in connection with such sales or securities.
The securities offered by the Selling Securityholders may be sold by one or more
of the following methods, including without limitation: (a) a block trade in
which a broker or dealer so engaged will attempt to sell the shares as agent but
may position and resell a portion of the block as principals to facilitated the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions where the broker solicits purchases, and
(d) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Securityholders may arrange for other brokers or dealers to participate. The
Selling Securityholders and intermediaries through whom such securities are sold
may be deemed "underwriters" within the meaning of the Securities Act of 1933
with respect to the securities offered, and any profits realized or commission
received may be deemed underwriting compensation.
At the time a particular offer of the securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares of common stock being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for the shares of
common stock purchased from the Selling Securityholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public. The Registrant has informed the Selling
Securityholders that the anti-manipulative rules under the Securities and
Exchange Act of 1934, including Regulation M thereunder, may apply to their
sales in the market and have furnished each of the Selling Securityholders with
a copy of these rules. The Registrant has also informed the Selling
Securityholders of the need for delivery of copies of this Prospectus in
connection with any sale of securities registered hereunder. Sales of securities
by the Registrant and the Selling Securityholders, or even the potential of such
sales, could have an adverse effect on the market price of the shares of common
stock offered hereby.
LEGAL PROCEEDINGS
The Registrant is aware that the Internal Revenue Service subpoenaed records
from its transfer agent. Through discussions with the IRS, the Registrant has
been informed that the IRS is investigating a former director of a corporation
that merged with the Registrant.
9
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Elwin D. Cathcart: Mr. Cathcart, age 73, has been a director of the Registrant
since April 1997. Over the last 5 years, Mr. Cathcart has also been serving as
Chairman and Chief Executive Officer of Groupmark Canada Limited, a private
marketing company specializing in direct mail service products which he founded
in 1970. From 1970 to 1972, Mr. Cathcart also served as President of the
Canadian Direct Mail Marketing Association, a Toronto based company he helped
found in 1969, and where he continues to serve in an advisory capacity as a Life
Member. From 1960 to 1970, Mr. Cathcart served as National Sales Manager for
Canada and then became National Sales Manager for the United States for a
private, direct mail marketing company known as R.L. Polk & Co., located in
Detroit, Michigan. Mr. Cathcart has served on the board of several public
companies including Equity Investment Corp., a financial marketing company;
TelSoft Mobile Data Inc., a company which purchased priority software for
Motorola; The Equity Group, a holding company for Equity Investments Corp. and
TelSoft Mobile Data Inc.; and Pacific Gold Corp., a west coast mining company.
Mr. Cathcart attended Riverdale College from 1942 to 1943 and received a
Bachelors Degree in Industrial Design from Ontario College of Art in 1950.
Thomas Roberts: Mr. Roberts, age 64, has been a director of the Registrant since
April 1997. For the past 37 years he has been an accountant in private practice.
Mr. Roberts attended Alberson Graughon College and the University of Alabama
Birmingham in 1954 and 1955, respectively.
David Smelsky: Mr. Smelsky, age 42, has been an officer and a director of the
Registrant since April 1997. Mr. Smelsky was the Chief Financial Officer of
Groupmark from November 1994 to October 1999. Since October 1999 he has been the
Manager of Finance and Administration for Halton Hills Hydro Commission. Mr.
Smelsky received his certificate as Certified Management Accountant of Ontario
in 1985.
Gang Chai: Dr. Chai, age 41 obtained his Bachelor and Masters in geoscience from
China University in 1987 and 1985, respectively. After moving to Canada in 1987,
Dr. Chai attended University of Toronto and received a Ph.D. in economic geology
in 1992. Dr. Chai has been a director of the Registrant since April 12, 2000.
Prior to founding China eMall Corporation in 1994, Dr. Chai worked for private
Canadian companies and both the Ontario and federal governments. In addition to
his duties on the board of the Registrant, he also sits on the board of McVicar
Minerals Ltd. which he founded in 1997 and currently acts as CEO of McVicar
which trades on the Canadian Venture Exchange under the symbol MVR.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the number and
percentage of shares of the Registrant's common stock (being the Registrant's
only voting securities) currently outstanding which would be deemed under the
current rules of the Securities and Exchange Commission to be beneficially owned
by the Registrant's officers and directors individually and as a group based
upon 15,535,268 issued and outstanding on June 29, 2000. Except as otherwise
indicated, the Registrant believes that the individuals listed below have the
sole power to vote and dispose of the number of shares set forth opposite their
respective names. No preferred shares are outstanding as of the date hereof.
10
- --------------------------------------------------------------------------------
Title of Name and Address of Amount and Nature of Percentage
Class Beneficial Owner Beneficial Owner of Class
- --------------------------------------------------------------------------------
Elwin D.
Common Cathcart 9,270,000(1) 47.4%
1400 Dixie Road
Mississauga, Ontario
L5E 3E1
- --------------------------------------------------------------------------------
Gang Chai
Common 89 Drewry Avenue 1,048,502(2) 5.4%
Toronto, Ontario
M2M 1E1
- --------------------------------------------------------------------------------
David
Common Smelsky 685,000(3) 3.5%
RR#4
Rockwood, Ontario
Canada N0B 2K0
- --------------------------------------------------------------------------------
Thomas
Common Roberts 500,000(4) 2.6%
P.O. Box 128
Fayette AL
35555
================================================================================
Common All officers and 11,503,502 58.9%
directors as a Group
(4 individuals)
- --------------------------------------------------------------------------------
(1) Includes 7,900,000 common shares owned by Groupmark Canada Limited
which is a wholly owned corporation of Elwin D. Cathcart and 370,000
common shares held by Elwin D. Cathcart and options to purchase
1,000,000 common shares granted to Elwin D. Cathcart (750,000 options
at an exercise price of $0.40 expiring December 31, 2002 and 250,000
options at an exercise price of $0.35 expiring December 31, 2001).
(2) Includes 350,000 common shares and conversion privileges of Class B
Special Shares of China eMall Corporation, into 698,502 common shares.
The Registrant acquired China eMall Corporation pursuant to a share
exchange agreement wherein the shareholders of China eMall including,
Dr. Chai, received Class B Special Shares of China eMall Corporation
that are exchangeable on a one for one basis into common shares of the
Registrant.
(3) Includes options to purchase 500,000 common shares (250,000 options at
an exercise price of $0.40 expiring December 31, 2002 and 250,000
options at an exercise price of $0.35 expiring December 31, 2001) and
185,000 common shares.
(4) Consists of options to purchase 500,000 common shares (250,000 options
at an exercise price of $0.40 expiring December 31, 2002 and 250,000
options at an exercise price of $0.35 expiring December 31, 2001).
11
The following table sets forth certain information regarding the number and
percentage of shares of the Registrant's common stock (being the Registrant's
only voting securities) currently outstanding which would be deemed under the
current rules of the Securities and Exchange Commission to be beneficially owned
by any person (including any "group" as that term is used in Instruction No. 7
to S-B Item 403) known by the Registrant to be the beneficial owner of more than
five percent of the Registrant's common shares based upon 19,535,268 issued and
outstanding on June 29, 2000. Except as otherwise indicated, the Registrant
believes that the individuals listed below have the sole power to vote and
dispose of the number of shares set forth opposite their respective names. No
preferred shares are outstanding as of the date hereof.
Name and Address of r Amount and Nature of Percentage
Beneficial Owne Beneficial Owner of Class
- -----------------------------------------------------------------------------------------------
Common Elwin D. 9,270,000(1) 47.4%
Cathcart
1400 Dixie Road
Mississauga, Ontario, Canada
L5E 3E1
- ---------------------------------------------------------------------------------------------
Common Rouge-Mountain Corp. 1,259,993 6.4%
13065 Riverdale Drive NW
Coon Rapids, MN 55448
- ---------------------------------------------------------------------------------------------
Common Forte Management Corp. 2,208,334(2) 11.3%
Buckingham Square, Penthouse
West Bay Road, SMB
P.O. Box 1159GT
West Bay Road, SMB
Grand Cayman, Cayman Islands,
BWI
- ---------------------------------------------------------------------------------------------
Common Charles He 1,274,000(3) 6.5%
56 Temperance Street
Suite 501
Toronto, Ontario
M5H 3V5
- ---------------------------------------------------------------------------------------------
Gang Chai 1,048,502(4) 5.4%
Common 89 Drewry Avenue
Toronto, Ontario
Canada M2M 1E1
- ---------------------------------------------------------------------------------------------
Qin Lu Chai
Common 89 Drewry Avenue 1,048,498(5) 5.4%
Toronto, Ontario
Canada M2M 1E1
- ---------------------------------------------------------------------------------------------
Qing Wang
Common 18 Hollywood Ave. 1,022,000(6) 5.2%
Suite 900
North York, Toronto
Canada M4P 2B1
- ---------------------------------------------------------------------------------------------
Tai Xue Shi
Common 18 Hollywood Ave. 1,022,000(7) 5.2%
Suite 900
North York, Toronto
Canada M4P 2B1
- ---------------------------------------------------------------------------------------------
12
(1) This consists of 7,900,000 common shares owned by Groupmark Canada
Limited which is a wholly owned corporation of Elwin D. Cathcart,
370,000 common shares held by Elwin D. Cathcart and options to purchase
1,000,000 shares granted to Elwin D. Cathcart (750,000 options at an
exercise price of $0.40 expiring December 31, 2002 and 250,000 options
at an exercise price of $0.35 expiring December 31, 2001).
(2) This consists of warrants to purchase up to 708,334 common shares of
the Registrant (warrants to purchase 383,334 common shares at $0.50
expiring July 11, 2000; warrants to purchaser 200,000 common shares at
$0.60 expiring August 10, 2000; and warrants to purchase 125,000 common
shares at $0.95 expiring October 9, 2000) and 1,500,000 common shares.
(3) This consists of conversion privileges of 1,274,000 Class B Special
Shares of China eMall Corporation exchangeable into 1,274,000 common
shares of the Registrant. The Registrant acquired China eMall
Corporation pursuant to a share exchange agreement wherein the
shareholders of China eMall received Class B Special Shares of China
eMall that are exchangeable on a one-for-one basis into common shares
of the Registrant.
(4) This consists of conversion privileges of 698,502 Class B Special
Shares of China eMall Corporation exchangeable into 698,502 common
shares of the Registrant and 350,000 common shares of the Registrant.
The Registrant acquired China eMall Corporation pursuant to a share
exchange agreement wherein the shareholders of China eMall received
Class B Special Shares of China eMall that are exchangeable on a
one-for-one basis into common shares of the Registrant.
(5) This consists of conversion privileges of 698,498 Class B Special
Shares of China eMall Corporation exchangeable into 698,498 common
shares of the Registrant and 350,000 common shares of the Registrant.
The Registrant acquired China eMall Corporation pursuant to a share
exchange agreement wherein the shareholders of China eMall received
Class B Special Shares of China eMall that are exchangeable on a
one-for-one basis into common shares of the Registrant.
(6) This consists of conversion privileges of 672,000 Class B Special
Shares of China eMall Corporation exchangeable into 672,000 common
shares of the Registrant and 350,000 common shares of the Registrant.
The Registrant acquired China eMall Corporation pursuant to a share
exchange agreement wherein the shareholders of China eMall received
Class B Special Shares of China eMall that are exchangeable on a
one-for-one basis into common shares of the Registrant.
(7) This consists of conversion privileges of 672,000 Class B Special
Shares of China eMall Corporation exchangeable into 672,000 common
shares of the Registrant and 350,000 common. The Registrant acquired
China eMall Corporation pursuant to a share exchange agreement wherein
the shareholders of China eMall received Class B Special Shares of
China eMall that are exchangeable on a one-for-one basis into common
shares of the Registrant.
DESCRIPTION OF SECURITIES
The Registrant is presently authorized to issue 100,000,000 common shares with a
par value of $0.001 and 25,000,000 preferred shares with a par value of $0.001.
As of June 29, 2000 there were 19,535,268 common shares issued and outstanding
and nil preferred shares issued and outstanding.
Common Shares. Each common share entitles the holder thereof to one vote on each
matter with respect to which shareholders have the right to vote, to fully
participate in all shareholder meetings, and to share ratably in the net assets
of the corporation upon liquidation or dissolution, but each such share shall be
subject to the rights and preferences of the preferred shares.
13
Preferred Shares. The rights, privileges and restrictions of the preferred
shares are as follows:
Preferred shares may be issued from time to time in one or more series in any
manner permitted by law, as determined from time to time by the board of
directors of the Registrant and stated in any resolution providing for the
issuance of such shares adopted by the board of directors of the Registrant
pursuant to authority hereby vested in it, each series to be appropriately
designated, prior to the issuance of any shares thereof, by some distinguishing
letter, number or title. All shares of each series of preferred shares shall be
alike in every particular and of equal rank, have the same powers, preferences
and rights and be subject to the same qualifications, limitations and
restrictions, without distinction between the shares of different series
thereof, except in regard to the following particulars, which may differ as to
different series:
(a) the annual rate of dividends payable and the dates from which such
dividends shall commence to accrue, if at all;
(b) the amount payable upon a share redemption and the manner in which
shares of a particular series may be redeemed;
(c) the amount payable upon any voluntary or involuntary liquidation,
dissolution or winding up of the Registrant;
(d) the provisions of any sinking fund established with respect to the
shares of a series;
(e) the terms and rates of conversion or exchange, if shares of a series
are convertible or exchangeable; and
(f) the provisions as to voting rights, if any; provided that the shares of
any series of preferred shares having voting power shall not have more
than one vote per share.
Before any shares of a particular series of preferred shares are issued, the
designations of such series and its terms in respect of the foregoing
particulars shall be fixed and determined by the board of directors of the
Registrant in any manner permitted by law and stated in a resolution providing
for the issuance of such shares adopted by the board of directors of the
Registrant pursuant to authority hereby vested in it. Such designation and terms
shall be set forth in full or summarized on the certificates for such series.
The board of directors of the Registrant may increase the number of such shares
by providing that any unissued preferred shares shall constitute part of such
series, or may decrease (but not below the number of shares thereof then
outstanding) the number of shares of any series of preferred shares already
created by providing that any unissued shares previously assigned to such series
shall no longer constitute part thereof. The board of directors of the
Registrant is hereby empowered to classify or reclassify any unissued preferred
shares by fixing or altering the terms thereof in respect of the above-reference
particulars and by assigning the same to an existing or newly established series
from time to time before the issuance of such shares.
The holders of shares of each series shall be entitled to receive, out of any
funds legally available therefor, when and as declared by the board of directors
of the Registrant, cash dividends at such rate per annum as shall be fixed by
resolution of the board of directors of the Registrant for such series, payable
14
periodically on the dates fixed by the board of directors of the Registrant for
the series. Such dividends may be cumulative or non-cumulative, deemed to accrue
from day to day regardless of whether or not earned or declared, and may
commence to accrue on each preferred share from such date or dates, all as may
be determined and stated by the board of directors of the Registrant prior to
the issuance thereof. The Registrant shall make dividend payments ratably upon
all outstanding preferred shares in proportion to the amount of dividends
accrued thereon to the date of such dividend payment, if any.
As long as any preferred share shall remain outstanding, no dividend (other than
a dividend payable in shares ranking junior to such preferred shares with
respect to the payment of dividends or liquidating assets) shall be declared or
paid upon, nor shall any distribution be made or ordered in respect of, the
common shares or any other class of shares ranking junior to such preferred
shares as to the payment of dividends or liquidating assets, nor shall any
monies (other than the net proceeds received from the sale of shares ranking
junior to such preferred shares as to the payment of dividends or liquidating
assets) be set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of the common shares or of any other class of shares
ranking junior to the preferred shares as to dividends or assets unless:
(a) all dividends on the preferred shares of all series for past
dividend periods shall have been paid and the full dividend on
all outstanding preferred shares of all series for the then
current dividend period shall have been paid or declared and
set apart for payment; and
(b) the Registrant shall have set aside all amounts, if any,
required to be set aside as and for sinking funds, if any, for
the preferred shares of all series for the then current year,
and all defaults, if any, in complying with any such sinking
fund requirements in respect of previous years shall have been
cured.
The Registrant, at the option of its board of directors, may at any time redeem
the whole, or from time to time any part, of any series of preferred shares,
subject to such limitations as may be adopted by the board of directors of the
Registrant authorizing the issuance of such shares, by paying therefor in cash
the amount which shall have been determined by the board of directors of the
Registrant, in the resolution authorizing such series, to be payable upon the
redemption of such shares at such time. Redemption may be made of the whole or
any part of the outstanding shares of any one or more series, in the discretion
of the board of directors of the Registrant; but if the redemption shall be
effected only with respect to a part of a series, the shares to be redeemed may
be selected by lot, or all of the shares of such series may be redeemed pro
rata, in such manner as may be prescribed by resolution of the board of
directors of the Registrant.
Subject to the foregoing provisions and to any qualifications, limitations, or
restrictions applicable to any particular series of preferred shares which may
be stated in the resolution providing for the issuance of such series, the board
of directors of the Registrant shall have authority to prescribe from time to
time the manner in which any series of preferred shares shall be redeemed.
Upon any liquidation, dissolution or winding up of the Registrant, whether
voluntary or involuntary, the preferred shares of each series shall be entitled,
before any distribution shall be made with respect of shares of common shares or
to any other class of shares junior to the preferred shares as to the payment of
15
dividends or liquidating assets, to be paid the full preferential amount fixed
by the board of directors of the Registrant for such series as herein
authorized; but the preferred shares shall not be entitled to any further
payment and any remaining net assets shall be distributed ratably to all
outstanding common stock. If upon such liquidation or dissolution of the
Registrant, whether voluntary or involuntary, the net assets of the Registrant
shall be insufficient to permit the payment to all outstanding preferred shares
of all series of the full preferential amounts to which they are respectively
entitled, the entire net assets of the Registrant shall be distributed ratably
to all outstanding preferred shares in proportion to the full preferential
amount to which each such share is entitled. Neither a consolidation nor a
merger of the Registrant with or into any other entity nor the sale of all or
substantially all of the assets of the Registrant shall be deemed to be a
liquidation or dissolution within the meaning of this paragraph.
Any preferred shares issued by the board of directors of the Registrant may have
class or series voting rights. Under certain circumstances the issuance of
preferred shares or the existence of the unissued preferred shares may tend to
discourage or render more difficult a merger or other change in control of the
Registrant. No preferred shares have been issued as of the date hereof.
Dividends. Dividends, if any, will be contingent upon the Registrant's revenues
and earnings, if any, capital requirements and financial conditions. The payment
of dividends, if any, will be within the discretion of the Registrant's board of
directors. The Registrant presently intends to retain all earnings, if any, for
use in its business operations and accordingly, the board of directors does not
anticipate declaring any dividends.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT OF 1933 LIABILITIES
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify any person, who was or is a party to a proceeding by
reason of the fact that he is or was a director or officer of the Registrant, or
is or was serving at the request of the Registrant as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, and may indemnify any person, who was or is a party to a
proceeding by reason of the fact that he is or was an employee or agent of the
Registrant or is or was serving at the request of the Registrant as an employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with such proceeding if he acted in good faith and
in a manner he reasonably believed to be or not opposed to the best interests of
the Registrant, in accordance with, and to the full extent permitted by law.
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Securities Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
16
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 in a successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
DESCRIPTION OF BUSINESS
Business Development
The Registrant, a Florida corporation, was incorporated pursuant to articles of
incorporation dated December 18, 1995, under the name Ronden Vending Corp. On
December 24, 1996, the Registrant incorporated a wholly owned subsidiary called
Ronden Acquisition, Inc. a Florida corporation. Ronden Acquisition, Inc. then
merged with Video Home Shopping, Inc. (a Tennessee corporation) and filed
articles of merger on December 27, 1996, with Ronden Acquisition, Inc. as the
surviving Florida corporation. Pursuant to this merger all of the shareholders
of Video Home Shopping, Inc. received in aggregate 10,462,750 shares of the
Registrant and employees of Video Home Shopping, Inc. had reserved for them
137,250 shares of the Registrant for future issuance pursuant to a stock option
plan. After giving effect to this merger 12,041,000 shares of the Registrant
were issued and outstanding on a fully diluted basis. At the time, Video Home
Shopping, Inc. was a network marketing and distribution company which offered a
wide range of products and services to consumers through the medium of video
tape. It was intended that video home shopping be the principal focus of the
Registrant's business however after the merger the Registrant decided not to
continue with the business operations of Video Home Shopping, Inc.
On January 9, 1997, articles of merger were filed for the Registrant as the
surviving corporation of a merger between the Registrant and its wholly owned
subsidiary Ronden Acquisitions, Inc. This step completed the forward triangular
merger between Video Home Shopping, Inc., Ronden Acquisition, Inc. and the
Registrant.
On January 9, 1997, articles of amendment were filed to change the name of the
Registrant from Ronden Vending Corp. to VHS Network, Inc.
On April 9, 1997, the Registrant incorporated VHS Acquisition, Inc. as a
wholly-owned subsidiary.
In April, 1997, the Registrant was restructured by way of a reverse take-over
involving its wholly-owned subsidiary, VHS Acquisition, Inc. a Florida company,
and VHS Network Inc., a Manitoba and Canadian controlled private corporation.
Pursuant to the reverse take-over the sole shareholder of VHS Network Inc. (the
Manitoba corporation), Groupmark Canada Limited, received 8,000,000 common
shares of the Registrant and a secured promissory note for US$500,000 and thus
became the controlling shareholder of the Registrant. As a result of the reverse
take-over all the directors of the Registrant, except Thomas Roberts, resigned
and Elwin D. Cathcart and David Smelsky were appointed directors of the
Registrant.
17
On or about April 28, 1997, the Registrant, under its current management,
commenced a private placement of its common shares under Rule 504 of Regulation
D promulgated under the Securities Act of 1933, for a maximum aggregate offering
of US$890,000. The Registrant raised proceeds of US$416,492.50 under this
offering.
On November 20, 1997, the board of directors of the Registrant approved and
effected consolidation of the issued and outstanding common shares on a 20 for 1
basis.
On March 31, 1998, the promissory note payable to Groupmark Canada Limited in
the amount of US$500,000 was converted to 5,000,000 restricted common shares of
the Registrant. In May, 1998, 1,399,992 restricted common shares were issued in
an arm's length transaction for the purchase of inventory for resale. The
inventory consists of full colour lithographic prints from a sold out limited
edition release, "The Andover Series" by artist Jim Perleberg.
In December, 1999, the Registrant commenced a private placement of its common
shares under Rule 504 of Regulation D promulgated under the Securities Act of
1933 and section 203 (t) of the Pennsylvania Securities Act of 1972. The
Registrant raised proceeds of US$950,000 pursuant to this offering and issued
shares for services valued at US$50,000.
On April 12, 2000, the Registrant acquired all the issued and outstanding common
shares of China eMall Corporation, an Ontario private company. China eMall is a
business-to-business e-commerce company doing business through a major retail
store in China.
The Registrant acquired all of the issued and outstanding common shares of China
eMall Corporation pursuant to a share exchange agreement made between the
Registrant, China eMall Corporation, Uphill Capital Inc., GDCT Investment Inc.,
Gang Chai, Qin Lu Chai, Qing Wang, Tai Xue Shi, Charles He and Forte Management
Corp. (the "Share Exchange Agreement"). The common shares of China eMall were
held by five individual shareholders and three corporations. Two of the
corporate shareholders, GDCT Investment Limited and Uphill Capital Inc, were
holding companies whose only activities were holding shares of China eMall. The
Registrant purchased all the issued and outstanding shares of GDCT Investment
Limited and Uphill Capital Inc. and thus indirectly acquired the shares of China
eMall held by these companies. The shareholders of GDCT Investment Limited and
Uphill Capital Inc. received common shares in the Registrant pursuant to the
Share Exchange Agreement. The other corporate shareholder, Forte Management
Corp., received common shares of the Registrant in exchange for its shares of
China eMall.
All the shareholders of China eMall who are individuals (the "Individual
Vendors") received Class B Special Shares of China eMall that are exchangeable
on a one for one basis for common shares of the Registrant. In total the
Registrant issued 2,100,000 common shares on closing and has allotted 4,015,000
common shares for issuance when the Class B Special Shares are exchanged into
18
common shares of the Registrant. The holders of the Class B Special Shares can
exchange any or all of their Class B Special Shares into common shares of the
Registrant at any time however if any Class B Special Shares remain issued and
outstanding after the expiration of the earlier of (A) three years from the date
on which a Form SB-2 or similar filing has been filed with the SEC with respect
to the common shares of the Registrant and the SEC has reached a position of no
further comment, and (B) five years after which such Exchangeable Shares were
issued, then China eMall Corporation may redeem the Class B Special Shares on
payment of one common share of the Registrant for each Class B Special Share.
The transaction was structured in this way to allow the Individual Vendors to
postpone the realization of capital gains tax pursuant to the Income Tax Act
(Canada) on the sale of their China eMall common shares. Since the Individual
Vendors' common shares were converted into Class B Special Shares of China
eMall, any capital gain on the disposition of the China eMall common shares will
be deferred until the Class B Special Shares are converted into common shares of
the Registrant.
Pursuant to an Agreement and Plan of Reorganization dated May 6, 2000 the
Registrant acquired all the outstanding shares of common stock of Exodus
Acquisition Corporation, a California corporation, from the shareholders thereof
in an exchange for an aggregate of 500,000 shares of common stock of the
Registrant. As a result, Exodus became a wholly owned subsidiary of the
Registrant. The acquisition is intended to qualify as a reorganization within
the meaning of Section 368 (a) (1) (B) of the Internal Revenue Code of 1986, as
amended. Upon effectiveness of the acquisition, pursuant to Rule 12g-3(a) of the
General Rules and Regulations of the Securities and Exchange Commission, the
Registrant should become the successor issuer to Exodus for reporting purposes
under the Securities and Exchange Act of 1934 (the "Act") and the Registrant
elected to report under the Act effective May 12, 2000. Exodus has had no
operating history nor any revenues or earnings from operations and it has no
significant assets or financial resources.
Business of Issuer
Over the last two years the Registrant has positioned itself to identify
technologies and market opportunities in the United States, Canada and abroad in
internet and interactive media electronic commerce and smartCARD loyalty
marketing.
China eMall
Acquisition. The Registrant recently acquired all the common shares of China
eMall Corporation, a corporation incorporated pursuant to the Business
Corporations Act (Ontario). China eMall is an e-commerce company that provides
Internet marketing and information services to facilitate trade between Chinese
and western businesses. China eMall's primary focus is to establish an on-line
presence to facilitate the export of Chinese products. Through its
multi-functional portal, Chinese suppliers can post their products and services
in a format that is easy for searching, quoting and tracking, thus giving
western buyers access to multiple suppliers for the best quality and price.
19
Realizing that there is a difference business culture and financial systems as
between China on the one hand and North America and Europe on the other hand,
China eMall allocates a substantial amount of resources assisting web-site users
in effecting communications between buyers and sellers, import/export
processing, financial transactions and product services. China eMall's business
makes use of Internet technology to speed up the export process and broaden the
sales channels for Chinese goods and services, and more importantly, brings
customers into direct contact with Chinese producers who can constantly upgrade
their products to meet customers' needs. China eMall has an agreement with
Wangfujing Department Store Ltd., the "Wal Mart" of China, as its prime product
supplier. With the tremendous resources and expertise in retail business,
Wangfujing can make the identification, organization and exporting of Chinese
products a lot more efficient and economic.
China eMall has the following goals:
o to provide an online business to business portal for both the suppliers and
purchasers to engage in direct business communications and transactions;
o to provide critical assistance to both the suppliers and purchasers to
complete the business transactions;
o to offer various China based services to western customers; and o to create a
market place for China-related goods that can attract a broad
range of companies for advertisement.
Market. China is one of the largest economies in the world and is therefore an
important market for the export of consumer goods and services. International
trade has mushroomed during the last decades since China began its economic
reform and started its open door policy to foreign economies. Revenue from
export was close to US$200 billion last year alone. China eMall believes that
capturing a piece of the export market could translate into tremendous economic
value.
History. China eMall, incorporated on February 5, 1999, was established by Dr.
Gang Chai, and two partners, Dr. Charles He, a computer expert, and Ms. Qing
Wang a veteran Chinese businesswoman. In April, 1999, the initial China eMall
website, based on a software platform Intershop, was built and began test
functioning. In May, 1999, Dr. Chai made initial contact with Wanfujing Dept.
Store Group Ltd. regarding this concept and received a welcoming response. Other
manufacturers contacted were very enthusiastic about joining China eMall as
product suppliers. In August 1999, China eMall signed an initial supply
agreement with Wangfujing. In the mean time, China eMall supplied personnel to
assist in product photo-ampling, scanning and data inputting and an upgraded
version of China eMall's website was built. China eMall continued to contact
more suppliers to broaden its product lines. In November 1999, China eMall
introduced services in addition to its product line and is planning to focus on
marketing and sales of services. On February 12, 2000, all the issued and
outstanding common shares of China eMall were acquired by the Registrant.
Products - Manufactured Goods. China eMall offers a complete spectrum of
products that are catalogue and organized under twenty categories that appear on
the home page of the website www.china-emall.com as follows: Agriculture;
Apparel; Arts & Crafts; Chemical Industry; Communications & Transportation;
Construction & Decoration; Electronics; Energy & Mineral Resources;
Entertainment; Food; Health & Medicine; Home & Garden; Industrial Supplies;
Jewelry, Clocks & Watches; Office Supplies; Pet Supplies; Security; Sports;
Textiles, Silk; and Toys.
20
Internet Services. One distinctive feature of China eMall business model is that
the company offers a broad range of China based services and opportunities such
as high tech projects, legal services and translation services. The service
aspect will be the main emphasis of China eMall's offerings and revenue
generator. The following services are offered:
Business Information Services:
o Macro- and micro- economy of China;
o Update of various sectors of industry and business opportunities; o
Special industrial reportsfor individual companies ; o Posting of
governmentservices Government policies, laws and
regulations;
o Update of the changes of government's administration system
Investment projects from various levels of government;
o Engineering projects from various levels of government; and o Other
available projectsfrom the government.
Professional services:
o Construction and Engineeringservices for projects abroad; o Business
consulting for western companies; and o Technical and labor exchange,
including providing technical personnel
and skillful workers.
Financial services:
o Services for companies to get listed in foreign stock exchanges; and o
Financing, including stocks and loans, training of financial
personnel.
Other services:
o Traveling services for both Chinese and Foreigners; o Immigration; o
Studying abroad; and o Investment abroad.
Business Strategy. China eMall's management intends to establish a major
e-commerce center to link China and Western business markets using the following
strategies:
Short Term
o Selecting entry products from brand suppliers as a base for the
initial establishment;
o Outsourcing exporting duties to suppliers and importing duties to
importing agencies. China eMall will mainly coordinate the process in
order to fulfill its supply side objective. China eMall believes that
this will ensure a variety and quality of goods and timely delivery
of products to customers;
21
o Building up marketing and sales infrastructure by establishing a
sales force and by acquiring a few existing exporting businesses for
the initial sales and customer base, as well as experts in related
fields. China eMall will expand the sales side by providing wider
ranges of products in each category, streamlining the
exporting/importing process, and building the marketing and sales
infrastructure;
o Identifying and establishing services that many Western companies are
anxious to access and are of immediate values to those companies. In
the near future, China eMall will focus on services such as business
consulting, traveling and translation; and
o Through active marketing, trying to establish China eMall as a brand
e-commerce name in North America to increase viewers.
Long Term
o Broadening product bases to have a full chain of merchandise for
customers outside of China;
o Increasing the proportion of retail purchases;
o Expanding services offered as China eMall is established and accepted
by Western customers; and
o Starting to host Chinese business on China eMall's web site by
renting out web space as well as offering web service to provide
China eMall's Chinese tenants with more standard web pages.
Marketing Strategies. China eMall intends to use various marketing channels to
build up its name and obtain market shares for its products and services such as
the following:
Internet Marketing
o China eMall will actively post its web site to various search engines
and advertise its site in the most popular portals or other popular
web sites to attract the maximum numbers of visitors.
Business-Business
o Easy to realize at lower costs as there are only a limited number of
businesses compared to individual consumers and marketing can be done
through posting to various business associations and other
distributors.
Business-Government
o Western government may want to help its companies for China related
business and governments may provide special channels for various
reasons.
Other Channels
o The acquisition of China eMall by the Registrant gives China eMall an
immediate advantage through broadcasting news releases; and
o Professional marketing companies will also be hired to do traditional
media marketing.
22
Competition. The business of China eMall Corporation competes with the
traditional export market including wholesalers and distributors as well as with
other Internet wholesalers and distributors, such as the meetChina.com. This
industry hosts a number of well-established competitors including national,
regional and local companies within and outside China possessing greater
financial, marketing, personnel and other resources than China eMall. There is
no assurance that the China eMall will be able to market or sell its products if
faced with direct product and services competition from these larger and more
established wholesalers and distributors.
SmartCARD
The Registrant intends to engage in the sale of computer chip-based plastic
access cards that utilize the Registrant's proprietary smartCARD technology.
This technology enables the cards to be used for identification purposes and as
debit or charge cards. The Registrant intends to focus its marketing efforts on
companies that wish to distribute these cards to their customers as a reward for
their loyalty.
Groupmark Canada Limited owns the registered trade-mark "smartCARD" in Canada
and has a pending application in the United States. Groupmark Canada has granted
the Registrant a license to use the trade-mark smartCARD, to manufacture and
market smartCARDS world-wide on a non-exclusive basis and to utilize the
technology and other know-how related to smartCARDs, until January 1, 2010. The
license agreement also grants the right to the Registrant to permit others to
manufacture the smartCARDs. Pursuant to the terms of the license agreement the
Registrant will pay to Groupmark a royalty of 5% of net sales of products using
the smartCARD trade-mark and technology.
Competition. There are several companies who engineer, design and market
applications for chip-based cards, with greater financial, personnel, marketing
and sales resources than the Registrant. However, these companies focus the
marketing of these cards for security purposes and debit or charge cards,
whereas the Registrant will be focusing its marketing of these cards as a
loyalty reward to a company's customers.
Suppliers. The Registrant's success as a marketer of e-commerce products depends
on its ability to obtain a reliable source of products and then locate retailers
who wish to purchase these products. There are over a dozen companies that
manufacture the chip that is used in smartCARDs and several companies that put
together the chip and the plastic card to produce a smartCARD. The Registrant
believes it can obtain smartCARDS from up to six different suppliers depending
on the type of card that is needed.
Research and Development. During the last two fiscal years the Registrant has
spent significant time on research and development activities.
Employees. The Registrant employs the services of 5 full time employees which
are provided to the Registrant through the management services agreement with
Groupmark Canada Limited.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
The information in this section should be read together with the financial
statements that are included elsewhere in this Prospectus.
Going Concern. The Registrant is in the development stage and has generated
virtually no revenues and has not attained profitability. Its continued
existence and its ability to continue as a going concern are dependent upon its
ability to obtain additional capital to fund its operations.
Through a recent acquisition and successful financing in the first five months
of 2000 the Registrant is continuing to position itself to identify market
opportunities in the United States and Canada in Internet e-commerce and
smartCARD loyalty marketing.
Goals and Objectives. The Registrant's goals and objectives are centered on the
ability to identify technologies and market opportunities in the United States,
Canada and abroad in Internet and interactive media e-commerce and smartCARD
loyalty marketing. The Registrant is committed to becoming a well diversified,
globally integrated e-commerce based solutions provider. To achieve its goals,
the Registrant is identifying prospective companies from which it can acquire
technology and proven financial performance through acquisitions or joint
ventures.
Cash Requirements. The issuer may need to raise additional funds in the next 12
months to satisfy its cash requirements. The Registrant intends to raise
additional funds and pursue acquisitions with revenue potential.
Employees. The Registrant may experience significant changes in the number of
employees in the next 12 months.
Results of Operations
Results of three months ended March 31, 2000. Revenues for the three months
ended March 31, 2000 were $0. Operating Expenses for the three months ended
March 31, 2000 were $103,769.
Results of years ended December 31, 1999 and December 31, 1998. Revenues for
both years ended December 31, 1999 and December 31, 1998 were $0. Operating
Expenses decreased from $816,714 for the year ended December 31, 1998, compared
with $453,877 for the year ended December 31, 1999 largely due to a decrease in
Agency Fees, General and Administration Fees and Management Fees since most of
the research and development was completed in 1998.
24
Liquidity and Capital Resources
The Registrant achieved no revenues from operations in either the 1998 or 1999
fiscal year or during the three months ended March 31, 2000. During 1998 the
Registrant received an aggregate of approximately $336,000 from investors
through the sale of common shares made pursuant to an offering under Rule 504 of
Regulation D promulgated under the Securities Act. During the first four months
of 2000 the Registrant received an aggregate of approximately $1,165,000 from
investors through the sale of common shares made pursuant to offerings exempt
from registration including the exercise of outstanding warrants.
Revenues are projected to commence during the current fiscal year ending
December 31, 2000.
Changes in Financial Position
On March 31, 1998 a promissory note payable to Groupmark Canada Limited in the
amount of $500,000 US was converted to 5,000,000 restricted common shares of the
Registrant.
During 1999 the Registrant's total assets decreased from $656,962 to $628,304.
During 1999 total liabilities increased from $1,722,516 to $2,097,735 which is
largely due to an increase in a note payable to Groupmark Canada Limited
pursuant to the management services agreement between Groupmark and the
Registrant.
The number of issued common shares of the Registrant increased from 1,240,721 on
December 31, 1997 to 10,429,435 on December 31, 1998 and to 10,929,435 on
December 31, 1999. Shareholders' equity decreased from ($1,065,554) to
($1,419,431) during 1999.
DESCRIPTION OF PROPERTY
SmartCARD. The Registrant does not own any property, however since September,
1999 it has leased approximately 1,200 square feet of office space located at
6705 Tomken Road, Unit 12-14, Mississauga, Ontario Canada for which it pays rent
on a month to month basis of CDN $10 per square foot per year or CDN $1,000
(approximately US $680) per month. The premises are shared with Groupmark Canada
Limited.
China eMall. China eMall Corporation maintains its office at 56 Temperance
Street, Toronto, Canada. China eMall shares the premises with another tenant on
a month to month basis at the annual rent of CDN $18,000 (approximately US
$12,250) or CDN $1,500 (approximately US $1,020) per month.
It is the Registrant's intention to find a suitable accommodation where the
Registrant could house both the smartCARD operation and the China eMall
operation at the same facility.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Groupmark Canada Limited. Groupmark Canada Limited, a significant shareholder of
the Registrant is wholly owned by Elwin D. Cathcart, a director of the
Registrant. Groupmark provides executive management personnel and services to
the Registrant pursuant to an agreement made between Groupmark and the
Registrant (the "Agreement"). All personnel services for the Registrant are paid
by Groupmark and are provided to the Registrant as needed.
25
During the fiscal year ended December 31, 1998 the Registrant accrued a debt of
US$672,000 payable to Groupmark Canada Limited and during the year ended
December 31, 1999 the Registrant accrued a debt of US$336,000 payable to
Groupmark Canada Limited for such services. A copy of the Agreement is filed as
an exhibit to this Form SB-2 and is incorporated in its entirety herein. The
foregoing description is modified by such reference.
Gang Chai. Dr. Gang Chai provides services to the Registrant through a
consulting agreement made between G.C. Consulting and Investment Corp. (the
"Consultant"), Gang Chai and the Registrant (the "Consulting Agreement").
Pursuant to the Consulting Agreement, the Registrant agrees to pay to the
Consultant during the term a monthly fee of CDN $7,833.34 (approximately US
$5,330), plus applicable goods and services tax, payable on the first day of
each month for the term of the Consulting Agreement, the initial term of which
is one year. A copy of the Consulting Agreement is filed as an exhibit to this
Form SB-2 and is incorporated in its entirety herein. The foregoing description
is modified by such reference.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. In 1996 the common shares of the Registrant began trading on
the NASD Over-the-Counter Bulletin Board market and continued trading under the
trading symbol "VHSN" until, on or about, May 18, 2000 when it continued trading
on the Pink Sheets. The following table sets forth high and low bid prices of
the Registrant's common shares for 1998 and 1999 as obtained by the National
Quotation Bureau, LLC.
Closing Bid
--------------------------------------------------
Quarter(1) High $ Low $
--------------------------------------------------
1998
----
First Quarter 1.03 0.13
Second Quarter 3.25 0.31
Third Quarter 3.44 1.50
Fourth Quarter 2.16 0.44
1999
----
First Quarter 0.88 0.16
Second Quarter 0.59 0.13
Third Quarter 0.27 0.06
Fourth Quarter 0.20 0.12
2000
----
First Quarter 2.00 0.03
(1) Each quarter is based on the calendar year
Holders. As of June 30, 2000 the numbers of registered holders of record of
common shares was 164 and the number of beneficial holders of common shares was
well over 300.
Dividends. The Registrant has not declared any dividends in the last two fiscal
years.
26
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
paid to or accrued by the Chief Executive Officer for all services rendered in
all capacities to the Registrant during the last three years. No executive
officer earned more than $100,000 in each of the last three years.
Summary Compensation Table
--------------------------
Long Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Name Securities
And Other Restricted Underlying
Principal Annual Stock Options LTIP
Position Year Salary($) Bonus($) Compensation($) Award(s)($) (#) Payouts($)
- -----------------------------------------------------------------------------------------------------------------------
Elwin D. Cathcart 1997 0 0 0 0 250,000 0
CEO and President 1998 0 0 0 0 750,000 0
1999 0 0 0(1) 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
David Smelsky 1997 0 0 0 0 250,000 0
Secretary 1998 0 0 0 0 250,000 0
1999 0 0 0(2) 0 0 0
(1) Elwin D. Cathcart received 370,000 common shares in lieu of salary for
services.
(2) David Smelsky received 185,000 common shares in lieu of salary for
services.
OPTION GRANTS IN FISCAL YEARS ENDING DECEMBER 31, 1999,
DECEMBER 31, 1998 AND DECEMBER 31, 1997
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or Expiration Date
Options Employees Base
Name Year Granted(#) In Fiscal Year Price($/Sh)
- -------------------------------------------------------------------------------------------------------------------
Elwin D. Cathcart 1999 0 0 N/a N/a
1998 750,000 60% 0.40 Dec.31,2002
1997 250,000 28% 0.35 Dec.31,2001
- -------------------------------------------------------------------------------------------------------------------
David Smelsky 1999 0 0 N/A N/a
1998 250,000 20% 0.40 Dec.31,2002
1997 250,000 28% 0.35 Dec.31,2001
- -------------------------------------------------------------------------------------------------------------------
Thomas Roberts 1999 0 0 N/A N/a
1998 250,000 20% 0.40 Dec.31,2002
1997 250,000 28% 0.35 Dec.31,2001
27
AGGREGATE OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- ---------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999
Acquired on Value Exercisable/ Unexercisable Exercisable/ Unexercisable
Name Exercise (#) Realized ($) ($)
- ---------------------------------------------------------------------------------------------------------------------
Elwin D. Cathcart 0 0 1,000,000/0 0/n/a
- ---------------------------------------------------------------------------------------------------------------------
David Smelsky 0 0 500,000/0 0/n/a
- ---------------------------------------------------------------------------------------------------------------------
Thomas Roberts 0 0 500,000/0 0/n/a
FINANCIAL STATEMENTS
Audited financial statements for the year ended December 31, 1999 and interim
financial statements for the period ended March 31, 2000 are filed herewith.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the last two fiscal years the auditor for the Registrant has not
resigned, declined to stand for re-election or been dismissed. However, the
Registrant was required to change from its Canadian auditor to a Certified
Public Accountant in the United States in preparation of becoming a reporting
company in the United States.
28
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws provide that the company
shall indemnify any person, who was or is a party to a proceeding by reason of
the fact that he is or was a director or officer of the Registrant, or is or was
serving at the request of the Registrant as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, and may indemnify any person, who was or is a party to a proceeding
by reason of the fact that he is or was an employee or agent of the Registrant
or is or was serving at the request of the Registrant as an employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with such proceeding if he acted in good faith and in a manner
he reasonably believed to be or not opposed to the best interests of the
Registrant, in accordance with, and to the full extent permitted by law.
RECENT SALES OF UNREGISTERED SECURITIES
Starting in April, 1997 and continuing into 1998, the Registrant, under its
current management continued an offering pursuant to Rule 504 of Regulation D
promulgated under the Securities Act of 1933 which would have allowed it to
raise a maximum of $890,000. Each purchaser completed a subscription agreement.
The Registrant raised a total of $416,492 pursuant to this offering with the
issuance of common shares as follows:
Purchaser Number of Shares
- --------- ----------------
Tomorrow's Stock Today, Inc. 945,000
Robert Seary 759,000
Dana Sieber 650,000
Thomas Michael Vitucci 700,000
On May 8, 1998, the Registrant issued 5,000,000 common shares to Groupmark
Canada Limited based on a price of $0.10 per share in full satisfaction of a
promissory note in the amount of $500,000. The exemption from registration
relied on by the Registrant is Regulation S promulgated under the Securities Act
of 1933, as amended.
On May 14, 1998, the Registrant issued 1,399,992 common shares to Rogue-Mountain
Corp. in an arm's length transaction for the purchase of inventory valued at
$559,997. The exemption relied on by the Registrant is section 4(6) of the
Securities Act of 1933, as amended.
29
On October 13, 1999 the directors passed a resolution to issue 370,000 common
shares to Elwin D. Cathcart and 185,000 common shares to David Smelsky in lieu
of salary as officers of the Registrant. The exemption from registration relied
on by the Registrant is Regulation S promulgated under the Securities Act of
1933, as amended.
In December, 1999 the Registrant commenced another offering pursuant to Rule 504
of Regulation D promulgated under the Securities Act of 1933 to raise a maximum
of $1,000,000. On December 20, 1999, the Registrant issued 150,000 common shares
to Steven Rossi and 350,000 common shares to Kevin Waltzner as payment for
consulting services rendered to the Registrant pursuant to consulting agreements
dated December 20, 1999, and December 16, 1999, respectively. The exemptions
from registration relied on are provided by Rule 504 of Regulation D,
promulgated under the Securities Act of 1933, as amended and section 203 (t) of
the Pennsylvania Securities Act of 1972, as amended. During the first three
months of 2000 the Registrant issued 2,083,333 common shares to Paul Winters at
prices of $0.10 and $0.60 for aggregate proceeds of $950,000. The purchaser was
provided with a private placement memorandum, completed an investor
questionnaire and a subscription agreement. This private placement was made in
reliance on the exemption from registration provided by Rule 504 of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act")
and section 203 (t) of the Pennsylvania Securities Act of 1972, as amended. The
issuance of this 504 offering are summarized below:
Purchaser Number of Shares Price
- --------- ---------------- -----
Steven Rossi 150,000 $0.10
Kevin Waltzner 350,000 $0.10
Paul Winters 600,000 $0.10
Paul Winters 1,483,333 $0.60
On April 12, 2000 pursuant to a share exchange agreement for the acquisition of
China eMall Corporation, the Registrant issued 2,100,000 common shares and
further allotted 4,015,000 common shares for issuance on exchange of the Class B
Special Shares of China eMall for common shares of the Registrant. The holders
of the Class B Special Shares can exchange any or all of their Class B Special
Shares for common shares of the Registrant at any time however if any Class B
Special Shares remain issued and outstanding after the expiration of the earlier
of (A) three years from the date on which a Form SB-2 or similar filing has been
filed with the SEC with respect to the common shares of the Registrant and the
SEC has reach a position of no further comment, and (B) five years after which
such Exchangeable Shares were issued, then China eMall Corporation may redeem
the Class B Special Shares on payment of one common share of the Registrant for
each Class B Special Share. The exemption from registration relied on by the
Registrant is Regulation S promulgated under the Securities Act of 1933, as
amended.
30
The 2,100,000 shares were issued as follows:
Purchaser Number of Shares
--------- ----------------
Gang Chai 350,000
Qin Lu Chai 350,000
Qing Wang 350,000
Tai Xue Shi 350,000
Forte Management Corp. 700,000
The 4,015,000 Class B Special Shares were issued as follows:
Purchaser Number of Shares
--------- ----------------
Gang Chai 698,502
Qin Lu Chai 698,498
Qing Wang 672,000
Tai Xue Shi 672,000
Charles He 1,274,000
In April, 2000 the Registrant issued 50,000 common shares to Alexander Stewart
for the provision of legal services. The shares were valued at $0.50 and were
issued in reliance upon the exemption from registration under Regulation S
promulgated under the Securities Act of 1933, as amended..
In April, 2000 the Registrant completed a private placement with Forte
Management Corp. a non-US investor operating outside the United States for the
issuance of 550,000 common shares and 1,225,000 share purchase warrants for
proceeds of $110,000. The warrants have the following expirations dates and
exercise prices.
Number of Warrants Expiration Date Exercise Price
------------------ --------------- --------------
400,000 June 12, 2000 $0.35
500,000 July 11, 2000 $0.50
200,00 August 10, 2000 $0.60
125,000 October 9, 2000 $0.95
31
As of the date hereof 250,000 warrants have been exercised for proceeds of
$105,000 to the Registrant.
In March, 2000 the Registrant issued 2,500,000 common shares to Groupmark Canada
Limited in settlement of $865,868 owing under the management services agreement
between the Registrant and Groupmark. The Registrant relied upon the exemption
from registration under Regulation S promulgated under the Securities Act of
1933, as amended.
On May 6, 2000 the Registrant acquired all the issued and outstanding shares of
Exodus Acquisition Corporation pursuant to an Agreement of Plan of
Reorganization wherein the shareholders of Exodus, BAC Consulting Corporation,
received 500,000 common shares of the Registrant. The Registrant relied upon
exemption from registration under Rule 145 promulgated under the Securities Act
of 1933, as amended.
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization between VHS Network, Inc. and Exodus
Acquisition Corporation, dated May 6, 2000.
3.1 Articles of Incorporation for VHS Network, Inc.
3.2 Articles of Merger for VHS Network, Inc. (Exhibit A referred to in the
Articles of Merger is filed as a separate document as Exhibit 10.6
hereof)
3.3 Articles of Amendment for VHS Network, Inc.
3.4 By-laws of VHS Network Inc.
4.1 Specimen Stock Certificate.
5.1 Opinion of legal counsel on the legality of the securities being issued
stating that when sold they will be legally issued, fully paid and
non-assessable.**
10.1 Share Exchange Agreement made April 12, 2000 among VHS Network, Inc.,
China eMall Corporation, Gang Chai, Qin Lu Chai, Uphill Capital Inc.,
Charles He, Qing Wang and Forte Management Corp.
10.2 Consulting Services Agreement between VHS Network, Inc., G.C. Consulting
and Investment Corp. and Gang Chai.
10.3 Licence Agreement between Groupmark Canada Limited and VHS Network, Inc.
dated January 1, 2000.
10.4 Management Services Agreement between the Registrant and Groupmark Canada
Limited dated April 1997.
10.5 Stephen Rossi Consulting Agreement between VHS Network, Inc. and Stephen
Rossi dated December 20, 1999.
10.6 Agreement and Plan of Merger dated as of December 26, 1996 made among
Ronden Vending Corp., Ronden Acquisition, Inc., Video Home Shopping, Inc.
(a Tennessee corporation), Progressive Media Group, Inc. and Pamela
Wilkerson.
32
10.7 Agreement and Plan of Merger dated as of December 30, 1996 between Ronden
Vending Corp. and Ronden Acquisition, Inc.
10.8 Agreement and Plan of Reorganization dated April 10, 1997 among VHS
Network, Inc. and VHS Acquisition, Inc. and VHS Network (Canada), Inc.**
21.1 List of subsidiaries, jurisdiction of incorporation and business names.
23.1 Consent of lawyer giving opinion to be used herein**
23.2 Consent of Berg & Company, LLP.
27.1 Financial Data Schedule
** To be filed by amendment
32
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 Toronto,
Ontario, Canada, on the 10th day of July, 2000.
VHS NETWORK, INC.
Per: /s/ Elwin Cathcart
-----------------------
Elwin Cathcart, CEO